IRIDEX Corporation 1 Shareholders’ L E T T E R 2001 was a very challenging year for IRI- DEX. We were greatly affected by the general economic downturn beginning in Q1 of 2001 as well as the concerns over Medicare reimbursement for certain age-related macular degeneration (AMD) procedures. The economic slowdown had a greater effect on sales of our aesthetic products, particu- larly the Apex 800 laser system for hair removal, than on sales of our ophthalmology products. Aesthetic procedures are typi- cally elective and therefore can be deferred, while therapeutic ophthalmic procedures typically cannot be deferred. These combined factors contributed to our first loss year since 1992. We responded by concentrating our resources to focus on our core medical markets. This resulted in the decision to discontinue our efforts in the industrial laser segment. Also, we have been care- fully managing expenses and preparing ourselves to respond with strength to customer requirements when the econ- 2001 for IRIDEX: • Noridian issued a written policy to provide Medicare reimbursement for Transpupillary Thermotherapy (TTT), a procedure that utilizes our OcuLight SLx laser system to treat a certain type of wet AMD. We estimate that up to 350,000 patients per year worldwide may enrollment had been reached to statistically detect a clinically rele- vant difference in the outcomes of the study when additional follow- up is completed, and as a result enrollment was stopped. The 21 center 5 year randomized PTAMD study was designed to determine whether a low dose laser treatment for patients with dry AMD using the “We responded by concentrating our resources to focus on our core medical markets.” benefit from TTT. At the end of the year, CIGNA announced Medicare coverage for TTT proce- dures within their network. TTT is becoming more recognized as a viable treatment for wet AMD and we believe that TTT will have a very strong and significant position among the therapeutic alternatives available for this devastating condi- tion. • We introduced the Apex 800, the first high power, infrared (800 nm) diode laser hair removal system that has a light, ergonomic fiber optic handpiece. The Apex 800 allows us to compete in the $180 million annual laser market to remove unwanted hair. OcuLight SLx laser system could preserve visual acuity and/or reduce the risk of progression to wet AMD. Of the estimated 5 mil- lion new cases of AMD per year, about 4.5 million are the dry form of the disease. We see the treatment of eyes with dry AMD as a significant potential opportunity for IRIDEX and we are optimistic about these developments. Looking forward to 2002, we expect the results to be released from two AMD clinical studies, TTT4CNV and PTAMD. Both of these studies follow a Minimum Intensity Photocoagulation (MIP) proto- col. MIP is omy turns around. • The Data Safety Monitoring a laser treatment approach pioneered by There were some good developments in Trial determined that sufficient mize preservation of sensitive tissues Committee for the PTAMD Clinical IRIDEX, that utilizes our lasers to maxi- IRIDEX Corporation 2 Advanced Ophthalmologists depend on IRIS Medical to treat the wet form of age-related largest share of the ophthalmic laser OcuLight laser photocoagulator systems macular degeneration (AMD). In the photocoagulator market. IRIDEX in offices, clinics and hospitals in 91 United States, the TTT4CNV Clinical continues to take market share within countries worldwide. IRIDEX enjoys a Study is underway to confirm this treat- this segment as older technology is global leadership position in the semicon- ment, and similar studies are being replaced with state-of-the-art OcuLight ductor-based laser photocoagulator mar- conducted in Germany and Japan. laser systems. ket, for both infrared (OcuLight SL/SLx) and visible (OcuLight GL/GLx) laser sys- MIP protocols, which were pioneered by tems. Our reputation for providing reli- IRIDEX, are being performed using IRIS “We believe that maintaining leadership in MIP laser treat- ment protocols will allow us to make a substantial contri- bution in the treatment of serious eye diseases.” able products is the foundation for our Medical OcuLight SLx solid-state infrared success in ophthalmology. In a recently lasers. We believe that maintaining lead- conducted independent survey, product ership in MIP laser treatment protocols reliability was found to be the single will permit us to make a substantial con- most important decision-making factor tribution in the treatment of serious eye in the purchase of a laser photocoagula- diseases such as AMD, diabetic retinopa- tor system. thy and glaucoma. This validation will enable us to expand the market for our Clinical validation is another key factor in products, as MIP protocols will permit the continually expanding market earlier treatment of these diseases. acceptance of IRIS Medical OcuLight laser systems. While we believe in the future of MIP This is evident in the increased interest protocols, we also understand the in Minimum Intensity Photocoagulation importance of maintaining our leadership (MIP) protocol developing throughout position within the visible wavelength the world. One such protocol, transpupil- market segment. Visible wavelength lary thermotherapy (TTT) is being used laser systems currently occupy the 3 2001 Annual Report Advanced A E S T H E T I C S Over the past 5 years, IRIDEX has estab- procedure, the treated area may experi- lished a leadership position in the aes- ence slight swelling or redness that typi- thetic laser market by providing a family cally lasts only a few hours. Most of lasers recognized for performance, patients can return immediately to work ease of use, reliability and portability. and social obligations. before The DioLite 532 for vascular and pig- mented lesions, and the Apex 800 for the removal of unwanted hair are used by dermatologists, plastic surgeons and other specialists interested in increasing their revenue base and expanding their practices. The products harness the principles of selective photothermolysis and MIP to deliver the right balance of wavelength, spot size, energy density and pulse duration to maximize efficacy and after Photos courtesy of Mary Christian, MD safety. “With benefits of efficacy, speed, ergonomics and patient The DioLite 532 is used to treat vascu- comfort, the Apex is well positioned in the $180 million annual market for laser hair removal devices.” lar and pigmented skin lesions including spider veins, freckles and age spots. Part of the appeal of the DioLite 532 is its abil- ity to treat a vast patient population quickly, gently and with minimal follow- up. The DioLite 532 uses pulses of laser light to gently heat the vessels, coagu- lating and collapsing them without disrupting them for a bruise-free appear- ance. Treatment is comfortable. Patients are typically treated without anesthesia. After a Financial IRIDEX Corporation 4 SALES (in millions) R & D EXPENSE (in millions) INCOME (LOSS) FROM CONTINUING OPERATIONS (in millions) $35 30 25 20 15 10 5 0 ’97 ’98 ’99 ’00 ’01 $6 5 4 3 2 1 0 ’97 ’98 ’99 ’00 ’01 $2.5 2.0 1.5 1.0 0.5 0 -0.5 -1.0 ’97 ’98 ’99 ’00 ’01 2001 Sales International 41.3% Domestic 58.7% (Dollar and share amounts in thousands except per share data) 1997 1998 1999 2000 2001 FOR THE FISCAL YEAR Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,995 22,338 26,391 32,838 27,275 2,320 (1,989) Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,884 (601) 2,080 Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,594 (0.09) 0.29 0.24 Diluted net income (loss) from continuing operations per common share . . . . $ 6,757 7,285 6,755 Shares used in per share calculations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,573 1,447 0.21 6,849 966 1,108 0.16 6,765 END OF FISCAL YEAR Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,716 23,450 23,842 27,005 26,374 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,686 28,377 32,763 35,025 33,788 Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,880 25,885 27,504 30,500 29,833