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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 September 30, 2000
[ ] 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)
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<S> <C>
Delaware 77-0210467
--------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
</TABLE>
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 7, 2000 was 6,670,964.
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IRIDEX CORPORATION
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000
and January 1, 2000 3
Condensed Consolidated Statements of Income for the three months
and nine months ended September 30, 2000 and October 2, 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and October 2, 1999 5
Condensed Consolidated Statements of Comprehensive Income for
the three and nine months ended September 30, 2000 and October
2, 1999 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
INDEX TO EXHIBITS 21
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 10,650 $ 9,645
Available-for-sale securities ......................... 3,000 3,503
Accounts receivable, net .............................. 8,640 8,162
Inventories ........................................... 9,015 7,256
Prepaids and other current assets ..................... 442 437
-------- --------
Total current assets ............................... 31,747 29,003
Property and equipment, net ........................... 2,036 2,144
Deferred income taxes ................................. 1,518 1,518
-------- --------
Total assets ....................................... $ 35,301 $ 32,665
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 1,671 $ 1,128
Accrued expenses ...................................... 3,610 4,033
-------- --------
Total liabilities .................................. 5,281 5,161
-------- --------
Stockholders' equity:
Common stock .......................................... 68 66
Additional paid-in capital ............................ 22,645 22,124
Accumulated other comprehensive income(loss) .......... 3 (2)
Retained earnings ..................................... 7,304 5,316
-------- --------
Total stockholders' equity ......................... 30,020 27,504
-------- --------
Total liabilities and stockholders' equity ......... $ 35,301 $ 32,665
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales ............................................................. $ 8,498 $ 6,295 $ 25,475 $ 18,455
Cost of sales ..................................................... 3,818 2,771 10,882 8,298
-------- -------- -------- --------
Gross Profit ................................................... 4,680 3,524 14,593 10,157
-------- -------- -------- --------
Operating expenses:
Research and development ....................................... 1,287 947 3,873 2,789
Selling, general and administrative ............................ 2,714 2,234 8,219 6,568
-------- -------- -------- --------
Total operating expenses ....................................... 4,001 3,181 12,092 9,357
-------- -------- -------- --------
Income from operations ............................................ 679 343 2,501 800
Interest and other income, net .................................... 146 135 422 429
-------- -------- -------- --------
Income before provision for income taxes ....................... 825 478 2,923 1,229
Provision for income taxes ........................................ (264) (153) (935) (394)
-------- -------- -------- --------
Net income ..................................................... $ 561 $ 325 $ 1,988 $ 835
======== ======== ======== ========
Basic net income per common share ................................. $ 0.08 $ 0.05 $ 0.30 $ 0.13
======== ======== ======== ========
Diluted net income per common share ............................... $ 0.08 $ 0.05 $ 0.27 $ 0.12
======== ======== ======== ========
Shares used in basic net income per common share calculation ...... 6,663 6,489 6,627 6,496
======== ======== ======== ========
Shares used in diluted net income per common share calculation .... 7,284 6,743 7,327 6,751
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 2,
2000 1999
-------- --------
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Cash flows from operating activities:
Net income ............................................................................ $ 1,988 $ 835
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 661 551
Provision for sales returns ........................................................ 100 --
Changes in operating assets and liabilities:
Accounts receivable ............................................................. (578) 1,096
Inventories ..................................................................... (1,759) (702)
Prepaids and other current assets ............................................... (5) (104)
Accounts payable ................................................................ 543 (247)
Accrued expenses ................................................................ (423) 1,233
-------- --------
Net cash provided by operating activities .......................................... 527 2,652
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities ........................................... (3,856) (1,867)
Proceeds from maturity of available-for-sale securities .............................. 4,365 4,184
Acquisition of property and equipment ................................................ (553) (445)
-------- --------
Net cash provided by (used in) activities .......................................... (44) 1,872
-------- --------
Cash flows from financing activities:
Issuance of common stock, net ........................................................ 522 242
Purchase of treasury stock ....................................................... -- (315)
-------- --------
Net cash provided by (used in) financing activities ................................ 522 (73)
-------- --------
Net increase in cash and cash equivalents ....................................... 1,005 4,451
Cash and cash equivalents at beginning of period ......................................... 9,645 5,791
-------- --------
Cash and cash equivalents at end of period ............................................... $ 10,650 $ 10,242
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gains (losses) on available-for-sale securities $ 5 $ (9)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income .................................. $ 561 $ 325 $1,988 $ 835
Other comprehensive income (loss):
Change in unrealized gain (loss) on
available-for-sale securities ......... 5 4 5 (9)
------ ------ ------ ------
Comprehensive income ........................ $ 566 $ 329 $1,993 $ 826
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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IRIDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
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 March 31, 2000. The results of operations for the three month and
nine month periods ended September 30, 2000 are not necessarily indicative of
the results for the year ending December 30, 2000 or any future interim period.
2. INVENTORIES COMPRISE (IN THOUSANDS) :
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<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
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(unaudited)
<S> <C> <C>
Raw materials and work in progress.................................... $ 5,356 $ 3,839
Finished goods........................................................ 3,659 3,417
-------- --------
Total inventories..................................................... $ 9,015 $ 7,256
======== ========
</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):
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THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------ ------ ------ ------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator -- Net income per common share and
diluted net income per common share
Net income ............................................... $ 561 $ 325 $1,988 $ 835
Denominator -- Net income per common share
Weighted average common stock outstanding ............. 6,663 6,489 6,627 6,496
Basic net income per common share ........................ $ 0.08 $ 0.05 $ 0.30 $ 0.13
====== ====== ====== ======
Denominator -- Diluted net income per common share
Weighted average common stock outstanding ............. 6,663 6,489 6,627 6,496
Effect of dilutive securities
Weighted average common stock options ................. 621 254 700 255
------ ------ ------ ------
Total weighted average stock and options outstanding ..... 7,284 6,743 7,327 6,751
====== ====== ====== ======
Diluted net income per common share ...................... $ 0.08 $ 0.05 $ 0.27 $ 0.12
====== ====== ====== ======
</TABLE>
During the three months ended September 30, 2000 and October 2, 1999,
options to purchase 61,044 and 396,109 shares at weighted average exercise
prices of $13.50 and $6.95 per share 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. For the nine months ended September 30, 2000 and October 2, 1999 options
to purchase 35,282 and 331,764 shares at weighted average exercise prices of
$14.19 and $7.37 per share were outstanding but 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.
4. BUSINESS SEGMENTS
We operate in two reportable segments: the laser medical device segment
and the laser research segment. In the laser medical device segment, we develop,
manufacture and market medical devices for the ophthalmology and dermatology
markets. Our revenues arise from the sale of consoles, delivery devices,
disposables and service and support activities. In the laser research segment,
we conduct research and development under research grants from the U.S. Federal
Government and others. Under the terms of these grants we typically retain the
right to commercially market the technology developed.
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Information on reportable segments for the three and nine months ended
September 30, 2000 and October 2, 1999 is as follows ( in thousands):
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THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 OCTOBER 2, 1999 SEPTEMBER 30, 2000 OCTOBER 2, 1999
--------------------- -------------------- -------------------- --------------------
Laser Laser Laser Laser
Medical Laser Medical Laser Medical Laser Medical Laser
Devices Research Devices Research Devices Research Devices Research
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales ................... $ 8,213 $ 285 $ 6,229 $ 66 $25,027 $ 448 $18,015 $ 440
Depreciation ............ 192 6 188 3 648 12 540 11
Income before
provision
for income taxes ........ 593 232 443 35 2,590 333 998 231
</TABLE>
Income before provision for income taxes of the laser research segment
does not include indirect costs of manufacturing, research and development and
selling, general and administrative costs. Such costs are not allocated and
therefore are included in the Laser Medical Device segment.
5. INCOME TAXES
The Company uses the liability method to account for income taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The provision for income taxes
for the three month and nine month periods ended September 30, 2000 and October
2, 1999 are based on the estimated effective income tax rate of 32% for the
fiscal years ending December 30, 2000 and January 1, 2000.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 will be effective for
fiscal quarters beginning after June 15, 1999. In July of 1999, the FASB issued
Statement of Financial Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 ("SFAS 137") which defers the effective date to all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company believes that SFAS 133
and 137 will not have a material effect on the financial position or results of
operation of the Company. The Company does not currently hold derivative
instruments or engage in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
(SAB 101), "Revenue Recognition in Financial Statements." In June 2000, the SEC
issued SAB 101B, which deferred the implementation of SAB 101 until the fourth
quarter of fiscal years beginning after December 15, 1999. The Company is
currently evaluating the effect of adopting SAB 101 and does not believe it
will have a significant impact.
9
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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, such as those relating to level of international sales; future sales
growth; timing of the introduction of the Apex 800; expected sales of the
DioLite 532 in the fourth quarter of fiscal 2000;anticipated increases in
manufacturing, research and development and sales, general and administrative
expenses;anticipated decreases and fluctuations in gross margins; future
liquidity. 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>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 44.9 44.0 42.7 45.0
----- ----- ----- -----
Gross profit ............................ 55.1 56.0 57.3 55.0
----- ----- ----- -----
Operating expenses:
Research and development ................ 15.1 15.0 15.2 15.1
Sales, general and administrative ....... 32.0 35.5 32.3 35.6
----- ----- ----- -----
Total operating expenses ............. 47.1 50.5 47.5 50.7
----- ----- ----- -----
Income (loss) from operations .............. 8.0 5.5 9.8 4.3
Other income, net .......................... 1.7 2.1 1.7 2.3
----- ----- ----- -----
Income before provision for income ......... 9.7 7.6 11.5 6.6
taxes
Provision for income taxes ................. (3.1) (2.4) (3.7) (2.1)
----- ----- ----- -----
Net income ................................. 6.6% 5.2% 7.8% 4.5%
===== ===== ===== =====
</TABLE>
Sales. Our sales increased 35% to $8.5 million for the three months
ended September 30, 2000 from $6.3 million for the three months ended October 2,
1999. The increase was due primarily to strong sales of the Company's
ophthalmology products, specifically the Oculight GLx and Oculight GL
photocoagulators and products used to treat Age Related Macular Degeneration
(AMD). Sales of the Company's dermatology products decreased to $1.2 million in
the third quarter compared to $1.6 million for the corresponding 1999 quarter.
This was due primarily to increased competition for the DioLite 532, which is
used in the treatment of vascular and pigmented lesions, and record third
quarter DioLite sales in 1999. We expect DioLite sales for the fourth quarter of
2000 to be near the sales levels of the fourth quarter of 1999 due to improved
marketing efforts. Sales increased 38% to $25.5 million for the nine months
ended September 30, 2000 from $18.5 million for the nine months ended October 2,
1999. Domestic sales of $5.1 million accounted for 60% of sales for the three
months ended September 30, 2000 compared to $4.2 million or 66% of sales in the
comparable 1999 period. The increase in domestic sales in absolute dollars was
due to increases in ophthalmology product sales offset, in part,
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by decreases in dermatology product sales. International sales of $3.4 million
accounted for 40% of sales for the three months ended September 30, 2000
compared to $2.1 million or 34% in the comparable 1999 period. The increase in
international sales was primarily due to increases in both ophthalmology and
dermatology product sales. International sales increased in all regions but were
most pronounced in Asia and the Americas. We expect revenues from international
sales to continue to account for a substantial portion of our sales. We expect
future growth in sales to be primarily derived from sales of ophthalmology
products and related delivery devices, and the Apex 800 hair removal laser for
dermatology. Introduction of the Apex 800 is expected in the fourth quarter of
fiscal 2000.
There were $0.3 million sales into the research segment for the three
months ended September 30, 2000 as compared with $0.1 million for the three
months ended October 2, 1999. For the nine months ended September 30, 2000 and
October 2, 1999 sales were $0.4 million.
Gross Profit. Our gross profit increased 33% to $4.7 million for the
three months ended September 30, 2000 from $3.5 million for the three months
ended October 2, 1999. Gross profit as a percentage of net sales for the three
months ended September 30, 2000 decreased to 55.1%, compared to 56.0% for the
three months ended October 2, 1999, primarily due to the increased sales volume
of the OcuLight GLx and GL, both of which have relatively lower gross margins.
In addition, a higher percentage of international product sales, which have
lower average sales prices as they are transacted through independent
distributors, had the impact of lowering our gross profit as a percentage of
revenue. Such gross margin rate decreases were offset in part by increases in
sales volume of the OcuLight SLx and SL, both of which have relatively higher
gross margins. For the nine months ended September 30, 2000, our gross profit
increased 43.7% to $14.6 million as compared to $10.2 million for the comparable
period in 1999. Gross profit as a percentage of net sales for the nine months
ended September 30, 2000 increased to 57.3% compared to 55.0% for the nine
months ended October 2, 1999. For the balance of 2000, we expect manufacturing
costs to increase in absolute dollars to support increasing unit shipment
volumes. We expect to begin shipping the Apex 800 hair removal laser system in
the fourth quarter of 2000. As a result, we expect the gross profit margin to
drop slightly since initial production costs for the Apex 800 are likely to
cause a comparatively lower gross profit margin. We also expect our gross profit
margins to continue to fluctuate due to changes in the relative proportions of
domestic and international sales, mix of sales of existing products, pricing,
product costs and a variety of other factors.
Research and Development. Our research and development expenses
increased by 35.9% to $1.3 million for the three months ended September 30, 2000
from $0.9 million for the three months ended October 2, 1999. Research and
development expenses increased as a percentage of net sales to 15.1% for the
three months ended September 30, 2000 from 15.0% for the comparable prior year
three-month period. The increase in research and development expenses during
this period was primarily attributable to increases in personnel, clinical study
expenses and other resources as a result of an increase in development efforts
for our applications and products, including the Apex 800 hair removal system.
For the nine months ended September 30, 2000, research and development expenses
increased 38.9% to $3.9 million as compared to $2.8 million for the nine months
ended October 2, 1999. Research and development expenses as a percentage of net
sales increased during the period to 15.2% for the nine months ended September
30, 2000 from 15.1% for the comparable 1999 period. We expect these expenses for
research and development to continue to increase in absolute dollars during the
remainder of 2000 in connection with activities related to new products, such as
the Apex 800, and clinical treatment development, such as the Transpupillary
ThermoTherapy (TTT) for Age-related Macular Degeneration (AMD) study that
commenced in March 2000.
Sales, General and Administrative. Our sales, general and administrative
expenses increased by 21.5% to $2.7 million for the three months ended September
30, 2000 from $2.2 million for the three months ended October 2, 1999. Sales,
general and administrative expenses decreased as a percentage of net sales to
31.9% for
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the three months ended September 30, 2000 from 35.5% for the comparable prior
year three-month period. The increase in absolute dollars in sales, general and
administrative expenses was primarily due to increased marketing efforts and the
hiring of additional employees to support expanding unit sales volumes for our
medical products and administrative activities. For the nine months ended
September 30, 2000, sales, general and administrative expenses increased by
25.1% to $8.2 million from $6.6 million for the comparable period in 1999.
Sales, general and administrative expenses as a percentage of net sales
decreased during this period due to the increase in the rate of growth of
revenue relative to the rate of growth of sales, general and administrative
expenses. We expect sales, general and administrative expenses to continue to
increase in absolute dollars during the balance of 2000 to support the
increasing unit shipment volumes and additional employees.
Income Taxes. Our effective tax rate for the three months ended
September 30, 2000 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 earnings on available-for-sale security investments and tax benefits
from our foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, our primary sources of liquidity included cash
and cash equivalents and available-for-sale securities in the aggregate amount
of $13.7 million. In addition, we have available $2 million under our unsecured
line of credit which bears interest at the bank's prime rate and expires in
September 2001. As of September 30, 2000, no borrowings were outstanding under
this credit facility.
During the nine months ended September 30, 2000, we generated $1.0
million in cash and cash equivalents. During this period, operating activities
provided $0.5 million of cash. Sources of cash from operating activities
included net income of $2.0 million, depreciation and amortization of $0.7
million, a net increase in accounts payable and accrued expenses of an aggregate
of $0.1 million, offset by uses of cash including an increase in inventories of
$1.8 million and an increase in accounts receivable of $0.6 million. The
increase in inventory was primarily due to an increase in raw materials
inventory.
We consumed $0.05 million in cash and cash equivalents with investing
activities during the nine months ended September 30, 2000, primarily due to the
acquisition of $0.55 million of property and equipment offset by the net
maturities of $0.5 million of available-for-sale securities.
Net cash provided by financing activities during the nine months ended
September 30, 2000 was $0.5 million which consisted of the issuance of common
stock.
We believe that, based on current estimates, our available-for-sale
securities together with cash generated from operations will be sufficient to
meet our anticipated cash requirements for the next 12 months.
In December 1998, we instituted a stock repurchase program whereby up to
150,000 shares of our Common Stock may be repurchased in the open market. We
plan to utilize all of the reacquired shares for reissuance in connection with
employee stock programs. No shares were repurchased during the nine months ended
September 30, 2000. To date, we have purchased 76,000 shares of our Common Stock
under this program.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 will be effective for
fiscal quarters beginning after June 15, 1999. In July of 1999, the FASB issued
Statement of Financial Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 ("SFAS 137") which defers the effective date to all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company believes that SFAS 133
and 137 will not have a material effect on the financial position or results of
operation of the Company. The Company does not currently hold derivative
instruments or engage in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition in Financial Statements." In June 2000, the SEC
issued SAB 101B, which deferred the implementation of SAB 101 until the fourth
quarter of fiscal years beginning after December 15, 1999. The Company is
currently evaluating the effect of adopting SAB 101 and does not believe it
will have a significant impact.
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 dermatology
market. We believe the 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;
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- The level of reimbursement for treatments administered with our
products; and
- Our ability to introduce new products into these markets.
For example, in July 2000, the Health Care Financing Administration (HCFA) of
the Department of Health and Human Services advised that claims for
reimbursement for certain AMD procedures, including Transpupillary Thermotherapy
(TTT), would not be reimbursed by Medicare. As a result, sales of our OcuLight
SLx decreased in the third quarter of 2000. However, in September 2000, HCFA
reversed its position and advised that claims for reimbursement for the
aforementioned AMD procedures can be submitted for reimbursement with coverage
and payment to be determined by the local medical carrier. The sales impact of
the HCFA advisories on the OcuLight SLx during the fourth quarter of 2000 is
unclear. However, if doctors are successful in obtaining reimbursements from
local carriers, we would expect increased interest in the Transpupillary
Thermotherapy (TTT) procedure with a resulting increase in sales of the OcuLight
SLx laser system. The HCFA advisories will not affect international sales. 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. Our newest product, the Apex
800 Laser Hair Removal System, will compete with products from Coherent, Inc.,
Candela Corporation, ESC Medical Systems, Ltd. and Cynosure, Inc. Some
competitors have substantially greater financial, engineering, product
development, manufacturing, marketing and technical resources than we do. In
addition to other companies that 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 recur. 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. In addition, introduction of
the Apex
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800 hair removal laser has been delayed due to a key component delay. We expect
the Apex 800 to be introduced in the fourth quarter of fiscal 2000. 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 purchase 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 1999 and
1998, our international sales were $10.3 million and $8.6 million, or 39% and
37%, respectively, of total sales. For the nine months ended September 30, 2000
and October 2, 1999, our international sales were $9.0 million and $7.5 million,
representing 35% and 41%, respectively, of total sales. Therefore, a large
portion of our revenues will continue to be subject to the risks associated with
international sales. None of our international revenues and costs have been
denominated in foreign currencies. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and thus less competitive in foreign markets. The current high U.S.
dollar relative value to the European currency (the Euro) is making our products
less competitive in Europe when compared to European competitors and could
negatively impact future sales levels from the region. 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 on a quarterly basis during 1998, and to a lesser extent during
1999 and the first quarter of 2000, as a result of the economic downturn and
currency problem. Sales to the Asian region recovered in the second and third
quarters of 2000. 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;
- 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
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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, such as the
Apex 800 hair removal laser system. 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, such as the Apex
800, or enhanced versions of existing products, could have a material adverse
effect on our business, operating results and financial condition. We expect to
introduce the Apex 800 to the market in the fourth quarter of 2000. A delay in
the introduction 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 implemented a new enterprise-wide management
information system in 1998. 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.
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
Medical Technologies, 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
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development of our business. We have been issued eight 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 March 2000, we entered into a patent license agreement with Palomar
Medical Technologies, Inc. (PMTI). This agreement gives us a non-exclusive 7.5%
royalty bearing sublicense to skin cooling patents for use in laser hair
removal. The license provides the Apex 800 hair removal system with additional
cooling features.
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.
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
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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 ("QSRs"), 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 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.
To date, we have not experienced any product liability claims which would result
in payments in excess of our policy limits.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
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 September 30, 2000. 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 September 30, 2000,
we performed sensitivity analyses to assess the potential effect of this risk
and concluded
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that near-term changes in interest rates should not materially adversely affect
our financial position, results of operations or cash flows.
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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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 14, 2000 By: /s/ Robert Kamenski
-------------------------------------
Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
<S> <C>
27.1 Financial Data Schedule ___
</TABLE>
21
