<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 October 2, 1999
[ ] 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.
(1) Yes [X] No [ ]; (2) Yes [X ] No [ ]
The number of shares of Common Stock, $.01 par value, issued and outstanding as
of November 9, 1999 was 6,526,533.
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IRIDEX CORPORATION
TABLE OF CONTENTS
<TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of October 2, 1999
and January 2, 1999 3
Condensed Consolidated Statements of Income for the three months
and nine months ended October 2, 1999 and October 3, 1998 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended October 2, 1999 and October 3, 1998 5
Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended October 2, 1999 and October 3, 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
INDEX TO EXHIBITS 20
</TABLE>
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 2, JANUARY 2,
1999 1999
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ASSETS
Current assets:
Cash and cash equivalents ........................ $10,242 $ 5,791
Available-for-sale securities .................... 2,759 5,085
Accounts receivable, net ......................... 6,512 7,608
Inventories ...................................... 7,206 6,504
Prepaids and other current assets ................ 451 347
Deferred income taxes ............................ 607 607
------- -------
Total current assets ......................... 27,777 25,942
Property and equipment, net ...................... 2,180 2,274
Intangible assets ................................ 84 96
Deferred income taxes ............................ 65 65
------- -------
Total assets ................................. $30,106 $28,377
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 632 $ 879
Accrued expenses ................................. 2,836 1,613
------- -------
Total liabilities ............................ 3,468 2,492
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Stockholders' equity:
Common stock ..................................... 66 65
Additional paid-in capital ....................... 22,041 21,800
Treasury stock ................................... (315) --
Accumulated other comprehensive income (loss) .... (2) 7
Retained earnings ................................ 4,848 4,013
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Total stockholders' equity ................... 26,638 25,885
------- -------
Total liabilities and stockholders' equity ... $30,106 $28,377
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales ............................................ $6,295 $5,200 $18,455 $17,074
Cost of sales .................................... 2,771 2,650 8,298 7,627
------ ------ ------- -------
Gross Profit ................................. 3,524 2,550 10,157 9,447
------ ------ ------- -------
Operating expenses:
Research and development ..................... 947 725 2,789 1,948
Selling, general and administrative .......... 2,234 1,892 6,568 6,027
------ ------ ------- -------
Total operating expenses ................. 3,181 2,617 9,357 7,975
------ ------ ------- -------
Income (loss) from operations .................... 343 (67) 800 1,472
Interest and other income (expense), net ......... 135 132 429 380
------ ------ ------- -------
Income before provision for income taxes .... 478 65 1,229 1,852
Provision for income taxes ....................... (153) (22) (394) (629)
------ ------ ------- -------
Net income ............................... $ 325 $ 43 $ 835 $ 1,223
====== ====== ======= =======
Net income per common share ...................... $ 0.05 $ 0.01 $ 0.13 $ 0.19
====== ====== ======= =======
Diluted net income per common share .............. $ 0.05 $ 0.01 $ 0.12 $ 0.18
====== ====== ======= =======
Shares used in income per common share calculation 6,489 6,485 6,496 6,473
====== ====== ======= =======
Shares used in diluted net income per common
share calculation ........................... 6,743 6,703 6,751 6,797
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
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Cash flows from operating activities:
Net income ...................................................................... $ 835 $1,223
Adjustments to reconcile net income to net cash provided by (used in) activities:
Depreciation and amortization ............................................... 551 507
Provision for doubtful accounts ............................................. -- (20)
Changes in operating assets and liabilities:
Accounts receivable ....................................................... 1,096 (1,426)
Inventories ............................................................... (702) (2,847)
Prepaids and other current assets ......................................... (104) 42
Accounts payable .......................................................... (247) 171
Accrued expenses .......................................................... 1,223 (500)
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Net cash provided by (used in) operating activities ....................... 2,652 (2,850)
------- ------
Cash flows from investing activities:
Purchases of available-for-sale securities ..................................... (1,867) (7,670)
Proceeds from maturity of available-for-sale securities ........................ 4,184 3,572
Acquisition of intangible assets ............................................... -- (44)
Acquisition of property and equipment .......................................... (445) (724)
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Net cash provided by (used in) investing activities ......................... 1,872 (4,866)
------- ------
Cash flows from financing activities:
Payment on capital lease obligations ........................................... -- (1)
Issuance of common stock, net .................................................. 242 242
Purchase of treasury stock ..................................................... (315) --
------- ------
Net cash (used in) provided by financing activities ........................ (73) 241
------- ------
Net increase (decrease) in cash and cash equivalents ...................... 4,451 (7,475)
Cash and cash equivalents at beginning of period .................................... 5,791 9,900
------- ------
Cash and cash equivalents at end of period .......................................... $10,242 $2,425
======= ======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gains(losses) on available-for-sale securities ........ $ (9) $ 9
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
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OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---- --- ---- ------
<S> <C> <C> <C> <C>
Net income ................................ $325 $43 $835 $1,223
Other comprehensive income (loss):
Change in unrealized gain (loss) on
available-for-sale securities .... 4 8 (9) 9
---- --- ---- ------
Comprehensive income ..................... $329 $51 $826 $1,232
==== === ==== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
as of October 2, 1999 of IRIDEX Corporation have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included.
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 our Annual Report on Form 10-K, which was filed with
the Securities and Exchange Commission on April 1, 1999. The results of
operations for the three month and nine month periods ended October 2, 1999 are
not necessarily indicative of the results for the year ending January 1, 2000 or
any future interim period.
2. INVENTORIES COMPRISE (IN THOUSANDS) :
<TABLE>
<CAPTION>
OCTOBER 2, JANUARY 2,
1999 1999
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(unaudited)
<S> <C> <C>
Raw materials and work in progress.... $4,376 $3,877
Finished goods ....................... 2,830 2,627
------ ------
Total inventories .................... $7,206 $6,504
====== ======
</TABLE>
3. COMPUTATIONS OF NET INCOME PER COMMON SHARE AND DILUTED NET INCOME PER COMMON
SHARE
Net income per common share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net
income per common share is computed using the weighted average number of shares
of common stock and dilutive common equivalent shares from stock options
outstanding.
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A reconciliation of the numerator and denominator of net income per
common share and diluted net income per common share is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator -- Net income per common share and diluted net income
per common share
Net income ...................................................... $ 325 $ 43 $ 835 $1,223
====== ====== ====== ======
Denominator -- Net income per common share
Weighted average common stock outstanding ................... 6,489 6,485 6,496 6,473
====== ====== ====== ======
Net income per common share ..................................... $ 0.05 $ 0.01 $ 0.13 $ 0.19
====== ====== ====== ======
Denominator -- Diluted net income per common share
Weighted average common stock outstanding ................... 6,489 6,485 6,496 6,473
Effect of dilutive securities
Weighted average common stock options ....................... 254 218 255 324
------ ------ ------ ------
Total weighted average stock and options outstanding ............ 6,743 6,703 6,751 6,797
====== ====== ====== ======
Diluted net income per common share ............................. $ 0.05 $ 0.01 $ 0.12 $ 0.18
====== ====== ====== ======
</TABLE>
During the three months ended October 2, 1999 and October 3, 1998,
options to purchase 396,109 and 612,791 shares, respectively, at weighted
average exercise prices of $6.95 and $7.92 per share, respectively, were
outstanding, but were not included in the computations of diluted net income per
common share because the exercise price of the related options exceeded the
average market price of the common shares. These options could dilute earnings
per share in future periods.
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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 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 our income statement for the periods indicated.
<TABLE>
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THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 44.0 51.0 45.0 44.7
----- ----- ----- -----
Gross profit ....................... 56.0 49.0 55.0 55.3
----- ----- ----- -----
Operating expenses:
Research and development ........... 15.0 13.9 15.1 11.4
Sales, general and administrative .. 35.5 36.4 35.6 35.3
----- ----- ----- -----
Total operating expenses ....... 50.5 50.3 50.7 46.7
----- ----- ----- -----
Income (loss) from operations .......... 5.5 (1.3) 4.3 8.6
Other income, net ...................... 2.1 2.5 2.3 2.2
----- ----- ----- -----
Income before provision for income taxes 7.6 1.2 6.6 10.8
Provision for income taxes ............. (2.4) (0.4) (2.1) (3.6)
----- ----- ----- -----
Net income ............................. 5.2% 0.8% 4.5% 7.2%
===== ===== ===== =====
</TABLE>
Sales. Our sales increased 21% to $6.3 million for the three months
ended October 2, 1999 from $5.2 million for the three months ended October 3,
1998. Sales increased 8% to $18.5 million for the nine months ended October 2,
1999 from $17.1 million for the nine months ended October 3, 1998. The growth in
sales was primarily attributable to increased unit volume as the Company
expanded its product offerings and expanded its customer base, offset in part by
a decrease in research product sales not directly related to our core business.
Domestic sales of $4.2 million accounted for 66% of sales for the three months
ended October 2, 1999 compared to $3.4 million or 65% of sales in the comparable
1998 period. The increase in domestic sales was due primarily to increases in
dermatology and opthalmology product sales partially offset by a decrease in
external research product sales. The increases in dermatology product sales were
primarily due to increased customer contact as a result of adding a separate
direct sales force for dermatology. International sales of $2.1 million
accounted for 34% of sales for the three months ended October 2, 1999 compared
to $1.8 million or 35% in the comparable 1998 period. The increase in
international sales was primarily due to increases in opthalmology product sales
partially offset by decreases in dermatology product sales and external research
product sales. International ophthalmology product sales increased in most
regions. Acceptance of the OcuLight GLx, which we started shipping in January
1999, contributed to the international sales increases. We expect revenues from
international sales to continue to account for a substantial portion of our
sales.
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Gross Profit. Our gross profit increased by 38% to $3.5 million for the
three months ended October 2, 1999 from $2.6 million for the three months ended
October 3, 1998. For the nine months ended October 2, 1999, the company's gross
profit increased 8% to $10.2 million as compared to $9.4 million for the
comparable period in 1998. Gross profit as a percentage of net sales for the
three months ended October 2, 1999 increased to 56%, compared to 49% for the
three months ended October 3, 1998, due primarily to a greater volume of
dermatology and opthalmology product sales with slightly lower manufacturing
costs. In addition, we had increased domestic sales which have higher gross
profit margins. Such domestic product sales have higher average sales prices as
they are transacted directly with the user-customer by a direct sales force.
International product sales are transacted through independent distributors. For
the balance of 1999, we expect manufacturing costs to increase in absolute
dollars to support increasing unit shipment volumes. Additionally, we expect our
gross profit margins to continue to fluctuate due to changes in the relative
proportions of domestic and international sales, product mix, pricing, product
costs and a variety of other factors.
Research and Development. Research and development expenses increased by
31% to $0.9 million for the three months ended October 2, 1999 from $0.7 million
for the three months ended October 3, 1998, and increased as a percentage of net
sales to 15% for the three months ended October 2, 1999 from 14% for the
comparable prior year three-month period. For the nine months ended October 2,
1999, research and development expenses increased 43% to $2.8 million as
compared to $2.0 million for the nine months ended October 3, 1998. The increase
in research and development expenses during this period was primarily
attributable to increases in personnel, clinical study expenses and other
resources as we increased our product and applications development efforts. We
expect these expenses for research and development to continue to increase in
absolute dollars during the remainder of 1999 in connection with new product and
clinical treatment development activities.
Sales, General and Administrative. Our sales, general and administrative
expenses increased by 18% to $2.2 million for the three months ended October 2,
1999 from $1.9 million for the three months ended October 3, 1998, and decreased
as a percentage of net sales to 35% for the three months ended October 2, 1999
from 36% for the comparable prior year three-month period. For the nine months
ended October 2, 1999, sales, general and administrative expenses increased by
9% to $6.6 million as compared to $6.0 million for the nine months ended October
3, 1998. The increase in absolute dollars in sales, general and administrative
expenses was primarily due to the hiring of additional sales employees to
address new opportunities and to support expanding unit volumes for our medical
products. We expect sales, general and administrative expenses to continue to
increase in absolute dollars during the balance of 1999 to support the
increasing unit shipment volumes and additional employees.
Income Taxes. Our effective tax rate for the three months ended October
2, 1999 was 32%. 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 our foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
At October 2, 1999, our primary sources of liquidity included cash and
cash equivalents and available-for-sale securities of $13.0 million. During the
nine months ended October 2, 1999, we generated $2.1 million in cash and cash
equivalents and available-for-sale securities. During this period, operating
activities provided a net $2.7 million of cash. Sources of cash from operating
activities included a decrease in accounts receivable of $1.1 million, a net
increase in accounts payable and accrued expenses of $1.0 million, net income of
$0.8 million, and depreciation and amortization of $0.6 million, offset by uses
of cash including an increase in inventories of $.7 million.
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The increase in inventory was primarily due to an increase in raw materials
inventory. We generated $1.9 million in investing activities during the nine
months ended October 2, 1999, primarily from the net maturities of $2.3 million
of available-for-sale securities offset by the acquisition of $.4 million of
property and equipment. Net cash used in financing activities during the nine
months ended October 2, 1999 was $73,000 which consisted of the purchase of
$315,000 of treasury stock offset by the issuance of common stock of $242,000.
We believe that, based on current estimates, our current cash and cash
equivalents, and available-for-sale securities will be sufficient to meet our
anticipated cash requirements for the next 12 months.
YEAR 2000 DISCLOSURE
We use a significant number of information technology ("IT") and non-IT
systems in our internal operations. IT systems include applications for various
financial, business and administrative functions and non-IT systems include
those that have embedded technology in the systems. These systems 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. Also, we may be
exposed to risks from systems of parties with whom we transact material
business. Our products that we sell to our customers do not contain any internal
embedded calendars in them and therefore we do not anticipate any problems
related to the Year 2000 issue to develop with our products.
We are assessing our Year 2000 risk exposure and plan to implement
remedial and corrective action where necessary. We have reviewed all of our
major internal systems, including financial, business, administrative and
manufacturing systems, to assess Year 2000 readiness and to identify critical
systems that require correction or remediation. Based on the results of this
assessment, we have installed a new ERP system and upgraded our phone and
security system software to be fully Year 2000 compliant.
Also, we may be exposed to risks from systems of parties with whom we
transact material business. We are working with critical suppliers of products
and services to assess their Year 2000 readiness with respect both to their
operations and the products and services they supply to us. Inquiries have been
made and responses are being monitored, with appropriate follow up where
required. This analysis will continue through the end of 1999, with corrective
action taken commensurate with the criticality of affected products and
services. We depend significantly on revenue from sales of our products placed
from customers from other countries. We do not know the extent to which
Year 2000 problems will affect current and potential customers, whether
international or domestic. A disruption in their business may cause a delay in
or cancellation of orders that may adversely affect our business, financial
condition or results of operations.
We are in the process of developing various contingency plans to address
potential problems with critical internal systems and third party interactions.
Our contingency plans include procedures for dealing with a major disruption of
internal business systems, plans for long-term factory shutdown and
identification of alternative vendors of critical materials in the event of
Year 2000 related disruption in supply. Contingency planning will continue
through the end of 1999.
Our costs to date related to the Year 2000 issue consist of the costs of
a new ERP system and phone system upgrade and the reallocation of internal
resources to evaluate our Year 2000 situation, assess systems and make
contingency plans. We have currently spent approximately $400,000 on capital
expenditures for the cost of software, hardware, external consulting fees and
other related upgrades. We believe the costs of reallocation of internal
resources to address this issue is immaterial based on the review of department
budgets and staff allocations. We estimate that a maximum of $25,000 will be
needed to continue to assess,
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monitor, plan contingencies and make appropriate remediation, where needed. The
estimate is based on our assessment of our systems and the responses of our
critical third parties.
Based on currently available information, management does not believe
that the Year 2000 issues discussed above related to internal systems or
products sold to customers will have a material adverse impact on our financial
condition or overall trends in results of operations. However, we are exposed to
risks from third parties, both suppliers not delivering parts or services as
expected and customers delaying or not ordering from us, and from interruptions
of internal systems. Additionally, we may experience unknown system
interruptions or have unplanned costs to correct unexpected problems. Any of
these risks may result in a situation which may have material adverse effect on
our business, financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our Products. We currently
market visible and infrared light semiconductor-based photocoagulator medical
laser systems to the ophthalmic market. We also market a visible light
semiconductor-based photocoagulator medical laser system to the dermatological
market. We believe those continued and increased sales, if any, of these medical
laser systems is dependent upon the following factors:
- Product performance, procedures and price;
- Opinions of medical advisors and associates;
- Recommendations by ophthalmologists, dermatologists, clinicians, and
their associated opinion leaders;
- Performance of these laser systems and treatments which are a
beneficial alternative to competing technologies and treatments;
- The willingness of ophthalmologists and dermatologists to convert to
semiconductor-based or infrared laser systems from visible argon gas
or ion-based laser systems;
- The level of reimbursement for treatments administered with our
products; and
- Our ability to introduce new products into these markets.
Any significant decline in market acceptance of our products would have a
material adverse effect on our business, results of operations and financial
condition.
Our Market is Competitive. Competition in the market for devices used
for ophthalmic and dermatological treatments is intense and is expected to
increase. This market is also characterized by rapid technological innovation
and change and our products could be rendered obsolete as a result of future
innovations. Our competitive position depends on a number of factors including
product performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology are
Coherent, Inc., Nidek, Inc. ("Nidek"), Carl Zeiss, Inc. ("Zeiss"), Alcon
International, and HGM Medical Laser Systems, Inc. ("HGM") and our principal
competitors in dermatology are Laserscope and HGM. Some competitors have
substantially greater financial, engineering, product development,
manufacturing, marketing and technical resources than we do. In addition to
other companies that
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<PAGE> 13
manufacture photocoagulators, we compete with pharmaceutical solutions, other
technologies and other surgical techniques. Some medical companies, academic and
research institutions or others may develop new technologies or therapies that
are more effective in treating conditions targeted by us or are less expensive
than our current or future products. Any such developments could have a material
adverse effect on our business, financial condition and results of operations.
We Face Risks of Manufacturing. The manufacture of our infrared and
visible light photocoagulators and the related delivery devices is a highly
complex and precise process. Although our OcuLight Systems and our DioLite 532
have been successfully introduced, we continue to face risks associated with
manufacturing these products. Various difficulties may occur despite testing.
Furthermore, we depend on third parties to manufacture substantially all of the
components used in our products and have in the past experienced delays in
manufacturing when a sole source supplier was unable to deliver components in
volume and on a timely basis. Such a problem may reoccur. See "--We Depend on
Key Manufacturers and Suppliers." As a result of these factors, we may not be
able to continue to manufacture our existing products or future products on a
cost-effective and timely basis.
We Depend on Key Manufacturers and Suppliers. We rely on third parties
to manufacture substantially all of the components used in our products,
although we assemble critical subassemblies and the final product at our
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 optics and laser diodes. We have qualified two or more
sources for most of the components used in our products. In the past, we
experienced delays in our manufacturing the OcuLight GL due to the inability of
a supplier to deliver components in volume and on a timely basis. We have
qualified a second source for this diode component. The process of qualifying
suppliers is ongoing and may be lengthy, particularly as new products are
introduced. We do not have long-term or volume purchases agreements with any of
our suppliers and currently purchase components on a purchase order basis. These
components may not be available in the quantities required, on reasonable terms,
or at all. Establishing our own capabilities to manufacture these components
would be expensive and could significantly decrease our profit margins. Our
business, results of operations and financial condition would be adversely
affected if we were unable to continue to obtain components as required at a
reasonable cost.
We Depend on International Sales. We derive and expect to continue to
derive a large portion of our revenue from international sales. In 1998 and
1997, our international sales were $8.6 million and $9.4 million, or 37% and
52%, respectively, of total sales. For the three months end October 2, 1999 and
October 3, 1998, our international sales were $2.1 million and $1.8 million,
representing 34% and 35%, respectively, of total sales. Therefore, a large
portion of our revenues will continue to be subject to the risks associated with
international sales. Economic difficulties in Asia and the devaluation of the
currencies of many Asian countries in the past couple of years have
significantly increased the purchase price of our products to our distributors
in that region. Product sales were lower for the affected Asian region during
1998 on a quarterly basis as a result of the economic downturn and currency
problem. The factors stated above could have a material adverse effect on our
business, financial condition or results of operations.
Our Operating Results Fluctuate from Quarter to Quarter. Our sales and
operating results have varied substantially on a quarterly basis and may
continue to vary in the future. Our operating results are affected by a number
of factors, many of which are beyond our control. Factors contributing to these
fluctuations include the following:
- The timing of the introduction and market acceptance of new products,
product enhancements and new applications;
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<PAGE> 14
- The cost and availability of components and subassemblies;
- Changes in our pricing and our competitors;
- Our long and highly variable sales cycle;
- Changes in customers' or potential customers' budgets; and
- Increased product development costs.
In addition to these factors, our quarterly results have been and are expected
to continue to be affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If
sales levels in a particular quarter do not meet expectations, we may be unable
to adjust operating expenses quickly enough to compensate for the shortfall of
sales, and our results of operations may be adversely affected. In addition, we
have historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, any delays in shipment
of products 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 we will remain profitable in
the future or that operating results will not vary significantly.
We Depend on Development of New Products and New Applications. Our
future success is dependent upon, among other factors, our ability to develop,
obtain regulatory approval of, manufacture and market new products. In addition,
we must 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. These variables include price, safety, efficacy,
reliability, marketing and sales efforts, the development of new applications
for these products and general economic conditions affecting purchasing
patterns. Any failure in our ability to successfully develop and introduce new
products or enhanced versions of existing products could have a material adverse
effect on our business, operating results and financial condition. We are
seeking to expand the market for our existing and new products by working with
clinicians and third parties to identify new applications and procedures for our
products. Failure to develop and achieve market acceptance of new applications
or new products would have a material adverse effect on our business, results of
operations and financial condition.
We Must Manage Growth. We have experienced, and may continue to
experience growth in production, the number of employees, the scope of our
business, our operating and financial systems and the geographic area of our
operations. This growth has resulted in new and increased responsibilities for
management personnel and our operating, inventory and financial systems. To
effectively manage future growth, if any, we have been required to continue to
implement and improve operational, financial and management information systems,
procedures and controls. We have implemented a new enterprise-wide management
information system. We must also expand, train, motivate and manage our work
force. Our personnel, systems, procedures and controls may not be adequate to
support our existing and future operations. Any failure to implement and improve
our operational, financial and management systems or to expand, train, motivate
or manage employees could have a material adverse effect on our business,
results of operations and financial condition.
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<PAGE> 15
We Depend on Collaborative Relationships. We have entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of our
products. We plan to collaborate with third parties to develop and commercialize
existing and new products. In May 1996, we executed an agreement with Miravant,
formerly known as PDT, Inc., a maker of photodynamic drugs to collaborate on a
device that emits a laser beam to activate a photodynamic drug developed by
Miravant for the treatment of wet AMD. The development and support of this new
photodynamic system will require significant financial and other resources. This
collaborative development effort may not continue or it may not result in the
successful development and introduction of a photodynamic system and the amount
and timing of resources to be devoted to these activities are not within our
control. Additionally, our reliance on others for clinical development,
manufacturing and distribution of our products may result in unforeseen
problems. Further, our collaborative partners may develop or pursue alternative
technologies either on their own or in collaboration with others. The failure of
any current or future collaboration efforts could have a material adverse effect
on our ability to introduce new products or applications and therefore could
have a material adverse effect on our business, results of operations and
financial condition.
We Rely on Patents and Proprietary Rights. Our success and ability to
compete is dependent in part upon our proprietary information. We rely on a
combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
our intellectual property rights. We file patent applications to protect
technology, inventions and improvements that are significant to the development
of our business. We have been issued six United States patents on the
technologies related to our products and processes. Our patent applications may
not issue as patents, any patents now or in the future may not offer any degree
of protection, or our patents or patent applications may be challenged,
invalidated or circumvented in the future. Moreover, our competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, may seek to apply for and obtain patents that will
prevent, limit or interfere with our ability to make, use or sell our products
either in the United States or in international markets.
In addition to patents, we rely on trade secrets and proprietary
know-how which we seek to protect, in part, through proprietary information
agreements with employees, consultants and other parties. Our proprietary
information agreements with our employees and consultants contain industry
standard provisions requiring such individuals to assign to us without
additional consideration any inventions conceived or reduced to practice by them
while employed or retained by us, subject to customary exceptions. Proprietary
information agreements with employees, consultants and others may be breached,
and we may not have adequate remedies for any breach. Also our trade secrets may
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. 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 our competitors. 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, we have
not conducted any searches to determine whether our technology infringes any
patents or patent applications. We have from time to time been notified of, or
have otherwise been made aware of, claims that we may be infringing upon patents
or other proprietary intellectual property owned by others. If it appears
necessary or desirable, we may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses,
licenses under such patents or intellectual property may not be offered or the
terms of any offered licenses may not be reasonable. This may adversely impact
our operating results.
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<PAGE> 16
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 us 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
us from manufacturing and selling our products, which would have a material
adverse effect on our business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us 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.
We Are Subject To Government Regulation. The medical devices that we
market and manufacture are subject to extensive regulation by the FDA and by
foreign and state governments. Under the FDA Act and the related regulations,
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 our expectations due to the longer than expected time
period required to obtain FDA premarket clearance. Noncompliance with applicable
requirements, including Quality System Regulations ("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 we manufacture
or distribute. Our failure to obtain government approvals or any delays in
receipt of such approvals would have a material adverse effect on our business,
results of operations and financial condition.
International regulatory bodies often establish varying product
standards, packaging requirements, labeling requirements, tariff regulations,
duties and tax requirements. As a result of our sales in Europe, we are required
to have all products "CE" registered, an international symbol affixed to all
products demonstrating compliance to the European Medical Device Directive and
all applicable standards. In July 1998, we received CE registration under Annex
II guidelines, the most stringent path to CE registration. With Annex II
CE registration, we have demonstrated our ability to both understand and comply
with all applicable European standards. This allows us to register any product
upon our internal verification of compliance to all applicable European
Standards. Currently all released IRIS Medical and IRIDERM products are
CE registered. Continued registration is based on successful review of the
process by our European Registrar during their annual audit. Any loss of
registration would have a material adverse effect on our business, results of
operations and financial condition.
We Face Product Liability Risks. We may be subject to product liability
claims in the future. Our products are highly complex and are used to treat
extremely delicate eye tissue and skin conditions on and near a patient's face.
Product defects or the improper use of our products could cause blindness,
eyesight damage or skin damage. In addition, although we recommend that our
disposable products only be used once and so prominently label these
disposables, we believe that certain customers may nevertheless reuse these
disposable products. Accordingly, the manufacture and sale of medical products
entails significant risk of product liability claims. Although we maintain
product liability insurance with coverage limits of $11.0 million per occurrence
and an annual aggregate maximum of $12.0 million, our coverage from our
insurance
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<PAGE> 17
policies may not 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 us in excess of our insurance coverage could have a material adverse
effect on our business, results of operations and financial condition.
Our Stock Price is Volatile. The trading price of our Common Stock has
been subject to wide fluctuations in response to a variety of factors since our
initial public offering in February 1996. 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 our Common Stock.
We Face Risks of the Year 2000 Issue. We are assessing our Year 2000
risk exposure and plan to implement remedial and corrective action where
necessary. We have reviewed all of our major internal systems, including
financial, business, administrative and manufacturing systems, to assess Year
2000 readiness and to identify critical systems that require correction or
remediation. Based on currently available information, management does not
believe that the Year 2000 issues related to internal systems or products sold
to customers will have a material adverse impact on our financial condition or
overall trends in results of operations. However, we are exposed to risks from
third parties, both suppliers not delivering parts or services as expected and
customers delaying or not ordering from us and from interruptions of internal
systems. Additionally, we may experience unknown system interruptions or have
unplanned costs to correct unexpected problems. Any of these risks may result in
a situation which may have a material adverse effect on our business, financial
condition or results of operations. See "Year 2000 Disclosure."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relate
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio and had no holdings of derivative
financial or commodity instruments at October 2, 1999. A review of our financial
instruments in our investment portfolio and risk exposures at that date revealed
that we had exposure to interest rate risk. At October 2, 1999, we performed
sensitivity analyses to assess the potential effect of this risk and concluded
that near-term changes in interest rates should not materially adversely affect
our financial position, results of operations or cash flows.
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<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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.
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<PAGE> 19
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: November 15, 1999 By: /s/ Robert Kamenski
--------------------------------
Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
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<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
<S> <C> <C>
27.1 Financial Data Schedule --
</TABLE>
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 10,242
<SECURITIES> 2,759
<RECEIVABLES> 6,895
<ALLOWANCES> (383)
<INVENTORY> 7,206
<CURRENT-ASSETS> 27,777
<PP&E> 4,259
<DEPRECIATION> (2,079)
<TOTAL-ASSETS> 30,106
<CURRENT-LIABILITIES> 3,468
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 26,572
<TOTAL-LIABILITY-AND-EQUITY> 30,106
<SALES> 18,455
<TOTAL-REVENUES> 18,455
<CGS> 8,298
<TOTAL-COSTS> 8,298
<OTHER-EXPENSES> 9,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,229
<INCOME-TAX> (394)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 835
<EPS-BASIC> .13
<EPS-DILUTED> .12
</TABLE>
