<PAGE>
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: April 2, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-11634
STAAR SURGICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-3797439
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1911 Walker Avenue
Monrovia, California
91016
(Address of principal executive offices)
(Zip Code)
(626) 303-7902
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
The Registrant has 14,029,811 shares of common stock, par value $0.01 per share,
issued and outstanding as of May 12, 1999.
Total number of sequentially numbered pages in this document: 9
<PAGE>
STAAR SURGICAL COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I
Item 1 - Financial Information
Condensed Consolidated Balance Sheets - April 2, 1999 and
January 1, 1999............................................................ 1
Condensed Consolidated Statements of Income - Three Months Ended
April 2, 1999 and April 3, 1998............................................ 2
Condensed Consolidated Statements of Cash Flows - Three Months Ended
April 2, 1999 and April 3, 1998............................................ 3
Notes to Condensed Consolidated Financial Statements............................ 4
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 5
PART II
Item 5 - Other Information............................................................... 8
Signature Page.................................................................. 9
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
--------
27 Financial Data Schedule
Reports on Form 8-K
-------------------
None
</TABLE>
<PAGE>
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 2, January 1,
1999 1999
ASSETS (Unaudited) (Note)
------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,103,046 $ 4,689,574
Accounts receivable, less allowance for doubtful accounts 11,189,517 10,167,449
Other receivables 1,444,830 1,386,830
Inventories 19,623,832 20,139,979
Prepaids, deposits and other current assets 4,268,199 3,624,390
Deferred income tax 1,108,761 1,108,761
------------ ------------
Total current assets 41,738,185 41,116,983
------------ ------------
Investment in joint venture 3,090,550 3,178,477
Property, plant and equipment, net 10,494,072 10,379,997
Patents and licenses, net 12,069,609 12,038,023
Goodwill, net 4,933,504 5,047,982
Other assets 1,446,989 1,528,150
------------ ------------
Total assets $73,772,909 $73,289,612
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ 748,782 $ 1,034,801
Accounts payable 4,190,956 4,975,222
Current portion of long-term debt 1,250,395 1,277,474
Deferred income tax 2,822,706 2,822,706
Other current liabilities 4,414,346 4,081,885
------------ ------------
Total current liabilities 13,427,185 14,192,088
------------ ------------
Long-term debt, net of current portion 10,309,224 10,021,287
Other long-term liabilities 433,116 513,699
------------ ------------
Total liabilities 24,169,525 24,727,074
------------ ------------
Minority interest 1,021,528 856,039
------------ ------------
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 14,098,343 at April 2, 1999 and
13,994,593 at January 1, 1999 140,983 139,946
Capital in excess of par value 46,651,391 46,039,428
Accumulated other comprehensive income (541,260) (536,491)
Retained earnings 7,990,529 7,317,778
------------ ------------
54,241,643 52,960,661
Notes receivable from officers and directors (5,659,787) (5,254,162)
------------ ------------
Total stockholders' equity 48,581,856 47,706,499
------------ ------------
$73,772,909 $73,289,612
============ ============
</TABLE>
Note: The amounts presented in the January 1, 1999 Balance Sheet are derived
from the audited financial statements for the year ended January 1,
1999.
See accompanying notes to the condensed consolidated financial statements.
1
<PAGE>
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
April 2, 1999 April 3, 1998
------------- -------------
<S> <C> <C>
Sales $14,725,103 $14,042,833
Royalty income 58,036 58,036
------------- -------------
Total revenues 14,783,139 14,100,869
Cost of sales 5,744,670 4,283,689
------------- -------------
Gross profit 9,038,469 9,817,180
------------- -------------
Selling, general and administrative expenses:
General and administrative 1,741,779 1,681,963
Marketing and selling 4,846,486 4,384,999
Research and development 1,062,416 1,016,719
------------- -------------
Total selling, general and administrative expenses 7,650,681 7,083,681
------------- -------------
Operating income 1,387,788 2,733,499
------------- -------------
Other income (expense):
Equity in earnings of joint venture 99,243 150,054
Interest expense - net (200,183) (183,873)
Other income (expense) (28,787) (64,942)
------------- -------------
Total other income (expense) (129,727) (98,761)
------------- -------------
Income before income taxes and minority interest 1,258,061 2,634,738
Income tax provision 419,821 843,781
Minority interest 165,489 116,069
------------- -------------
Net income 672,751 $ 1,674,888
============= =============
Net income per share:
Basic $.05 $.13
============= =============
Diluted $.05 $.12
============= =============
Weighted average number of shares outstanding:
Basic 14,093,495 13,263,243
Diluted 14,329,031 14,338,719
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE>
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
April 2, April 3,
1999 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 672,751 $ 1,674,888
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation of property and equipment 453,470 477,845
Amortization of intangibles 505,446 842,144
Change in deferred revenue (58,036) (58,036)
Minority interest 165,489 116,069
Equity in earnings of joint venture (99,244) (150,054)
Deferred income taxes -- 4,024
Change in operating working capital, excluding effects of
acquisitions (1,659,535) 1,343,960
---------------------- ----------------------
Net cash provided by (used in) operating activities (19,659) 4,250,840
---------------------- ----------------------
Cash flows from investing activities:
Purchase of property and equipment (567,545) (563,437)
Increase in patents and licenses (332,863) (496,695)
Acquisition of a foreign distributor, net of cash acquired -- (4,269,923)
Dividends received from joint venture 187,171 --
Increase in other assets (8,530) (1,130,351)
---------------------- ----------------------
Net cash used in investing activities (721,767) (6,460,406)
---------------------- ----------------------
Cash flows from financing activities:
Increase in borrowings under notes payable and long-term debt -- 4,375,162
Payments on notes payable and long-term debt (308,754) (858,444)
Net borrowings (payments) under line-of-credit 261,046 (3,706,940)
Proceeds from the exercise of stock options 207,375 105,499
---------------------- ----------------------
Net cash provided by (used in) financing activities 159,667 (84,723)
---------------------- ----------------------
Effect of exchange rate changes on cash and cash equivalents (4,769) (390,887)
---------------------- ----------------------
Decrease in cash and cash equivalents (586,528) (2,685,176)
Cash and cash equivalents, at beginning of period 4,689,574 6,279,136
---------------------- ----------------------
Cash and cash equivalents, at end of period $ 4,103,046 $ 3,593,960
====================== ======================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 2, 1999
1. Basis of Presentation
The accompanying financial statements consolidate the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Assets and liabilities of foreign subsidiaries are translated at rates of
exchange in effect at the close of the period. Revenues and expenses are
translated at the weighted average of exchange rates in effect during the
period. The resulting translation gains and losses are deferred and are shown as
a separate component of stockholders' equity. During the three-months ended
April 2, 1999 and April 3, 1998, the net foreign translation loss was
$4,769 and $390,887 and net foreign currency transaction gain/(loss) was not
material. Investments in affiliates and joint ventures are accounted for using
the equity method of accounting.
Each of the Company's reporting periods ends on the Friday nearest to the
quarter ending date.
2. Foreign Sales
During the three-months ended April 2, 1999 and April 3, 1998, the Company
had foreign sales primarily to Europe, South Africa, Australia and Southeast
Asia of approximately $8,513,000 and $7,642,000. Of these sales, approximately
$6,441,000 and $6,160,000 were to Europe, which has been the Company's principal
foreign market, for the quarters ended April 2, 1999 and April 3, 1998.
The Company sells its products internationally. International transactions
subject the Company to several potential risks, including fluctuating exchange
rates (to the extent the Company's transactions are not in U.S. dollars),
regulation of fund transfers by foreign governments, United States and foreign
export and import duties and tariffs and possible political instability.
3. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market
(net realizable value) and consisted of the following at April 2, 1999 and
January 1, 1999:
<TABLE>
<CAPTION>
April 2, January 1,
1999 1999
----------- -----------
<S> <C> <C>
Raw materials and purchased parts.......$ 2,133,110 $ 2,189,154
Work in process......................... 2,221,418 2,279,002
Finished goods.......................... 15,269,304 15,671,823
----------- -----------
$19,623,832 $20,139,979
----------- -----------
</TABLE>
4. Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial statements for the three-months
ended April 2, 1999 and April 3, 1998, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial condition and results of operations for this
interim period. The results of operations for the three-months ended April 2,
1999 are not necessarily indicative of the results to be expected for any other
interim period or the entire year.
5. Reclassifications
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform with the 1999 presentation.
4
<PAGE>
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the percentage of total revenues represented
by certain items reflected in the Company's income statement for the period
indicated and the percentage increase or decrease in such items over the prior
period.
<TABLE>
<CAPTION>
Percentage of
Total Revenues For Three Percentage change
Months Ended for Three Months
----------------------- ----------------------
April 2, April 3,
1999 1998 1999 vs 1998
----------------------- ----------------------
Increase (Decrease)
<S> <C> <C> <C>
Total revenues........................ 100.0% 100.0% 4.8%
Cost of sales......................... 38.9 30.4 34.1
----- -----
Gross profit.......................... 61.1 69.6 (7.9)
Costs and expenses:
General and administrative....... 11.8 11.9 3.6
Marketing and selling............ 32.8 31.1 10.5
Research and development......... 7.2 7.2 4.5
----- -----
Total costs and expenses.... 51.8 50.2 8.0
Other expense, net.................... (.9) (.7) 31.4
----- -----
Income before income taxes............ 8.5 18.7 (52.3)
Income tax provision.................. 2.8 6.0 (50.2)
Minority interest..................... 1.1 .8 42.6
----- -----
Net income............. 4.6% 11.9% (59.8)
===== =====
</TABLE>
Revenues
- --------
Revenues for the three-month period ended April 2, 1999 were $14.8
million, which is 4.8% greater than the $14.1 million in revenues for the three-
month period ended April 3, 1998. The increase in revenues was attributable to
an increase in sales of the Company's refractive products, primarily the
Implantable Contact Lens(TM) , a deformable intraocular refractive corrective
lens, and the Toric(TM) intraocular lens. Additionally, increased sales of the
Company's intraocular lenses (IOL's) were partially offset by lower average
selling prices for IOL's due to competitive pressures.
Cost of Sales
- -------------
Cost of sales increased to 38.9% of revenues for the three-months ended
April 2, 1999 from 30.4% of revenues for the three-months ended April 3, 1998.
The increase as a percentage of revenue was due to lower average selling prices
of IOLs and higher unit costs of IOLs produced in 1998 due to lower production
volume.
General & Administrative
- ------------------------
General and administrative expense decreased slightly to 11.8% of revenues
for the three-months ended April 2, 1999 from 11.9% of revenues for the three-
months ended April 3, 1998. While actual expense increased 3.6% over the
5
<PAGE>
same period last year, the decrease as a percent of revenues was due to the
slightly larger change in revenues.
Marketing and Selling
- ---------------------
Marketing and selling expense increased to 32.8 % of revenues for the
three-months ended April 2, 1999 compared to 31.1% of revenues for the three-
months ended April 3, 1998. The increase in marketing and selling expense as a
percentage of revenues was attributable to marketing and selling expenses of the
product launch for the Toric(TM) intraocular lens and to increased domestic
commission expenses.
Research and Development
- ------------------------
Research and development expense for the first quarter ending April 2, 1999
and April 3, 1998 was 7.2% of revenues. Actual expense increased 4.5% over the
same period last year due to increased costs of managing clinical trials.
Other Expense, Net
- ------------------
Other expense, net for the quarter ended April 2, 1999 was ($130,000), or
(.9%) of revenues, as compared to ($99,000), or (.7%) of revenues, for the
quarter ended April 3, 1998. The primary reasons for this change were increased
interest expenses, offset by decreased losses in foreign currency transactions,
and a decrease in earnings related to the Company's joint venture with Canon
STAAR.
Income Tax Provision (Income Taxes)
- -----------------------------------
The Company's effective income tax rate at April 2, 1999 increased to 33.4%
as compared to April 3, 1998 when it was 32%.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents for the quarter ended April 2, 1999 decreased by
approximately $.6 million relative to the fiscal year ended January 1, 1999.
This decrease was principally due to purchases of property and equipment and
acquisition of patents partially offset by cash provided by financing
activities.
As of April 2, 1999, the Company had a current ratio of 3.1:1, net working
capital of $28.3 million and net equity of $48.6 million compared to January 1,
1999 when the Company's current ratio was 2.9:1, its net working capital was
$26.9 million, and its net equity was $47.7 million.
During the quarter, an officer of the Company exercised options for the
Company's common stock in exchange for a note in the amount of $405,625. The
note bears interest at a rate of 7%, or at the lowest applicable rate allowed by
the Internal Revenue Service. The note is secured by a stock pledge agreement
and matures on September 4, 2003.
The Company expects to continue to be profitable in the future and the
Company believes that all future cash flow needs will come from cash generated
by operations or additional financing, if required.
Year 2000 Compliance
- --------------------
The Company's management understands the importance of identifying and
addressing Year 2000 compliance issues and has placed a high priority on this
project. Accordingly, the Company's Year 2000 efforts are guided by a special
Year 2000 Steering Committee which reports to the President of the Company. The
Steering Committee is made up of designees from each department within the
Company and includes representatives of its foreign subsidiaries. The Committee
meets on a regular basis to discuss the progress of each department in achieving
its Year 2000 goals and to discuss new information.
The Company has developed a comprehensive plan for achieving Year 2000
compliance that is consistent with the five-step process prescribed by federal
regulators as follows:
6
<PAGE>
. Awareness - Creating and maintaining awareness of the Company's Year
2000 effort at all levels of the organization.
. Assessment - Determining which computers, operating systems,
applications, machinery and equipment, and facilities are impacted and
prioritizing the remediation effort.
. Renovation - Fixing any problems.
. Validation - Testing and certification.
. Implementation - Implementation of validated systems.
The Company's principal computer hardware used by its business application
systems has been certified to be Year 2000 compliant by the vendor, Hewlett-
Packard. The Company's principal internal operating systems are UNIX/Unidata
based. These systems use a sequentially incremented integer to store the date
beginning with a day 1 of January 1, 1968. Therefore, the date logic of these
systems had few Year 2000 related problems, the vendor has addressed such
problems and the Company has upgraded its systems to a Year 2000 certified
version. The Company's principal business application software is a modified
version of one purchased from a third party. The Company's personnel have
assessed, modified and installed the modified programs into a test environment.
Testing by the Company's information system personnel is complete, including
advancing the system date to the Year 2000, and all programs functioned as
expected. The Company has recently successfully completed user testing of all
mission critical programs and the Year 2000 compliant programs have been
installed domestically. These same systems and programs are used by the
majority of the Company's subsidiaries and those installations are scheduled to
be complete during the third quarter of 1999. In general, the Company is ahead
of its schedule for this project and has met all internal milestones. For those
subsidiaries using other systems, either those systems have been certified as
Year 2000 compliant or plans are in place to upgrade or replace with the
Company's principal system.
In addition to reviewing its internal systems, the Company is contacting
certain suppliers, vendors, and other providers of goods and services to
determine their ability to do business in the Year 2000 and have included Year
2000 considerations in the vendor selection and certification process. The
Company expects this process to be ongoing as companies progress with their own
Year 2000 issues. In any event, contingency plans are being developed in the
event that the Year 2000 does impact critical suppliers or vendors.
The Company's costs of achieving Year 2000 compliance to date have been
immaterial to financial position, results of operations or cash flows. The
Company does not anticipate that additional amounts incurred in connection with
its Year 2000 compliance program will be material to its financial conditions or
results of operations.
Due to the uncertainties involved, the Company cannot predict the impact of
the Year 2000 on its operations. Achieving Year 2000 compliance is dependent on
many factors, some of which are not within the Company's control, including,
without limitation, the continuity of services provided by the government,
utilities, transportation industry and other service providers. Should one of
these systems fail, or should the Company's internal systems or the internal
systems of one or more significant vendors or suppliers fail to achieve Year
2000 compliance, the Company's business and its results of operations could be
adversely affected.
7
<PAGE>
PART II - ITEM 5
Other Information
- -----------------
None
PART II - ITEM 6
Exhibits and Reports on Form 8-K
Exhibits
27 Financial Data Schedule
Reports on Form 8-K
None
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAAR SURGICAL COMPANY
Date: May 14, 1999 By: /s/ WILLIAM C. HUDDLESTON
-------------------------------------
William C. Huddleston
Chief Financial Officer and
Duly Authorized Officer
(principal accounting and financial
officer for the quarter)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> APR-02-1999
<CASH> 4,103,046
<SECURITIES> 0
<RECEIVABLES> 11,511,671
<ALLOWANCES> 322,154
<INVENTORY> 19,623,832
<CURRENT-ASSETS> 41,738,185
<PP&E> 24,343,073
<DEPRECIATION> 13,849,001
<TOTAL-ASSETS> 73,772,909
<CURRENT-LIABILITIES> 13,427,185
<BONDS> 0
0
0
<COMMON> 140,983
<OTHER-SE> 48,440,873
<TOTAL-LIABILITY-AND-EQUITY> 73,772,909
<SALES> 14,725,103
<TOTAL-REVENUES> 14,783,139
<CGS> 5,744,670
<TOTAL-COSTS> 13,395,351
<OTHER-EXPENSES> 28,787
<LOSS-PROVISION> 19,702
<INTEREST-EXPENSE> 200,183
<INCOME-PRETAX> 1,258,061
<INCOME-TAX> 419,821
<INCOME-CONTINUING> 672,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 672,751
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
