FORM 10−K
STAAR SURGICAL CO − STAA
Filed: March 15, 2006 (period: December 30, 2005)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
PART I
Item 1.
Business 2
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant s Common Equity, Related Stockholder Matters, and
Issuer Purchases of
Selected Financial Data
Management s Discussion and Analysis of Financial Condition and Results
of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matt
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Item 15.
SIGNATURES
EX−23.1 (Consents of experts and counsel)
EX−31.1
EX−31.2
EX−32.1
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10−K
(Mark One)
(cid:254)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2005
or
o
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: 0−11634
STAAR SURGICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1911 Walker Avenue
Monrovia, California
(Address of principal executive offices)
95−3797439
(I.R.S. Employer
Identification No.)
91016
(Zip Code)
(626) 303−7902
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark if the registrant is a well−known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No (cid:254)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No (cid:254)
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 (cid:254) No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S−K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10−K or any amendment to this Form 10−K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non−accelerated filer. See
definition of “accelerated filer” or “large accelerated filer” in Rule 12b−2 of the Act.
Large accelerated filer o Accelerated filer (cid:254) Non−accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b−2 of the Act). Yes o No (cid:254)
The aggregate market value of the voting and non−voting common equity held by non−affiliates of the registrant as of July 1,
2005, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $102,620,000 based
on the closing price per share of $5.15 of the registrant’s Common Stock on that date.
The number of shares outstanding of the registrant’s Common Stock as of March 8, 2006 was 24,918,541.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2006 annual meeting of stockholders, which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the registrant’s last fiscal year,
are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
PART IV
Page
2
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22
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40
40
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40
41
45
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Signatures
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Table of Contents
PART I
This Annual Report on Form 10−K contains statements that constitute “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. These
statements include comments regarding the intent, belief or current expectations of the Company and its management. Readers can
recognize forward−looking statements by the use of words like “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”
“believe,” “will,” “target”, “forecast” and similar expressions in connection with any discussion of future operating or financial
performance. STAAR Surgical Company cautions investors and prospective investors that any such forward−looking statements are
not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those
projected in the forward−looking statements. See “Item 1A. Risk Factors.”
Item 1. Business
General
STAAR Surgical Company develops and manufactures visual implants and other innovative ophthalmic products to improve or
correct the vision of patients with cataracts and refractive conditions and distributes them worldwide. Originally incorporated in
California in 1982, STAAR Surgical Company reincorporated in Delaware in 1986. Unless the context indicates otherwise “we,” “us,”
the “Company,” and “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.
Cataract Surgery. Our main products are foldable silicone and Collamer® intraocular lenses (“IOLs”), available in both
three−piece and one−piece designs, used after minimally invasive small incision cataract extraction. Over the years, we have
expanded our range of products for use in cataract surgery to include:
• Silicone Toric IOLs, used in cataract surgery to treat astigmatism;
• Preloaded Injector, a three−piece silicone IOL preloaded into a single−use disposable injector;
• STAARVISCtm II, a viscoelastic material which is used as a tissue protective lubricant and to maintain the shape of the eye
during surgery;
• STAAR SonicWAVEtm Phacoemulsification System, a medical device system, used to remove a cataract patient’s cloudy lens,
that has low energy and high vacuum characteristics; and
• Cruise Control, a disposable filter which allows for a faster, cleaner phacoemulsification procedure and is compatible with all
phacoemulsification equipment utilizing Venturi and peristaltic pump technologies.
We also sell other instruments, devices and equipment that we manufacture or that are manufactured by others in the ophthalmic
industry. In general, these products complement STAAR’s proprietary product range and allow us to compete more effectively.
Refractive Surgery. In the area of refractive surgery, we have used our biocompatible Collamer material to develop and
manufacture implantable Collamer lenses (“ICLs”). STAAR’s VISIANtm ICL and VISIANtm Toric ICL (“TICL”) treat refractive
disorders such as myopia (near−sightedness), hyperopia (far−sightedness) and astigmatism. These disorders of vision affect a large
proportion of the population. Unlike the IOL, which replaces a cataract patient’s cloudy lens, these products are designed to work with
the patient’s natural lens to correct refractive disorders. The surgeon implants the foldable ICL or TICL through a tiny incision,
generally under local anesthesia. STAAR began selling the ICL outside the U.S. in 1996 and the TICL in 2002. These products are
sold in approximately 41 countries. The Company’s goal is to establish the ICL and TICL as the next paradigm shift in refractive
surgery, making the products increasingly significant revenue generators for the Company beginning in 2006.
The U.S. Food and Drug Administration (the “FDA”) approved the ICL for use in treating myopia on December 22, 2005. While
the U.S. roll−out of this product remains in its earliest stage, we believe that the ICL will be a viable choice for refractive surgery and
could replace cataract surgery products as STAAR’s largest
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source of revenue. The ICL and TICL are approved for use in countries that require the European Union CE Mark and in Korea,
Singapore, and Canada. Applications are pending in China and Australia, and the Company is working to obtain new approvals for the
ICL and TICL in other countries. The Company has completed enrollment in the U.S. clinical trials for the TICL and expects to file its
submission with the FDA at the end of the first quarter or early in the second quarter of 2006.
Background
The human eye is a specialized sensory organ capable of receiving visual images and transmitting them to the visual center in the
brain. The main parts of the eye are the cornea, the iris, the lens, the retina, and the trabecular meshwork. The cornea is the clear
window in the front of the eye through which light first passes. The iris is a muscular curtain located behind the cornea which opens
and closes to regulate the amount of light entering the eye through the pupil, an opening at the center of the iris. The lens is a clear
structure located behind the iris that changes shape to focus light to the retina, located in the back of the eye. The retina is a layer of
nerve tissue consisting of millions of light receptors called rods and cones, which receive the light image and transmit it to the brain
via the optic nerve. The posterior chamber of the eye, located behind the iris and in front of the natural lens, is filled with a watery
fluid called the aqueous humor, while the portion of the eye behind the lens is filled with a jelly−like material called the vitreous
humor. The trabecular meshwork, a drainage channel located between the iris and the surrounding white portion of the eye, maintains
a normal pressure in the anterior chamber of the eye by draining excess aqueous humor.
The eye can be affected by common visual disorders, disease or trauma. The most prevalent ocular disorders or diseases are
cataracts and glaucoma. Cataract formation is generally an age−related disorder that involves the hardening and loss of transparency
of the natural crystalline lens, impairing visual acuity.
Refractive disorders, which are generally not age−related, include myopia, hyperopia, and astigmatism. A normal, well
functioning eye receives images of objects at varying distances from the eye and focuses the images on the retina. Refractive errors
occur when the eye’s natural optical system does not properly focus an image on the retina. Myopia, also know as nearsightedness,
occurs when the eye’s lens focuses images in front of the retina. Hyperopia, or farsightedness, occurs when the eye’s lens focuses
images behind the plane of the retina. Individuals with myopia or hyperopia may also have astigmatism. Astigmatism is blurred vision
caused when an irregularly shaped cornea or, in some cases, a defect in the natural lens, produces a distorted image on the retina.
Presbyopia is an age−related condition caused by the loss of elasticity of the natural crystalline lens, reducing the eye’s ability to
accommodate or adjust its focus for varying distances.
History
STAAR developed, patented, and licensed the first foldable intraocular lens, or IOL, for cataract surgery. Made of pliable material,
the foldable IOL permitted surgeons for the first time to replace a cataract patient’s natural lens with minimally invasive surgery. The
foldable IOL quickly became the standard of care for cataract surgery throughout the world. STAAR introduced its first versions of
the lens, made of silicone, in 1991.
In 1996 STAAR began selling the ICL outside the U.S. Made of STAAR’s proprietary biocompatible Collamer® lens material, the
ICL is implanted behind the iris and in front of the patient’s natural lens to treat refractive errors such as myopia, hyperopia and
astigmatism. The ICL received CE Marking in 1997, permitting sales in countries that require the European Union CE Mark, and it
received FDA approval for the treatment of myopia in the U.S. in December 2005. The ICL is now sold in approximately 41 countries
and has been implanted in more than 50,000 eyes worldwide.
Other milestones in STAAR’s history include the following:
• In 1998, STAAR introduced the Toric IOL, the first implantable lens approved for the treatment of astigmatism. Typically used
in cataract surgery, the Toric IOL was STAAR’s first venture into the refractive market in the United States.
• In 2000, STAAR introduced an IOL made of the Collamer material, making its clarity, refractive qualities, and biocompatibility
available to cataract patients and their surgeons.
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• In 2001, STAAR commenced commercial sales of its VISIAN Toric ICL (“TICL”), which corrects both astigmatism and
myopia, outside the U.S. In 2002 the TICL received CE Marking, allowing commercial sales in countries that require the
European Union CE Mark. The TICL is not yet approved for commercial sale in the U.S.
• In late 2003, STAAR, through its Japanese joint venture company, Canon Staar, introduced the first preloaded lens injector
system in international markets. The Preloaded Injector offers surgeons improved convenience and reliability. The Preloaded
Injector is not yet available in the U.S.
• On December 22, 2005, the FDA approved the ICL for the treatment of myopia, making it the first small incision phakic implant
commercially available in the United States.
Financial Information about Segments and Geographic Areas
STAAR’s principal products are IOLs and ancillary products used in cataract and refractive surgery. As such, 100% of STAAR’s
sales are generated from the ophthalmic surgical product segment and, therefore, the Company operates as one operating segment for
financial reporting purposes. See Note 17 to the Consolidated Financial Statements for financial information about product lines and
operations in geographic areas
Principal Products
Our products are designed to:
• Improve patient outcomes,
• Minimize patient risk and discomfort, and
• Simplify ophthalmic procedures or post−operative care for the surgeon and the patient.
Intraocular Lenses (IOLs) and Related Cataract Treatment Products. We produce and market a line of foldable IOLs for use in
minimally invasive cataract surgical procedures. Because they can be folded, our IOLs can be implanted into the eye through an
incision as small as 2.8 mm. Once inserted, the IOL unfolds naturally to replace the cataractous lens.
Currently, our foldable IOLs are manufactured from both our proprietary Collamer material and silicone. Both materials are
offered in two differently configured styles, the single−piece plate haptic design and the three−piece design where the optic is
combined with polyimide loop haptics. The selection of one style over the other is primarily based on the preference of the
ophthalmologist.
We have developed and currently market globally the Toric IOL, a toric version of our single−piece silicone IOL, which is
specifically designed for cataract patients who also have pre−existing astigmatism. The Toric IOL is the first refractive product we
offered in the U.S.
In late 2003, we introduced through our joint venture company, Canon Staar, the first preloaded lens injector system in
international markets. The Preloaded Injector is a disposable lens delivery system containing a three−piece silicone IOL that is
sterilized and ready for implant. We believe the Preloaded Injector offers surgeons improved convenience and reliability. The
Preloaded Injector is not yet available in the U.S.
Sales of IOLs accounted for approximately 52% of our total revenues for the 2005 fiscal year, 56% of total revenues for the 2004
fiscal year and 61% of total revenues for the 2003 fiscal year.
As part of our approach to providing complementary products for use in minimally invasive cataract surgery, we also market
STAARVISC II, a viscoelastic material which is used as a protective lubricant and to maintain the shape of the eye during surgery, the
STAAR SonicWAVE Phacoemulsification System, a medical device system that uses ultrasound to remove a cataract patient’s cloudy
lens through a small incision and has low energy and high vacuum characteristics, and Cruise Control, a single−use disposable filter
which allows for a faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing
Venturi and peristaltic pump technologies. We also sell other related instruments, devices, surgical packs and equipment that we
manufacture or that are manufactured by others. Sales of other cataract products accounted for
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approximately 36% of our total revenues for the 2005 fiscal year, 32% of total revenues for the 2004 fiscal year and 29% of total
revenues for the 2003 fiscal year.
Refractive Correction — VISIAN ICLtm (ICLs). ICLs are implanted into the eye in order to correct refractive disorders such as
myopia, hyperopia and astigmatism. Lenses of this type are generically called “phakic IOLs” or “phakic implants” because they work
along with the patient’s natural lens, or phakos, rather than replacing it. The ICL is capable of correcting refractive errors over a wide
diopter range.
The ICL is folded and implanted into the eye behind the iris and in front of the natural crystalline lens using minimally invasive
surgical techniques similar to implanting an IOL during cataract surgery, except that the natural lens is not removed. The surgical
procedure to implant the ICL is typically performed with topical anesthesia on an outpatient basis. Visual recovery is usually within
one to 24 hours.
We believe the ICL will complement current refractive technologies and allow refractive surgeons to expand their treatment range
and customer base.
The ICL for myopia was approved by the FDA for use in the United States on December 22, 2005. The ICL and TICL are
approved in countries that require the European Union CE Mark, Canada, Korea and Singapore. Applications are pending in China
and Australia, and the Company is working to obtain new approvals for the ICL and TICL in other countries. The Company has
completed enrollment in the U.S. clinical trials for the TICL and expects to file its submission with the FDA in at the end of the first
quarter or early in the second quarter of 2006.
The Hyperopic ICL is approved for use in countries that require the European Union CE Mark and in Canada, and is currently in
clinical trials in the United States.
The ICL is available for myopia in the United States in four lengths and 27 powers for each length, and internationally in five
lengths, with 41 powers for each length, and for hyperopia in five lengths, with 38 powers for each length, which equates to
approximately 500 inventoried parts. This requires the Company to carry a significant amount of inventory to meet the customer
demand for rapid delivery. The Toric ICL is available for myopia in the same powers and lengths but carries additional parameters of
cylinder and axis with 11 and 180 possibilities, respectively. Accordingly, the Toric ICL is made to order.
Sales of ICLs (including TICLs) accounted for approximately 10% of our total revenues for the 2005 fiscal year, 8% of total
revenues for the 2004 fiscal year and 6% of total revenues for the 2003 fiscal year.
Other Products
AquaFlow Collagen Glaucoma Drainage Device. Among STAAR’s other products is the AquaFlow Collagen Glaucoma Drainage
Device, an implantable device used for the surgical treatment of glaucoma. Glaucoma is a progressive ocular disease that manifests
itself through increased intraocular pressure. This, in turn, may result in damage to the optic disc and a decrease of the visual field.
Untreated, progressive glaucoma can result in blindness.
Our AquaFlow Device is surgically implanted in the outer tissues of the eye to maintain a space that allows increased drainage of
intraocular fluid so as to reduce intraocular pressure. It is made of collagen, a porous material that is compatible with human tissue and
facilitates drainage of excess eye fluid. The AquaFlow Device is specifically designed for patients with open−angled glaucoma, which
is the most prevalent type of glaucoma. In contrast to conventional and laser glaucoma surgeries, implantation of the AquaFlow
Device does not require penetration of the anterior chamber of the eye. Instead, a small flap of the outer eye is folded back and a
portion of the sclera and trabecular meshwork is removed. The AquaFlow Device is placed above the remaining trabecular meshwork
and Schlemm’s canal and the outer flap is refolded into place. The device swells, creating a space as the eye heals. It is absorbed into
the surrounding tissue within six months to nine months after implantation, leaving the open space and possibly creating new fluid
collector channels. The 15 to 45 minute surgical procedure to implant the AquaFlow Device is performed under local or topical
anesthesia, typically on an outpatient basis.
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While STAAR has seen continuing interest by surgeons in learning the surgical procedure to implant the AquaFlow Device, the
market for this product is not expanding due to several factors, including the conservative nature of the glaucoma market, the time
needed to train ophthalmic surgeons to perform the surgical procedure and the need to develop instruments or new product designs to
simplify the implantation procedure. Sales of AquaFlow Devices accounted for approximately 1% of our total revenues in 2005, and
2% of our total revenues in each of the 2004 and 2003 fiscal years.
Sources and Availability of Raw Materials
The Company uses a wide range of raw materials in the production of our products. Most of the raw materials and components are
purchased from external suppliers. Some of our raw materials are single−sourced due to regulatory constraints, cost effectiveness,
availability, quality, and vendor reliability issues. Many of our components are standard parts and are available from a variety of
sources although we do not typically pursue regulatory and quality certification of multiple sources of supply.
Our sources of supply for raw materials can be threatened by shortages of raw materials and other market forces, by natural
disasters, by the supplier’s failure to maintain adequate quality or a recall initiated by the supplier. Even when substitute suppliers are
available, the need to certify regulatory compliance and quality standards of substitute suppliers could cause significant delays in
production and a material reduction in our sales revenue. We try to mitigate this risk by stockpiling raw materials when practical and
identifying secondary suppliers, but the risk cannot be entirely eliminated. For example, the failure of one of our suppliers could be the
result of an unforeseen industry−wide problem, or the failure of our supplier could create an industry−wide shortage affecting
secondary suppliers as well.
In particular, loss of our external supply source for silicone could cause us material harm. In addition, the proprietary
collagen−based raw material used to manufacture our IOLs, ICLs and the AquaFlow Device is internally sole−sourced from one of
our facilities in California. If the supply of these collagen−based raw materials is disrupted we know of no alternative supplier, and
therefore, any such disruption could result in our inability to manufacture the products and would have a material adverse effect on the
Company.
Patents, Trademarks and Licenses
We strive to protect our investment in the research, development, manufacturing and marketing of our products through the use of
patents, licenses, trademarks, and copyrights. We own or have rights to a number of patents, licenses, trademarks, copyrights, trade
secrets and other intellectual property directly related and important to our business. As of December 30, 2005, we owned
approximately 155 United States and foreign patents and had approximately 64 patent applications pending.
We believe that our patents are important to our business. Of significant importance to the Company are the patents, licenses, and
technology rights surrounding our VISIAN ICL and Collamer material. In 1996, we were granted an exclusive royalty−bearing license
to manufacture, use, and sell ICLs in the United States, Europe, Latin America, Africa, and Asia using the uniquely biocompatible
Collamer material. The Collamer material is also used in certain of our IOLs. We have also acquired or applied for various patents and
licenses related to our Aqua Flow Device, our phacoemulsification system, our insertion devices, and other technologies of the
Company.
Patents for individual products extend for varying periods of time according to the date a patent application is filed or a patent is
granted and the term of patent protection available in the jurisdiction granting the patent. The scope of protection provided by a patent
can vary significantly from country to country.
Our strategy is to develop patent portfolios for our research and development projects in order to obtain market exclusivity for our
products in our major markets. Although the expiration of a patent for a product normally results in the loss of market exclusivity, we
may continue to derive commercial benefits from these products. We routinely monitor the activities of our competitors and other
third parties with respect to their use of intellectual property, including considering whether or not to assert our patents where we
believe they are being infringed.
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Worldwide, all of our major products are sold under trademarks we consider to be important to our business. The scope and
duration of trademark protection varies widely throughout the world. In some countries, trademark protection continues only as long
as the mark is used. Other countries require registration of trademarks and the payment of registration fees. Trademark registrations
are generally for fixed but renewable terms.
We protect our proprietary technology, in part, through confidentiality and nondisclosure agreements with employees, consultants
and other parties. Our confidentiality agreements with employees and consultants generally contain standard provisions requiring
those individuals to assign to STAAR, without additional consideration, inventions conceived or reduced to practice by them while
employed or retained by STAAR, subject to customary exceptions.
Seasonality
We generally experience lower sales during the third quarter due to the effect of summer vacations on elective procedures. In
particular, because sales activity in Europe drops dramatically in the summer months, and European sales have recently accounted for
a greater proportion of our total sales, this seasonal variation in our results has become even more pronounced.
Distribution and Customers
We market our products to a variety of health care providers, including surgical centers, hospitals, managed care providers, health
maintenance organizations, group purchasing organizations and government facilities. The primary user of our products is the
ophthalmologist. No material part of our business, taken as a whole, is dependant upon a single or a few customers.
We maintain direct distribution to the physician or facility in the United States, Canada, Germany and Australia. Sales efforts in
Germany and Australia are primarily supported through a direct sales force. In the United States and Canada we primarily sell through
a network of independent manufacturers’ representatives. We compensate the independent representatives through sales commissions.
They may represent manufacturers other than STAAR, although not in competing products. In all other countries where we do
business, we sell principally through independent distributors.
We support the sales efforts of our agents, employees and distributors through the activities of our internal marketing department.
Sales efforts are supplemented through the use of promotional materials, educational courses, speakers programs, participation in trade
shows and technical presentations.
The dollar amount of the Company’s backlog orders is not significant in relation to total annual sales. The Company generally
keeps sufficient inventory on hand to ship product when ordered.
Competition
Competition in the ophthalmic surgical product market is intense and characterized by extensive research and development and
rapid technological change. Development by competitors of new or improved products, processes or technologies may make our
products obsolete or less competitive. Accordingly, we must devote continued efforts and significant financial resources to enhance
our existing products and to develop new products for the ophthalmic industry.
We believe our primary competitors in the development and sale of products used to surgically correct cataracts, specifically
foldable IOLs and phacoemulsification machines, include Alcon Laboratories (“Alcon”), Advanced Medical Optics (“AMO”), and
Bausch & Lomb. According to a 2005 Market Scope report, Alcon holds 50% of the U.S. IOL market, followed by AMO with 27%
and Bausch & Lomb with 12%. We hold approximately 8% of the U.S. IOL market. Our competitors have been established for longer
periods of time than we have and have significantly greater resources than we have, including greater name recognition, larger sales
operations, greater ability to finance research and development and proceedings for regulatory approval, and more developed
regulatory compliance and quality control systems.
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In the U.S. market, physicians prefer IOLs made out of acrylic. Acrylic IOLs currently account for a 55% share of the U.S. IOL
market. We believe that we are positioned to compete effectively in this market segment with the Collamer IOL, and that the
introduction of the improved three−piece Collamer IOL and injector system will strengthen our position and help reverse the decline
in our overall IOL market share. Although the market for Silicone IOLs, which currently account for 40% of the U.S. market, has
declined in recent years, we believe they still provide an opportunity for us as we introduce improvements in silicone IOL technology
and build market awareness of our Collamer IOLs and improved injection systems.
Our ICL faces significant competition in the marketplace from other products and procedures that improve or correct refractive
conditions, such as corrective eyeglasses, external contact lenses, and conventional and laser refractive surgical procedures. These
products and procedures are long established in the marketplace and familiar to patients in need of refractive correction. In particular,
eyeglasses and external contact lenses are much cheaper and more easily obtained, because a prescription for the product is usually
written following a routine eye examination in a doctor’s office, without admitting the patient to a hospital or surgery center.
We believe that the following providers of laser surgical procedures comprise our primary competition in the marketplace for
patients seeking surgery to correct refractive conditions: Advanced Medical Optics (AMO) Alcon, Bausch & Lomb, Nidek and Wave
Light. All of these companies market Excimer lasers for corneal refractive surgery. Approval of custom ablation, along with the
addition of wavefront technology, has increased awareness of corneal refractive surgery by patients and practitioners. Conductive
Keratoplasty (CK) by Refractec competes for the hyperopic market for +.75 to +3.0 diopters. In the phakic implant market, there are
only two approved phakic IOLs available in the U.S., our VISIANtm ICL and the AMO Verisyse. In international markets, our ICL’s
main competition is the Ophtec Artisan IOL, although there are several other phakic IOLs, manufactured by various companies, which
are also available.
Regulatory Matters
Regulatory Requirements
We must secure and maintain regulatory approval to sell our products in the United States and in most foreign countries. We are
also subject to various federal, state, local and foreign laws that apply to our operations including, among other things, working
conditions, laboratory and manufacturing practices, and the use and disposal of hazardous or potentially hazardous substances.
The following discussion outlines the various regulatory regimes that govern our manufacturing and sale of our products.
Regulatory Requirements in the United States. Under the federal Food, Drug & Cosmetic Act as amended by the Food and Drug
Administration Modernization Act of 1997 (the “Act”), the FDA has the authority to adopt regulations that do the following:
• set standards for medical devices,
• require proof of safety and effectiveness prior to marketing devices that the FDA believes require pre−market clearance,
• require test data approval prior to clinical evaluation of human use,
• permit detailed inspections of device manufacturing facilities,
• establish “good manufacturing practices” that must be followed in device manufacture,
• require reporting of serious product defects to the FDA, and
• prohibit the export of devices that do not comply with the Act unless they comply with established foreign regulations, do not
conflict with foreign laws, and the FDA and the health agency of the importing country determine that export is not contrary to
public health.
Most of our products are medical devices intended for human use within the meaning of the Act and, therefore, are subject to FDA
regulation.
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The FDA establishes procedures for compliance based upon regulations that designate devices as Class I (general controls, such as
labeling and record−keeping requirements), Class II (performance standards in addition to general controls) or Class III (pre−market
approval (“PMA”) required before commercial marketing). Class III devices are the most extensively regulated because the FDA has
determined they are life−supporting, are of substantial importance in preventing impairment of health, or present a potential
unreasonable risk of illness or injury. The effect of assigning a device to Class III is to require each manufacturer to submit to the
FDA a PMA that includes information on the safety and effectiveness of the device.
A medical device that is substantially equivalent to a directly related medical device previously in commerce may be eligible for
the FDA’s pre−market notification “510(k) review” process. FDA 510(k) clearance is a “grandfather” process. As such, FDA
clearance does not imply that the safety, reliability and effectiveness of the medical device has been approved or validated by the
FDA, but merely means that the medical device is substantially equivalent to a previously cleared commercial medical device. The
review period and FDA determination as to substantial equivalence generally is made within 90 days of submission of a 510(k)
application, unless additional information or clarification or clinical studies are requested or required by the FDA. As a practical
matter, the review process and FDA determination may take longer than 90 days.
Our IOLs, ICLs, and AquaFlow Devices are Class III devices, our, phacoemulsification equipment, ultrasonic cutting tips and
surgical packs are Class II devices, and our lens injectors are Class I devices. We have received FDA pre−market approval for our
IOLs, the ICL for the treatment of myopia, and AquaFlow Device and 510(k) clearance for our phacoemulsification equipment, lens
injectors, and ultrasonic cutting tips.
As a manufacturer of medical devices, our manufacturing processes and facilities are subject to continuing review by the FDA and
various state agencies to ensure compliance with quality system regulations. These agencies inspect our facilities from time to time to
determine whether we are in compliance with various regulations relating to manufacturing practices, validation, testing, quality
control and product labeling.
Regulatory Requirements in Foreign Countries. The requirements for approval or clearance to market medical products in foreign
countries vary widely. The requirements range from minimal requirements to requirements comparable to those established by the
FDA. For example, many countries in South America have minimal regulatory requirements, while many others, such as Japan, have
requirements at least as stringent as those of the FDA. Foreign governments do not always accept FDA approval as a substitute for
their own approval or clearance procedures.
As of June 1998, the member countries of the European Union (the “Union”) require that all medical products sold within their
borders carry a Conformite’ Europeane Mark (“CE Mark”). The CE Mark denotes that the applicable medical device has been found
to be in compliance with guidelines concerning manufacturing and quality control, technical specifications and biological or chemical
and clinical safety. The CE Mark supersedes all current medical device regulatory requirements for Union countries. We have
obtained the CE Mark for all of our principal products including our ICL and TICL, IOLs (except for the Collamer three−piece IOL
which we expect to receive in the second half of 2006), SonicWAVE Phacoemulsification System and our AquaFlow Device.
U.S. Approval of the ICL
The FDA Office of Device Evaluation approved the VISIAN ICL for the treatment of myopia on December 22, 2005. The
approved models are indicated for the correction of myopia in adults with myopia ranging from −3.0 to less than or equal to −15.0
diopters with astigmatism less than or equal to 2.5 diopters at the spectacle plane, and the reduction of myopia in adults with myopia
ranging from greater than −15.0 to −20.0 diopters with astigmatism less than or equal to 2.5 diopters at the spectacle plane, in patients
21 to 45 years of age with anterior chamber depth (ACD) 3.00 mm or greater, and a stable refractive history within 0.5 diopters for
one year prior to implantation.
STAAR plans to submit a supplemental pre−market approval application for the TICL during the first quarter of 2006 or early in
the second quarter. The Company is also conducting clinical trials on the hyperopic ICL for the U.S. market.
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Recent Proceedings With the FDA Office of Compliance
After an inspection of STAAR’s Monrovia, California facility in August and September of 2003, STAAR received Form 483
Inspectional Observations, Warning Letters, and other correspondence from the FDA’s Office of Compliance indicating that the FDA
deemed STAAR’s Monrovia, California facility to be violating the FDA’s Quality System Regulations and Medical Device Reporting
regulations. In a Warning Letter received on December 29, 2003 the FDA warned of possible enforcement action and stated that it
would not approve premarket applications for the approval of Class III devices (such as the ICL) until related violations of the Quality
System Regulation were corrected. These violations were last asserted by the FDA in a letter received on July 5, 2005, which stated
that the agency found STAAR’s earlier responses inadequate.
STAAR responded to the FDA’s observations and assertions by implementing numerous improvements to its quality system in
consultation with the agency and independent consultants. Among other things, STAAR developed a Global Quality Systems Action
Plan, which has been continuously updated since its adoption in April, 2004, and took steps to emphasize a focus on compliance
throughout the organization.
In 2005, STAAR undertook a compliance initiative that included a comprehensive revision of its operating procedures to ensure
alignment with all FDA regulations and the international ISO 13485 standard, training to implement the new procedures and the
enhancement of its internal audit function to provide for self−regulation by verifying compliance and ensuring corrective action for
noncompliance.
The FDA reinspected STAAR’s Monrovia, California facility between August 29, 2005 and September 14, 2005. Based on the
results of the reinspection, and the FDA’s final approval of the VISIAN ICL on December 22, 2005, STAAR believes that it is now
substantially in compliance with the FDA’s Quality System Regulations and Medical Device Reporting regulations.
Nevertheless, the FDA’s findings of compliance deficiencies during the preceding two years have harmed our reputation in the
ophthalmic industry and affected our product sales, and delayed FDA approval of the ICL. STAAR’s ability to continue its
U.S. business depends on the continuous improvement of its quality systems and its ability to demonstrate substantial compliance with
FDA regulations. Accordingly, for the foreseeable future STAAR’s management expects its strategy to include devoting significant
resources and attention to those efforts.
Research and Development
We are focused on furthering technological advancements in the ophthalmic products industry through the development of
innovative ophthalmic products and materials and related surgical techniques. We maintain an active internal research and
development program which includes research and development, clinical activities, and regulatory affairs and is comprised of 28
employees. In order to achieve our business objectives, we will continue the investment in research and development. Over the past
year, we have principally focused our research and development efforts on:
• improving regulatory compliance and quality systems and procedures,
• obtaining approval for the ICL,
• completing enrollment in the U.S. clinical trials for the TICL,
• redesigning the three−piece Collamer IOL,
• designing an insertion system for the three−piece Collamer IOL,
• improving insertion and delivery systems for our other foldable products,
• improving manufacturing systems and procedures for all products to reduce manufacturing costs and improve yields, and
• developing products and extending foreign registrations.
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Research and development expenses were approximately $5,573,000, $6,246,000, and $5,120,000 for our 2005, 2004 and 2003
fiscal years, respectively. STAAR expects to pay at least a similar amount for research and development in 2006.
STAAR’s research and development staff devoted significant resources to improving STAAR’s regulatory and compliance
systems during 2004 and 2005. STAAR believes it has achieved substantial compliance with the FDA’s quality regulations and that
the tasks of continuously improving quality and maintaining regulatory compliance can be borne by STAAR’s quality and regulatory
staffs. Accordingly, in future periods STAAR expects its research and development staff to shift resources devoted to improving
regulatory compliance and quality systems to product development.
Environmental Matters
The Company is subject to federal, state, local and foreign environmental laws and regulations. We believe that our operations
comply in all material respects with applicable environmental laws and regulations in each country where we do business. We do not
expect compliance with these laws to materially affect our capital expenditures, earnings or competitive position. We currently have
no plans to invest in material capital expenditures for environmental control facilities for the remainder of our current fiscal year or for
the next fiscal year. We are not aware of any pending actions, litigation or significant financial obligations arising from current or past
environmental practices that are likely to have a material adverse impact on our financial position. However, environmental problems
relating to our properties could develop in the future, and such problems could require significant expenditures. In addition, we cannot
predict changes in environmental legislation or regulations that may be adopted or enacted in the future and that may adversely affect
us.
Significant Subsidiaries
The Company’s only significant subsidiary is STAAR Surgical AG, a wholly owned entity incorporated in Switzerland. This
subsidiary develops, manufactures and distributes products worldwide including Collamer IOLs, ICLs, TICLs and the AquaFlow
Device. STAAR Surgical AG also controls 100% of Domilens GmbH, a European sales subsidiary, which distributes both STAAR
products and products from other ophthalmic manufacturers.
Canon Staar Joint Venture
In 1988, STAAR entered into a Joint Venture Agreement with Canon Inc. and Canon Sales Co., Inc., creating a company for the
principal purpose of designing, manufacturing, and selling in Japan intraocular lenses and other ophthalmic products. The joint
venture company, Canon Staar Co., Inc., markets its products worldwide through Canon, Canon Sales, their subsidiaries and/or
STAAR or such other distributors as the Board of Directors of the joint venture may approve. The terms of any such distribution
arrangements require the unanimous approval of the Board of Directors of the joint venture. Of the five members of the Board of
Directors of the joint venture, STAAR and Canon Sales are each entitled to appoint two directors and Canon may appoint one. The
president of the joint venture is to be appointed by STAAR. Several matters require the unanimous approval of the directors, including
appointment of officers, acquiring or disposing of assets exceeding 20% of the joint venture’s total book value, and borrowing money
or granting a lien exceeding 20% of the joint venture’s total book value. Upon the occurrence of a merger, a sale of substantially all of
the assets or change in the management of one of the parties, any of the other parties may have the right to acquire the first party’s
interest in the joint venture at book value.
In 1988, STAAR also entered into a Technical Assistance and Licensing Agreement with the joint venture to further its purposes,
granting to the joint venture a perpetual exclusive license to use STAAR technology to make and sell products in Japan, and a
perpetual non−exclusive license to use STAAR technology to sell products in the rest of the world, subject to the requirements of the
Joint Venture Agreement that all sales take place through a distribution agreement unanimously approved by the directors of the joint
venture. STAAR also granted to the joint venture a right of first refusal on the distribution of STAAR’s products in Japan.
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In 2001, the parties entered into a settlement agreement whereby (i) they reconfirmed the Joint Venture Agreement and the
Technical Assistance and Licensing Agreement, (ii) they agreed that the Company would promptly commence the transfer of
STAAR’s technology to the joint venture, (iii) the Company granted the joint venture an exclusive license to make any products in
China and sell such products in Japan and China (subject to STAAR’s existing licenses and the existing rights of third parties), (iv) the
Company agreed to provide the joint venture with raw materials under a supply agreement to be entered into with the joint venture,
(v) Canon Sales is to enter into a distribution agreement with the joint venture providing a minimum 50−70% share of sales revenue to
the joint venture and having such other terms as unanimously approved by the directors of the joint venture, and (vi) the parties settled
certain patent disputes.
The joint venture has a single class of capital stock, of which STAAR owns 50%. Accordingly, STAAR is entitled to 50% of any
dividends or distributions by the joint venture and 50% of the proceeds of any liquidation.
The foregoing description of the joint venture agreement, technical assistance and license agreement and settlement agreement is
qualified in its entirety by the full text of such agreements, which have been filed as exhibits or incorporated by reference to this
report. See “Item 1A. Risk Factors — We have licensed our technology to our joint venture company and have granted certain rights
to the partners that could be exercised in the event of a change in control of the Company.”
Employees
As of February 24, 2006, we employed approximately 267 persons.
Code of Ethics
The Company has adopted a Code of Ethics that applies to all Company directors, officers, and employees. The Code of Ethics is
posted on the Company’s website, www.staar.com — Investor Relations: Corporate Governance.
Additional Information
The Company makes available free of charge through our website, www.staar.com, our Annual Report on Form 10−K, Quarterly
Reports on Form 10−Q and Current Reports on Form 8−K and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after those reports are filed with or furnished
to the Securities and Exchange Commission (“SEC”).
The public may read any of the items we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at
1−800−SEC−0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other
information regarding the Company and other issuers that file electronically with the SEC at http://www.sec.gov.
Item 1A. Risk Factors
Our short and long−term success is subject to many factors that are beyond our control. Investors and prospective investors should
consider carefully the following risk factors, in addition to other information contained in this report. This Annual Report on Form
l0−K contains forward−looking statements, which are subject to a variety of risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward−looking statements as a result of various factors, including those set forth below.
Risks Related to Our Business
We have a history of losses and anticipate future losses.
We have reported losses in each of the last three fiscal years and have an accumulated deficit of $71.7 million as of December 30,
2005. There can be no assurance that we will report net income in any future period.
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We have only limited working capital.
We believe that our current sources of working capital are sufficient to satisfy our anticipated working capital requirements for
fiscal 2006. However, the declining sales of our cataract products and the delay in U.S. approval for the ICL raise uncertainties about
the sufficiency of our working capital for future years and we may have to consider alternative sources of funding. We can provide no
assurance as to the availability of such funding or the terms upon which it might be available.
We have limited access to credit and could default of the terms of our loan agreement.
As of December 30, 2005, we have outstanding balances on the credit facility of a European subsidiary of approximately
$1.7 million, based on exchange rates on that date. If our losses continue, we risk defaulting on the terms of our credit facility,
particularly as it relates to the maintenance of minimum levels of equity and the payment of intercompany receivables.
We have only limited access to financing.
Because of our history of losses, our ability to obtain adequate financing on satisfactory terms or at all is limited. Any such
financing may involve substantial dilution to existing shareholders. In addition, we have only approximately 1.31 million authorized
shares of common stock that are unissued and that have not been reserved for issuance on the exercise of outstanding stock options as
of December 30, 2005. This relatively small number of available shares limits our ability to raise equity capital by selling common
stock or securities convertible into common stock unless our stockholders approve an amendment to our Certificate of Incorporation to
increase the number of authorized shares of common stock. Even if additional authorized shares become available, equity financing at
recently prevailing prices could result in substantial dilution to existing stockholders. An inability to secure additional financing could
limit our ability to expand our business. If we fail to achieve profitability and cannot secure adequate funding our ability to continue
operations would be in jeopardy.
Recent FDA compliance issues have harmed our reputation, and we expect to devote significant resources to maintaining
compliance in the future.
The Office of Compliance of the FDA’s Center for Devices and Radiological Health regularly inspects STAAR’s facilities to
determine whether we are in compliance with the FDA Quality System Regulations relating to such things as manufacturing practices,
validation, testing, quality control, product labeling and complaint handling, and in compliance with FDA Medical Device Reporting
regulations.
Based on the results of an FDA inspection of STAAR’s Monrovia, California facility between August 29, 2005 and September 14,
2005, and the FDA’s final approval of the VISIAN ICL, STAAR believes that it is substantially in compliance with the FDA’s Quality
System Regulations and Medical Device Reporting regulations. However, between December 29, 2003 and July 5, 2005 the Company
received Warning Letters, Form 483 Inspectional Observations and other correspondence from the FDA indicating that the FDA
deemed STAAR’s Monrovia, California facility to be violating the FDA’s Quality System Regulations and Medical Device Reporting
regulations, warning of possible enforcement action and suspending approval of Class III medical devices to which the violations
related.
The FDA’s findings of compliance deficiencies during the preceding two years have harmed our reputation in the ophthalmic
industry and affected our product sales and delayed FDA approval of the ICL. STAAR’s ability to continue its U.S. business depends
on the continuous improvement of its quality systems and its compliance with FDA regulations. Accordingly, for the foreseeable
future STAAR’s management expects its strategy to include devoting significant resources and attention to those efforts. STAAR
cannot ensure that these efforts will always be successful, and any failure to demonstrate substantial compliance with these regulations
can result in enforcement actions that terminate, suspend or severely restrict our ability to continue manufacturing and selling medical
devices.
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Our success depends on the successful marketing of the ICL in the United States market.
The FDA approved the sale of the ICL for treatment of myopia on December 22, 2005. The ICL will not reach its full sales
potential unless we successfully plan and execute its launch and marketing in the United States. This presents new challenges to our
sales and marketing staff and to our independent manufacturers’ representatives. In countries where the ICL has been approved to
date, our sales have grown steadily, but slowly. In the United States in particular, patients who might benefit from the ICL have
already been exposed to a great deal of advertising and publicity about laser refractive surgery, but have little if any awareness of the
ICL. As a result, we expect to make extensive use of advertising and promotion targeted to potential patients through providers, and to
carefully manage the introduction of the ICL. Final training of surgeons in the U.S. will be conducted by a finite number of proctors
on our staff. Our resources are limited and we cannot predict whether the particular marketing, advertising and promotion strategies
we pursue will be as successful as we intend. If we do not successfully market the ICL in the United States, we will not achieve our
planned profitability and growth.
Our core domestic business has suffered declining sales, which sales of new products have only partially offset.
STAAR pioneered the foldable IOL for use in cataract surgery, and the foldable silicone IOL remains our largest source of sales.
Since we introduced the product, however, competitors have introduced IOLs employing a variety of designs and materials. Over the
years these products have gradually taken a larger share of the IOL market, while the market share for STAAR silicone IOLs has
decreased. In particular, many surgeons now choose lenses made of acrylic material rather than silicone for their typical patients. In an
effort to maintain our competitive position we have introduced IOLs made of a biocompatible lens material, Collamer, and more
recently a three−piece silicone IOL preloaded into a single−use disposable injector which is sold internationally. Despite the
introduction of these products, our overall cataract business has continued to decline in recent periods.
We face stronger competition from multifocal and accommodating lenses because of a change in Medicare reimbursement
rules.
The Centers for Medicare and Medicaid Services recently changed the reimbursement policy applicable to cataract surgery by
permitting Medicare−covered cataract patients to receive higher−cost multifocal IOLs by paying only the additional cost of the lens
and surgical procedure while still receiving reimbursement for the basic cost of cataract surgery and a monofocal IOL. This has made
the more costly cataract lenses that claim to reduce or eliminate the need for spectacles for close−up vision more accessible financially
for older patients with active lifestyles. STAAR does not sell a multifocal or accommodating lens design and cannot participate in this
market. Moreover, surgeons receive significant additional fees when they implant multifocal or accommodating lenses, so these
procedures have absorbed significant time and attention of surgeons in our U.S. target market. Beginning in the second half of 2005,
surgeons, including most of STAAR’s customers, who wished to offer a multifocal option to patients by use of Alcon’s ReSTOR®
lens, were required to implant an Alcon monofocal IOL in each of at least thirty patients as a pre−requisite to training in implanting
the ReSTOR lens. This generally resulted in the surgeon implanting sixty of our competitor’s lenses in order to use the same lens in
each of the patients’ eyes, which contributed to STAAR’s significant decline in U.S. sales during the third and fourth quarter of 2005.
Competition from multifocal lenses under the new Medicare reimbursement rules will probably continue to take business from
STAAR’s domestic cataract business, but the full impact of this trend cannot be estimated at this time.
Our sales are subject to significant seasonal variation.
We generally experience lower sales during the third quarter due to the effect of summer vacations on elective procedures. In
particular, because sales activity in Europe drops dramatically in July and August, and European sales have recently accounted for a
greater proportion of our total sales, this seasonal variation in our results has become even more pronounced.
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We depend on independent manufacturers’ representatives.
In an effort to manage costs and bring our products to a wider market, we have entered into long−term agreements with
independent regional manufacturers’ representatives, who introduce our products to eye surgeons and provide the training needed to
begin using some of our products. Under our agreements with these representatives, each receives a commission on all of our sales
within a specified region, including sales on products we sell into their territories without their assistance. Because they are
independent contractors, we have a limited ability to manage these representatives or their employees. In addition, a representative
may represent manufacturers other than STAAR, although not in competing products. We have been relying on the independent
representatives to introduce our new products like Collamer IOLs, Toric IOLs and the AquaFlow Device, and we are relying on them,
in part, to help introduce the ICL. If our independent manufacturers’ representatives do not devote sufficient resources to marketing
our products, or if they lack the skills or resources to market our new products, our new products will fail to reach their full sales
potential and sales of our established products could decline.
Product recalls have been costly and may be so in the future.
Medical devices must be manufactured to the highest standards and tolerances, and often incorporate newly developed technology.
Despite all efforts to achieve the highest level of quality control and advance testing, from time to time defects or technical flaws in
our products may not come to light until after the products are sold or consigned. In those circumstances, we have previously made
voluntary recalls of our products. We may also be subject to recalls initiated by manufacturers of products we distribute. In February
2006, our German subsidiary recalled all lots of a balanced salt solution it distributes due to a manufacturer’s recall for possible
endotoxin content. In 2005, we recalled one lot of Phaco tubing manufactured by a third party, due to incorrect labelling, and we
recalled one lot of STAARVISC, also manufactured by a third party, due to a potential sterility breach of the packaging of the cannula
that is packaged with the STAARVISC. During 2004, we initiated several voluntary recalls of STAAR−manufactured product
including 33 lots of IOL cartridges, three lots of injectors, and 529 lenses, and in February 2004, in an action considered a recall but
with no requirement for product to be returned to us, we issued a letter to healthcare professionals advising them of the potential for a
change in manifest refraction over time in rare cases involving the single−piece Collamer IOL. While the majority of the direct costs
associated with the recalls have not been material, we believe recalls have harmed our reputation and adversely affected our product
sales, although the impact cannot be quantified. Similar recalls could take place again. Courts or regulators can also impose mandatory
recalls on us, even if we believe our products are safe and effective.
Recalls can result in lost sales of the recalled products themselves, and can result in further lost sales while replacement products
are manufactured, especially if the replacements must be redesigned. If recalled products have already been implanted, we may bear
some or all of the cost of corrective surgery. Recalls may also damage our professional reputation and the reputation of our products.
The inconvenience caused by recalls and related interruptions in supply, and the damage to our reputation, could cause some
professionals to discontinue using our products.
We could experience losses due to product liability claims.
We have been subject to product liability claims in the past and continue to be so. As part of our risk management policy, we have
obtained third−party product liability insurance coverage. In recent periods this insurance has become more expensive and difficult to
procure. Product liability claims against us may exceed the coverage limits of our insurance policies or cause us to record a loss in
excess of our deductible. A product liability claim in excess of applicable insurance could have a material adverse effect on our
business, financial condition and results of operations. Even if any product liability loss is covered by an insurance policy, these
policies have retentions or deductibles that provide that we will not receive insurance proceeds until the losses incurred exceed the
amount of those retentions or deductibles. To the extent that any losses are below these retentions or deductibles, we will be
responsible for paying these losses. The payment of retentions or deductibles for a significant amount of claims could have a material
adverse effect on our business, financial condition, and results of operations.
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Any product liability claim would divert managerial and financial resources and could harm our reputation with customers. We
cannot assure you that we will not have product liability claims in the future or that such claims would not have a material adverse
effect on our business.
We compete with much larger companies.
Our competitors, including Alcon, Advanced Medical Optics, and Bausch & Lomb have much greater financial resources than we
do and some of them have large international markets for a full suite of ophthalmic products. Their greater resources for research,
development and marketing, and their greater capacity to offer comprehensive products and equipment to providers, make it difficult
for us to compete. We have lost significant market share to some of our competitors.
Most of our products have single−site manufacturing approvals, exposing us to risks of business interruption.
We manufacture all of our products either at our facilities in California or at our facility in Switzerland. Most of our products are
approved for manufacturing only at one of these sites. Before we can use a second manufacturing site for an implantable device we
must obtain the approval of regulatory authorities. Because this process is expensive we have generally not sought approvals needed to
manufacture at an additional site. If a natural disaster, fire, or other serious business interruption struck one of our manufacturing
facilities, it could take a significant amount of time to validate a second site and replace lost product. We could lose customers to
competitors, thereby reducing sales, profitability and market share.
The global nature of our business may result in fluctuations and declines in our sales and profits.
Our products are sold in approximately 50 countries. Sales from international operations make up a significant portion of our total
sales. For the year ended December 30, 2005, sales from international operations were 64% of total sales. The results of operations
and the financial position of certain of our offshore operations are reported in the relevant local currencies and then translated into
United States dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to translation
risk. In addition, we are exposed to transaction risk because some of our expenses are incurred in a different currency from the
currency in which our sales are received. Our most significant currency exposures are to the Euro, the Swiss Franc, and the Australian
dollar. The exchange rates between these and other local currencies and the United States dollar may fluctuate substantially. We have
not attempted to offset our exposure to these risks by investing in derivatives or engaging in other hedging transactions. Fluctuations
in the value of the United States dollar against other currencies have not had a material adverse effect on our operating margins and
profitability in the past.
Economic, social and political conditions, laws, practices and local customs vary widely among the countries in which we sell our
products. Our operations outside of the United States are subject to a number of risks and potential costs, including lower profit
margins, less stringent protection of intellectual property and economic, political and social uncertainty in some countries, especially
in emerging markets. Our continued success as a global company depends, in part, on our ability to develop and implement policies
and strategies that are effective in anticipating and managing these and other risks in the countries where we do business. These and
other risks may have a material adverse effect on our operations in any particular country and on our business as a whole. We price
some of our products in U.S. dollars, and as a result changes in exchange rates can make our products more expensive in some
offshore markets and reduce our sales. Inflation in emerging markets also makes our products more expensive there and increases the
credit risks to which we are exposed.
We obtain some of the components of our products from a single source, and an interruption in the supply of those
components could reduce our sales.
We obtain some of the components for our products from a single source. For example, only one supplier produces our
viscoelastic product. Although we believe we could find alternate supplies for any of these components, the loss or interruption of any
of these suppliers could increase costs, reducing our sale and
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profitability, or harm our customer relations by delaying product deliveries. Even when substitute suppliers are available, the need to
certify regulatory compliance and quality standards of substitute suppliers could cause significant delays in production and a material
reduction in our sales revenue. We try to mitigate this risk by stockpiling raw materials when practical and identifying secondary
suppliers, but the risk cannot be entirely eliminated. For example, the failure of one of our suppliers could be the result of an
unforeseen industry−wide problem, or the failure of our supplier could create an industry−wide shortage affecting secondary suppliers
as well.
Our activities involve hazardous materials and emissions and may subject us to environmental liability.
Our manufacturing, research and development practices involve the controlled use of hazardous materials. We are subject to
federal, state and local laws and regulations in the various jurisdictions in which we have operations governing the use, manufacturing,
storage, handling and disposal of these materials and certain waste products. Although we believe that our safety and environmental
procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate
the risk of accidental contamination or injury from these materials. Remedial environmental actions could require us to incur
substantial unexpected costs, which would materially and adversely affect our results of operations. If we were involved in a major
environmental accident or found to be in substantial non−compliance with applicable environmental laws, we could be held liable for
damages or penalized with fines.
We risk losses through litigation.
STAAR and its Chief Executive Officer are defendants in a class action lawsuit pending in the Central District of California. A
consolidated amended complaint filed by the plaintiffs on April 29, 2005 generally alleges that the defendants violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b−5 under the Exchange Act by issuing false and misleading statements
regarding the prospects for FDA approval of STAAR’s VISIAN ICL, thereby artificially inflating the price of the STAAR’s Common
Stock. The plaintiffs generally seek to recover compensatory damages, including interest. The defendants filed a motion to dismiss the
lawsuit, which the court denied in an Order filed September 19, 2005. While permitting the case to proceed, the Order effectively
narrowed the proposed class to purchasers of the Company’s securities between October 6, 2003 and January 5, 2004 by limiting the
statements of STAAR that the plaintiffs may challenge.
On December 27, 2005, the parties filed a Joint Status Report and Notice of Settlement with the court, indicating that the parties
had entered into a Memorandum of Understanding agreeing in principal to settle the litigation. The terms of the proposed settlement
are described more fully under “Part I — Item 3 — Legal Proceedings.” The proposed settlement will not be effective until the parties
have executed and filed a Stipulation of Settlement and the court has granted final approval of the Stipulation of Settlement. Until that
time the class action lawsuit remains pending.
From time to time we are party to various claims and legal proceedings arising out of the normal course of our business. These
claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability. While
we do not believe that any of the claims known to us is likely to have a material adverse effect on our financial condition or results of
operations, new claims or unexpected results of existing claims could lead to significant financial harm.
We depend on key employees.
We depend on the continued service of our senior management and other key employees. The loss of a key employee could hurt
our business. We could be particularly hurt if any key employee or employees went to work for competitors. Our future success
depends on our ability to identify, attract, train and motivate other highly skilled personnel. Failure to do so may adversely affect
future results.
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We have licensed our technology to our joint venture company and have granted certain rights to the partners that could be
exercised in the event of a change in control of the Company.
We have granted to the Canon Staar joint venture, an irrevocable, exclusive license to make and sell products using our technology
in Japan. We have also granted the joint venture an irrevocable, exclusive license to make products using our technology in China and
to sell in China and Japan the products made in China. In addition, we have granted Canon Staar an irrevocable, non−exclusive license
to sell products using our technology in the rest of the world. Subject to the unanimous approval of the Board of Directors of the joint
venture, such licenses may allow the Canon Staar joint venture to sell products in the rest of the world directly or through distributors.
If a party to the Canon Staar joint venture undergoes a merger, sale of substantially all of its assets or changes its management, any
of the other joint venture partners has the right to acquire that party’s interest in the joint venture at book value. The terms of the
principal agreements governing the joint venture are described under the caption “Business — Canon Staar Joint Venture.”
Changes in accounting standards could affect our financial results.
The accounting rules applicable to public companies like STAAR are subject to frequent revision. Future changes in accounting
standards could require us to change the way we calculate income, expense or balance sheet data, resulting in significant changes in
our reported results of operation or financial condition.
We are subject to international taxation laws that could affect our financial results.
STAAR conducts international operations through its subsidiaries. Tax laws affecting international operations are highly complex
and subject to change. STAAR’s payment of income tax in the different countries where it operates depends in part on internal
settlement prices and administrative charges among STAAR and its subsidiaries. These arrangements require judgments by STAAR
and are subject to risk that tax authorities will disagree with those judgments and impose additional taxes, penalties or interest on
STAAR. STAAR engages in dialogue with tax authorities in some of the countries where it operates to mitigate this risk, but it cannot
be entirely eliminated. In addition, transactions that STAAR has arranged in light of current tax rules could have unforeseeable
negative consequences if tax rules change.
If we suffer loss to our facilities due to catastrophe, our operations could be seriously harmed.
We depend on the continuing operation of all of our manufacturing facilities in California and Switzerland, which have little
redundancy or overlap among their activities. Our facilities are subject to catastrophic loss due to fire, flood, earthquake, terrorism or
other natural or man−made disasters. In particular, our California facilities are in areas where earthquakes could cause catastrophic
loss. If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and
revenue and result in large expenses to repair or replace the facility. Although we carry insurance for property damage and business
interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from earthquakes or terrorism.
If we are unable to protect our information systems against data corruption, cyber−based attacks or network security breaches,
our operations could be disrupted.
We are increasingly dependent on information technology networks and systems, including the Internet, to process, transmit and
store electronic information. In particular, we depend on our information technology infrastructure for electronic communications
among our locations around the world and between Company personnel and our subsidiaries, customers, and suppliers. Security
breaches of this infrastructure can create system disruptions, shutdowns or unauthorized disclosure of confidential information. If we
are unable to prevent such security breaches, our operations could be disrupted or we may suffer financial damage or loss because of
lost or misappropriated information.
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Risks Related to the Ophthalmic Products Industry
If we fail to keep pace with advances in our industry or fail to persuade physicians to adopt the new products we introduce,
customers may not buy our products and our sales may decline.
Constant development of new technologies and techniques, frequent new product introductions and strong price competition
characterize the ophthalmic industry. The first company to introduce a new product or technique to market usually gains a significant
competitive advantage. Our future growth depends, in part, on our ability to develop products to treat diseases and disorders of the eye
that are more effective, safer, or incorporate emerging technologies better than our competitors’ products. Sales of our existing
products may decline rapidly if one of our competitors introduces a substantially superior product, or if we announce a new product of
our own. Similarly, if we fail to make sufficient investments in research and development or if we focus on technologies that do not
lead to better products, our current and planned products could be surpassed by more effective or advanced products.
In addition, we must manufacture these products economically and market them successfully by persuading a sufficient number of
eye care professionals to use them. For example, glaucoma requires ongoing treatment over a long period of time; thus, many doctors
are reluctant to switch a patient to a new treatment if the patient’s current treatment for glaucoma remains effective. This has been a
challenge in selling our AquaFlow Device.
Resources devoted to research and development may not yield new products that achieve commercial success.
We spent 10.9% of our sales on research and development during the year ended December 30, 2005, and we expect to spend
approximately 10% in future periods. Development of new implantable technology, from discovery through testing and registration to
initial product launch, is expensive and typically takes from three to seven years. Because of the complexities and uncertainties of
ophthalmic research and development, products we are currently developing may not complete the development process or obtain the
regulatory approvals required for us to market the products successfully. It is possible that few or none of the products currently under
development will become commercially successful.
Failure of users of our products to obtain adequate reimbursement from third−party payors could limit market acceptance of
our products, which could affect our sales and profits.
Many of our products, in particular IOLs and products related to the treatment of glaucoma, are used in procedures that are
typically covered by health insurance, HMO plans, Medicare, Medicaid, or other governmental sponsored programs. These
third−party payors have recently been trying to contain costs by restricting the types of procedures they reimburse to those viewed as
most cost−effective and capping or reducing reimbursement rates. These polices could adversely affect sales and prices of our
products. Physicians, hospitals and other health care providers may be reluctant to purchase our products if third−party payors do not
adequately reimburse them for the cost of our products and the use of our surgical equipment. For example:
• Major third−party payors for hospital services, including government insurance plans, Medicare, Medicaid and private health
care insurers, have substantially revised their payment methodologies during the last few years, resulting in stricter standards for
reimbursement of hospital and outpatient charges for some medical procedures, including cataract procedures and IOLs;
• Numerous legislative proposals have been considered that, if enacted, would result in major reforms in the United States’ health
care system, which could have an adverse effect on our business;
• Our competitors may reduce the prices of their products, which could result in third−party payors favoring our competitors;
• There are proposed and existing laws and regulations governing maximum product prices and the profitability of companies in
the health care industry; and
• There have been recent initiatives by third−party payors to challenge the prices charged for medical products. Reductions in the
prices for our products in response to these trends could reduce our sales.
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Moreover, our products may not be covered in the future by third−party payors, which would also reduce our sales.
We are subject to extensive government regulation, which increases our costs and could prevent us from selling our products.
Government regulations and agency oversight apply to every aspect of our business, including testing, manufacturing, safety and
environmental controls, efficacy, labeling, advertising, promotion, record keeping, the sale and distribution of products and samples.
We are also subject to government regulation over the prices we charge and the rebates we offer to customers. Complying with
government regulation substantially increases the cost of developing, manufacturing and selling our products.
In the United States, we must obtain approval from the FDA for each product that we market. Competing in the ophthalmic
products industry requires us to continuously introduce new or improved products and processes, and to submit these to the FDA for
approval. Obtaining FDA approval is a long and expensive process, and approval is never certain. In addition, our operations in the
United States are subject to periodic inspection by the FDA. An unfavorable outcome in an FDA inspection may result in the FDA
ordering changes in our business practices or taking other enforcement action, which could be costly and severely harm our business.
Products distributed outside of the United States are also subject to government regulation, which may be equally or more
demanding. Our new products could take a significantly longer time than we expect to gain regulatory approval and may never gain
approval. If a regulatory authority delays approval of a potentially significant product, the potential sales of the product and its value
to us can be substantially reduced. Even if the FDA or another regulatory agency approves a product, the approval may limit the
indicated uses of the product, or may otherwise limit our ability to promote, sell and distribute the product, or may require post−
marketing studies. If we cannot obtain regulatory approval of our new products, or if the approval is too narrow, we will not be able to
market these products, which would eliminate or reduce our potential sales and earnings.
We depend on proprietary technologies, but may not be able to protect our intellectual property rights adequately.
We have numerous patents and pending patent applications. We rely on a combination of contractual provisions, confidentiality
procedures and patent, trademark, copyright and trade secrecy laws to protect the proprietary aspects of our technology. These legal
measures afford limited protection and may not prevent our competitors from gaining access to our intellectual property and
proprietary information. Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, we
cannot be certain that any pending patent application held by us will result in an issued patent or that if patents are issued to us, the
patents will provide meaningful protection against competitors or competitive technologies. Litigation may be necessary to enforce
our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any
litigation could result in substantial expense, may reduce our profits and may not adequately protect our intellectual property rights. In
addition, we may be exposed to future litigation by third parties based on claims that our products infringe their intellectual property
rights. This risk is exacerbated by the fact that the validity and breadth of claims covered by patents in our industry may involve
complex legal issues that are not fully resolved.
Any litigation or claims against us, whether or not successful, could result in substantial costs and harm our reputation. In addition,
intellectual property litigation or claims could force us to do one or more of the following: to cease selling or using any of our
products that incorporate the challenged intellectual property, which would adversely affect our sales; to negotiate a license from the
holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at
all; or to redesign our products to
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avoid infringing the intellectual property rights of a third party, which may be costly and time−consuming or impossible to
accomplish.
We may not successfully develop and launch replacements for our products that lose patent protection.
Most of our products are covered by patents that give us a degree of market exclusivity during the term of the patent. We have also
earned revenue in the past by licensing some of our patented technology to other ophthalmic companies. The legal life of a patent is
20 years from application. Patents covering our products will expire from this year through the next 20 years. Upon patent expiration,
our competitors may introduce products using the same technology. As a result of this possible increase in competition, we may need
to charge a lower price in order to maintain sales of our products, which could make these products less profitable. If we fail to
develop and successfully launch new products prior to the expiration of patents for our existing products, our sales and profits with
respect to those products could decline significantly. We may not be able to develop and successfully launch more advanced
replacement products before these and other patents expire.
Risks Related to Ownership of Our Common Stock
Our Certificate of Incorporation could delay or prevent an acquisition or sale of our company.
Our Certificate of Incorporation empowers the Board of Directors to establish and issue a class of preferred stock, and to
determine the rights, preferences and privileges of the preferred stock. These provisions give the Board of Directors the ability to
deter, discourage or make more difficult a change in control of our company, even if such a change in control would be in the interest
of a significant number of our stockholders or if such a change in control would provide our stockholders with a substantial premium
for their shares over the then−prevailing market price for the common stock.
We also have a Stockholders’ Rights Plan, or “Poison Pill,” which could discourage a third party from making an offer to acquire
us. However the Stockholders’ Rights Plan will expire on April 20, 2006, and our Board of Directors has no intention to renew or
replace it at this time.
Our bylaws contain other provisions that could have an anti−takeover effect, including the following:
• only one of the three classes of directors is elected each year;
• stockholders have limited ability to remove directors;
• stockholders cannot act by written consent;
• stockholders cannot call a special meeting of stockholders; and
• stockholders must give advance notice to nominate directors.
Anti−takeover provisions of Delaware law could delay or prevent an acquisition of our company.
We are subject to the anti−takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates
corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in
control transaction. They could also have the effect of discouraging others from making tender offers for our common stock or
preventing changes in our management.
Future sales of our common stock could reduce our stock price.
Our Board of Directors could issue additional shares of common or preferred stock to raise additional capital or for other corporate
purposes without stockholder approval. In addition, the Board of Directors could designate and sell a class of preferred stock with
preferential rights over the common stock with respect to dividends or other distributions. Sales of common or preferred stock could
dilute the interest of existing stockholders and reduce the market price of our common stock. Even in the absence of such sales, the
perception among investors that additional sales of equity securities may take place could reduce the market price of our common
stock.
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The market price of our common stock is likely to be volatile.
Our stock price has fluctuated widely, ranging from $3.12 to $9.37 during the year ended December 30, 2005. Our stock price
could continue to experience significant fluctuations in response to factors such as quarterly variations in operating results, operating
results that vary from the expectations of securities analysts and investors, changes in financial estimates, changes in market
valuations of competitors, announcements by us or our competitors of a material nature, additions or departures of key personnel,
future sales of Common Stock and stock volume fluctuations. Also, general political and economic conditions such as recession or
interest rate fluctuations may adversely affect the market price of our stock.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our operations are conducted in leased facilities throughout the world. Our executive offices, manufacturing, warehouse and
distribution, and primary research facilities are located in Monrovia, California. STAAR Surgical AG maintains office, manufacturing,
and warehouse and distribution facilities in Nidau, Switzerland. The Company has one additional facility in Aliso Viejo, California for
raw material production and research and development activities. The Company leases additional sales and distribution facilities in
Germany and Australia. We believe our manufacturing facilities in the U.S. and Switzerland are suitable and adequate for our current
and future planned requirements. The Company could increase capacity by adding additional shifts at our existing facilities. However,
the Company is at capacity in the U.S. and Switzerland in the area of administration. The Company would require additional space to
support growth in those areas, although this is not anticipated for 2006.
Item 3.
Legal Proceedings
In re STAAR Surgical Co. Securities Litigation, No. CV 04−8007. The Company and its Chief Executive Officer are defendants in
a class action lawsuit pending in the Central District of California. A consolidated amended complaint filed by the plaintiffs on
April 29, 2005 generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b−5 promulgated thereunder, by issuing false and misleading statements regarding the prospects for FDA
approval of STAAR’s VISIAN ICL, thereby artificially inflating the price of the Company’s Common Stock. The plaintiffs generally
seek to recover compensatory damages, including interest.
The defendants filed a motion to dismiss, which the court denied in an order filed September 19, 2005 (the “Order”). While
permitting the case to proceed, the Order effectively narrowed the proposed class to purchasers of STAAR’s securities between
October 6, 2003 and January 5, 2004 by limiting the statements of STAAR that the plaintiffs may challenge.
On December 27, 2005, a Joint Status Report and Notice of Settlement (the “Notice”) was filed with the court, indicating that the
parties had reached an agreement to settle all claims. In the Notice, the parties to the Class Action Lawsuit informed the Court that
they have reached an agreement to resolve the litigation, without admission of liability, and have signed a Memorandum of
Understanding. The effectiveness of the agreement among the parties is subject to the parties’ negotiating and approving the terms of a
Stipulation of Settlement, and to the Court’s final approval, after notice to the Class, of the terms set forth in that Stipulation.
The Memorandum of Understanding provides, among other things, that in consideration of their agreement to settle STAAR will
pay to the plaintiffs total consideration of $3,700,000. STAAR’s insurance carrier has represented that the proceeds of insurance will
cover those payments and all other costs related to settlement of the Class Action Lawsuit, except for approximately $100,000 in
administrative costs payable by the Company (which was accrued as of December 30, 2005) as part of its retention under the terms of
its insurance policy.
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The Stipulation of Settlement remains under negotiation among the parties. The Class Action Lawsuit remains pending until the
Stipulation of Settlement is executed and filed by the parties and finally approved by the court.
From time to time the Company is subject to various claims and legal proceedings arising out of the normal course of our business.
These claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability.
We do not believe that any of the claims known to us is likely to have a material adverse effect on our financial condition or results of
operations.
Item 4.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter ended December 30, 2005.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our Common Stock is quoted on the Nasdaq National Market under the symbol “STAA.” The following table sets forth the
reported high and low bid prices of the Common Stock as reported by Nasdaq for the calendar periods indicated:
PART II
Period
2006
First Quarter (through March 8, 2006)
2005
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2004
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$
$
$
8.660
9.370
6.050
5.170
7.300
6.400
7.480
9.730
11.260
$
$
$
6.630
4.870
3.120
3.580
3.500
3.500
2.880
6.250
7.230
On March 8, 2006, the closing price of the Company’s Common Stock was $8.57. Stockholders are urged to obtain current market
quotations for the Common Stock.
As of March 8, 2006, there were approximately 590 record holders of our Common Stock.
We have not paid any cash dividends on our Common Stock since our inception. We currently expect to retain any earnings for
use to further develop our business and not to declare cash dividends on our Common Stock in the foreseeable future. The declaration
and payment of any such dividends in the future depends upon the Company’s earnings, financial condition, capital needs and other
factors deemed relevant by the Board of Directors and may be restricted by future agreements with lenders.
As of March 8, 2006, options to purchase 2,823,895 shares of Common Stock were exercisable.
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Item 6.
Selected Financial Data
The following table sets forth selected consolidated financial data with respect to the five most recent fiscal years ended
December 30, 2005, December 31, 2004, January 2, 2004, January 3, 2003, and December 28, 2001. The selected consolidated
statement of operations data set forth below for each of the three most recent fiscal years, and the selected consolidated balance sheet
data set forth below at December 30, 2005 and December 31, 2004, are derived from the consolidated financial statements which have
been audited by BDO Seidman, LLP, independent registered public accounting firm, as indicated in their report which is included in
this Annual Report. The selected consolidated statement of operations data set forth below for each of the two fiscal years in the
periods ended January 3, 2003, and December 28, 2001, and the consolidated balance sheet data set forth below at January 2, 2004,
January 3, 2003, and December 28, 2001 are derived from the Company’s audited consolidated financial statements not included in
this Annual Report. The selected consolidated financial data should be read in conjunction with the consolidated financial statements
of the Company, and the Notes thereto, included in this Annual Report, and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Item 7.
December 30,
2005
December 31,
2004
Fiscal Year Ended
January 2,
2004
January 3,
2003
December 28,
2001
(In thousands except per share data)
Statement of Operations
Sales
Royalty and other income
Total revenues
Cost of sales
Gross profit
Selling, general and
administrative expenses
General and administrative
Marketing and selling
Research and development
Other charges
Total selling, general and
administrative expenses
Operating loss
Total other income (expense), net
Loss before income taxes and
minority interest
Income tax provision (benefit)
Minority interest
Net loss
Basic and diluted net loss per share
Weighted average number of basic
and diluted shares
Balance Sheet Data
Working capital
Total assets
Notes payable and current portion
of long−term debt
Stockholders’ equity
$
$
$
$
51,303
—
51,303
27,517
23,786
9,727
18,552
5,573
746
34,598
(10,812)
854
(9,958)
1,239
(22)
(11,175)
(0.47)
23,704
22,735
52,755
1,676
40,366
$
$
$
$
51,685
—
51,685
25,542
26,143
9,253
20,302
6,246
500
36,301
(10,158)
(88)
(10,246)
1,057
29
(11,332)
(0.58)
19,602
19,103
51,973
3,004
37,840
24
$
50,409
49
50,458
22,621
27,837
9,343
19,509
5,120
390
34,362
(6,525)
(637)
(7,162)
1,127
68
(8,357)
(0.47)
17,704
15,883
47,376
2,950
35,219
$
$
$
$
$
$
$
47,880
368
48,248
24,099
24,149
8,959
16,833
4,016
1,454
31,262
(7,113)
(785)
(7,898)
8,805
75
(16,778)
(0.98)
17,142
7,095
45,220
5,845
30,551
$
$
$
$
50,237
549
50,786
28,203
22,583
8,746
20,043
3,800
7,780
40,369
(17,786)
(724)
(18,510)
(3,649)
139
(15,000)
(0.88)
17,003
16,780
64,650
8,216
46,142
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The matters addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations that are not
historical information constitute “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. Readers can recognize forward−looking statements
by the use of words like “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” “target”, “forecast” and
similar expressions in connection with any discussion of future operating or financial performance. In particular, these include
statements relating to future actions, prospective products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal
proceedings, and financial results.
Although the Company believes that the expectations reflected in these forward−looking statements are reasonable, such
statements are inherently subject to risks and the Company can give no assurance that its expectations will prove to be correct. Actual
results could differ from those described in this report because of numerous factors, many of which are beyond the control of the
Company. These factors include, without limitation, those described in this Annual Report in “Item 1 — Risk Factors.” The Company
undertakes no obligation to update these forward−looking statements after the date of this report to reflect future events or
circumstances or to reflect actual outcomes.
The following discussion should be read in conjunction with the audited consolidated financial statements of STAAR, including
the related notes, provided in this report.
Overview
Strategy
STAAR is currently focusing on the following four strategic goals:
• successfully launching the ICL in the U.S. market and securing U.S. approval of the TICL;
• generating further growth of the ICL and TICL in international markets;
• reversing the decline in U.S. market share for our core cataract product lines by renewing and refining our product offering
through enhanced R&D; and
• maintaining our focus on regulatory compliance and continuous quality improvement.
Successfully launching the ICL in the U.S. market and securing U.S. approval of the TICL. STAAR’s VISIAN ICL is the first
implantable lens to be sold for the correction of myopia in the U.S. that is foldable, and therefore minimally invasive. U.S. Surgeons
who had developed expertise in implanting the ICL during our clinical trials began implanting the ICL in new patients on January 10,
2006, and STAAR began its pre−launch in a rollout to qualify ICL surgeons on January 27, 2006. STAAR makes the ICL available to
selected surgeons only after completion of a training program that includes proctoring of selected supervised surgeries. STAAR
believes that this carefully guided method of product release is essential to help ensure the consistent quality of patient outcomes and
the high levels of patient satisfaction needed to establish wide acceptance of the ICL as a choice for refractive surgery. In international
markets, this approach has resulted in relatively slow but steady and sustained growth in sales over the last few years. STAAR
believes that the TICL, a variant of the ICL that corrects both astigmatism and myopia in a single lens, also has a significant potential
market in the U.S. Securing FDA approval of the TICL is therefore an integral part of STAAR’s strategy to develop its U.S. refractive
market. Because the application for FDA approval of the TICL is considered a supplement to the pre−market application for the ICL,
it could not be submitted until after approval of the ICL was granted. STAAR has completed clinical trials for the TICL and intends to
submit its application for U.S. approval of the TICL around the end of the first quarter or early in the second quarter of 2006.
Generating further growth of the ICL and TICL in international markets. In markets where the ICL and TICL have been approved,
STAAR has gradually increased its share of the refractive implant market and of the overall market for refractive surgery. STAAR has
principally emphasized the superior visual outcomes the ICL
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can provide in patients who fall outside the ideal range for LASIK surgery and similar procedures. STAAR believes that when
surgeons using the ICL for those patients become accustomed to the predictable, superior outcomes of the ICL, they may begin
offering it to a broader range of patients as an alternative to cornea−based procedures. STAAR bases this belief on the fact that in most
markets, over time, the sales of mid−powered ICLs increases as a proportion of total sales. When surgeons and patients choose the
ICL for lower levels of correction, the size of its potential market increases greatly.
In addition, the introduction of the TICL in international markets has strengthened our refractive offering and contributed to
accelerated sales growth for both the ICL and TICL. Because it is designed to provide a customized solution for a wide array of
refractive errors, the TICL is made in numerous powers and must be custom ordered. The time required to fill orders has been a
challenge to STAAR in marketing the TICL. STAAR has recently been able to commit to more rapidly delivery of the TICL, which
has allowed us to win market share from other phakic implants. STAAR believes that for a large number of patients with both myopia
and astigmatism the TICL can provide an outcome that is superior to that of any other surgical procedure. When measured six months
after surgery, approximately 75% of the patients receiving the TICL have shown better visual acuity than the best they previously
achieved with glasses or contact lenses.
STAAR continues to seek new approvals for the ICL and TICL in other countries. During the second quarter of 2005, STAAR
received market approvals for the TICL in Canada and Korea and for both the ICL and TICL in Singapore. STAAR believes it could
obtain approval for the ICL and TICL in China around the end of the first quarter or early in the second quarter of 2006.
Reversing the decline in U.S. market share for our core cataract product lines by intensifying selling efforts and renewing and
refining our product offering through enhanced R&D. STAAR pioneered the foldable IOL for use in cataract surgery. Sales of IOLs
and other cataract−related products still make up 88% of STAAR’s total revenue. However, over the last several years STAAR has
experienced declining U.S. sales of IOLs. STAAR seeks to reverse the decline in its domestic cataract market share by intensifying its
selling efforts in the improved environment resulting from ICL approval. In addition, the resolution of FDA compliance issues has
enabled STAAR to shift R&D resources to developing improved cataract products intended to help reverse the decline.
STAAR’s management believes that the erosion STAAR’s U.S. cataract market share principally resulted from our sales
representatives’ lack of effective selling time with our target surgeon market. In recent periods, our independent sales representatives
have had difficulty obtaining selling time with receptive surgeons because of two factors: lack of improved or innovative products to
introduce, and negative publicity resulting from FDA compliance issues and past concerns about STAAR’s financial stability. A more
detailed discussion of these problems is provided under the caption “Recent Highlights — Decline in U.S. Sales of IOL” below.
Management believes that approval of the ICL in the U.S. and the resolution of STAAR’s issues with the FDA Office of
Compliance have improved the sales environment for STAAR’s cataract products as well. STAAR has developed a combined sales
incentive plan for its independent representatives, which is intended to capitalize on the interest in the ICL among ophthalmologists by
encouraging intensified selling efforts in our cataract product line along with the sales of the ICL.
Accomplishing U.S. ICL approval and resolving FDA compliance issues has also enabled STAAR to shift its R&D resources to
the initiative to renew and revamp its cataract product offering. The first product offering from this effort is a redesigned three−piece
Collamer IOL and a newly designed delivery system, which we introduced to the U.S. market in 2005. While the outcome of R&D is
never certain, STAAR’s management believes that its investments in cataract technology in fiscal 2006 may yield further improved
and enhanced products that will generate greater sales interest.
To reverse the decline in U.S. IOL sales, STAAR must overcome several short and long−term challenges. In particular,
overcoming reputational harm will take time. We cannot ensure that this strategy will ultimately be successful.
Maintaining our focus on regulatory compliance and continuous quality improvement. As a manufacturer of medical devices,
STAAR’s manufacturing processes and facilities are subject to regulation by the FDA. Failure to demonstrate compliance with FDA
regulations can result in enforcement actions that terminate, suspend
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or severely restrict the ability to continue manufacturing and selling medical devices. Between December 29, 2003 and July 5, 2005
STAAR received Warning Letters, Form 483 Inspectional Observations and other correspondence from the FDA indicating
deficiencies in STAAR’s compliance with the FDA’s Quality System Regulations and Medical Device Reporting regulations and
warning of possible enforcement action. In response, STAAR implemented numerous improvements to its quality system. Among
other things, STAAR developed a Global Quality Systems Action Plan, which has been continuously updated since its adoption in
April, 2004, and took steps to emphasize a focus on compliance throughout the organization.
Based on the results of the FDA’s most recent inspection of STAAR’s Monrovia, California facility between August 29, 2005 and
September 14, 2005 and the FDA’s final approval of the VISIAN ICL, STAAR believes that it is substantially in compliance with the
FDA’s Quality System Regulations and Medical Device Reporting regulations. Nevertheless, the FDA’s findings of compliance
deficiencies have harmed our reputation in the ophthalmic industry and affected our product sales, and likely resulted in a significant
delay in FDA approval of the ICL. STAAR’s ability to continue its U.S. business depends on the continuous improvement of its
quality systems and its ability to demonstrate compliance with FDA regulations. Accordingly, for the foreseeable future STAAR’s
management expects its strategy to include devoting significant resources and attention to strict regulatory compliance and continuous
improvement in quality.
Financing Strategy
While STAAR’s international business generates positive cash flow and 64% of STAAR’s revenue, STAAR has reported losses
on a consolidated basis for each of the last three fiscal years due to a number of factors, including eroding sales of cataract products in
the U.S. and FDA compliance issues that consumed additional resources while delaying the introduction of new products in the
U.S. market. During the last three years STAAR has secured additional capital to sustain operations through private sales of equity
securities.
STAAR’s management believes that in the near term its best prospect for returning its U.S. and consolidated operations to
profitability is the successful launch of the ICL in the U.S. In the longer term STAAR seeks to develop and introduce products in the
U.S. cataract market to stop further erosion of its market share and resume growth in that sector. Nevertheless, success of these
strategies is not assured and, even if successful, STAAR is not likely to achieve positive cash flow on a consolidated basis during
fiscal 2006.
To avoid, if possible, additional rounds of equity financing and potential dilution to the interests of existing stockholders, STAAR
plans to finance its operations, including the U.S. launch of the ICL, through funds from operations and existing cash resources.
STAAR is also seeking a line of credit through a U.S. bank, and its Swiss subsidiary has $824,000 in borrowing availability under its
$2.5 million line of credit for use in Swiss operations. STAAR’s cash resources are discussed in further detail under the caption
“Liquidity and Capital Resources” below.
To maximize the effective use of its cash resources, STAAR implemented a number of cost reduction strategies beginning in the
fourth quarter of 2004. For the full year 2005, the Company used approximately $6,976,000 for operating activities, which is 21%
below the Company’s cash usage of $8,804,000 for 2004.
The success of STAAR’s financing strategy is not assured and is subject to numerous contingencies and risks, including those
discussed under “Item 1A. Risk Factors.” STAAR may find it necessary to raise additional capital in the future through the sale of
equity securities, but STAAR has only 1.31 million shares of common stock authorized for issuance as of December 30, 2005, that
have not already been issued or reserved for issuance on the exercise of outstanding options. To address this issue, STAAR’s board of
directors adopted a resolution to submit a proposal to the stockholders at the Annual Meeting to increase STAAR’s authorized shares
of common stock. STAAR has limited access to financing, and if its funds from operations, cash and access to borrowing are not
sufficient to support operations STAAR may not be able to secure financing on favorable terms or at all.
Recent Highlights
Decline in U.S. Sales of IOLs. Several factors led to a 14% decline in total U.S. sales during 2005, from $21.6 million to
$18.7 million. STAAR’s management believes that, above all, the decline has resulted from our sales representatives’ lack of effective
selling time with our target surgeon market. Our independent
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sales representatives have had difficulty obtaining selling time with receptive surgeons because of two factors: negative publicity
resulting from FDA compliance issues and past concerns about STAAR’s financial stability, and a lack of improved or innovative
products to introduce.
In a number of documents, including Form 483 observations, warning letters, and in particular a letter received from the FDA on
July 5, 2005, the FDA found STAAR to be in violation of provisions of the FDA’s Quality System Regulation and Medical Device
Reporting regulations and indicated that regulatory action against STAAR was possible. STAAR believes the issues raised by the
FDA were resolved by the fourth quarter of 2005, and believes it is substantially in compliance with FDA regulations. Nevertheless,
negative publicity surrounding the FDA proceedings damaged STAAR’s quality reputation with customers and led to doubts about
STAAR’s ability to continue its domestic business.
In addition, in their original report on the Company’s audited financial statements for fiscal year 2004, the Company’s independent
registered public accounting firm included a qualifying paragraph expressing substantial doubt about the Company’s ability to
continue as a going concern. While this qualification was withdrawn following the Company’s receipt of the proceeds of a private
placement of common stock on April 4, 2005, doubt about the Company’s ability to continue to support its products caused some
customers to curtail purchases of our products.
The uncertainty created by the above factors worsened a sales environment that was already difficult because of STAAR’s failure
in recent years to match the pace of its competitors in improving IOL technology and standard lens delivery systems. The slow pace of
improvements, in turn, resulted from STAAR’s need to invest in developing and commercializing its ICL technology and in
revamping its quality systems, which left limited resources for developing new and enhanced lenses and injector systems for cataract
treatment. STAAR has introduced some innovative products during this period, including IOLs made of the same uniquely
biocompatible Collamer material used in the ICL and the first preloaded injector system, which was developed by STAAR’s joint
venture company in Japan, Canon Staar. However, the preloaded injector is not yet approved for sale in the U.S. and these products
did not significantly increase surgeons’ receptiveness to our representatives’ selling efforts.
The poor sales environment has severely hampered our representatives’ ability to gain selling time to generate new business and
preserve our existing domestic business. As discussed above under the caption “Strategy — Reversing the decline in U.S. market
share for our core cataract product lines by intensifying selling efforts and renewing and refining our product offering through
enhanced R&D,” STAAR believes that the U.S. launch of the ICL and the recent resolution of compliance issues with the FDA have
provided on opportunity to gain selling time for our representatives in a more favorable sales environment.
STAAR introduced the redesigned three−piece Collamer IOL and newly designed delivery system to the U.S. market in 2005.
Sales of this lens have been encouraging, comprising approximately 8% of STAAR’s total U.S. IOL sales in the fourth quarter of
2005.
Sales in the third and fourth quarters were also affected by a ruling of the Centers for Medicare and Medicaid Services (“CMS”).
The ruling permits Medicare−covered cataract patients to receive higher−cost multifocal IOLs by paying only the additional cost of
the lens and surgical procedure while still receiving reimbursement for the basic cost of cataract surgery and a monofocal IOL.
Surgeons who wished to offer this alternative to patients, including most of STAAR’s customers, by use of Alcon’s ReSTOR® lens,
were required to implant an Alcon monofocal IOL in at least thirty patients as a pre−requisite to training in implanting the ReSTOR
lens. This generally resulted in the surgeon implanting sixty of our competitor’s lenses in order to use the same lens in each of the
patients’ eyes, and as a consequence, STAAR likely lost significant sales. While STAAR expects some rebound in sales, the CMS
ruling and the ability of surgeons to offer multifocal lenses with partial Medicare reimbursement is expected to continue to affect sales
of STAAR’s IOLs in future periods.
Growth in International Sales of VISIAN ICLs and Preloaded Silicone IOLs. The decline in the U.S. cataract business during 2005
was offset in part by a 30% increase in international sales of the VISIAN ICL and TICL. In addition, the preloaded silicone IOL
injector system developed with our joint venture partner Canon
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Staar experienced strong sales in international markets, growing 85% for the year. This growth in the business contributed to an
increase in international sales of 9% for fiscal 2005 compared with 2004.
Seasonality. We generally experience lower sales during the third quarter due to the effect of summer vacations on elective
procedures. In particular, because sales activity in Europe drops dramatically in the summer months, and European sales have recently
accounted for a greater proportion of our total sales, this seasonal variation in our results has become even more pronounced.
Foreign Currency Fluctuations. Our products are sold in approximately 50 countries. During fiscal year 2005, sales from
international operations represented 64% of total sales. The results of operations and the financial position of certain of our offshore
operations are reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for
inclusion in our consolidated financial statements, exposing us to currency translation risk. For fiscal year 2005, changes in currency
exchange rates did not have a material impact on net sales and marketing and selling expenses.
Gross Profit. Our gross profit margin decreased to 46.4% for fiscal year 2005, compared with 50.6% in 2004. The decline in gross
profit from 2004 generally resulted from higher unit costs as a result of manufacturing process changes and reduced volume, and a
shift in geographical and product mix. The Company expects the U.S. launch of the ICL, with its higher margins, to improve gross
profit.
Research and Development. We spent approximately 11% of our sales on research and development (which includes regulatory
and quality assurance expenses) during fiscal 2005, and we expect to spend approximately 10% of our sales on an annual basis in the
future.
Private Placements. Due to the delay in the FDA approval of the ICL, we sought additional cash to invest in research and
development, regulatory and compliance, and manufacturing engineering and to support other operating activities. This was
accomplished through the private placement of 4,100,000 shares of our Common Stock on April 4, 2005, which generated net
proceeds of $13.4 million and 2,000,000 shares of our Common Stock on June 10, 2004, which generated net proceeds of
$11.6 million.
Cash Flow. The Company used approximately $7.0 million for operating activities during fiscal 2005, which is 21% below the
Company’s cash usage of $8.8 million during fiscal 2004. During the fourth quarter of 2004, we took steps to reduce operating
expenses by reducing our reliance on outside consultants. This reduction in spending resulted in savings of approximately
$1.3 million. In early February 2005, we implemented additional cost reduction strategies, including the reduction in size of our direct
sales force, which resulted in another $825,000 in annualized cost savings. Use of cash for the fourth quarter of 2005 was 41% below
that in the fourth quarter of 2004. We will continue to pursue other cost savings opportunities, wherever possible, to conserve cash.
The Company expects to reverse its operating losses and negative cash flows as ICL sales reach targeted levels for 2007.
Retention of Morgan Stanley. In December 2004 we engaged Morgan Stanley to assist our Board of Directors in a review of the
strategic and financial options available to us.
Litigation. The Company and its Chief Executive Officer are defendants in a class action lawsuit pending in the Central District of
California on behalf of all persons who purchased the Company’s securities during various periods of 2003 and 2004. On
December 27, 2005, a Joint Status Report and Notice of Settlement was filed with the Central District of California, indicating that the
parties to the lawsuit had reached an agreement in principal to settle on all claims. A Stipulation of Settlement is currently being
negotiated by the parties. Until the parties agree to the Stipulation Settlement and it is finally approved by the court the case will
remain pending. Please see the discussion under “Part I. Item 3. Legal Proceedings.”
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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.
December 30,
2005
Percentage of Total Revenues
December 31,
2004
January 2,
2004
Percentage Change
2005 vs.
2004
2004 vs.
2003
Total revenues
Cost of sales
Gross profit
Costs and expenses:
General and administrative
Marketing and selling
Research and development
Other charges
Total costs and expenses
Operating loss
Other expense, net
Loss before income taxes
Income tax provision (benefit)
Minority interest
Net loss
100.0%
53.6%
46.4%
19.0%
36.2%
10.9%
1.4%
67.5%
(21.1)%
1.7%
(19.4)%
2.4%
0.0%
(21.8)%
100.0%
49.4%
50.6%
17.9%
39.3%
12.1%
1.0%
70.3%
(19.7)%
(0.1)%
(19.8)%
2.0%
0.1%
(21.9)%
100.0%
44.8%
55.2%
18.5%
38.7%
10.1%
0.8%
68.1%
(12.9)%
(1.3)%
(14.2)%
2.2%
0.1%
(16.5)%
(0.7)%
7.7%
(9.0)%
5.1%
(8.6)%
(10.8)%
49.3%
(4.7)%
6.4%
—
(2.8)%
17.4%
—
(1.4)%
2.4%
12.9%
(6.1)%
(1.0)%
4.1%
22.0%
28.2%
5.6%
55.7%
(86.2)%
43.1%
(6.2)%
(57.4)%
35.6%
2005 Fiscal Year Compared to 2004 Fiscal Year
Revenues. Net sales for the years ended December 30, 2005 (“fiscal 2005”) and December 31, 2004 (“fiscal 2004”) were
$51.3 million and $51.7 million, respectively. Changes in currency exchange rates did not have a material impact on net sales for
fiscal 2005. The primary reason for the decrease in product sales was a decrease in U.S. cataract product sales, both in average selling
prices and volumes, due to (i) increasing concerns in the marketplace regarding the Company’s long unresolved compliance issues
with the FDA, (ii) the Company’s failure to match competitors’ improvements to IOL technology, (iii) although subsequently
withdrawn, the receipt of a going concern qualification from the Company’s auditors; (iv) our sales representatives’ loss of effective
selling time as a result of the foregoing; (v) a supplier recall of viscoelastic which is often bundled with IOLs; and (vi) the CMS ruling
that permits Medicare−covered cataract patients to receive higher−cost multifocal IOLs by paying only the additional cost of the lens
and surgical procedure while still receiving reimbursement for the basic cost of cataract surgery and a monofocal IOL. The decreases
in U.S. cataract product sales were partially offset by a 30% increase in sales of the Company’s VISIANtm ICL (“ICL”) and
VISIANtm Toric ICL (“TICL”) in international markets, and an 85% increase in sales of preloaded IOLs in international markets.
Gross profit. Gross profit margin decreased to 46.4% of revenues for fiscal 2005, from 50.6% of revenues for fiscal 2004. The
primary reasons for the decrease in gross profit margin were higher unit costs due to the allocation of fixed overhead across fewer
units produced, lower overall average selling prices of IOLs, and a continued shift in geographical and product mix. The Company
expects gross profit margin to improve gradually with the launch of the ICL in the United States.
General and administrative expenses. General and administrative expenses for fiscal 2005 increased $474,000, or 5%, over fiscal
2004 primarily due to increased insurance premiums and increased professional fees, particularly legal and settlement fees associated
with the class action lawsuit. The Company does not expect significant increases in general and administrative expenses in 2006.
Marketing and selling expenses. Marketing and selling expenses for fiscal 2005 decreased $1.8 million, or 8.6%, over fiscal 2004
primarily as a result of cost reduction measures taken during 2005 and a decrease in
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U.S. commissions due to decreased cataract product sales. The Company expects marketing and selling expenses to increase
approximately $2,500,000 in 2006 as a result of increased promotional activities associated with the launch of the ICL in the U.S.
Further, marketing and selling expenses in the U.S. will also increase as a result of increased commissions associated with the ICL.
Research and development expenses. Research and development expenses for the fiscal 2005, decreased $673,000, or 10.8%,
compared to fiscal 2004, as anticipated, because significant consulting costs were incurred in the previous year in preparation for FDA
audits in the Company’s Nidau, Switzerland and Monrovia, California facilities. The Company expects research and development
expenses to increase in 2006 based upon planned IOL development activities, costs associated with the TICL supplement to be filed
with the FDA, and the initiation of ICL post−marketing studies.
Other charges. Other charges for fiscal 2005 were $746,000 compared to $500,000 in fiscal 2004. During fiscal 2005, the
Company recorded additional reserves totaling $746,000 against promissory notes of a former director of the Company. Aggregate
principal and accrued interest owed to the Company under the notes was $1.9 million as of December 30, 2005, against which the
Company has reserved a total of $1.2 million. The former Director is in default under the notes and a related Forbearance Agreement
with the Company, but has recently affirmed his obligation to pay the full principal and interest under the notes.
On these events, the Company re−evaluated its likelihood of collecting on the notes and re−examined the collateral for the notes,
which consists of a pledge of 120,000 shares of the Company’s Common Stock (the “Pledged Shares”) and a second mortgage on a
home in Florida. During the third quarter of 2005, the Company was advised that its collateral may be compromised with respect to
the second mortgage. Accordingly, the Company increased its reserve on the notes to reflect the status of the collateral.
Notwithstanding the additional reserve amount, the Company believes the former director is obligated to repay the full amount of
principal and interest on the notes, and continues to pursue full repayment of the notes.
Other income (expense), net. Other income, net for fiscal 2005 was $854,000, compared to fiscal 2004 when it was expense of
$88,000. The principal reasons for the increase in other income are due to 1) $334,000 of exchange gains recorded during the year
versus $190,000 of exchange losses recorded during fiscal 2004; 2) increased interest income due to higher cash balances and interest
rates; and 3) $158,000 in earnings from the Company’s joint venture versus $191,000 of losses recorded during fiscal 2004.
Income taxes. The Company recorded income taxes of $1.2 million for fiscal 2005 and $1.1 million for fiscal 2004, primarily
based on the income of the Company’s German subsidiary.
2004 Fiscal Year Compared to 2003 Fiscal Year
Revenues. Product sales for the years ended December 31, 2004 (“fiscal 2004”) and January 2, 2004 (“fiscal 2003”) were
$51.7 million and $50.4 million, respectively. Changes in currency exchange rates had a favorable impact on product sales of
approximately $2.2 million for fiscal 2004. The primary reason for the decrease in product sales, excluding the impact of exchange
rates, was a decrease in U.S. IOL sales due to (i) the decline in the silicone IOL market as many surgeons now choose lenses made of
acrylic material, (ii) the Company’s failure to match competitors’ improvements to IOL technology, (iii) the market response to the
Company’s compliance issues with the FDA and (iv) the lack of competitive lens delivery systems. The Company also experienced
decreased sales of distributed products as it concentrates on the distribution of its higher margin proprietary products. The decreases in
U.S. IOL sales and sales of distributed products were partially offset by increased sales of the Company’s VISIANtm ICL (“ICL”) and
VISIANtm TICL (“TICL”) in international markets, sales of the newly launched preloaded IOLs in international markets, and
increased sales of Cruise Control.
Total revenues for 2003 included $49,000 in royalties from technology licenses that terminated in 2003.
Gross profit. Gross profit margin decreased to 50.6% of revenues for fiscal 2004, from 55.2% of revenues for fiscal 2003. The
most significant impact on gross margins resulted from increased expenses associated with
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manufacturing engineering and quality control and assurance, an increase in inventory provisions, higher unit costs due to process
changes and reduced volumes, and a shift in geographical and product mix.
Marketing and selling expenses. Marketing and selling expenses for fiscal 2004 increased $793,000, or 4%, over fiscal 2003. The
increase is principally due to fluctuations in foreign exchange rates which negatively impacted marketing and selling expenses by
$777,000. International sales and marketing expenses increased due to increased salaries, travel, and commissions. Headcount in the
U.S. increased due to the addition of direct sales representatives for a newly established sales territory in the Pacific Northwest Region
and as a result of the addition of proctors−trainers hired principally to train physicians in the ICL implantation technique. These
increases were offset by decreased promotional activities, primarily in response to the delay in the launch of the VISIANtm ICL in the
U.S. and the cost savings realized from the closure of a subsidiary.
Research and development expenses. Research and development expenses for fiscal 2004, increased $1,126,000, or 22%,
compared to fiscal 2003. This was primarily due to our increased investment in insertion systems, the redesign of the Collamer
three−piece IOL and injector and preparation for the FDA audit of our facilities in Nidau, Switzerland and Monrovia, California.
Increases in research and development expense were partially offset by decreased research and development expenses of subsidiaries,
as all research and development efforts were consolidated into one location.
Other charges. Other charges for fiscal 2004 were $500,000 compared to $390,000 in fiscal 2003. During fiscal 2004, the
Company recorded a $500,000 reserve against the notes of a former director of the Company which, at the time, totaled $1.8 million
including accrued interest. The notes are collateralized by 120,000 shares of the Company’s Common Stock and a second mortgage on
a home in Florida. The amount of the reserve is based on the difference between the note amount and the collateral value.
Other expense, net. Other expense for fiscal 2004 decreased $549,000 over fiscal 2003. Included in other expense for fiscal 2003
was the write−off of a note receivable in the amount of $430,000. During fiscal 2004, the Company recovered $200,000 of the note
and recorded the cash received as other income. These increases in other income were partially offset by losses recorded in 2004 by
the Company’s joint venture, Canon Staar.
Income taxes. For each of fiscal 2004 and fiscal 2003, the Company recorded income taxes of $1.1 million primarily based on the
income of the Company’s German subsidiary.
Liquidity and Capital Resources
The Company has funded its activities over the past several years principally from cash flow generated from operations, credit
facilities provided by institutional domestic and foreign lenders, the private placement of Common Stock, the repayment of former
directors’ notes, and the exercise of stock options.
As of December 30, 2005 and December 31, 2004, the Company had $12.7 million and $9.3 million, respectively, of cash, cash
equivalents and short−term investments.
Net cash used in operating activities was $7.0 million, $8.8 million, and $4.1 million for fiscal 2005, 2004, and 2003, respectively.
For fiscal 2005, cash used in operations was the result of the net loss, adjusted for depreciation, amortization, notes receivable reserves
and other non−cash charges, and net increases in working capital. For fiscal 2004, cash used in operations was the result of the net
loss, adjusted for depreciation, amortization, notes receivable reserves and other non−cash charges, and net decreases in working
capital. For fiscal 2003, cash used in operations was the result of the net loss, adjusted for depreciation, amortization, the write−off of
patents, and other non−cash charges.
Accounts receivable was $5.1 million in 2005, $6.2 million in 2004, and $5.7 million in 2003. The decrease in accounts receivable
is due to decreased sales in the U.S. during fiscal 2005 and in Germany, in the fourth quarter of 2005 and the effect of changes in
exchange rates. Days Sales Outstanding (“DSO”) increased slightly from 39 days in 2003 to 41 days in 2004, and decreased to 38 days
in 2005. The Company expects DSO to improve further in 2006 with the launch of the ICL in the U.S. which have shorter payment
terms than cataract product.
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Inventory at year−end 2005, 2004, and 2003 was $14.7 million, $15.1 million, and $12.8 million, respectively. Day’s inventory on
hand decreased from 204 days in 2003 to 186 days in 2004, and increased to 235 days in 2005. The increase in days inventory on hand
from 2004 to 2005 is due to decreased sales in the U.S. without a corresponding decrease in inventories. Despite decreased sales, the
Company increased its minimum inventory levels to resolve backorder issues it faced during the year. In terms of the dollar change,
inventory at the end of 2005 decreased $385,000 compared to 2004 primarily due to the impact of changes in currency exchange rates,
in particular the Euro. Although inventory units decreased overall from 2003 to 2004, the decrease was more than offset by higher cost
inventory that was produced during the year as a result of lower than planned production volume resulting in an increase in inventory
of $2.3 million in 2004 over 2003. Inventory, at the end of 2003, increased $1.0 million over 2002 levels due to the build−up of ICL
inventory in preparation of the launch of the product in the U.S. and increased Collamer IOL inventory based on increased demand for
the product.
Net cash provided by (used in) investing activities was approximately $4,077,000, ($7,294,000), and $2,151,000 for fiscal 2005,
2004, and 2003, respectively. During 2005, the Company invested $13.4 million of the proceeds of a private placement and additional
$1.9 million in cash in taxable auction−rate securities which were classified as available for sales investments and sold $7.8 million of
the investment during the year to provide cash for operations. During the third quarter of 2005, the Company sold all of its remaining
auction−rate securities totaling $12.6 million and purchased high−quality commercial paper, which is classified as a cash equivalent.
During 2004, the Company invested $8.0 million of the proceeds of a private placement in taxable auction−rate securities which are
classified as available for sale investments and sold $2.9 million of the investment during the year to provide cash for operations. Also
during 2004, the Company purchased the 20% minority interest in an 80% owned subsidiary in exchange for cash of $768,000 and a
long−term note in the amount of $542,000 due on November 1, 2007. The transaction resulted in the recording of goodwill of
$1.1 million. The principal investments of the Company are in property and equipment. Investments in property and equipment were
$1.2 million, $1.7 million, and $1.3 million for fiscal 2005, 2004, and 2003, respectively. The investments are generally made to
upgrade and improve existing production equipment and processes. The Company expects to spend approximately $1.4 million on
property and equipment in 2006.
Net cash provided by financing activities was approximately $12,298,000, $12,547,000, and $7,589,000 for fiscal 2005, 2004, and
2003, respectively. In 2005, cash provided by financing activities resulted from the receipt of net proceeds of $13.4 million from a
private placement of 4.1 million shares of the Company’s Common Stock and $130,000 received from the exercise of the stock
options. During 2005, the Company used $1.2 million in cash generated from international operations to pay down (while retaining
availability) the Company’s Swiss credit facility. In 2004, cash provided by financing activities resulted from the receipt of net
proceeds of $11.6 million from a private placement of 2.0 million shares of the Company’s Common Stock and $829,000 received
from the exercise of stock options. In 2003, cash provided by financing activities is primarily the result of net proceeds of $8.9 million
from a private placement of the Company’s Common Stock and $1.6 million received from the exercise of stock options. During
2003, the Company used approximately $2.1 million of the proceeds to pay off the note to its domestic lender and $812,000 to pay
down other notes payable.
Subsidiaries of the Company have foreign credit facilities with different banks to support operations in Switzerland and Germany.
The Swiss credit agreement, as amended on August 2, 2004, provides for borrowings of up to 3.25 million Swiss Francs “CHF”
(approximately $2.5 million based on the exchange rate on December 30, 2005), and permits either fixed−term or current advances.
The interest rate on current advances was 6.0% per annum at December 30, 2005 and 6.0% per annum at December 31, 2004, plus a
commission rate of 0.25% payable quarterly. There were no current advances outstanding at December 30, 2005 or December 31,
2004. The base interest rate for fixed−term advances follows Euromarket conditions for loans of a corresponding term and currency,
plus an individual margin (4.25% at December 30, 2005 and 4.5% at December 31, 2004). Borrowings outstanding under the facility
were CHF 2.2 million at December 30, 2005 (approximately $1.7 million based on the exchange rate on December 30, 2005) and CHF
3.4 million at December 31, 2004 (approximately $3.0 million based on the exchange rate on December 31, 2004). The credit facility
is secured by a general assignment of claims and includes positive and negative covenants which, among other things, require the
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maintenance of a minimum level of equity of at least $12.0 million and prevents the Swiss subsidiary from entering into other secured
obligations or guaranteeing the obligations of others. The agreement also prohibits the sale or transfer of patents or licenses without
the prior consent of the lender and the terms of intercompany receivables may not exceed 90 days.
The Swiss credit facility is divided into two parts. Part A provides for borrowings of up to CHF 3.0 million ($2.3 million based on
the exchange rate on December 30, 2005) and does not have a termination date. Part B presently provides for borrowings of up to
CHF 250,000 ($190,000 based on the exchange rate on December 30, 2005). The loan amount under Part B of the agreement is
reduced by CHF 250,000 ($190,000 based on the exchange rate on December 31, 2004) semi−annually. As of December 30, 2005,
approximately $824,000 was available under the credit facility for future borrowings for use in Swiss operations.
The German subsidiary renewed its credit agreement on August 30, 2005. The renewed credit agreement provides for borrowings
of up to 100,000 EUR ($119,000 based on the exchange rate on December 30, 2005), at a rate of 7.0% per annum and does not have a
termination date. The credit facility is not secured. There were no borrowings outstanding as of December 30, 2005 and December 31,
2004.
The Company was in compliance with the covenants of these credit facilities as of December 30, 2005.
The following table represents the Company’s known contractual obligations as of December 30, 2005 (in thousands):
Contractual Obligations
Notes payable and other current liabilities
Capital lease obligations
Operating lease obligations
Purchase obligations
Open purchase orders
Other long−term liabilities
Total
Payments Due by Period
Total
1,776
177
3,030
2,094
363
868
8,308
$
$
Less
Than
1 Year
$ 1,776
51
1,179
600
363
—
$ 3,969
1−3
Years
—
126
1,485
1,494
—
868
3,973
$
$
3−5
Years
$ —
—
366
—
—
—
$ 366
More
Than
5 Years
$ —
—
—
—
—
—
$ —
The table presented above excludes employment agreements for the two previous minority owners of our Australian subsidiary.
See Note 9 to the Consolidated Financial Statements.
While the Company’s international business generates positive cash flow and represents 64% of consolidated net sales, the
Company has reported losses on a consolidated basis for each of the last three fiscal years due to a number of factors, including
eroding sales of cataract products in the U.S. and FDA compliance issues that consumed additional resources while delaying the
introduction of new products in the U.S. market. During the last three years the Company has secured additional capital to sustain
operations through private sales of equity securities. The Company believes that as a result of these financings, along with expected
cash from operations, it currently has sufficient cash to meet its funding requirements over the next year.
The Company believes that in the near term its best prospect for returning its U.S. and consolidated operations to profitability is
the successful launch of the ICL in the U.S. In the longer term the Company seeks to develop and introduce products in the
U.S. cataract market to stop further erosion of its market share and resume growth in that sector. Nevertheless, success of these
strategies is not assured and, even if successful, the company is not likely to achieve positive cash flow on a consolidated basis during
fiscal 2006.
To avoid, if possible, additional rounds of equity financing and potential dilution to the interests of existing stockholders, the
Company plans to finance its operations, including the U.S. launch of the ICL, through funds from operations and existing cash
resources. The Company is also seeking a line of credit through a U.S. bank to provide an additional source of working capital for its
U.S. operations, and its Swiss subsidiary has $824,000 in borrowing capacity available for Swiss operations under its line of credit.
However, given its history of losses and
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negative cash flows, there can be no assurance that the Company will be able to secure debt financing for its U.S. operations on
favorable terms, if at all.
If it is unable to obtain additional debt financing, the Company may find it necessary to raise additional capital in the future
through the sale of equity securities, but has only 1.31 million shares of common stock authorized for issuance as of December 30,
2005, that have not already been issued or reserved for issuance on the exercise of outstanding options. To address this issue, The
Company’s board of directors adopted a resolution to submit a proposal to the stockholders at the Annual Meeting to increase the
Company’s authorized shares of common stock.
The Company’s liquidity requirements arise from the funding of its working capital needs, primarily inventory, work−in−process
and accounts receivable. The Company’s primary sources for working capital and capital expenditures are cash flow from operations,
which will be largely dependent on the success of the ICL, proceeds from the private placement of Common Stock, proceeds from
option exercises, debt repayments by former directors, and borrowings under the Company’s foreign bank credit facilities. Any
withdrawal of support from its banks could have serious consequences on the Company’s liquidity. The Company’s liquidity is also
dependent, in part, on customers paying within credit terms, and any extended delays in payments or changes in credit terms given to
major customers may have an impact on the Company’s cash flow. In addition, any abnormal product returns or pricing adjustments
may also affect the Company’s short−term funding. Changes in the market price of our Common Stock affects the value of our
outstanding options, and lower market prices could reduce our expected revenue from option exercises.
The business of the Company is subject to numerous risks and uncertainties that are beyond its control, including, but not limited
to, those set forth above and in the other reports filed by the Company with the Securities and Exchange Commission. Such risks and
uncertainties could have a material adverse effect on the Company’s business, financial condition, operating results and cash flows.
See “Item 1A. — Risk Factors.”
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses
during the reporting period. On an on−going basis, we evaluate our estimates, including those related to revenue recognition,
allowance for doubtful accounts, inventory reserves and income taxes, among others. Our estimates are based on historical
experiences, market trends and financial forecasts and projections, and on various other assumptions that management believes are
reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these if
actual conditions differ from our assumptions.
The Company believes the following represent its critical accounting policies.
• Revenue Recognition and Accounts Receivable. The Company recognizes revenue when it is realized or realizable and earned,
based on terms of sale with the customer, generally upon product shipment. We record revenue from product sales when title and
risk of ownership has been transferred to the customer, which is typically upon delivery to the customer. The exception to this
recognition policy is sales from IOLs distributed on a consignment basis, which are recognized when we are notified that the
lens has been implanted in a patient. During the normal course of business, the Company may offer terms, including extended
credit terms, and arrangements that vary by product category, owing to the differing nature of the customers. The Company
believes its revenue recognition policies are appropriate in all circumstances. See Note 1 Accounting Policies for a further
discussion of the Company’s revenue recognition policy.
The Company generally permits returns of product if the product is returned within the time allowed by the Company, and in
good condition. The Company provides allowances for returns based on an analysis of our historical patterns of returns matched
against the sales from which they originated. While such allowances have historically been within the Company’s expectations,
the Company cannot guarantee that
35
Table of Contents
it will continue to experience the same return rates that it has in the past. Measurement of such returns requires consideration of
historical return experience, including the need to adjust for current conditions and product lines, and judgments about the
probable effects of relevant observable data. The Company considers all available information in its quarterly assessments of
the adequacy of the allowance for returns.
The Company maintains provisions for uncollectible accounts based on estimated losses resulting from the inability of its
customers to remit payments. If the financial condition of customers were to deteriorate, thereby resulting in an inability to
make payments, additional allowances could be required. The Company performs ongoing credit evaluations of its customers
and adjusts credit limits based upon customer payment history and current creditworthiness, as determined by the Company’s
review of its customers’ current credit information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer
collection issues that have been identified. While such credit losses have historically been within the Company’s expectations
and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that
it has in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust
for current conditions, and judgments about the probable effects of relevant observable data, including present economic
conditions such as delinquency rates and financial health of specific customers. The Company considers all available
information in its quarterly assessments of the adequacy of the reserves for uncollectible accounts.
• Stock−Based Compensation. We measure stock−based compensation for option grants to employees and members of the Board
of Directors using the intrinsic value method. We also disclose on a proforma basis the effect on our earnings if we used the
fair−value method. The fair value of each option grant for determining the pro forma impact of stock−based compensation
expense is estimated on the date of grant using the Black−Scholes option−pricing model with weighted average assumptions.
These assumptions consist of expected dividend yield, expected volatility, expected life, and risk−free interest rate. If the
assumptions used to calculate the value of each option grant do not properly reflect future activity, the weighted average fair
value of our grants could be impacted.
• Income Taxes. We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We evaluate the need to establish a valuation allowance for deferred tax assets based on the amount of existing temporary
differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance
to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be
realized. As of December 30, 2005, the valuation allowance fully offsets the value of deferred tax assets on the Company’s
balance sheet. Net increases to the valuation allowance were $5,490,000, $6,097,000 and $3,468,000 in 2005, 2004 and 2003,
respectively.
We expect to continue to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is
sustained, or we are able to develop tax strategies that would enable us to conclude that it is more likely than not that a portion
of our deferred tax assets would be realizable.
In the normal course of business, the Company is regularly audited by federal, state and foreign tax authorities, and is
periodically challenged regarding the amount of taxes due. These challenges include questions regarding the timing and amount
of deductions and the allocation of income among various tax jurisdictions. Management believes the Company’s tax positions
comply with applicable tax law and
36
Table of Contents
intends to defend its positions. The Company’s effective tax rate in a given financial statement period could be impacted if the
Company prevailed in matters for which reserves have been established, or was required to pay amounts in excess of
established reserves.
• Inventories. The Company provides estimated inventory allowances for excess, slow moving and obsolete inventory as well as
inventory whose carrying value is in excess of net realizable value. These reserves are based on current assessments about future
demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than
those projected by management, additional inventory write−downs may be required. The Company values its inventory at the
lower of cost or net realizable market values. The Company regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based primarily on the expiration of products with a shelf life of less than four
months, estimated forecasts of product demand and production requirements for the next twelve months. Several factors may
influence the realizability of its inventories, including decisions to exit a product line, technological change and new product
development. These factors could result in an increase in the amount of obsolete inventory quantities on hand. Additionally,
estimates of future product demand may prove to be inaccurate, in which case the provision required for excess and obsolete
inventory may be understated or overstated. If in the future, the Company determined that its inventory was overvalued, it would
be required to recognize such costs in cost of sales at the time of such determination. Likewise, if the Company determined that
its inventory was undervalued, cost of sales in previous periods could have been overstated and the Company would be required
to recognize such additional operating income at the time of sale. While such inventory losses have historically been within the
Company’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the
same loss rates that it has in the past. Therefore, although the Company makes every effort to ensure the accuracy of forecasts of
future product demand, including the impact of planned future product launches, any significant unanticipated changes in
demand or technological developments could have a significant impact on the value of its inventory and its reported operating
results. The Company recorded $1,081,000, $1,089,000 and $845,000 in provisions to the Statements of Income for excess, slow
moving and obsolete inventory in 2005, 2004 and 2003, respectively. At this time, management does not believe that anticipated
product launches would have a material effect on the recovery of the Company’s existing net inventory balances.
• Impairment of Long−Lived Assets. Intangible and other long lived−assets are reviewed for impairment whenever events such as
product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount
may not be recoverable. Certain factors which may occur and indicate that an impairment exists include, but are not limited to
the following: significant underperformance relative to expected historical or projected future operating results; significant
changes in the manner of the Company’s use of the underlying assets; and significant adverse industry or market economic
trends. In reviewing for impairment, the Company compares the carrying value of such assets to the estimated undiscounted
future cash flows expected from the use of the assets and their eventual disposition. In the event that the carrying value of assets
is determined to be unrecoverable, the Company would estimate the fair value of the assets and record an impairment charge for
the excess of the carrying value over the fair value. The estimate of fair value requires management to make a number of
assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability of
certain outcomes and scenarios. The Company’s policy is consistent with current accounting guidance as prescribed by
SFAS No. 144,Accounting for the Impairment or Disposal of Long−Lived Assets. An assessment was completed under the
guidance of SFAS No. 144 during the fourth quarter of 2005, and no impairment was identified. See Note 1 Accounting Policies
for a further discussion of SFAS No. 144.
• Goodwill. Goodwill, which has an indefinite life and was previously amortized on a straight−line basis over the periods
benefited, is no longer amortized to earnings, but instead is subject to periodic testing for impairment. Intangible assets
determined to have definite lives are amortized over their remaining useful
37
Table of Contents
lives. Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below its carrying amount. Certain factors which may
occur and indicate that an impairment exists include, but are not limited to the following: significant underperformance relative
to expected historical or projected future operating results; significant changes in the manner of the Company’s use of the
underlying assets; and significant adverse industry or market economic trends. In the event that the carrying value of assets is
determined to be unrecoverable, the Company would estimate the fair value of the reporting unit and record an impairment
charge for the excess of the carrying value over the fair value. The estimate of fair value requires management to make a number
of assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability
of certain outcomes and scenarios. The Company’s policy is consistent with current accounting guidance as prescribed by
SFAS No. 142, Goodwill and Intangible Assets. As provided under SFAS No. 142, an annual assessment was completed during
the fourth quarter of 2005, and no impairment was identified. As of December 30, 2005, the carrying value of goodwill was
$7.5 million. See Note 1 Accounting Policies for a further discussion of SFAS No. 142.
• Patents and Licenses. The Company also has other intangible assets consisting of patents and licenses, with a gross book value
of $11.5 million and accumulated amortization of $6.6 million as of December 30, 2005. Amortization is computed on the
straight−line basis over the estimated useful lives, which are based on legal and contractual provisions, and range from 10 to
20 years.
Foreign Exchange
Management does not believe that the fluctuation in the value of the dollar in relation to the currencies of its suppliers or
customers in the last three fiscal years has adversely affected the Company’s ability to purchase or sell products at agreed upon prices.
No assurance can be given, however, that adverse currency exchange rate fluctuations will not occur in the future, which would affect
the Company’s operating results. The Company does not engage in hedging transactions to offset changes in currency.
Inflation
Management believes inflation has not had a significant impact on the Company’s operations during the past three years.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign
currency exchange rates. The Company manages its risks based on management’s judgment of the appropriate trade−off between risk,
opportunity and costs. Management does not believe that these market risks are material to the results of operations or cash flows of
the Company, and, accordingly, does not generally enter into interest rate or foreign exchange rate hedge instruments.
Interest rate risk. Our $1.7 million of debt is based on the borrowings of our international subsidiaries. The majority of our
international borrowings bear an interest rate that is linked to Euro market conditions and, thus, our interest rate expense will fluctuate
with changes in those conditions. If interest rates were to increase or decrease by 1% for the year, our annual interest rate expense
would increase or decrease by approximately $17,000.
Foreign currency risk. Our international subsidiaries operate in and are net recipients of currencies other than the U.S. dollar and,
as such, our revenues benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies
worldwide (primarily, the Euro and Australian dollar). Accordingly, changes in exchange rates, and particularly the strengthening of
the US dollar, may negatively affect our consolidated sales and gross profit as expressed in U.S. dollars. Additionally, as of
December 30, 2005, all of our debt is denominated in Swiss Francs and as such, we are subject to fluctuations of the Swiss Franc as
compared to the U.S. dollar in converting the value of the debt to U.S. dollars. The U.S. dollar value of the debt is increased by a
weaker dollar and decreased by a stronger dollar relative to the Swiss Franc.
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Table of Contents
In the normal course of business, we also face risks that are either non−financial or non−quantifiable. Such risks include those set
forth in “Item 1A. — Risk Factors.”
Item 8. Financial Statements and Supplementary Data
Financial Statements and the Report of Independent Registered Public Accounting Firm are filed with this Annual Report on
Form 10−K in a separate section following Part IV, as shown on the index under Item 15 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Attached as exhibits to this Annual Report on Form 10−K are certifications of STAAR’s Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a−14 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls
evaluation referred to in the certifications. Page F−3 of this Annual Report on Form 10−K sets forth the report of BDO Seidman, LLP,
our independent registered public accounting firm, regarding its audit of STAAR’s internal control over financial reporting and of
management’s assessment of internal control over financial reporting set forth below in this section. This section should be read in
conjunction with the certifications and the BDO Seidman, LLP report for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the CEO and CFO, conducted an evaluation of the effectiveness of the
Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a−15(e), as of the end of the period covered by
this Form 10−K. Based on that evaluation, the CEO and the CFO concluded that, as of the end of the period covered by this
Form 10−K, the Company’s disclosure controls and procedures are effective in accumulating and communicating to them in a timely
manner material information relating to the Company (including its consolidated subsidiaries) required to be included in its periodic
reports filed with the Securities Exchange Commission.
Management Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Exchange Act Rule 13a−15(f) and for assessing the effectiveness of its internal control over financial reporting. Our
internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements in accordance with United States’ generally accepted accounting
principles.
The Company’s management, with the participation of the CEO and CFO, conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting as of December 30, 2005, the end of our fiscal year. Management based its
assessment on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end
of the fiscal year ended December 30, 2005.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and
may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the
risks that controls may become inadequate because of changes in conditions and that the degree of compliance with policies or
procedures may deteriorate.
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Table of Contents
BDO Seidman LLP, the independent registered public accounting firm that audited and reported on the consolidated financial
statements of the Company contained in this report, has issued an attestation report on management’s assessment of our internal
control over financial reporting, which appears on Page F−3 of this Annual Report on Form 10−K.
Changes in Internal Control over Financial Reporting
There was no change during the fiscal quarter ended December 30, 2005, known to the Chief Executive Officer or the Chief
Financial Officer, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 10. Directors and Executive Officers of the Registrant
PART III
The information in Item 10 is incorporated herein by reference to the section entitled “Proposal One — Election of Directors”
contained in the proxy statement (the “Proxy Statement”) for the 2006 annual meeting of stockholders to be filed with the Securities
and Exchange Commission within 120 days of the close of the fiscal year ended December 30, 2005.
Item 11.
Executive Compensation
The information in Item 11 is incorporated herein by reference to the section entitled “Proposal One — Election of Directors”
contained in the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in Item 12 is incorporated herein by reference to the section entitled “General Information — Security Ownership
of Certain Beneficial Owners and Management” and “Proposal One — Election of Directors” contained in the Proxy Statement.
Item 13.
Certain Relationships and Related Transactions
The information in Item 13 is incorporated herein by reference to the section entitled “Proposal One — Election of Directors”
contained in the Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information in Item 14 is incorporated herein by reference to the section entitled “Proposal Two — Ratification of the
Appointment of Independent Registered Public Accounting Firm” contained in the Proxy Statement.
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Table of Contents
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(1)
(2)
Financial statements required by Item 15 of this form are filed as a separate part of this report following
Part IV:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 30, 2005 and at December 31, 2004
Consolidated Statements of Operations for the years ended December 30, 2005, December 31, 2004, and
January 2, 2004
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss for the years ended
December 30, 2005, December 31, 2004, and January 2, 2004
Consolidated Statements of Cash Flows for the years ended December 30, 2005, December 31, 2004, and
January 2, 2004
Notes to Consolidated Financial Statements
Schedules required by Regulation S−X are filed as an exhibit to this report:
I. Independent Registered Public Accounting Firm Report on Schedule
II. Schedule II — Valuation and Qualifying Accounts and Reserves
Page
F−2
F−3
F−4
F−5
F−6
F−7
F−8
F−30
F−31
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown
in the financial statements and the notes thereto.
(3) Exhibits
3.1
3.2
†4.1
†4.2
†4.3
4.4
†4.5
4.6
†4.7
4.8
4.9
4.10
10.1
10.2
10.3
10.4
10.5
Certificate of Incorporation, as amended to date(7)
By−laws, as amended to date(8)
1991 Stock Option Plan of STAAR Surgical Company(1)
1995 STAAR Surgical Company Consultant Stock Plan(2)
1996 STAAR Surgical Company Non−Qualified Stock Plan(3)
Stockholders’ Rights Plan, dated effective April 20, 1995(8)
1998 STAAR Surgical Company Stock Plan, adopted April 17, 1998(4)
Form of Certificate for Common Stock, par value $0.01 per share(13)
2003 Omnibus Equity Incentive Plan and form of Option Grant and Stock Option Agreement(12)
Amendment No. 1 to Stockholders’ Rights Plan, dated April 21, 2003(14)
Registration Rights Agreement, dated June 4, 2004(18)
Registration Rights Agreement, dated March 31, 2005(21)
Joint Venture Agreement, dated May 23, 1988, among the Company, Canon Sales Co, Inc. and Canon,
Inc., and Exhibit B, Technical Assistance and License Agreement, dated September 6, 1988, between the
Company and Canon Staar Co., Inc.(6)
Settlement Agreement among the Company, Canon, Inc., Canon Sales Co., Inc., and Canon Staar
Company, Inc. dated September 28, 2001(9)
Indenture of Lease dated September 1, 1993, between the Company and FKT Associates and First through
Third Additions Thereto(8)
Second Amendment to Indenture of Lease dated September 21, 1998, between the Company and FKT
Associates(8)
Third Amendment to Indenture of Lease dated October 13, 2003, by and between the Company and FKT
Associates(16)
41
Table of Contents
10.6
10.7
10.9
10.10
10.11
10.12
10.13
10.14
10.15
†10.16
†10.17
†10.18
†10.19
†10.20
†10.21
†10.22
†10.23
†10.24
†10.25
†10.26
†10.27
†10.28
†10.29
†10.30
†10.31
†10.32
†10.33
†10.34
†10.35
†10.36
†10.37
†10.38
†10.39
†10.40
†10.42
Indenture of Lease dated October 20, 1983, between the Company and Dale E. Turner and Francis R.
Turner and First through Fifth Additions Thereto(5)
Sixth Lease Addition to Indenture of Lease dated October 13, 2003, by and between the Company and
Turner Trust UTD Dale E. Turner March 28, 1984(16)
Amendment No. 1 to Standard Industrial/ Commercial Multi−Tenant Lease dated January 3, 2003, by
and between the Company and California Rosen(16)
Lease Agreement dated July 12, 1994, between STAAR Surgical AG and Calderari and Schwab AG/
SA(20)
Supplement #1 dated July 10, 1995, to the Lease Agreement of July 12, 1994, between STAAR Surgical
AG and Calderari and Schwab AG/ SA(20)
Supplement #2 dated August 2, 1999, to the Lease Agreement of July 12, 1994, between STAAR
Surgical AG and Calderari and Schwab AG/ SA(20)
Commercial Lease Agreement dated November 29, 2000, between Domilens GmbH and DePfa Deutsche
Pfandbriefbank AG(20)
Patent License Agreement, dated May 24, 1995, with Eye Microsurgery Intersectoral Research and
Technology Complex(15)
Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and
Technology Complex(8)
Promissory Note dated June 16, 1999, from Peter J. Utrata to the Company(7)
Stock Pledge Agreement dated June 16, 1999, by Peter J. Utrata in favor of the Company(7)
Promissory Note dated June 2, 2000, from Peter J. Utrata to the Company(8)
Stock Pledge Agreement dated June 2, 2000, between the Company and Peter J. Utrata(8)
Mortgage dated July 16, 2004, between the Company and Peter J. Utrata(20)
Forbearance Agreement dated July 22, 2004, between the Company and Peter J. Utrata(20)
Employment Agreement dated December 19, 2000, between the Company and David Bailey(8)
Stock Option Plan and Agreement for Chief Executive Officer dated November 13, 2001, between the
Company and David Bailey(9)
Stock Option Certificate dated August 9, 2001, between the Company and David Bailey(20)
Stock Option Certificate dated January 2, 2002, between the Company and David Bailey(20)
Stock Option Certificate dated February 14, 2003, between the Company and David Bailey(20)
Amended and Restated Stock Option Certificate dated February 12, 2003, between the Company and
David Bailey(20)
Stock Option Certificate dated May 9, 2000, between the Company and Volker Anhaeusser(20)
Stock Option Certificate dated May 31 2000, between the Company and Volker Anhaeusser(20)
Stock Option Certificate dated May 30, 2002, between the Company and Volker Anhaeusser(20)
Stock Option Agreement dated November 13, 2001, between the Company and David R. Morrison(9)
Stock Option Certificate dated February 13, 2003, between the Company and Donald Duffy(20)
Employment Agreement dated January 3, 2002, between the Company and John Bily(10)
Stock Option Certificate dated January 18, 2002, between the Company and John C. Bily(20)
Amended and Restated Stock Option Certificate dated February 12, 2003, between the Company and
John C. Bily(20)
Offer of Employment dated July 12, 2002, from the Company to Nick Curtis(20)
Amendment to Offer of Employment dated February 14, 2003 from the Company to Nick Curtis(20)
Stock Option Certificate dated February 14, 2003, between the Company and Nicholas Curtis(20)
Amended and Restated Stock Option Certificate dated February 12, 2003, between the Company and
Nicholas Curtis(20)
Employment Agreement dated March 18, 2005, between the Company and Tom Paul(20)
Form of Indemnification Agreement between the Company and certain officers and directors(20)
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Table of Contents
†10.43
†10.44
†10.45
†10.46
†10.47
†10.48
#10.49
10.50
10.51
10.53
10.54
†10.56
†#10.57
10.58
10.59
10.60
14.1
21.1
23.1
31.1
31.2
32.1
Managing Director’s Contract of Employment, dated June 22, 1993, between Domilens and Guenther
Roepstorff(20)
Supplementary Agreement #1 to the Managing Director’s Contract of Employment, dated
November 25, 1997, between STAAR Surgical AG and Guenther Roepstorff(20)
Supplementary Agreement #2 to the Managing Director’s Contract of Employment dated January 1,
1998, between Domilens and Guenther Roepstorff(20)
Supplementary Agreement #3 to the Managing Director’s Contract of Employment dated January 1,
2003, between Domilens and Guenther Roepstorff(20)
Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited CAN
006 391 928 and Philip Butler Stoney(17)
Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited CAN
006 391 928 and Robert William Mitchell(17)
Assignment Agreement of the Share Capital of Domilens Vertrieb fuer medizinische Produkte GmbH
dated January 3, 2003, between STAAR Surgical AG and Guenther Roepstorff(11)
Assignment Agreement of the Share Capital of ConceptVision Australia Pty Limited ACN 006 391 928,
dated May 5, 2004, between the Company and Philip Butler Stoney and Robert William Mitchell(17)
Addendum to the Assignment Agreement of the Share Capital of ConceptVision Australia Pty Limited
ACN 006 391 928, dated May 5, 2004, between the Company and Philip Butler Stoney and Robert
William Mitchell(17)
Stock Purchase Agreement dated June 4, 2004(18)
Master Credit Agreement dated August 2, 2004, between STAAR Surgical AG and UBS AG(19)
Promissory Note dated March 29, 2002, between the Company and Pollet & Richardson(20)
Security Agreement dated March 29, 2002, between the Company and Pollet & Richardson(11)
Loan Agreement between Deutsche Postbank AG and Domilens GmbH dated August 30, 2005(22)
Standard Industrial/ Commercial Multi Tenant Lease — Gross dated October 6, 2005, entered into
between the Company and Z & M LLC(22)
Stock Purchase Agreement dated March 31, 2005(21)
Code of Ethics(20)
List of Significant Subsidiaries(20)
Consent of BDO Seidman, LLP*
Certification Pursuant to Rule 13a−14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to
Section 302 of the Sarbanes−Oxley Act of 2002*
Certification Pursuant to Rule 13a−14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to
Section 302 of the Sarbanes−Oxley Act of 2002*
Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the
Sarbanes−Oxley Act of 2002*
*
Filed herewith
† Management contract or compensatory plan or arrangement
# All schedules and or exhibits have been omitted. Any omitted schedule or exhibit will be furnished supplementally to the
Securities and Exchange Commission upon request.
(1) Incorporated by reference from the Company’s Registration Statement on Form S−8, File No. 033−76404, as filed on March 11,
1994.
(2) Incorporated by reference from the Company’s Registration Statement on Form S−8, File No. 033−60241, as filed on June 15,
1995.
(3) Incorporated by reference from the Company’s Annual Report on Form 10−K, for the year ended January 3, 1997, as filed on
April 2, 1997.
43
Table of Contents
(4) Incorporated by reference from the Company’s Proxy Statement, for its Annual Meeting of Stockholders held on May 29, 1998, as
filed on May 1, 1998.
(5) Incorporated by reference from the Company’s Annual Report on Form 10−K, for the year ended January 2, 1998, as filed on
April 1, 1998.
(6) Incorporated by reference from the Company’s Annual Report on Form 10−K, for the year ended January 1, 1999, as filed on
April 1, 1999.
(7) Incorporated by reference from the Company’s Annual Report on Form 10−K, for the year ended December 31, 1999, as filed on
March 30, 2000.
(8) Incorporated by reference from the Company’s Annual Report on Form 10−K, for the year ended December 29, 2000, as filed on
March 29, 2001.
(9) Incorporated by reference to the Company’s Annual Report on Form 10−K, for the year ended December 28, 2001, as filed on
March 28, 2002.
(10) Incorporated by reference to the Company’s Quarterly Report, for the period ended June 28, 2002, as filed on August 12, 2002.
(11) Incorporated by reference to the Company’s Annual Report on Form 10−K, for the year ended January 3, 2003, as filed on
April 3, 2003.
(12) Incorporated by reference from the Company’s Proxy Statement, for its Annual Meeting of Stockholders held on June 18, 2003,
as filed on May 19, 2003.
(13) Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s Registration Statement on Form 8−A/ A, as
filed on April 18, 2003.
(14) Incorporated by reference to the Company’s Quarterly Report, for the period ended April 4, 2003, as filed on May 19, 2003.
(15) Incorporated by reference from the Company’s Annual Report on Form 10−K/ A, for the year ended December 29, 2000, as
filed on May 9, 2001.
(16) Incorporated by reference to the Company’s Annual Report on Form 10−K, for the year ended January 2, 2004, as filed on
March 17, 2004.
(17) Incorporated by reference to the Company’s Quarterly Report, for the period ended April 2, 2004, as filed on May 12, 2004.
(18) Incorporated by reference to the Company’s Current Report on Form 8−K filed on June 9, 2004.
(19) Incorporated by reference to the Company’s Quarterly Report, for the period ended October 1, 2004, as filed on November 10,
2004.
(20) Incorporated by reference to the Company’s Annual Report on Form 10−K, for the year ended December 31, 2004, as filed on
March 30, 2005.
(21) Incorporated by reference to the Company’s Current Report on Form 8−K filed on April 5, 2005.
(22) Incorporated by reference to the Company’s Quarterly Report for the period ended September 30, 2005, as filed on November 9,
2005.
44
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Annual Report on Form 10−K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
STAAR SURGICAL COMPANY
By: /s/ David Bailey
David Bailey
President and Chief Executive Officer
(principal executive officer)
Date: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Name
/s/ David Bailey
David Bailey
/s/ Deborah Andrews
Deborah Andrews
/s/ Don Bailey
Don Bailey
Title
Date
President, Chief Executive Officer and
Director (principal executive officer)
March 15, 2006
Chief Financial Officer (principal accounting
and financial officer)
March 15, 2006
Chairman of the Board, Director
March 15, 2006
/s/ Volker Anhaeusser
Director
March 15, 2006
Volker Anhaeusser
/s/ Donald Duffy
Donald Duffy
/s/ David Morrison
David Morrison
/s/ David Schlotterbeck
David Schlotterbeck
45
Director
March 15, 2006
Director
March 15, 2006
Director
March 15, 2006
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 30, 2005,
December 31, 2004 and January 2, 2004
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 30, 2005 and at December 31, 2004
Consolidated Statements of Operations for the years ended December 30, 2005, December 31, 2004, and January 2, 2004
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss for the years ended December 30,
2005, December 31, 2004, and January 2, 2004
Consolidated Statements of Cash Flows for the years ended December 30, 2005, December 31, 2004, and January 2, 2004
Notes to Consolidated Financial Statements
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F−3
F−4
F−5
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F−7
F−8
F−1
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited the accompanying consolidated balance sheets of STAAR Surgical Company and subsidiaries as of
December 30, 2005 and December 31, 2004, and the related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended December 30, 2005. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of STAAR Surgical Company and subsidiaries as of December 30, 2005 and December 31, 2004, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended December 30, 2005, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over financial reporting as of December 30, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 15, 2006 expressed an unqualified opinion thereon.
Los Angeles, California
March 15, 2006
/s/ BDO Seidman, LLP
F−2
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over
Financial Reporting included in Item 9A, that STAAR Surgical Company maintained effective internal control over financial
reporting as of December 30, 2005, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). STAAR Surgical Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that STAAR Surgical Company maintained effective internal control over financial
reporting as of December 30, 2005, is fairly stated, in all material respects, based on criteria established in COSO. Also in our opinion,
STAAR Surgical Company maintained, in all material respects, effective internal control over financial reporting as of December 30,
2005, based on criteria established in COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of STAAR Surgical Company as of December 30, 2005 and December 31, 2004 and the related
consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended
December 30, 2005, and our report dated March 15, 2006 expressed an unqualified opinion thereon.
Los Angeles, California
March 15, 2006
/s/ BDO Seidman, LLP
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 30, 2005 and December 31, 2004
2005
2004
(In thousands, except
par value amounts)
ASSETS
Current assets:
Cash and cash equivalents
Short−term investments
Accounts receivable, less allowance for doubtful accounts and sales returns
Inventories
Prepaids, deposits and other current assets
Total current assets
Investment in joint venture
Property, plant and equipment, net
Patents and licenses, net of accumulated amortization of $6,569 and $6,089
Goodwill
Other assets
Total assets
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable
Accounts payable
Other current liabilities
Total current liabilities
Other long−term liabilities
Total liabilities
Minority interest
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000 shares authorized, none issued or
outstanding
Common stock, $.01 par value; 30,000 shares authorized; issued and outstanding
24,819 and 20,664 shares
Additional paid−in capital
Accumulated other comprehensive income
Accumulated deficit
Notes receivable from former directors
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
12,708
—
5,100
14,699
1,763
34,270
283
5,595
4,920
7,534
153
52,755
1,676
4,014
5,845
11,535
854
12,389
—
—
248
112,434
146
(71,653)
41,175
(809)
40,366
52,755
$
$
$
$
4,187
5,125
6,217
15,084
1,969
32,582
125
6,163
5,400
7,534
169
51,973
3,004
5,313
5,162
13,479
632
14,111
22
—
207
98,691
1,024
(60,478)
39,444
(1,604)
37,840
51,973
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−4
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 30, 2005, December 31, 2004 and January 2, 2004
Sales
Royalty and other income
Total revenues
Cost of sales
Gross profit
Selling, general and administrative expenses:
General and administrative
Marketing and selling
Research and development
Other charges
Total selling, general and administrative expenses
Operating loss
Other income (expense):
Equity in earnings of joint venture
Interest income
Interest expense
Other income (expense), net
Total other income (expense), net
Loss before income taxes and minority interest
Provision for income taxes
Minority interest
Net loss
Loss per share:
Basic and diluted
Weighted average shares outstanding
Basic and diluted
2005
2004
(In thousands,
except per share amounts)
2003
$
$
$
51,303
—
51,303
27,517
23,786
9,727
18,552
5,573
746
34,598
(10,812)
158
453
(170)
413
854
(9,958)
1,239
(22)
(11,175)
(0.47)
$
$
$
51,685
—
51,685
25,542
26,143
9,253
20,302
6,246
500
36,301
(10,158)
(191)
219
(215)
99
(88)
(10,246)
1,057
29
(11,332)
(0.58)
$
$
$
50,409
49
50,458
22,621
27,837
9,343
19,509
5,120
390
34,362
(6,525)
11
256
(322)
(582)
(637)
(7,162)
1,127
68
(8,357)
(0.47)
23,704
19,602
17,704
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−5
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
Years Ended December 30, 2005, December 31, 2004 and January 2, 2004
Common
Stock
Common
Stock
Par
Additional
Accumulated
Other
Paid−In
Comprehensive
Accumulated
Notes
Shares
Value
Capital
16,962
$ 169
$
74,977
$
Income
(Loss)
(In thousands)
(111)
Deficit
Receivable
Total
$
(40,789)
$ (3,695)
$
30,551
—
—
387
54
—
1,000
—
—
—
18,403
—
—
250
11
—
2,000
—
—
—
20,664
—
—
36
13
—
4,100
6
—
—
—
—
24,819
—
—
4
1
—
10
—
—
—
184
—
—
3
—
—
20
—
—
—
207
—
—
—
—
—
41
—
—
—
—
—
1,549
278
206
8,938
—
—
—
85,948
—
—
826
60
231
11,626
—
—
—
98,691
—
—
130
77
203
13,333
37
(37)
—
—
—
$ 248
—
—
$ 112,434
$
—
683
—
—
—
—
—
—
—
572
—
452
—
—
—
—
—
—
—
1,024
—
(878)
—
—
—
—
—
—
—
—
—
146
(8,357)
—
—
—
—
—
—
—
—
(49,146)
(11,332)
—
—
—
—
—
—
—
—
(60,478)
(11,175)
—
—
—
—
—
—
—
—
—
—
(71,653)
$
$
—
—
—
—
—
—
3,270
(118)
(1,796)
(2,339)
—
—
—
—
—
—
330
(95)
500
(1,604)
—
—
—
—
—
—
—
—
130
(81)
746
(809)
(8,357)
683
(7,674)
$
1,553
279
206
8,948
3,270
(118)
(1,796)
35,219
(11,332)
452
$ (10,880)
829
60
231
11,646
330
(95)
500
37,840
(11,175)
(878)
$ (12,053)
130
77
203
13,374
37
(37)
130
(81)
746
40,366
$
Balance, at January 3, 2003
Comprehensive loss:
Net loss
Foreign currency translation
adjustment
Total comprehensive loss
Common stock issued upon
exercise of warrants
Common stock issued as payment
for services
Stock−based consultant expense
Net proceeds from private
placement
Proceeds from notes receivable
Accrued interest on notes
receivable
Reversal of notes receivable reserve
Balance, at January 2, 2004
Comprehensive loss:
Net loss
Foreign currency translation
adjustment
Total comprehensive loss
Common stock issued upon
exercise of options
Common stock issued as payment
for services
Stock−based consultant expense
Net proceeds from private
placement
Proceeds from notes receivable
Accrued interest on notes
receivable
Notes receivable reserve
Balance, at December 31, 2004
Comprehensive loss:
Net loss
Foreign currency translation
adjustment
Total comprehensive loss
Common stock issued upon
exercise of options
Common stock issued as payment
for services
Stock−based consultant expense
Net proceeds from private
placement
Restricted stock grants
Deferred compensation
Proceeds from notes receivable, net
Accrued interest on notes
receivable
Notes receivable reserve
Balance, at December 30, 2005
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−6
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 30, 2005, December 31, 2004 and January 2, 2004
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
2005
2004
(In thousands)
2003
$
(11,175)
$
(11,332)
$
(8,357)
Depreciation of property and equipment
Amortization of intangibles
Write−off of patents
Loss on disposal of fixed assets
Equity in earnings of joint venture
Stock−based consultant expense
Common stock issued for services
Net change in notes receivable reserve
Other
Minority interest
Changes in working capital:
Accounts receivable
Inventories
Prepaids, deposits and other current assets
Accounts payable
Other current liabilities
Net cash used in operating activities
Cash flows from investing activities:
Acquisition of property and equipment
Acquisition of patents and licenses
Purchase of short−term investments
Sale of short−term investments
Purchase of minority interest in subsidiary
Proceeds from notes receivable
Net change in other assets
Dividends received from joint venture
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net borrowings (payments) under notes payable and long−term debt
Proceeds from the exercise of stock options and warrants
Net proceeds from private placement
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
$
1,992
480
—
85
(158)
203
77
746
(81)
(22)
1,117
270
206
(1,399)
683
(6,976)
(1,194)
—
(15,300)
20,425
—
130
16
—
4,077
(1,206)
130
13,374
12,298
(878)
8,521
4,187
12,708
2,005
688
—
175
191
231
60
500
(95)
21
(542)
(2,282)
32
769
775
(8,804)
(1,705)
(16)
(8,000)
2,875
(768)
330
(91)
81
(7,294)
72
829
11,646
12,547
452
(3,099)
7,286
4,187
$
1,950
952
2,102
159
(11)
206
279
(1,796)
308
104
474
(1,041)
380
351
(206)
(4,146)
(1,309)
(75)
—
—
—
3,270
189
76
2,151
(2,912)
1,553
8,948
7,589
683
6,277
1,009
7,286
$
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−7
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 30, 2005 and December 31, 2004
Note 1 — Significant Accounting Policies
Organization and Description of Business
STAAR Surgical Company (the “Company”), a Delaware corporation, was incorporated in 1982 for the purpose of developing,
producing, and marketing intraocular lenses (“IOLs”) and other products for minimally invasive ophthalmic surgery. The Company
has evolved to become a developer, manufacturer and global distributor of products used by ophthalmologists and other eye care
professionals to improve or correct vision in patients with cataracts, refractive conditions and glaucoma. Products sold by the
Company for use in restoring vision adversely affected by cataracts include its line of silicone and Collamer IOLs, the Preloaded
Injector, a three−piece silicone IOL preloaded into a single−use disposable injector, the SonicWAVEtm Phacoemulsification System,
STAARVISCtm II, a viscoelastic material, and Cruise Control, a disposable filter which allows for a faster, cleaner
phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing Venturi and peristaltic pump
technologies. Products sold by the Company for use in correcting refractive conditions such as myopia (near−sightedness), hyperopia
(far−sightedness) and astigmatism include the VISIANtm ICL (“ICL”) and the VISIANtm TICL (“TICL”). The Company’s
AquaFlowtm Collagen Glaucoma Drainage Device is surgically implanted in the outer tissues of the eye to maintain a space that
allows increased drainage of intraocular fluid thereby reducing intraocular pressure, which otherwise may lead to deterioration of
vision in patients with glaucoma. The Company also sells other instruments, devices and equipment that are manufactured either by
the Company or by others in the ophthalmic products industry.
The Company’s only significant subsidiary is STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland to develop,
manufacture and distribute certain of the Company’s products worldwide, including the ICL and the AquaFlow device. STAAR
Surgical AG also controls a major European sales subsidiary that distributes both the Company’s products and products from various
other manufacturers.
Canon Staar Joint Venture
In 1988, the Company entered into a Joint Venture Agreement with Canon Inc. and Canon Sales Co., Inc., creating a company for
the principal purpose of designing, manufacturing, and selling in Japan intraocular lenses and other ophthalmic products. The joint
venture company, Canon Staar Co., Inc., markets its products worldwide through Canon, Canon Sales, their subsidiaries and/or
STAAR or such other distributors as the Board of Directors of the joint venture may approve. The terms of any such distribution
arrangements require the unanimous approval of the Board of Directors of the joint venture. Of the five members of the Board of
Directors of the joint venture, STAAR and Canon Sales are each entitled to appoint two directors and Canon may appoint one. The
president of the joint venture is to be appointed by STAAR. Several matters in addition to the approval of distribution arrangements
require the unanimous approval of the directors, including appointment of officers, acquiring or disposing of assets exceeding 20% of
the joint venture’s total book value, and borrowing money or granting a lien exceeding 20% of the joint venture’s total book value.
Upon the occurrence of certain events, including the merger, sale of substantially all of the assets or change in the management of one
of the parties, any of the other parties may have the right to acquire the first party’s interest in the joint venture at book−value.
In 1988, the Company also entered into a Technical Assistance and License Agreement with the joint venture to further its
purposes, granting to the joint venture a perpetual, exclusive license to use STAAR technology to make and sell products in Japan, and
a perpetual, non−exclusive license to use STAAR technology to sell products in the rest of the world, subject to the requirements of
the Joint Venture Agreement that all sales take place through a distribution agreement unanimously approved by the directors of the
joint venture. STAAR also granted to the joint venture a right of first refusal on the distribution of STAAR’s products in Japan.
In 2001, the parties entered into a settlement agreement whereby (i) they reconfirmed the Joint Venture Agreement and the
Technical Assistance and License Agreement, (ii) they agreed that the Company would
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
promptly commence the transfer of STAAR’s technology to the joint venture, (iii) the Company granted the joint venture an exclusive
license to make any products in China and sell such products in Japan and China (subject to STAAR’s existing licenses and the
existing rights of third parties), (iv) the Company agreed to provide the joint venture with raw materials under a supply agreement to
be entered into with the joint venture, (v) Canon Sales Co., Inc. is to enter into a distribution agreement with the joint venture
providing a minimum 50−70% share of sales revenue to the joint venture and having such other terms as unanimously approved by the
directors of the joint venture, and (iv) the parties settled certain patent disputes.
The joint venture has a single class of capital stock, of which STAAR owns 50%. Accordingly, STAAR is entitled to 50% of any
dividends or distributions by the joint venture and 50% of the proceeds of any liquidation.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned and majority
owned subsidiaries. All significant intercompany balances 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. Sales 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 as accumulated other comprehensive income. During 2005, 2004 and
2003, the net foreign translation gain (loss) was ($878,000), $452,000 and $683,000, respectively, and net foreign currency transaction
gain (loss), included in the statement of operations in other income (expense), net, was $334,000, ($190,000) and ($107,000),
respectively.
Investment in the Company’s joint venture, Canon Staar Co., Inc., is accounted for using the equity method of accounting (see
Note 6).
The Company’s fiscal year ends on the Friday nearest December 31 and each of the Company’s quarterly reporting periods
generally consists of 13 weeks.
Revenue Recognition
The Company recognizes revenue when realized or realizable and earned, which is when the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred; the sale price is fixed and determinable; and collectibility is reasonably
assured. We record revenue from product sales when title and risk of ownership has been transferred to the customer, which is
typically upon delivery to the customer. The exception to this recognition policy is revenue from intraocular lenses distributed on a
consignment basis, which is recognized upon notification of implantation in a patient.
The Company may bundle the sale of phacoemulsification equipment to customers with multi−year agreements to purchase
minimum quantities of foldable IOLs. The Company recognizes the revenue from the equipment based on monthly purchases of
minimum quantities of IOLs over the life of the agreement.
Revenue from license and technology agreements is recorded as income, when earned, according to the terms of the respective
agreements.
The Company generally permits returns of product if such product is returned within the time allowed by the Company, and in
good condition. Allowances for returns are provided for based upon an analysis of our historical patterns of returns matched against
the sales from which they originated. To date, historical product returns have been within the Company’s estimates.
The Company maintains provisions for uncollectible accounts for estimated losses resulting from the inability of its customers to
remit payments. The Company continuously monitors collections and payments from its customers and maintains a provision for
estimated credit losses based upon its historical experience and any specific customer collection issues that have been identified.
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. This risk is
limited due to the large number of customers comprising the Company’s customer base, and their geographic dispersion. Ongoing
credit evaluations of customers’ financial condition are performed and, generally, no collateral is required. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not exceeded management’s expectations.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the
tax basis of the Company’s assets and liabilities along with net operating loss and credit carryforwards. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset
may not be realized. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which
temporary differences are expected to be settled and reflected in the financial statements in the period of enactment.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Short−Term Investments
Short−term investments are classified as available for sale and are reported at fair value. Unrealized holding gains and losses, if
any, net of the related income tax effect, are excluded from income and are reported in other comprehensive income. Realized gains
and losses, if any, are included in income on the specific identification method.
Inventories
Inventories are stated at the lower of cost, determined on a first−in, first−out basis, or market. Inventory costs are comprised of
material, direct labor, and overhead. The Company records inventory provisions, based on a review of forecasted demand and
inventory levels.
In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs.” This
statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage). SFAS No. 151 requires that those items be recognized as
current−period charges. In addition, this statement requires that allocation of fixed production overheads to costs of conversions be
based upon the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory cost incurred
in fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of fiscal
2006. The adoption of this pronouncement is not expected to have a material effect on the Company’s financial statements.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation on property, plant, and equipment is computed using the
straight−line method over the estimated useful lives of the assets, generally ranging from 3 to 10 years. Major improvements are
capitalized and minor replacements, maintenance and repairs are charged to expense as incurred.
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Demonstration Equipment
In the normal course of business, the Company maintains demonstration and bundled equipment, primarily phacoemulsification
surgical equipment, for the purpose and intent of selling similar equipment or related products to the customer in the future.
Demonstration equipment is not held for sale and is recorded as property, plant and equipment. The assets are amortized utilizing the
straight−line method over their estimated economic life not to exceed three years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations accounted for as purchases. The Company accounts for goodwill in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.”
Goodwill, which has an indefinite life and was previously amortized on a straight−line basis over the periods benefited, is no
longer amortized to earnings but instead is subject to periodic testing for impairment. Intangible assets determined to have definite
lives are amortized over their remaining useful lives. Goodwill is tested for impairment on an annual basis or between annual tests if
an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is
done at the reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting
units within the same segment have similar economic characteristics. Under the criteria set forth by SFAS No. 142, the Company has
determined that its reporting units have similar economic characteristics and therefore, can be combined into one reporting unit for the
purposes of goodwill impairment testing. As provided under SFAS No. 142, an annual assessment was completed during fiscal year
2005 and no impairment was identified. As of December 30, 2005, the carrying value of goodwill was $7.5 million.
The Company also has other intangible assets consisting of patents and licenses, with a gross book value of $11.5 million and
accumulated amortization of $6.6 million as of December 30, 2005. The Company capitalizes the costs of acquiring patents and
licenses. Amortization is computed on the straight−line basis over the estimated useful lives, which are based on legal and contractual
provisions, and range from 10 to 20 years. Aggregate amortization expense for amortized other intangible assets was $480,000,
$688,000 and $952,000 for the years ended December 30, 2005, December 31, 2004 and January 2, 2004, respectively.
The following table shows the estimated amortization expense for these assets for each of the five succeeding years (in thousands):
Fiscal Year
2006
2007
2008
2009
2010
Total
$
$
480
480
480
480
380
2,300
Impairment of Long−Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment of Long−Lived Assets,” intangible and other long lived−assets
are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in
circumstances indicate that the carrying amount may not be recoverable. In reviewing for impairment, the Company compares the
carrying value of such assets to the
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated
undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between
the assets’ fair value and their carrying value.
There were no impairments of long−lived assets identified during the years ended December 30, 2005 or December 31, 2004.
During the year ended January 2, 2004, the Company wrote down $2.1 million (net book value) in capitalized patent costs in
connection with its routine evaluation of patent costs. The write−down related to patents acquired in the purchase of its majority
interest in Circuit Tree Medical, a developer and manufacturer of phacoemulsification equipment, whose ongoing operations were
moved to the Company’s Monrovia, CA facility during fiscal 2003. The Company believes the write−down was necessary based upon
the subsidiary’s historical losses and management’s uncertainty about whether the Company will be able to recover the cost.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results may materially differ from those estimates.
Fair Value of Financial Instruments
The carrying values reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts
payable, and notes payable approximate their fair values because of the short maturity of these instruments.
Loss Per Share
The Company presents loss per share data in accordance with the provision of SFAS No. 128, “Earnings per Share,” which
provides for the calculation of basic and diluted earnings per share. Loss per share of common stock is computed by using the
weighted average number of common shares outstanding during the period. Common stock equivalents are not included in the
determination of the weighted average number of shares outstanding, as they would be antidilutive. For the years ended December 30,
2005, December 31, 2004, and January 2, 2004, 3.9 million, 3.1 million, and 3.2 million options to purchase shares of the Company’s
common stock, respectively, were excluded from the computation.
Stock Based Compensation
The Company accounts for stock−based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”), and has adopted the disclosure provisions of SFAS No. 123, “Accounting
for Stock Based Compensation” (“SFAS 123”). SFAS 123 defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by APB 25. If the APB 25 intrinsic value method of accounting is used, SFAS 123
requires pro forma disclosures of net income and earnings per share as if the fair value based method of accounting for stock based
compensation had been applied. The Company records expense in an amount equal to the excess of the quoted market price on the
grant date over the option price. Such expense is recognized at the grant date for options fully vested. For options with a vesting
period, the expense is recognized over the vesting period.
The Company accounts for options granted to persons other than employees and directors under SFAS 123 and EITF 98−16,
Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring or in
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Conjunction with Selling Goods and Services. As such, the fair value of such options is periodically remeasured using the
Black−Scholes option−pricing model and income or expense is recognized over the vesting period.
SFAS 123, “Accounting for Stock−Based Compensation” requires the Company to provide pro forma information regarding net
income and earnings per share as if compensation expense for the Company’s stock option plans had been determined in accordance
with the fair value based method. The fair value of each stock option grant is estimated on the grant date using the Black−Scholes
option−pricing model with the following assumptions:
Dividend yield
Expected volatility
Risk−free interest rate
Expected holding period (in years)
2005
2004
2003
0%
70%
4.35%
4.3
0%
72%
4.22%
4.2
0%
69%
4.37%
4.8
The weighted average fair value of options granted during the years ended December 30, 2005, December 31, 2004 and January 2,
2004 was $2.55, $4.11, and $3.00, respectively.
Pro forma net loss and loss per share for fiscal years 2005, 2004, and 2003, had the Company accounted for stock options issued to
employees and others in accordance with the fair value method of SFAS 123, are as follows (in thousands, except per share data):
Net loss
As reported
Add: Stock−based employee compensation expense included in reported net
loss
Deduct: Total stock−based employee compensation expense determined
under fair value based method for all awards
Pro forma net loss
Basic and diluted loss per share
As reported
Pro forma
2005
2004
2003
$
(11,175)
$
(11,332)
$
(8,357)
—
(1,038)
(12,213)
(0.47)
(0.52)
$
$
$
—
(739)
(12,071)
(0.58)
(0.62)
$
$
$
—
(1,563)
(9,920)
(0.47)
(0.56)
$
$
$
In December 2004, the FASB issued SFAS No. 123 (revised) (“SFAS No. 123R”), “Share−Based Payment”. SFAS No. 123R
eliminates the intrinsic value method under APB 25 as an alternative method of accounting for stock−based awards. SFAS No. 123R
also revises the fair value−based method of accounting for share−based payment liabilities, forfeitures and modifications of
stock−based awards and clarifies SFAS No. 123’s guidance in several areas, including measuring fair value, classifying an award as
equity or as a liability and attributing compensation cost to reporting periods. In addition, SFAS No. 123R amends SFAS No. 95,
“Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash inflow rather than as reduction of taxes
paid, which is included in operating cash flows.
On April 14, 2005 the Securities and Exchange Commission announced a new rule delaying the implementation of Statement of
Financial Accounting Standards No. 123R, Share−Based Payment. The Commission’s new rule allows companies to implement
Statement No. 123R at the start of their next fiscal year, which begins after June 15, 2005. The Company is required to adopt
SFAS No. 123R for the interim period beginning December 31, 2005 using a modified version of prospective application or may elect
to apply a modified version of retrospective application. The Company currently expects to adopt SFAS No. 123R using the modified
prospective method with an effective date of December 31, 2005, and believes the adoption of
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SFAS No. 123R will result in increased losses in the Company’s 2006 statement of operations, the extent of which is dependent on the
number of options granted and other assumptions used in determining fair value.
Comprehensive Loss
The Company presents comprehensive losses in its Consolidated Statement of Changes in Stockholders’ Equity in accordance with
SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”). Total comprehensive loss includes, in addition to net loss,
changes in equity that are excluded from the consolidated statements of operations and are recorded directly into a separate section of
stockholders’ equity on the consolidated balance sheets.
Comprehensive loss and its components consist of the following (in thousands):
Net loss
Foreign currency translation adjustment
Comprehensive loss
Segments of an Enterprise
2005
(11,175)
(878)
(12,053)
$
$
2004
(11,332)
452
(10,880)
$
$
2003
(8,357)
683
(7,674)
$
$
The Company reports segment information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information” (“SFAS 131”). Under SFAS 131 all publicly traded companies are required to report certain information about
the operating segments, products, services and geographical areas in which they operate and their major customers. Although the
Company has expanded its marketing focus beyond the cataract market to include the refractive and glaucoma markets, the
ophthalmic surgery market remains its primary source of revenues and, accordingly, the Company operates as one business segment
(see Note 17).
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Note 2 — Short−Term Investments
Short−term investments consisted of the following at December 30, 2005 and December 31, 2004 (in thousands):
Auction rate securities
2005
2004
Cost
$ —
$ —
Market
Value
$ —
$ —
Cost
5,125
5,125
$
$
Market
Value
$
$
5,125
5,125
The short−term investments at December 31, 2004, are comprised solely of taxable auction−rate securities within a closed−end
fund with no stated maturity date. Due to the fact that these investments have frequent interest rate resets, the Company did not have
any realized or unrealized gains or losses at December 31, 2004. The Company sold its auction rate securities during 2005.
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3 — Accounts Receivable
Accounts receivable consisted of the following at December 30, 2005 and December 31, 2004 (in thousands):
Domestic
Foreign
Less allowance for doubtful accounts and sales returns
2005
2,066
3,514
5,580
480
5,100
$
$
2004
2,602
4,075
6,677
460
6,217
$
$
Note 4 — Inventories
Inventories consisted of the following at December 30, 2005 and December 31, 2004 (in thousands):
Raw materials and purchased parts
Work in process
Finished goods
2005
859
2,259
11,581
14,699
$
$
2004
985
2,253
11,846
15,084
$
$
Note 5 — Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 30, 2005 and December 31, 2004 (in thousands):
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
2005
12,174
5,498
4,832
22,504
16,909
5,595
$
$
2004
12,388
4,378
4,826
21,592
15,429
6,163
$
$
Depreciation expense for each of the years ended December 30, 2005, December 31, 2004, and January 2, 2004 was
approximately $2.0 million.
Note 6 — Investment in Joint Venture
The Company owns a 50% equity interest in a joint venture, the Canon Staar Co., Inc. (“CSC”), with Canon Inc. and Canon Sales
Co, Inc., together the “Canon Companies” (see Note 1). The investment in the Japanese joint venture is accounted for using the equity
method of accounting. Dividends received are recorded under the equity method as a reduction to the investment. The principal
difference between 50% of the equity balance recorded on CSC’s financial statements and the Company’s recorded investment in the
joint venture relates to the fiscal year 2000 write down of the investment of approximately $3.6 million due to disputes between the
Company and the Canon Companies. The disputes were subsequently resolved in late 2001.
F−15
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The financial statements of CSC include the following information (in thousands):
Current assets
Non−current assets
Current liabilities
Non−current liabilities
Net sales
Gross profit
Income from operations
Net Income (loss)
2005
2004
$
$
5,679
1,242
1,025
709
9,656
5,171
460
316
$
$
6,237
1,432
1,238
807
10,908
4,572
220
(382)
The Company’s equity in earnings (loss) of the joint venture is calculated as follows (in thousands):
Joint venture net income (loss)
Equity interest
Equity in earnings (loss) of joint venture
2005
2004
$
$
316
50%
158
$
$
(382)
50%
(191)
2003
22
$
50%
11
$
The Company received dividends of $0, $81,000 and $76,000 during 2005, 2004 and 2003, respectively.
The Company recorded sales of certain IOL products to CSC of approximately $180,000, $185,000 and $66,000 in 2005, 2004 and
2003, respectively.
The Company purchased preloaded injectors from CSC in the amount of $2.0 million, $1.7 million, and $239,000 in 2005, 2004,
and 2003, respectively.
Note 7 — Notes Payable
Subsidiaries of the Company have foreign credit facilities with different banks to support operations in Switzerland and Germany.
The Swiss credit agreement, as amended on August 2, 2004, provides for borrowings of up to 3.25 million Swiss Francs “CHF”
(approximately $2.5 million based on the rate of exchange on December 30, 2005), and permits either fixed−term or current advances.
The interest rate on current advances is 6.0% per annum at both December 30, 2005 and December 31, 2004, plus a commission rate
of 0.25% payable quarterly. There were no current advances outstanding at December 30, 2005. The base interest rate for fixed−term
advances follows Euromarket conditions for loans of a corresponding term and currency plus an individual margin (4.25% at
December 30, 2005 and 4.5% at December 31, 2004, respectively). Borrowings outstanding under the note at December 30, 2005 and
December 31, 2004, respectively, were CHF 2.2 million (approximately $1.7 million based on the rate of exchange at December 30,
2005) and CHF 3.4 million (approximately $3.0 million based on the rate of exchange on December 31, 2004). The credit facility is
secured by a general assignment of claims and includes positive and negative covenants which, among other things, require the
maintenance of a minimum level of equity of at least $12.0 million and prevents the Swiss subsidiary from entering into other secured
obligations or guaranteeing the obligations of others. The agreement also prohibits the sale or transfer of patents or licenses without
the prior consent of the lender and the terms of inter−company receivables may not exceed 90 days.
The Swiss credit facility is divided into two parts: Part A provides for borrowings of up to CHF 3.0 million ($2.3 million based on
the exchange rate on December 30, 2005) and does not have a termination date; Part B presently provides for borrowings of up to
CHF 250,000 ($190,000 based on the exchange rate on December 30, 2005). The loan amount under Part B of the agreement reduces
by CHF 250,000 ($190,000 based on the
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
exchange rate on December 30, 2005) semi−annually. As of December 30, 2005, approximately $824,000 was available under the
credit facility for future borrowings for use in Swiss operations.
The German subsidiary entered into a new credit agreement on August 30, 2005. The renewed credit agreement provides for
borrowings of up to 100,000 EUR ($119,000 at the rate of exchange on December 30, 2005), at a rate of 7.0% per annum and does not
have a termination date. The credit facility is not secured. There were no borrowings outstanding as of December 30, 2005 and
December 31, 2004.
The Company was in compliance with the covenants of these credit facilities as of December 30, 2005.
Note 8 — Income Taxes
The provision for income taxes consists of the following (in thousands):
Current tax provision:
U.S. federal
State
Foreign
Total current provision
Deferred tax provision:
U.S. federal and state
Foreign
Total deferred provision
Provision for income taxes
2005
2004
2003
$
$
—
18
1,221
1,239
—
—
—
1,239
$
—
—
1,057
1,057
—
—
—
$ 1,057
$
$
—
—
1,127
1,127
—
—
—
1,127
As of December 30, 2005, the Company had $74.2 million of federal net operating loss carryforwards available to reduce future
income taxes. The net operating loss carryforwards expire in varying amounts between 2020 and 2025.
The Company has net income taxes payable at December 30, 2005 and December 31, 2004 of $923,000 and $420,000,
respectively.
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for income before taxes differs from the amount computed by applying the statutory federal income tax rate to
income before taxes as follows (in thousands):
Computed benefit for taxes based on
income at statutory rate
Increase (decrease) in taxes resulting from:
Write down of investment in Circuit Tree
Medical Inc.
Permanent differences
State taxes, net of federal income tax
benefit
Tax effect attributed to foreign
operations
Other
Valuation allowance
Effective tax provision rate
2005
2004
2003
$ (3,386)
34.0% $ (3,484)
34.0% $ (2,435)
34.0%
—
19
12
—
(0.2)
(0.1)
—
36
—
—
(0.3)
(0.0)
715
23
—
300
29
4,265
1,239
$
(3.0)
(0.3)
(42.8)
(12.4)% $
158
7
4,340
1,057
(1.5)
(0.1)
(42.4)
(10.3)% $
107
—
2,717
1,127
(10.0)
(0.3)
(0.0)
(1.5)
—
(37.9)
(15.7)%
The state tax provision is composed of an increase to the state deferred tax asset and corresponding increase to the valuation
allowance of $945,000, $1,010,000, and $386,000 for 2005, 2004 and 2003 respectively. This results in a total state tax provision of
$18,000, for 2005 and zero state tax provision for 2004 and 2003.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $13.1 million at December 30, 2005.
Undistributed earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state
income taxes has been provided thereon. Upon distribution of earnings in the form of dividends or otherwise, the Company would be
subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of unrecognized deferred United States income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax
assets (liabilities) as of December 30, 2005 and December 31, 2004 are as follows (in thousands):
Current deferred tax assets (liabilities):
Allowance for doubtful accounts and sales returns
Inventory
Accrued vacation
State taxes
Deferred revenue
Accrued expenses
Valuation allowance
Total current deferred tax assets (liabilities)
Non−current deferred tax assets (liabilities):
Net operating loss and capital loss carryforwards
Business, foreign and AMT credit carryforwards
Depreciation and amortization
Notes receivable
Restructuring — investment in joint venture
Capitalized R&D
Contributions
Valuation allowance
Total non−current deferred tax assets (liabilities)
2005
2004
$
$
$
133
663
260
3
46
—
(1,105)
—
30,157
880
28
517
511
420
44
(32,557)
—
$
$
$
143
475
171
3
79
21
(892)
—
25,508
880
(54)
207
450
252
37
(27,280)
—
SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) requires that a valuation allowance be established when it is more
likely than not that all or a portion of a deferred tax asset may not be realized. Cumulative losses weigh heavily in the assessment of
the need for a valuation allowance. Due to its history of losses, the Company records a valuation allowance to fully offset the value of
its deferred tax assets. Further, under Federal Tax Law Internal Revenue Code Section 382, significant changes in ownership may
restrict the future utilization of these tax loss carry forwards.
Income (loss) before income taxes are as follows (in thousands):
Domestic
Foreign
Note 9 — Business Acquisitions
2005
(12,665)
2,707
(9,958)
$
$
2004
(12,887)
2,641
(10,246)
$
$
2003
(10,163)
3,001
(7,162)
$
$
During the year ended December 31, 2004, the Company purchased the remaining 20% interest in its Australian subsidiary for
$1.3 million, in exchange for $768,000 in cash and a long−term note in the amount of $542,000 due on November 1, 2007. The
transaction resulted in the recording of goodwill of $1.1 million. The Company also entered into employment agreements with the
previous minority owners of the subsidiary. The
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
employment agreements expire on November 1, 2007 and include clauses to not compete for a period of one year after termination for
any cause, except in the event of a change in control.
Pro forma amounts for the acquisition are not included, as the effect on operations is not material to the Company’s consolidated
financial statements.
Note 10 — Stockholders’ Equity
Common Stock
During fiscal year 2005, the Company issued 13,000 shares to consultants for services rendered to the Company. Also during
2005, the Company completed a private placement with institutional investors of 4,100,000 shares of the Company’s common stock,
for net proceeds of $13.4 million. Also during 2005, the Company issued 6,117 shares of restricted stock to certain employees and a
consultant in consideration for future services to the Company. The shares were issued at fair market value on the date of grant, vest
over a period of three years, and are subject to forfeiture until vested or the service period is terminated. The cost of the restricted
stock is recorded as deferred equity compensation in Additional Paid−in Capital and will be amortized over the vesting period. As of
December 30, 2005, none of the shares were vested.
During fiscal year 2004, the Company issued 11,000 shares to consultants for services rendered to the Company. Also during
2004, the Company completed a private placement with institutional investors of 2,000,000 shares of the Company’s common stock,
for net proceeds of $11.6 million.
During fiscal year 2003, the Company issued 11,000 shares to consultants for services rendered to the Company and
43,000 shares, in lieu of bonuses earned, to an officer and director of the Company. Also during 2003, the Company completed a
private placement with institutional investors of 1,000,000 shares of the Company’s common stock, for net proceeds of $8.9 million.
Receivables from Former Directors
As of December 30, 2005 and December 31, 2004, notes receivable (excluding reserves) from former directors totaling
$2.0 million and $2.1 million, respectively, were outstanding. The notes were issued in connection with purchases of the Company’s
common stock and bear interest at rates ranging between 1.98% and 6.40% per annum, or at the lowest federal applicable rate allowed
by the Internal Revenue Service. The notes are secured by stock pledge agreements and mature on various dates through July 1, 2006.
During the year ended December 31, 2004, the Company entered into a forbearance agreement with a former director of the
Company whereby the due date of a $1.2 million note receivable was extended from June 15, 2004 to March 15, 2005 and the interest
rate was reduced to 1.986%, which was the lowest applicable federal rate at the date of the agreement.
During the year ended December 30, 2005, the Company recorded additional reserves of $746,000 against promissory notes of a
former director of the Company. Aggregate principal and accrued interest owed to the Company under the notes was $1.9 million as
of December 30, 2005, against which the Company has reserved a total of $1.2 million. The former director is in default under the
notes and a related Forbearance Agreement with the Company, but has recently affirmed his obligation under the notes. On these
events, the Company re−evaluated its likelihood of collecting on the notes and re−examined the collateral for the notes, which consists
of a pledge of 120,000 shares of the Company’s Common Stock (the “Pledged Shares”) and a second mortgage on a home in Florida.
During the third quarter of 2005, the Company was advised that its collateral may be compromised with respect to the second
mortgage. Accordingly, the Company increased its reserve on the notes to reflect the status of the collateral. Notwithstanding the
additional reserve amount, the Company believes that the former director is obligated to repay the full amount of principal and interest
on the notes, and continues to pursue full repayment of the notes.
F−20
Table of Contents
Options
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below summarizes the transactions in the Company’s stock option plans (in thousands except per share data):
Balance at January 3, 2003
Options granted
Options exercised
Options forfeited/cancelled
Balance at January 2, 2004
Options granted
Options exercised
Options forfeited/cancelled
Balance at December 31, 2004
Options granted
Options exercised
Options forfeited/cancelled
Balance at December 30, 2005
Options exercisable at December 30, 2005
Options exercisable at December 31, 2004
Options exercisable at January 2, 2004
Number of
Shares
Weighted
Average
Exercise
Price
3,137
553
(387)
(84)
3,219
531
(250)
(348)
3,152
1,044
(36)
(290)
3,870
2,728
2,535
2,541
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6.86
4.52
4.03
5.89
6.84
7.76
3.32
8.27
7.12
4.40
3.65
9.55
6.23
6.77
7.27
7.44
In fiscal year 2003, the Board of Directors approved the 2003 Omnibus Equity Incentive Plan (the “2003 Plan”) authorizing the
granting of options to purchase or awards of the Company’s common stock. The 2003 Plan amends, restates and replaces the 1991
Stock Option Plan, the 1995 Consultant Stock Plan, the 1996 Non−Qualified Stock Plan and the 1998 Stock Option Plan (the
“Restated Plans”). Under provisions of the 2003 Plan, all of the unissued shares in the Restated Plans are reserved for issuance in the
2003 Plan. In addition, 2% of the total shares of common stock outstanding on the immediately preceding December 31 will be
reserved for issuance under the 2003 Plan. Options under the plan are granted at fair market value on the date of grant, become
exercisable over a 3−4 year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from
the date of grant. Pursuant to the plan, options for 1,508,000, 522,000 and 83,000 shares were outstanding at December 30, 2005,
December 31, 2004 and January 2, 2004, respectively, with exercise prices ranging between $3.70 and $11.24 per share.
In fiscal year 2000, the Board of Directors approved the Stock Option Plan and Agreement for the Company’s Chief Executive
Officer authorizing the granting of options to purchase or awards of the Company’s common stock. The options under the plan are
granted at fair market value on the date of grant, become exercisable over a 3−year period, and expire 10 years from the date of grant.
Pursuant to this plan, options for 500,000 were outstanding at December 30, 2005, December 31, 2004, and January 2, 2004,
respectively, with an exercise price of $11.125.
In fiscal year 1998, the Board of Directors approved the 1998 Stock Option Plan, authorizing the granting of incentive options
and/or non−qualified options to purchase or awards of the Company’s common stock. Under the provisions of the plan, 1.0 million
shares were reserved for issuance; however, the maximum number of shares authorized may be increased provided such action is in
compliance with Article IV of the plan. During fiscal year
F−21
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2001, pursuant to Article IV of the plan, the stockholders of the Company authorized an additional 1.5 million shares. Generally,
options under the plan are granted at fair market value at the date of the grant, become exercisable over a 3−year period, or as
determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Pursuant to the plan,
options for 1,441,000, 1,601,000, and 1,855,000 shares were outstanding at December 30, 2005, December 31, 2004, and January 2,
2004, respectively, with exercise prices ranging between $2.05 and $13.625 per share.
In fiscal year 1996, the Board of Directors approved the 1996 Non−Qualified Stock Plan, authorizing the granting of options to
purchase or awards of the Company’s common stock. Under provisions of the Non−Qualified Stock Plan, 600,000 shares were
reserved for issuance. Generally, options under the plan are granted at fair market value at the date of the grant, become exercisable
over a 3−year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of
grant. Pursuant to this plan, options for 141,000, 146,000, and 146,000 shares were outstanding at December 30, 2005, December 31,
2004, and January 2, 2004, respectively. The options were originally issued with an exercise price of $12.50 per share. During fiscal
year 1998 the exercise price of options held by employees was reduced to $6.25 per share by action of the Board of Directors.
In fiscal year 1995, the Company adopted the 1995 Consultant Stock Plan, authorizing the granting of options to purchase or
awards of the Company’s common stock. Generally, options under the plan are granted at fair market value at the date of the grant,
become exercisable on the date of grant and expire 10 years from the date of grant. Pursuant to this plan, options for 165,000, 165,000,
and 330,000 shares were outstanding at December 30, 2005, December 31, 2004, and January 2, 2004, respectively, with exercise
prices ranging from $1.70 to $3.99 per share.
Under provisions of the Company’s 1991 Stock Option Plan, 2.0 million shares were reserved for issuance. Generally, options
under this plan are granted at fair market value at the date of the grant, become exercisable over a 3−year period, or as determined by
the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Pursuant to this plan, options for
60,000, 163,000 and 220,000 shares were outstanding at December 30, 2005, December 31, 2004, and January 2, 2004, respectively,
with exercise prices ranging from $9.56 to $10.18 per share.
During fiscal years 1999 and 2000, the Company issued non−qualified options to purchase shares of its Common Stock to
employees and consultants. Pursuant to these agreements, options for 55,000, 55,000, and 85,000 shares were outstanding at
December 30, 2005, December 31, 2004, and January 2, 2004, respectively with exercise prices ranging between $9.375 and $10.63.
In fiscal year 2005, officers, employees and others exercised 36,000 options from the 1998 and 2003 stock option plans at prices
ranging from $2.00 to $4.62 resulting in cash proceeds totaling $130,000.
In fiscal year 2004, officers, employees and others exercised 250,000 options from the 1995, 1998 and 2003 stock option plans at
prices ranging from $1.90 to $4.65 resulting in cash proceeds totaling $829,000.
In fiscal year 2003, officers, employees and others exercised 387,000 options from the 1991, 1996 and 1998 stock option plans at
prices ranging from $2.00 to $9.56 resulting in cash proceeds totaling $1.6 million.
F−22
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about stock options outstanding and exercisable at December 30, 2005 (in thousands,
except per share data):
Range of
Exercise Prices
$ 1.70 to $ 2.15
$ 2.96 to $ 4.30
$ 4.62 to $ 6.54
$ 7.00 to $10.19
$10.60 to $13.63
$ 1.70 to $13.88
Number
Outstanding
at
12/30/05
149
1,788
621
471
841
3,870
Options
Outstanding
Weighted−Average
Remaining
Weighted−Average
Contractual Life
2.3 years
5.6 years
5.0 years
6.4 years
4.8 years
5.3 years
Exercise Price
1.91
$
3.70
$
5.71
$
8.53
$
11.48
$
6.23
$
Number
Exercisable
at
12/30/05
149
1,060
395
300
824
2,728
Weighted−Average
Exercise Price
1.91
$
3.56
$
5.69
$
8.96
$
11.49
$
6.77
$
Note 11 — Commitments and Contingencies
Lease Obligations
The Company leases certain property, plant and equipment under capital and operating lease agreements. These leases vary in
duration and many contain renewal options and/or escalation clauses.
Estimated future minimum lease payments under leases having initial or remaining non−cancelable lease terms in excess of one
year as of December 30, 2005 were approximately as follows (in thousands):
Fiscal Year
2006
2007
2008
2009
2010
Total minimum lease payments
Less amounts representing interest
Current
Long−term
Total
Operating
Leases
Capital
Leases
$
$
$
1,179
596
500
390
365
3,030
—
3,030
$
$
$
$
$
51
48
77
1
—
177
(25)
152
36
116
152
Rent expense was approximately $1.2 million for each of the years ended December 30, 2005, December 31, 2004, and January 2,
2004, respectively.
Supply Agreement
In December 2000, the Company entered into a minimum purchase agreement with another manufacturer for the purchase of
viscoelastic solution. In January 2006, the Company extended this agreement through December 31, 2008 under the same purchasing
terms as the original contract. In addition to the minimum purchase requirement, the Company is also obligated to pay an annual
regulatory maintenance fee. The agreement contains provisions to increase the minimum annual purchases in the event that the seller
gains
F−23
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
regulatory approval of the product in other markets, excluding the U.S and Canada, as requested by the Company. Purchases under the
agreement for fiscal 2005, 2004, and 2003 were approximately $728,000, $644,000, and $954,000, respectively.
As of December 30, 2005, estimated annual purchase commitments under this contract are as follows (in thousands):
Fiscal Year
2006
2007
2008
$
$
600
600
894
2,094
Resolution of Open Issues with the FDA Office of Compliance
The Office of Compliance of the FDA’s Center for Devices and Radiological Health regularly inspects STAAR’s facilities to
determine whether STAAR is in compliance with the FDA’s Quality System Regulations relating to such things as manufacturing
practices, validation, testing, quality control, product labeling and complaint handling, and in compliance with FDA Medical Device
Reporting regulations.
Failure to demonstrate substantial compliance with these regulations and can result in enforcement actions that terminate, suspend
or severely restrict the ability to continue manufacturing and selling medical devices.
After an inspection of STAAR’s Monrovia, California facility in August and September of 2003, STAAR received Form 483
Inspectional Observations, Warning Letters, and other correspondence from the FDA’s Office of Compliance indicating that the FDA
deemed STAAR’s Monrovia, California facility to be violating the FDA’s Quality System Regulations and Medical Device Reporting
regulations. In a Warning Letter received on December 29, 2003 the FDA warned of possible enforcement action and stated that it
would not approve premarket applications for the approval of Class III devices (such as the ICL) until related violations of the Quality
System Regulation were corrected. These violations were last asserted by the FDA in a letter received on July 5, 2005, which stated
that the agency found STAAR’s earlier responses inadequate.
STAAR responded to the FDA’s observations and assertions by implementing numerous improvements to its quality system in
consultation with the agency and independent consultants. Among other things, STAAR developed a Global Quality Systems Action
Plan, which has been continuously updated since its adoption in April, 2004, and took steps to emphasize a focus on compliance
throughout the organization.
In 2005, STAAR undertook a compliance initiative that included a comprehensive revision of its operating procedures to ensure
alignment with all FDA regulations and the international ISO 13485 standard, training to implement the new procedures and enhance
its internal audit function to provide for self−regulation by verifying compliance and ensuring corrective action for noncompliance.
The FDA Office of Compliance conducted its most recent inspection of STAAR’s Monrovia, California facility between
August 29, 2005 and September 14, 2005. At the conclusion of the inspection the inspectors issued three Inspectional Observations on
FDA Form 483. One of the observations was annotated as “corrected and verified,” and the Company promised to correct the
remaining two. The Company provided details of its corrective actions on the remaining two observations to the FDA by letter on
October 11, 2005.
On November 18, 2005, in response to a request by STAAR, STAAR received from the FDA certificates that may be provided to
foreign governments (the “Certificates”) to permit the importation into foreign countries of STAAR products manufactured at its
facility in Monrovia, California. In the Certificates, the FDA certified that during the FDA’s last inspection STAAR’s Monrovia
manufacturing facility appeared to be in substantial
F−24
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
compliance with current good manufacturing practice requirements for the products listed on the Certificates. The listed products
include all of the products then manufactured and sold in the U.S. by STAAR.
On December 22, 2005, the FDA Office of Device Evaluation notified STAAR that its pre−market approval application for the
VISIAN ICL was approved.
Based on the results of the re−inspection concluded on September 14, 2005, the issuance of the Certificates on November 18,
2005, and the FDA’s final approval of the VISIAN ICL on December 22, 2005, STAAR believes that it has resolved the compliance
issues previously identified by the FDA and has demonstrated that it is now substantially in compliance with the FDA’s Quality
System Regulations and Medical Device Reporting regulations.
Nevertheless, the FDA’s findings of compliance deficiencies during the preceding two years have harmed STAAR’s reputation in
the ophthalmic industry and affected its product sales, and delayed FDA approval of the ICL. STAAR’s ability to continue its
U.S. business depends on the continuous improvement of its quality systems and its ability to demonstrate substantial compliance with
FDA regulations. Accordingly, for the foreseeable future STAAR’s management expects its strategy to include devoting significant
resources and attention to those efforts.
Indemnification Agreements
The Company has entered into indemnification agreements with its directors and officers that may require the Company: a) to
indemnify them against liabilities that may arise by reason of their status or service as directors or officers, except as prohibited by
applicable law; b) to advance their expenses incurred as a result of any proceeding against them as to which they could be
indemnified; and c) to make a good faith determination whether or not it is practicable for the Company to obtain directors’ and
officers’ insurance. The Company currently has directors’ and officers’ insurance.
Litigation and Claims
In re STAAR Surgical Co. Securities Litigation, No. CV 04−8007. The Company and its Chief Executive Officer are defendants in
a class action lawsuit pending in the Central District of California. A consolidated amended complaint filed by the plaintiffs on
April 29, 2005 generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b−5 promulgated thereunder, by issuing false and misleading statements regarding the prospects for FDA
approval of STAAR’s VISIAN ICL, thereby artificially inflating the price of the Company’s Common Stock. The plaintiffs generally
seek to recover compensatory damages, including interest.
The defendants filed a motion to dismiss, which the court denied in an order filed September 19, 2005 (the “Order”). While
permitting the case to proceed, the Order effectively narrowed the proposed class to purchasers of the Company’s securities between
October 6, 2003 and January 5, 2004 by limiting the statements of the defendants that the plaintiffs may challenge.
On December 27, 2005, a Joint Status Report and Notice of Settlement (the “Notice”) was filed with the court, indicating that the
parties had reached an agreement to settle all claims. In the Notice, the parties to the Class Action Lawsuit informed the Court that
they have reached an agreement to resolve the litigation, without admission of liability, and have signed a Memorandum of
Understanding. The effectiveness of the agreement among the parties is subject to the parties’ negotiating and approving the terms of a
Stipulation of Settlement, and to the Court’s final approval, after notice to the Class, of the terms set forth in that Stipulation.
The Memorandum of Understanding provides, among other things, that in consideration of their agreement to settle the Company
will pay to the plaintiffs total consideration of $3,700,000. The Company’s insurance carrier has represented that the proceeds of
insurance will cover those payments and all other costs related to
F−25
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
settlement of the Class Action Lawsuit, except for approximately $100,000 in administrative costs payable, accrued at December 30,
2005 by the Company as part of its retention under the terms of its insurance policy.
The Stipulation of Settlement remains under negotiation among the parties. The Class Action Lawsuit remains pending until the
Stipulation of Settlement is executed and filed by the parties and finally approved by the court.
From time to time the Company is subject to various claims and legal proceedings arising out of the normal course of our business.
These claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability.
While the Company does not believe that any of the claims known is likely to have a material adverse effect on its financial condition
or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.
Note 12 — Other Liabilities
Other Current Liabilities
Included in other current liabilities at December 30, 2005 and December 31, 2004 are approximately $1,934,000 and $1,868,000
of accrued salaries and wages and $654,000 and $808,000 of commissions due to outside sales representatives, respectively.
Note 13 — Related Party Transactions
The Company has had significant related party transactions as discussed in Notes 6, 9, 10, and 15.
In addition to secured notes (see Note 10), the Company holds other various promissory notes from employees of the Company.
The notes, which provide for interest at the lowest applicable rate allowed by the Internal Revenue Code, are due on demand.
Amounts due from employees and included in prepaids, deposits, and other current assets at December 30, 2005 and December 31,
2004 were $110,000 and $104,000, respectively.
The Company paid a Board member for consulting services related to strategic marketing in the ophthalmic sector. Amounts paid
during the year ended December 30, 2005, December 31, 2004, and January 2, 2004, were $2,000, $13,000, and $50,000, respectively.
Note 14 — Supplemental Disclosure of Cash Flow Information
Interest paid was $181,000, $159,000 and $255,000 for the years ended December 30, 2005, December 31, 2004, and January 2,
2004, respectively. Income taxes paid amounted to approximately $1,047,000, $1,602,000 and $1,477,000 for the years ended
December 30, 2005, December 31, 2004, and January 2, 2004, respectively. Income taxes paid in fiscal 2003 were partially offset by
the receipt of $962,000 in U.S. federal tax refunds related to a carryback claim filed in fiscal 2002.
F−26
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s non−cash investing and financing activities were as follows (in thousands):
Non−cash investing activities:
Purchase of fixed assets on terms
Non−cash financing activities:
Notes receivable reserve
Other charges
Acquisition of business:
Minority interest acquired
Goodwill
Note payable
Cash paid
Patent impairment:
Patents
Accumulated amortization
Other charges
Note 15 — Other Charges
2005
2004
2003
$
200
$
—
746
(746)
$ —
—
—
—
$ —
—
—
500
(500)
203
1,107
(542)
(768)
—
—
—
$
$
$
$
$
—
1,713
(1,713)
—
—
—
—
(2,438)
336
2,102
During fiscal 2005 and fiscal 2004, the Company recorded reserves totaling $746,000 and $500,000, respectively, against
promissory notes of a former director of the Company. Aggregate principal and accrued interest owed to the Company under the notes
was $1.9 million as of December 30, 2005, against which the Company has reserved a total of $1.2 million. The former Director is in
default under the notes and a related Forbearance Agreement with the Company, but has recently affirmed his obligation under the
notes.
On these events, the Company re−evaluated its likelihood of collecting on the notes and re−examined the collateral for the notes,
which consists of a pledge of 120,000 shares of the Company’s Common Stock (the “Pledged Shares”) and a second mortgage on a
home in Florida. During the third quarter of 2005, the Company was advised that its collateral may be compromised with respect to
the second mortgage. Accordingly, the Company increased its reserve on the notes to reflect the status of the collateral.
Notwithstanding the additional reserve amount, the Company believes the former director is obligated to repay the full amount of
principal and interest on the notes, and continues to pursue full repayment of the notes.
During 2003, the Company recorded $390,000 in other charges. The amount includes a charge of $2.1 million relating to the
write−down of capitalized patent costs acquired in the purchase of the Company’s majority interest in Circuit Tree Medical, a
developer and manufacturer of phacoemulsification equipment, and was partially offset by the reversal of $1.7 million in reserves
previously recorded against notes receivable from former officers and directors which the Company has settled.
F−27
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 16 — Net Loss Per Share
The following is a reconciliation of the weighted average number of shares used to compute basic and diluted loss per share (in
thousands):
Basic weighted average shares outstanding
Diluted effect of stock options and warrants
Diluted weighted average shares outstanding
Note 17 — Geographic and Product Data
2005
23,704
—
23,704
2004
19,602
—
19,602
2003
17,704
—
17,704
The Company markets and sells its products in over 42 countries and has manufacturing sites in the United States and Switzerland.
Other than the United States, Germany and Australia, the Company does not conduct business in any country in which its sales in that
country exceed 5% of consolidated sales. Sales are attributed to countries based on location of customers. The composition of the
Company’s sales to unaffiliated customers between those in the United States, Germany, Australia, and other locations for each year,
is set forth below (in thousands):
Sales to unaffiliated customers
U.S.
Germany
Australia
Other
Total
2005
2004
2003
$
$
18,715
22,433
2,722
7,433
51,303
$
$
21,643
22,128
1,914
6,000
51,685
$ 23,464
19,840
1,522
5,583
$ 50,409
100% of the Company’s sales are generated from the ophthalmic surgical product segment and, therefore, the Company operates
as one operating segment for financial reporting purposes. The Company’s principal products are IOLs and ancillary products used in
cataract and refractive surgery. The composition of the Company’s net sales by surgical line are as follows (in thousands):
Net Sales by Surgical Line
Cataract
Refractive
Glaucoma
Total
2005
45,361
5,288
654
51,303
$
$
2004
46,772
4,066
847
51,685
$
$
2003
$ 46,409
3,050
950
$ 50,409
F−28
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The composition of the Company’s long−lived assets, consisting of property and equipment, patents and licences, and goodwill,
between those in the United States, Germany, Switzerland, and other countries is set forth below (in thousands):
Long−lived assets
U.S.
Germany
Switzerland
Australia
Total
2005
2004
$
$
8,072
6,952
1,646
1,379
18,049
$
$
9,035
6,799
2,010
1,253
19,097
The Company sells its products internationally, which subjects 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 political instability.
Note 18 — Quarterly Financial Data (Unaudited)
Summary unaudited quarterly financial data from continuing operations for fiscal 2005 and 2004 is as follows (in thousands except
per share data):
December 30, 2005
Revenues
Gross profit
Net loss
Basic and diluted loss per share
December 31, 2004
Revenues
Gross profit
Net loss
Basic and diluted loss per share
1st Qtr.
2nd Qtr.
3rd Qtr.
4th Qtr.
$
$
13,678
6,450
(2,338)
(.11)
1st Qtr.
13,569
7,317
(1,299)
(.07)
$
$
13,910
6,610
(2,110)
(.09)
2nd Qtr.
12,024
6,150
(3,380)
(.18)
$
$
11,647
5,197
(3,302)
(.13)
3rd Qtr.
12,140
6,097
(2,268)
(.11)
$
$
12,068
5,529
(3,425)
(.14)
4th Qtr.
13,952
6,579
(4,385)
(.21)
Quarterly and year−to−date computations of loss per share amounts are made independently. Therefore, the sum of the per share
amounts for the quarters may not agree with the per share amounts for the year.
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Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT ON SCHEDULE
To the Board of Directors
STAAR Surgical Company
Monrovia, CA
The audits referred to in our report dated March 15, 2006 relating to the consolidated financial statements of STAAR Surgical
Company and Subsidiaries, which is contained in Item 8 of this Form 10−K included the audit of Schedule II, Valuation and
Qualifying Accounts and Reserves as of December 30, 2005, and for each of the three years in the period ended December 30, 2005.
This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein.
By: /s/ BDO Seidman, LLP
Los Angeles, California
March 15, 2006
F−30
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A
Description
2005
Allowance for doubtful accounts and sales returns
deducted from accounts receivable in balance sheet
Deferred tax asset valuation allowance
Notes receivable reserve
2004
Allowance for doubtful accounts and sales returns
deducted from accounts receivable in balance sheet
Deferred tax asset valuation allowance
Notes receivable reserve
2003
Allowance for doubtful accounts and sales returns
deducted from accounts receivable in balance sheet
Deferred tax asset valuation allowance
Notes receivable reserve
Column B
Balance at
Beginning
of Year
Column C
Column D
Additions
Deductions
(In thousands)
Column E
Balance at
End of
Year
$
$
$
$
$
$
460
28,172
500
29,132
734
22,075
—
22,809
805
18,607
1,796
21,208
F−31
$
$
$
$
$
$
191
5,490
746
6,427
236
6,097
500
6,833
108
3,468
—
3,576
$
$
$
$
$
$
171
—
—
171
510
—
—
510
179
—
1,796
1,975
$
$
$
$
$
$
480
33,662
1,246
35,388
460
28,172
500
29,132
734
22,075
—
22,809
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
Exhibit 23.1
STAAR Surgical Company
Monrovia, CA
We hereby consent to the incorporation by reference in the Registration Statements on Forms S−8 No. 333−111154 and
No. 333−60241 and Forms S−3 No. 333−124022, No. 333−116901, No. 333−111140, No. 333−106989, and No. 333−124022 of
STAAR Surgical Company of our reports dated March 15, 2006, relating to the consolidated financial statements and the effectiveness
of STAAR Surgical Company’s internal control over financial reporting, which appear in this Form 10−K. We also consent to the
incorporation by reference of our report dated march 15, 2006 relating to the financial statement schedule which appears in this
Form 10−K.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
March 15, 2006
Exhibit 31.1
I, David Bailey, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10−K of STAAR Surgical Company;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a−15(f) and 15d−15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 15, 2006
By: /s/ DAVID BAILEY
David Bailey
President, Chief Executive Officer and
Director (principal executive officer)
Exhibit 31.2
I, Deborah Andrews, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10−K of STAAR Surgical Company;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a−15(f) and 15d−15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 15, 2006
By: /s/ DEBORAH ANDREWS
Deborah Andrews
Chief Financial Officer
(principal accounting and financial officer)
Certification pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 906 of the Sarbanes−Oxley Act of 2002
In connection with the filing of the Annual Report on Form 10−K for the year ended December 30, 2005 (the “Report”) by STAAR
Surgical Company (“Registrant”), each of the undersigned hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Registrant as of and for the periods presented in the Report.
Exhibit 32.1
Dated: March 15, 2006
Dated: March 15, 2006
/s/ DAVID BAILEY
By:
David Bailey
President, Chief Executive Officer and Director
(principal executive officer)
/s/ DEBORAH ANDREWS
By:
Deborah Andrews
Chief Financial Officer (principal
accounting and financial officer)
A signed original of this written statement required by Section 906 has been provided to STAAR Surgical Company and will be
furnished to the Securities and Exchange Commission or its staff upon request.
_______________________________________________
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