FORM 10−K
STAAR SURGICAL CO − STAA
Filed: March 29, 2007 (period: December 29, 2006)
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. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3.
Item 4. Submission of Matters to a Vote of Security Holders
Legal Proceedings
PART II
Item 5. Market for Registrant s Common Equity, Related Stockholder Matters, and
Issuer Purchases of
Item 6. Selected Financial Data
Item 7. Management s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Financial Statements and Supplementary Data
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matt
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
EX−23.1 (EXHIBIT 23.1)
EX−31.1 (EXHIBIT 31.1)
EX−31.2 (EXHIBIT 31.2)
EX−32.1 (EXHIBIT 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 29, 2006
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)
95−3797439
(I.R.S. Employer
Identification No.)
1911 Walker Avenue 91016
Monrovia, California
(Address of principal executive offices)
(626) 303−7902
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
(Title
of
each
class)
(Name
of
each
exchange
on
which
registered)
Common Stock, $0.01 par value
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
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)
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
The aggregate market value of the voting and non−voting common equity held by non−affiliates of the registrant
as of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was
approximately $195,393,000 based on the closing price per share of $7.74 of the registrant’s Common Stock on that
date.
The number of shares outstanding of the registrant’s Common Stock as of March 23, 2007 was 25,678,183.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2007 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.
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
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, Executive Officers and Corporate Governance
>Executive Compensation
>Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
>Certain Relationships and Related Transactions, and Director Independence
>Principal Accountant Fees and Services
>Exhibits and Financial Statement Schedules
>PART IV
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>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
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
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 minimally invasive 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.
STAAR Surgical Company, Visiantm, Collamer®, STAARVISC®, Elastimide®, SonicWAVEtm and AquaFlowtm are trademarks
or registered trademarks of STAAR in the U.S. and other countries. Collamer® is the brand name for STAAR’s proprietary collagen
copolymer lens material.
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 preexisting astigmatism;
• Preloaded Injector, a three−piece silicone IOL preloaded into a single−use disposable injector;
• STAARVISC® 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, which 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 Visian tm 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 more than 40 countries. The Company’s goal is to establish the ICL and TICL worldwide as a primary choice for refractive
surgery, making the products increasingly significant revenue generators for the Company.
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
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Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
be a viable choice for refractive surgery and could replace cataract surgery products as STAAR’s largest 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. The ICL is also approved in China where an application for the TICL is pending.
Applications are also pending in Australia, and the Company is working to obtain new approvals for the ICL and
TICL in other countries. The Company submitted its application for U.S. approval of the TICL to the FDA in 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. Among 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 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 more than 40 countries and has been implanted in more than 65,000 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
preexisting astigmatism. 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.
3
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
•
•
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 16 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 Polyimidetm 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 46% of our total revenues for the 2006 fiscal year, 52% of total
revenues for the 2005 fiscal year and 56% of total revenues for the 2004 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 approximately 31%
4
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
of our total revenues for the 2006 fiscal year, 36% of total revenues for the 2005 fiscal year and 32% of total
revenues for the 2004 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 submitted its application for U.S. approval of the TICL to the FDA in
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 four lengths, with 41 powers for each length, and for hyperopia in four lengths, with 37 powers for
each length, which equates to 420 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 generally made to order.
Sales of ICLs (including TICLs) accounted for approximately 22% of our total revenues for the 2006 fiscal
year, 10% of total revenues for the 2005 fiscal year and 8% of total revenues for the 2004 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.
While STAAR’s established customers for the AquaFlow device continue to implant the product, 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
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Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
or new product designs to simplify the implantation procedure. Sales of AquaFlow devices accounted for
approximately 1% of our total revenues in 2006, 1% of our total revenues in 2005, and 2% of our total revenues
2004.
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 29, 2006, we owned approximately 104 United States and foreign patents and had
approximately 42 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 may also
be able to maintain exclusivity by patenting important improvements to the 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.
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.
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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, Germany and Australia. Sales
efforts in Germany and Australia are primarily supported through a direct sales force. In the United States we sell
through a network of independent manufacturers’ representatives in some regions and sell through a direct sales
force in other regions. We compensate the independent representatives through sales commissions and compensate
direct sales staff through a combination of salary and commissions. Our independent manufacturers’ representatives
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 2006 Market Scope report, Alcon holds 54% of the
U.S. IOL market, followed by AMO with 26% and Bausch & Lomb with 14%. We hold approximately 4% 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.
In the U.S. market, physicians prefer IOLs made out of acrylic. Acrylic IOLs currently account for a 62% share
of the U.S. IOL market. We believe that we are positioned to compete effectively in the advanced material market
segment with the Collamer IOL. We plan to introduce enhanced models of the Collamer IOL and improved injectors
which we believe can strengthen our position and help reverse the decline in our overall IOL market share. Although
the market for Silicone IOLs, which currently account for 34% of the U.S. market, has declined in recent years, we
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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 Verisye. 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,
•
• 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.
require reporting of serious product defects to the FDA, and
Most of our products are medical devices intended for human use within the meaning of the Act and, therefore,
are subject to FDA regulation.
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
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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. Our activities as a sponsor of
clinical research are subject to review by the Bioresearch Monitoring Program of the FDA Office of Regulatory
Affairs, known as “BIMO.”
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 the respective European Directives and
associated 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 2007), 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 submitted a supplemental pre−market approval application for the TICL in April 2006, and is preparing
an amendment to the application in response to comments from the FDA Office of Device Evaluation. 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
Based on the results of the FDA inspections of STAAR’s Monrovia, California facilities in 2005 and 2006,
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. STAAR responded to the FDA’s observations and assertions by,
among other things, comprehensively revising its quality−related operating procedures, training to implement the
revised procedures, and enhancing its internal quality audit function to provide for self−regulation by verifying
compliance and ensuring corrective action for noncompliance. Notwithstanding the substantial improvement in
STAAR’s compliance and quality, the FDA’s past findings of compliance deficiencies harmed our reputation in the
ophthalmic industry, 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.
STAAR’s activities as a sponsor of biomedical research are subject to review by the Bioresearch Monitoring
Program of the FDA Office of Regulatory Affairs (“BIMO”). On March 14, 2007, BIMO concluded a routine audit
of the Company’s clinical trial records as a sponsor of biomedical research in connection with the Company’s
Supplemental Pre−Market Approval application for the Toric ICL (“TICL”). At the conclusion of the audit the
Company received eight Inspectional Observations on FDA Form 483 noting noncompliance with regulations. The
Company is preparing its response to the Inspectional Observations and expects to address the concerns raised by
BIMO through voluntary corrective actions. Most of the observed instances of non−compliance took place during
the 2000−2004 period and the Company expects to show that some of these have already been addressed by
corrective actions made in response to BIMO’s observations of December 11, 2003 in connection with the
Company’s application for the ICL.
The Company does not believe that the Inspectional Observations affect the integrity of the Toric clinical study.
However, the determination of whether the Inspectional Observations affect the use of the Toric clinical study in the
Toric application will be at the discretion of the FDA Office of Device Evaluation (“ODE”). Obtaining FDA
approval of medical devices is never certain. The Company cannot assure investors that the ODE will grant approval
to the TICL, or that the scope of requested TICL approval could not be limited by the FDA or the Ophthalmic
Devices Panel.
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 29 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, and expect to continue
to focus in 2007, our research and development efforts on the following:
• Development of a Collamer Toric IOL to complement our pioneering silicone Toric IOL;
• Development of a new three−piece Collamer IOL featuring an aspheric optic design;
• Development of new silicone IOL models featuring aspheric optics and a squared edge configuration;
• Enhancements to the injector system for our three−piece Collamer IOL to improve delivery, and
development of an all new injector system for the three−piece Collamer IOL;
• Development of a micro−incision injector for the one−piece Collamer IOL;
• Development of a preloaded injector system for our new silicone aspheric IOLs; and
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• Supporting the application for U.S. approval of the Toric ICL.
Research and development expenses were approximately $7,080,000, $5,573,000, and $6,246,000 for our 2006,
2005 and 2004 fiscal years, respectively. STAAR expects to pay a similar amount for research and development in
2007.
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 German
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 Marketing Japan 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 Marketing, 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 Marketing 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.
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 Marketing
is to enter into a distribution agreement with the joint venture providing a minimum 50−70% share of sales revenue
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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 March 23, 2007, we employed approximately 284 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 several fiscal years and have an accumulated deficit of $86.7 million as of
December 29, 2006. There can be no assurance that we will report net income in any future period.
We have only limited working capital and limited access to financing.
While STAAR has experienced increased sales in recent periods, our cash requirements continue to exceed the level of cash
generated by operations and we expect to continue to seek additional resources to support and expand our business, such as debt or
equity financing. Because of our history of losses and negative cash flows, our ability to obtain adequate financing on satisfactory
terms is limited. Our ability to raise financing through sales of equity securities depends on general market conditions and the demand
for STAAR’s common stock. We may be unable to raise adequate capital through sales of equity securities, and if our stock has a low
market price at the time of such
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sales our existing stockholders could experience substantial dilution. An inability to secure additional financing
could limit the expansion of our business and jeopardize our ability to continue operations.
Our history of losses limits our access to credit and increases the risk of a default on our loan agreements.
Under its U.S. and international bank credit facilities and lease lines of credit, STAAR had $3 million in
outstanding indebtedness and $1.4 million available for borrowing as of December 29, 2006. The credit facilities
are subject to various financial covenants, and if our losses continue we risk defaulting on the terms of our credit
facilities. Our limited borrowing capacity could cause a shortfall in working capital or prevent us from making
expenditures to expand or enhance our business. To the extent we borrow under our credit facilities, a subsequent
default could cause our obligations to be accelerated, make further borrowing difficult and jeopardize our ability to
continue operations.
We may be subject to limitations in fully utilizing our recorded tax loss carryforwards.
We have accumulated approximately $37.4 million of tax carryfowards to be used in future periods. If we were
to experience a significant change in ownership, Internal Revenue Code Section 382 may restrict the future
utilization of these tax loss carry forwards.
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 the FDA inspections of STAAR’s Monrovia, California facilities in 2005 and 2006,
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 we received Warning
Letters and other correspondence indicating that the FDA found STAAR’s Monrovia, California facility in violation
of applicable regulations, warning of possible enforcement action and suspending approval of new implantable
devices. The FDA’s findings of compliance deficiencies during that period harmed our reputation in the ophthalmic
industry, 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 its efforts
will always be successful, and any failure to demonstrate substantial compliance with FDA regulations can result in
enforcement actions that terminate, suspend or severely restrict our ability to continue manufacturing and selling
medical devices. Please see the related risks discussed under the headings “We are subject to extensive government
regulation, which increases our costs and could prevent us from selling our products” and “We are subject to federal
and state regulatory investigations.”
Our strategy to restore profitability in the near term relies on successfully penetrating the U.S. refractive market.
While products to treat cataracts continue to account for the majority of our revenue, we believe that increasing
sales of our Visian® ICL refractive products, especially in the U.S., present the best near term opportunity for a
return to profitability. The FDA approved the Visian ICL for treatment of myopia on December 22, 2005. Selling
and marketing the ICL has presented a challenge to our sales and marketing staff and to our independent
manufacturers’ representatives. In the United States 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. In addition, established refractive surgeons frequently have large and well developed practices that are
oriented entirely toward the delivery of laser procedures. In countries where the ICL has been approved to date, our
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sales have grown steadily but slowly, and the U.S. appears to be following this pattern. A surgeon interested in
implanting the ICL must first schedule training and certification and invest time in the training process. While
STAAR has sufficient resources to make training available to qualified surgeons with minimal delay, the need to
undergo training continues to limit the pace at which interested surgeons can begin providing the ICL to their
patients. STAAR employs advertising and promotion targeted to potential patients through providers, but has limited
resources for these purposes. Failure to successfully market the ICL in the United States will delay and possibly
prevent our planned growth and return to profitability.
Our core domestic business has suffered declining sales, which sales of new products have only begun to 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 addition, our competitors have begun
to offer multifocal or accommodating lenses that claim to reduce the need for cataract patients to use reading glasses;
the market for these “presbyopic” lenses is expected to grow as a segment of the cataract market. Our newer line of
IOLs made of our proprietary biocompatible Collamer® material have helped reverse the trend of declining domestic
cataract product sales, but it is too early to assess the potential for sustained growth and whether we can recover a
significant amount of the market share lost over the last several years.
Strikes, slow−downs or other job actions by doctors can reduce sales of cataract−related products.
In many countries where STAAR sells its products, doctors, including ophthalmologists, are employees of the
government, government−sponsored enterprises or large health maintenance organizations. In recent years employed
doctors who object to salary limitations, working rules, reimbursement policies or other conditions have sought
redress through strikes, slow−downs and other job actions. These actions often result in the deferral of non−essential
procedures, such as cataract surgeries, which can affect sales of our products. For example, in fiscal year 2006,
strikes and slow−downs by doctors in Germany were partly responsible for a drop in sales by our wholly owned
subsidiary Domilens GmbH, which distributes ophthalmic products in Germany. Such problems could occur again in
Germany or other regions and, depending on the importance of the affected region to STAAR’s business, the length
of the action and its pervasiveness, job actions by doctors can materially reduce our sales revenue and earnings.
Because state−sponsored healthcare systems, health maintenance organizations and insurance reimbursement
usually do not cover refractive surgery, job actions by doctors are unlikely to affect ICL sales.
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.
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. STAAR’s strategy for growth involves the marketing of
innovative products like the ICL, Collamer IOLs, Toric IOLs and the AquaFlow Device. We have relied on the
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independent representatives to implement the marketing of these products and to sustain the market for our more
established products. Because our independent representatives generally have little experience dealing with surgeons
who specialize in refractive procedures, we have faced greater challenges in developing the domestic market for 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 the manufacturer’s recall for possible endotoxin
content. In 2005, we recalled one lot of phaco tubing manufactured by a third party, due to incorrect labeling, 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. The last recall of STAAR products took place
during 2004, when 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.
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
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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 29, 2006, sales from international operations were 60% 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.
The success of our international operations depends on our successfully managing our foreign subsidiaries.
We conduct most of our international business through wholly owned subsidiaries. Managing distant
subsidiaries and fully integrating them into STAAR’s business is challenging. While STAAR seeks to fully integrate
its foreign subsidiaries into its operations, direct supervision of every aspect of their operations is impossible, and as
a result STAAR relies on its local managers and staff. Cultural factors and language differences can result in
misunderstandings among internationally dispersed personnel. In early 2007, STAAR learned that the president of its
German sales subsidiary, Domilens, had misappropriated corporate assets. While STAAR has implemented remedial
efforts to reinforce its Code of Ethics and increase its oversight of Domilens, the risk that unauthorized conduct may
go undetected will always be greater in foreign subsidiaries. Some countries may also have laws or cultural factors
that make it difficult to impose uniform standards and practices. For example, while STAAR’s Code of Ethics
requires all employees to certify they are not aware of code violations by others, German legal counsel has advised
STAAR that in Germany it cannot legally compel ordinary employees (i.e., non−supervisors) to notify STAAR of
breaches by others. STAAR believes the absence of such a requirement in its Code
16
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
of Ethics for German employees is a risk inherent to doing business in Germany that may be mitigated, but not
entirely eliminated, by other controls.
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 sales and
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.
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.
We have licensed our technology to our joint venture company and have granted rights to the partners that could
be exercised in the event of a change in control of STAAR.
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
17
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
venture at book value. The terms of the principal agreements governing the joint venture are described in this Annual
Report on Form 10−K under the heading “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 significantly 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 our 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.
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.
18
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 12.6% of our sales on research and development during the year ended December 29, 2006, and we
expect to spend approximately 10% for this purpose 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.
Changes in reimbursement for our products by third−party payors could reduce sales of our products or make
them less profitable.
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 in the U.S. and Europe. Third party payors in both government and the private sector continue
to seek to manage costs by restricting the types of procedures they reimburse to those viewed as most cost−effective
and by capping or reducing reimbursement rates. Whether they limit reimbursement prices for our products and or
limit the surgical fees for a procedure that uses our products, these policies can reduce the sales volume of our
reimbursed products, their selling prices or both.
In some countries government agencies control costs by limiting the number of surgical procedures they will
reimburse. For example, a recent reduction in the number of authorized cataract procedures in Germany has affected
the sales of our German subsidiary, Domilens. Similar changes could occur in our other markets.
The U.S. Congress has considered legislative proposals that would significantly change the system of public
and private health care reimbursement, and will likely consider such changes again in the future. We are not able to
predict whether new legislation or changes in regulations will take effect at the state or federal level, but if enacted
these changes could have a significant effect on our business.
We are subject to extensive government regulation, which increases our costs and could prevent us from selling
our products.
STAAR is regulated by regional, national, state and local agencies, including the Food and Drug
Administration, the Department of Justice, the Federal Trade Commission, the Office of the Inspector General of the
U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in
those foreign countries in which we manufacture or distribute products. The Federal Food, Drug, and Cosmetic Act,
the Public Health Service Act and other federal and state statutes and regulations govern the research, development,
manufacturing and commercial activities relating to medical devices, including their pre−clinical and clinical testing,
approval, production, labeling, sale, distribution, import, export, post−market surveillance, advertising,
dissemination of information and promotion. 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.
19
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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.
Regulatory investigations and allegations, whether or not they lead to enforcement action, can materially harm
our business and its reputation.
Failure to comply with the requirements of the FDA or other regulators can result in civil and criminal fines, the
recall of products, the total or partial suspension of manufacture or distribution, seizure of products, injunctions,
whistleblower lawsuits, failure to obtain approval of pending product applications, withdrawal of existing product
approvals, exclusion from participation in government healthcare programs and other sanctions. Any threatened or
actual government enforcement action can also generate adverse publicity and require us to divert substantial
resources from more productive uses in our business. Enforcement actions could affect our ability to commercially
distribute our products and could materially harm our business
From time to time STAAR is subject to formal and informal inquiries by regulatory agencies, which may or
may not lead to investigations or enforcement actions. Even when an inquiry results in no evidence of wrongdoing or
is inconclusive, the agency generally is not required to notify STAAR of its findings and may not inform STAAR
that the inquiry has been terminated.
STAAR maintains a hotline for employees to anonymously report any violation of laws, regulations or company
policies, and investigates any allegation of improper conduct. Nevertheless, present or former employees may elect
to bring complaints to regulators and enforcement agencies. The relevant agency will generally be obligated to
investigate such complaints to assess their validity and obtain evidence of any violation that may have occurred.
Even without a finding of misconduct, negative publicity about investigations or allegations of misconduct could
harm our reputation with customers and the market for our common stock.
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 avoid
20
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 in the U.S. 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.
Our bylaws contain other provisions that could have an anti−takeover effect, including the following:
• 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.
The market price of our common stock is likely to be volatile.
Our stock price has fluctuated widely, ranging from $6.31 to $9.53 during the year ended December 29, 2006.
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.
21
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 2007.
Item 3.
Legal Proceedings
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 29, 2006.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our Common Stock is traded on the Nasdaq Global 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
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2005
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$ 8.640
7.800
9.500
9.530
$ 9.370
6.050
5.170
7.300
$ 6.400
6.310
7.210
6.630
$ 4.870
3.120
3.580
3.500
On March 23, 2007, the closing price of the Company’s Common Stock was $5.79. Stockholders are urged to obtain current
market quotations for the Common Stock.
As of March 23, 2007, there were approximately 558 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 23, 2007, options to purchase 2,569,248 shares of Common Stock were exercisable.
22
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
Stock Performance Graph
The following graph compares the yearly and cumulative return on an investment in STAAR’s common stock
over the last five fiscal years to the yearly and cumulative return of the following over the same time period: (1) the
composite of all United States and foreign companies listed on the Nasdaq Stock Market (the “Nasdaq Index”); and
(2) the composite of all United States and foreign companies listed on the Nasdaq Stock Market that operate in the
surgical, medical and dental instrument and supply industries (the “Peer Index”), based on Standard Industrial
Classification (“SIC”) codes in the range of 3840 through 3849. The Company’s SIC code is 3845. The comparison
assumes $100 was invested on December 28, 2001 in STAAR’s common stock and in each of those indices, and
that dividends were reinvested. The Center for Research in Security Prices of the University of Chicago’s Graduate
School of Business compiled the Peer Index and produced the graph. The stock price performance on the following
graph is not necessarily indicative of future stock price performance.
In any of our filings under the Securities Act or Exchange Act that incorporate this Proxy Statement by
reference, this graph will be considered excluded from the incorporation by reference and it will not be deemed a
part of any such other filing unless we expressly state that the graph is so incorporated.
Comparison of Five−Year Cumulative Total Returns
CRSP Total Returns Index for:
STAAR SURGICAL CO
Nasdaq Stock Market (US &
Foreign)
NASDAQ Stocks (SIC 3840 –
3849 US + Foreign) Surgical,
Medical, and Dental Instruments
and Supplies
12/2001
100.0
100.0
01/2003
111.1
01/2004
294.2
12/2004
165.9
12/2005
209.0
12/2006
185.4
70.1
102.1
110.8
113.4
125.0
100.0
81.3
119.2
139.4
153.0
161.4
Notes:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year−end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 12/28/2001.
23
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 29, 2006, December 30, 2005, December 31, 2004, January 2, 2004 and January 3, 2003. 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 29, 2006 and December 30, 2005, 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 2, 2004, and January 3, 2003, and the consolidated balance sheet data set forth below at December 31,
2004, January 2, 2004, and January 3, 2003 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 29,
2006
December 30,
2005
Fiscal Year Ended
December 31,
2004 _
January 2,
2004
January 3,
2003
(In thousands except per share data)
$
$ 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)
$
$
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)
$
17,704
17,142
$ 15,883
47,376
$
7,095
45,220
2,950
35,219
5,845
30,551
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
Notes receivable reserves (reversals)/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
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
$
$
$
$
56,282
—
56,282
29,849
26,433
10,891
22,395
7,080
(331)
40,035
(13,602)
95
(13,507)
1,537
—
(15,044)
(0.60)
25,227
14,363
47,770
1,802
31,760
$
$
$
$
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
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
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:
• building the U.S. market for the ICL 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.
Building the U.S. market for the ICL and securing U.S. approval of the TICL. Because the ICL’s design has advantages over
other refractive procedures for many patients and its proprietary nature permits STAAR to maintain its profit margin, STAAR’s
management believes that increased sales of the ICL are the key to the company’s return to profitability. U.S. market penetration is
considered essential because of the size of the U.S. refractive surgery market and the perceived leadership of the U.S. in adopting
innovative medical technologies.
STAAR’s strategy for the U.S. market is to educate eye care professionals on the high quality of visual outcomes of the ICL for
a significant portion of patients seeking refractive surgery, and to make 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.
To develop specialized resources to meet the challenge of penetrating the refractive market, and to take advantage of
opportunities to improve cataract product sales, STAAR split its Sales and Marketing Department into two separate groups in the first
quarter of 2007. Among other advantages, the split will enable the Sales Department to focus on the development of STAAR’s direct
sales model in regions where STAAR will sell directly, and to better coordinate sales initiatives with the independent Regional
Marketing Representatives in those regions where STAAR will continue to rely on independent representatives.
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STAAR has relied on a largely independent sales force to sell its cataract products, and over the last several
months has worked to re−orient this sales force to deal with the very different practice environment for refractive
products. While STAAR expects to continue to rely on its independent sales force in some regions, it has moved to a
direct sales structure in other regions. Because the refractive surgery market has been dominated by corneal
laser−based techniques, STAAR faces special challenges in introducing an intraocular refractive implant. STAAR
has developed a number of marketing tools and practice support programs to increase the use of the ICL and
awareness of its advantages at laser−oriented surgery centers.
The Visian ICL was approved by the FDA for treatment of myopia on December 22, 2005. The U.S. rollout of
the product began in the first quarter of 2006. As of December 29, 2006, 306 surgeons had completed training and
350 had completed training by March 26, 2007. STAAR recognized $4,172,000 of U.S. sales revenue from ICLs in
2006. It is too early to determine whether STAAR’s strategy will be successful or to estimate the ultimate size of the
U.S. market for ICLs.
STAAR believes that the Visian 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. 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. Securing FDA approval of the TICL is therefore an integral part of
STAAR’s strategy to develop its U.S. refractive market. STAAR submitted a Pre−Market Approval (PMA)
application for the TICL to the FDA on April 28, 2006, and received comments from the Office of Device
Evaluation (“ODE”) on November 20, 2006 requesting that STAAR submit an amended application. In subsequent
discussion the ODE indicated that it expects to submit the amended application to review by the FDA Ophthalmic
Devices Panel. As of the date of this Report, STAAR is preparing an amendment to the TICL application addressing
the ODE comments.
Generating further growth of the ICL and TICL in international markets. The ICL and TICL are sold in more
than 40 countries. International sales of refractive implants have continued a steady rate of growth, increasing
approximately 50% in 2006 over the preceding year. STAAR believes that the international market for its refractive
products has the potential for further growth, both through the introduction of the ICL and TICL in new territories
and expanded market share in existing territories. In recent periods STAAR has received the majority of its revenue
from international markets, and sales of ICLs have represented an increasing share of that revenue. STAAR received
approval for the ICL in China on July 31, 2006 and we are awaiting approval of the TICL there as well. We also
continue to seek new approvals for the ICL and TICL in other countries, but these approvals are at the discretion of
the local authorities.
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. During the last several years STAAR has
experienced a decline in U.S. sales of IOLs. STAAR’s management believes the decline principally resulted from
the slow pace of cataract product improvement and enhancement during a period when we had to devote most of our
research and development resources to introducing the ICL and to resolving the regulatory and compliance issues
raised by the FDA, and the harm to our reputation from warning letters and other correspondence with the FDA
during 2004 and 2005.
STAAR seeks to reverse the decline in its domestic cataract market share by the introduction of enhanced
design IOLs and improved delivery systems in 2007 and 2008. The completion in 2005 of initiatives to revamp
STAAR’s systems of regulatory compliance and quality management permitted STAAR to shift resources back to
product development. In particular, STAAR has focused on the following projects intended to expand and improve
our cataract product offering:
• A Collamer Toric IOL;
• New Collamer IOL models featuring an aspheric optic design, in a three−piece configuration;
• New silicone IOL models featuring aspheric optics and a squared edge configuration;
• Enhancements to the injector system for our three−piece Collamer IOL to improve delivery;
• An all new injector system for the three−piece Collamer IOL;
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• A micro−incision injector for the one−piece Collamer IOL; and
• Development of a preloaded injector system for our new silicone aspheric IOLs.
STAAR cautions that the successful development and introduction of new products is subject to risks and
uncertainties, including the risk of unexpected delays.
STAAR also believes that expanding the U.S. market for the ICL should also improve the selling environment
for STAAR’s cataract products, especially cataract lenses made of the same biocompatible Collamer material used
in the ICL. STAAR intends that the split of its Sales and Marketing Department will help it take advantage of the
opportunities presented by the introduction of new cataract products and the improved selling environment for
STAAR’s products created by the ICL.
On January 22, 2007, the Centers for Medicare and Medicaid Services (CMS) issued a ruling that allows
cataract patients receiving reimbursement by Medicare to choose a lens that also corrects astigmatism. Under the
ruling, patients may elect to pay a premium for the correction of pre−existing astigmatism, while Medicare provides
the customary reimbursement for cataract surgery. STAAR expects its silicone Toric IOL, currently one of two IOLs
approved for sale in the U.S. for treatment of cataracts and astigmatism, to be covered by the CMS ruling. STAAR
believes that the CMS ruling will increase the profitability of its sales of Toric IOLs and generate greater interest in
implanting the product. In addition, STAAR expects to introduce a Toric IOL made of its proprietary Collamer
material, which would also likely fall under the CMS ruling and compete with our competitor’s acrylic model.
STAAR cannot estimate the increased revenue that may result from the CMS ruling at this time.
While STAAR’s U.S. cataract product sales, which include accessory products such as surgery packs and
phacoemulsification equipment, declined 5% during 2006, U.S. cataract product sales for the fourth quarter of 2006
increased 6% compared with the same period in 2005. Despite the decline in total U.S. cataract sales for the full
year, the fourth quarter sales in 2006 is a marked improvement compared with the first three quarters of 2006, which
have improved from 13% down in the first quarter of 2006 when compared to their respective periods in 2005.
To reverse the decline in U.S. IOL sales, STAAR must overcome several short and long−term challenges,
including overcoming reputational harm from the FDA’s past findings of compliance deficiencies, successfully
completing planned development projects, and organizing and managing a combined direct and independent sales
force. 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 regulated by the FDA. We also must satisfy
the requirements of the International Standards Organization (ISO) to maintain approval to sell products in the
European Community and other regions. Failure to demonstrate substantial compliance with FDA regulations can
result in enforcement actions that terminate, suspend 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.
The FDA’s most recent general quality inspections of STAAR’s facilities were a post−market inspection of the
Monrovia, California and Aliso Viejo, California facilities between August 2, 2006 and August 7, 2006, and a
post−market inspection of the Nidau, Switzerland facilities between September 26 and September 28, 2006. These
inspections resulted in no observations of noncompliance. Based in part on these inspections and the FDA
inspections conducted in 2005, STAAR believes that it is substantially in compliance with the FDA’s Quality
System Regulations and Medical Device Reporting regulations. Nevertheless, the FDA’s past findings of
compliance deficiencies have harmed our reputation in the ophthalmic industry and affected our product sales.
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
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management expects its strategy to include devoting significant resources and attention to strict regulatory
compliance and continuous improvement in quality.
In keeping with its compliance strategy, STAAR hired Rob Lally to serve as Vice President, Quality Assurance
and Regulatory affairs on October 23, 2006. Prior to joining STAAR, Mr. Lally was most recently the Director of
International Regulatory Affairs at Johnson & Johnson Vision Care in Florida. Mr. Lally previously served as Head
of the Medical Devices Sector of the British Standards Institution, the National Standards Body of the United
Kingdom responsible for independent certification of a variety of systems and products. Prior to this, he was a senior
consultant at Quintiles, a global quality and regulatory consulting firm. Mr. Lally also served as General Manager,
Quality and Certification at AMTAC Laboratories, a leading European Union notified body where he managed the
medical device and drug sector.
On March 14, 2007, the Bioresearch Monitoring Program of the FDA Office of Regulatory Affairs (“BIMO”)
concluded a routine audit of the Company’s clinical trial records as a sponsor of biomedical research in connection
with the Company’s Supplemental Pre−Market Approval application for the TICL. At the conclusion of the audit the
Company received eight Inspectional Observations on FDA Form 483 noting noncompliance with regulations. The
Company is preparing its response to the Inspectional Observations and expects to address the concerns raised by
BIMO through voluntary corrective actions. Most of the observed instances of non−compliance took place during
the 2000−2004 period and the Company expects to show that some of these have already been addressed by
corrective actions made in response to BIMO’s observations of December 11, 2003 in connection with the
Company’s application for the ICL. The Company does not believe that the Inspectional Observations affect the
integrity of the Toric clinical study. However, the determination of whether the Inspectional Observations affect the
use of the Toric clinical study in STAAR’s pending Toric application will be at the discretion of the ODE. Obtaining
FDA approval of medical devices is never certain.
Financing Strategy
While STAAR’s international business generates positive cash flow and 60% of STAAR’s revenue, STAAR
has reported losses on a consolidated basis over the last several 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, exercise of options, the repayment of
directors’ notes and debt financing.
STAAR’s management believes that in the near term its best prospect for returning its U.S. and consolidated
operations to profitability is achieving significant U.S. sales of the ICL. 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 2007.
To provide additional sources of available working capital, STAAR entered into two debt financing
arrangements in 2006 and 2007.
On March 21, 2007, STAAR entered into a loan arrangement with Broadwood Partners, L.P. (“Broadwood”).
Pursuant to a Promissory Note (the “Note”) between STAAR and Broadwood, Broadwood loaned $4 million to
STAAR. The Note has a term of three years and bears interest at a rate of 10% per annum, payable quarterly. The
Note is not secured by any collateral, may be pre−paid by STAAR at any time without penalty, and is not subject to
covenants based on financial performance or financial condition (except for insolvency). As additional consideration
for the loan STAAR also entered into a Warrant Agreement (the “Warrant Agreement”) with Broadwood granting
the right to purchase up to 70,000 shares of Common Stock at an exercise price of $6, exercisable for a period of six
years. The Note also provides that so long as a principal balance remains outstanding on the Note STAAR will grant
additional warrants each quarter on the same terms as the Warrant Agreement. The warrant agreement provides that
STAAR will register the stock for resale with the SEC. Based on publicly available information filed with the
Securities and Exchange Commission (the “SEC”), on the date of the transaction Broadwood Partners L.P.
beneficially owned 2,492,788 shares of the Company’s common stock, comprising 9.7% of the Company’s
common stock as of March 21, 2007, and Neal Bradsher, President of Broadwood Partners, L.P.,
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may have been deemed to beneficially own 2,518,688 shares of the Company’s common stock, comprising 9.8% of
the Company’s common stock as of that date.
On June 8, 2006 STAAR signed a Credit and Security agreement with Wells Fargo Bank for a revolving credit
facility. The credit facility provides for borrowings of 85% of eligible accounts receivable with a maximum of
$3.0 million, carries an interest rate of prime plus 1.5%, and is secured by substantially all of the assets of STAAR’s
U.S. operations. The term of the agreement is three years and it contains certain financial covenants relating to
minimum calculated net worth, net loss, liquidity and restrictions on Company investments or loans to affiliates and
investments in capital expenditures, which only apply if the Company borrows and/or maintains an outstanding
advance. No borrowings were outstanding as of December 29, 2006. However, as STAAR does not satisfy
minimum financial covenants in its U.S. operations that are a condition to borrowing, no borrowings are available.
In addition, STAAR’s Swiss subsidiary has $653,000 in borrowing availability under its $2.5 million line of
credit for use in Swiss operations.
STAAR may seek additional debt or equity financing to provide working capital, finance new business
initiatives, expand its business or make acquisitions. Because of our history of losses, our ability to obtain adequate
financing on satisfactory terms is limited. STAAR’s cash resources are discussed in further detail under the caption
“Liquidity and Capital Resources” below.
Investigation of Fraud at Domilens GmbH
Domilens GmbH is a wholly owned indirect subsidiary of STAAR Surgical Company based in Hamburg,
Germany. It distributes ophthalmic products made by both STAAR and other manufacturers. During fiscal year 2006
Domilens reported sales of $21.1 million.
On January 18, 2007, Guenther Roepstorff, president of Domilens, notified STAAR he had admitted to the
German Federal Ministry of Finance that without STAAR’s knowledge he had diverted property of Domilens to a
company under his control over a four−year period between 2001 and 2004. Mr. Roepstorff made this admission in
connection with an audit conducted by the Ministry in 2006, which examined the financial records of
Mr. Roepstorff, Domilens and the company to which he owned and diverted the property, Equimed GmbH
(currently known as eyemaxx GmbH), covering the four−year period.
Immediately after learning these facts STAAR commenced an internal investigation of Domilens. On
January 20, 2007, the Audit Committee of STAAR’s Board of Directors engaged PricewaterhouseCoopers LLP
(“PwC”) to conduct a forensic audit in connection with the investigation by legal counsel. The Committee
subsequently engaged the law firm of Taylor Wessing, through its Hamburg office, as independent German legal
counsel. The investigation included a comprehensive forensic review of the accounting records, documents and
electronic records of Domilens and interviews of current employees and Mr. Roepstorff. On March 6, 2007, the
Audit Committee of the Board of Directors of STAAR Surgical Company received PwC’s final report.
Key findings. PwC investigated instances of misappropriation of corporate assets by Mr. Roepstorff between
2001 and 2006. Areas of fraudulent activity investigated by PwC included diversions of sales of IOLs and equipment
to Equimed GmbH, payments to Mr. Roepstorff disguised as prepayments to suppliers and unauthorized borrowing.
It is estimated that from 2001 through 2006 these activities diverted assets having a book value of approximately
$400,000 and resulted in unreported proceeds to Equimed and Mr. Roepstorff of approximately $1,000,000.
PwC identified Mr. Roepstorff’s ability to override the internal controls implemented by STAAR as a key
factor in his ability to accomplish fraudulent transactions and avoid detection. In particular, they found that even
after STAAR had acquired full control of Domilens and implemented further oversight he continued to run the
company as his own and had a dominant presence with employees. PwC found evidence that, notwithstanding the
requirements of STAAR’s Code of Ethics, some Domilens employees had been aware of improper activities by
Mr. Roepstorff and in some instances cooperated in documenting the activities in a manner that aided concealment.
However, there is no evidence that other employees received any portion of the diverted assets or other payment for
cooperation.
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PwC also identified inadequate oversight of Domilens by STAAR AG and inadequate management oversight by
STAAR as significant factors enabling Mr. Roepstorff to accomplish his actions. PwC has determined that a greater
degree of scrutiny would have likely led to earlier detection of irregularities at Domilens.
Impact on financial statements. Domilens’ financial results are consolidated into the audited financial
statements of STAAR. STAAR has reviewed its historical financial statements, and has determined that properly
accounting for past transactions in Domilens in light of the information provided by PwC’s investigation did not
result in a material change in STAAR’s reported results of operations or reported financial condition for historical
periods.
STAAR has determined that the events at Domilens revealed a material weakness in its internal controls over
financial reporting. See “Item 9A. Controls and Procedures — Management Report on Internal Control Over
Financial Reporting.”
Expenses related to Domilens irregularities. It is currently estimated that the fees and reimbursable expenses
of advisors incurred by STAAR in connection with the investigation will total approximately $750,000, which will
be recorded in fiscal year 2007. In addition, STAAR has reserved approximately $700,000 against additional taxes
that may be assessed for unreported sales, but will seek to reduce that amount in discussions with the German
Ministry of Finance. The estimated tax liability was recorded in the fourth quarter of fiscal year 2006.
Other Actions. STAAR suspended all of Mr. Roespstorff’s duties as president on January 19, 2007. He
voluntarily resigned from his employment with Domilens on January 23, 2007. STAAR will provide all of
Domilens’ employees further training in their duties as employees and in STAAR’s Code of Ethics. In addition,
based on the advice of German counsel, the degree of individual culpability and other factors, STAAR may take
other disciplinary actions, including possible termination of employees or monitoring of selected employees during a
probationary period.
Other Recent Highlights
Growth in International Sales of Visian ICLs and Preloaded Silicone IOLs. The decline in the U.S. cataract
business during 2006 was offset in part by a 50% increase in international sales of the ICL and TICL. In addition, the
preloaded silicone IOL injector system developed with our joint venture partner Canon Staar experienced strong
sales in international markets, growing 21% for the year. This growth in the business contributed to an increase in
international sales of 4% for fiscal 2006 compared with 2005.
Job Actions by Doctors in Germany. STAAR receives significant revenue from its German subsidiary,
Domilens GmbH, a distributor of ophthalmic products manufactured by STAAR and other manufacturers. As is the
case in most countries, purchases of Domilens’ cataract−related products in Germany depend on government
reimbursement of cataract surgery. Germany has recently made a number of cost−cutting changes in its medical
reimbursement policies, including a requirement that government−employed surgeons reduce the number of cataract
surgeries performed to 20% below 2004 rates. In response to these changes in reimbursement policies, many medical
doctors throughout Germany initiated job actions during the first and second quarters of 2006 such as strikes or
slow−downs in which doctors provided only the most essential services to patients. While doctors and state−run and
university clinics reached a settlement in June, strikes continue at city−run hospitals throughout Germany during the
third quarter, but were ultimately resolved. These job actions, and the mandatory reduction in the number of cataract
procedures, caused a significant reduction in ophthalmic surgeries and reduced sales of distributed products by
Domilens, which during 2006 declined 6% compared to 2005, significantly impacting international and global sales
of cataract product for the year. However, fourth quarter sales in Germany of 2006 improved over the fourth quarter
of 2005 by 5% indicating we may have seen the worst in this market.
Competition with Multifocal IOLs. The U.S. IOL market continues to be affected by sales of multifocal and
accommodating lenses resulting from a ruling of the Centers for Medicare and Medicaid Services (“CMS”). The
ruling permits Medicare−covered cataract patients to receive more highly priced multifocal or accommodating IOLs
(sometimes referred to as “presbyopic lenses”) 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 increased
the number of patients to whom surgeons offer the alternative of the higher−priced lenses. While STAAR’s
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U.S. cataract product sales increased in the first, second, and fourth quarters of 2006 over the preceding quarter,
remained flat in the third quarter of 2006 compared to the same period in 2005, sales volume might have been
greater were it not for increased sales of multifocal and accommodative lenses.
In January 2007, the CMS made a similar ruling, that allows a Medicare patient to pay a premium for a lens that
also corrects astigmatism. STAAR expects this ruling will result in increased sales revenue from its silicone Toric
IOLs, currently one of only two lenses of this type in the U.S. market, and will enhance the market for a Collamer
Toric IOL currently in development. Nevertheless, with the help of the CMS ruling, presbyopic lenses are expected
to claim a share of the cataract market in the future, and STAAR does not offer a lens of this type.
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 2006,
sales from international operations represented 60% 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 2006, 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 increased to 47.0% for fiscal year 2006, compared with 46.4% in 2005.
The improvement in gross profit from 2005 generally resulted from increased volume of higher margin ICLs in the
U.S., partially offset by an obsolescence charge $807,000 against certain IOL inventory in anticipation of new
product launches in 2007 and higher IOL and ICL unit costs due to lower manufacturing volumes.
Research and Development. We spent approximately 13% of our sales on research and development (which
includes regulatory and quality assurance expenses) during fiscal 2006, and we expect to spend approximately 10%
of our sales on an annual basis in the future.
Cash Flow. We exited the year with approximately $7.9 million in cash, cash equivalents and restricted
short−term investments compared with $12.7 million at December 30, 2005. We used approximately $8.6 million
for operating activities during fiscal 2006, which is 24% above the $7.0 million used during fiscal 2005. However,
cash used in operating activities in 2006, which was at its highest level for the year in the first quarter of 2006 when
the ICL was first introduced in the U.S. market, declined in each of the three subsequent quarters. Purchases of
property and equipment were approximately $779,000. During the year we received approximately $2.9 million in
proceeds from stock options and $1.2 million in payments on notes from a former director. As a result of these
proceeds, the net cash usage (see Liquidity and Capital Resourses — Non−GAAP Measures) for fiscal 2006 was
$4.8 million, a 52% improvement over the $10.0 million reported for fiscal 2005. During 2006 we obtained
additional sources of financing such as the $3.0 million Wells Fargo LOC and $1.8 million in lease financing and
we expect to continue to identify alternative sources of liquidity to support operations. The Company expects to
reduce and and ultimately reverse its operating losses and negative cash flows as ICL sales reach targeted levels and
the TICL is approved in the U.S. In addition, we will continue to pursue cost savings opportunities, wherever
possible, to conserve cash.
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Table of Contents
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.
Net Sales
Cost of sales
Gross profit
General and administrative
Marketing and selling
Research and development
Note Reserve (reversals)
Operating loss
Total other income (expense), net
Loss before income taxes and
minority interest
Provision for income taxes
Minority interest
Net loss
December 29,
2006
Percentage of Total Sales
December 30,
2005
December 31,
2004
2006 vs.
2005
2005 vs.
2004
Percentage Change
100.0%
53.0%
47.0%
19.4%
39.8%
12.6%
(0.6)%
(24.2)%
0.2%
(24.0)%
2.7%
—
(26.7)%
100.0%
53.6%
46.4%
19.0%
36.2%
10.9%
1.4%
(21.1)%
1.7%
(19.4)%
2.4%
—
(21.8)%
100.0%
49.4%
50.6%
17.9%
39.3%
12.1%
1.0%
(19.7)%
(0.1)%
(19.8)%
2.0%
0.1%
(21.9)%
9.7%
8.5%
11.1%
12.0%
20.7%
27.1%
—
25.8%
(88.9)%
35.6%
24.4%
—
34.6%
(0.7)%
7.7%
(9.0)%
5.1%
(8.6)%
(10.8)%
49.3%
6.4%
—
(2.8)%
17.4%
—
(1.4)%
2006 Fiscal Year Compared to 2005 Fiscal Year
Net sales
Net sales for the year ended December 29, 2006 (“fiscal 2006”) were $56,282,000, an increase of 9.7%
compared with net sales for the year ended December 30, 2005 (“fiscal 2005”) of $51,303,000. Changes in currency
exchange rates did not have a material impact on net sales for fiscal 2006.
U.S. net sales for fiscal 2006 increased 19.1% to $22,293,000 compared with fiscal 2005. The increase in
U.S. sales reflects both the recent approval of the Visian ICL for the treatment of myopia, and were partially offset
by a 5% decrease in U.S. cataract product sales. The Company has lost increasing market share in the U.S. over the
last several years as it has not kept pace with the competition in introducing new and enhanced cataracts products
due to the Company’s focus on bringing the Visian ICL to the U.S. market. U.S. sales of the Visian ICL, which
was launched in the U.S. in February 2006, were $4,172,000 for fiscal 2006. The Company expects to grow ICL
sales and reverse declining cataract sales trends and regain market share as it continues the process of training ICL
surgeons and introduces enhanced cataract products to the market in 2007 and beyond.
International net sales for fiscal were $33,990,000, an increase of 4% compared with fiscal 2005 and were
impacted by a 50% increase in refractive product sales but partially offset by a decline of 5% in cataract product
sales. The decline in international cataract sales is primarily due to the impact in 2006 of doctor strikes in Germany,
one of STAAR’s largest cataract sales markets. The labor disputes were settled in 2006 and the Company believes
the declining cataract sales trends in Germany will reverse in 2007.
During fiscal 2006, global sales of ICLs and TICLs grew 129% to $12,093,000 compared with $5,287,000 in
fiscal 2005. Total refractive sales during fiscal 2006 grew 134% to $12,514,000 compared with $5,347,000 in fiscal
2005 due to the launch of the ICL in the U.S. and increased international ICL sales in 2006.
The Company expects continued growth in sales, both in the U.S. and internationally, as the ICL and TICL gain
broader acceptance and new cataract products are introduced.
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Table of Contents
Gross profit margin
Gross profit margin for the full year 2006 was 47.0% compared with 46.4% for 2005. Gross profit for 2006 was
impacted by obsolescence charges of $807,000 for certain IOL inventory in anticipation of new product launches in
2007 and to a lesser degree slower moving diopters of other lenses. Management intends to mitigate the risk of
write−off of this and other product but felt it prudent to take this action as cannibalization of existing product is
likely as new products roll out. This charge reduced gross profit margin by approximately 1.4%. Excluding this
charge, 2006 gross profit margin would have increased to 48.4%, a 2.0 percentage point improvement compared
with 2005.
Standard margin, which represents the margin associated with the direct costs of production and excludes other
cost of sales, for 2006 was 53.9%, an increase of 1.2% compared with 2005. IOL margins for the year decreased 5%
to 50%, due to an overall 2% decrease in average selling prices, a 2% decrease in IOL unit volume, and a 9%
increase in average unit costs. ICL margins increased 2% to 82% due to the launch of the product in the U.S. where
the Company realized margins of approximately 89%. International ICL/TICL margins at 79% were down 1% from
the previous year due to higher costs. Margins on all other products decreased 2% due to higher costs. For 2006,
other cost of sales was $3.9 million, an increase of $633,000 compared with 2005. The increase in other cost of sales
is due to the aforementioned inventory reserves and increased royalties, partially offset by a decrease in freight and
other costs.
The Company expects gross profit margin to increase as sales of ICLs become a larger percentage of overall
revenue, U.S. cataract sales continue to grow and as enhanced cataract products are delivered to the market.
General and administrative
General and administrative expenses for fiscal 2006 increased 12% or $1,165,000 over fiscal 2005. Excluding
the $952,000 impact of FAS 123R for fiscal 2006, general and administrative expenses increased 2% in fiscal 2006
over fiscal 2005 as a result of general cost increases. The Company does not expect significant increases in general
and administrative expenses in 2007.
Marketing and selling
Marketing and selling expenses for fiscal 2006 increased 21% or $3,842,000 compared with fiscal 2005.
Excluding the $419,000 impact of FAS 123R for fiscal 2006, marketing and selling expenses increased 19% in
fiscal 2006. The increase in marketing and selling expenses for fiscal 2006 primarily resulted from increased costs to
support the roll−out of the Company’s refractive products in new territories, including the U.S., and increased
commissions. The Company expects sales and marketing expense to decrease slightly as a percentage of sales over
2006 but increase in dollars due to increased commissions in the U.S. on higher sales.
Research and development
Research and development expenses, including regulatory and clinical expenses, for fiscal 2006 increased 27%
or $1,507,000 compared with fiscal 2005. Excluding the impact of the implementation of FAS 123R, which was
$262,000 for fiscal 2006, research and development expenses increased 22%. The increase in research and
development expenses, excluding the impact of the adoption of FAS 123R, is due to costs associated with new
product development and TICL regulatory and FDA submission costs. The Company expects to spend
approximately 10% of revenues in 2007 on its research and development activities.
Note reserves (reversals)
During 2006, the Company settled the last of its notes receivable from former directors and officers totaling
$1,961,000 (including accrued interest) for a cash payment of $175,000 and proceeds from the sale of
120,000 shares of pledged Company stock of $870,000. The deficiency on the notes was applied against reserves
recorded against the notes in 2005 and 2004 and $331,000 of excess reserves was reversed during fiscal 2006.
33
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
Other income (expense), net
Other income, net for fiscal 2006 was $95,000, compared to fiscal 2005 when it was $854,000. The principal
reasons for the decrease in other income are due to 1) $65,000 of exchange losses recorded during the year versus
$334,000 of exchange gains recorded during fiscal 2005; 2) decreased interest income due to decreased cash
balances; 3) increased interest expense due to lease financing obtained in 2006; and 4) a decrease in earnings from
the Company’s joint venture and other miscellaneous income decreases.
Income taxes
The Company recorded income taxes of $1.5 million for fiscal 2006 and $1.2 million for fiscal 2005, based on
the income of the Company’s German subsidiary including taxes of approximately $700,000 that were accrued
based on the results of a tax audit of the German subsidiary by the German tax authorities, see “Overview —
Investigation of Fraud at Domilens GmbH.”
2005 Fiscal Year Compared to 2004 Fiscal Year
Revenues
Net sales for the years ended 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 Visian tm ICL (“ICL”) and Visian tm 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.
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.
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 U.S. commissions due to decreased cataract
product sales.
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.
34
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
Note reserves (reversals)
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.
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.
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 29, 2006 and December 30, 2005, the Company had $7.9 million and $12.7 million,
respectively, of cash, cash equivalents and restricted short−term investments.
Net cash used in operating activities was $8.6 million, $7.0 million, and $8.8 million for fiscal 2006, 2005,
and 2004, respectively. For fiscal 2006, cash used in operations was the result of increased net losses, adjusted for
depreciation, amortization, expense related to the implementation of FAS 123R, and other miscellaneous non−cash
items, and further offset by increases in working capital. 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.
Accounts receivable was $6.5 million in 2006, $5.1 million in 2005, and $6.2 million in 2004. The increase in
accounts receivable is due to increased sales in the U.S. during fiscal 2006 and in international markets. Days Sales
Outstanding (“DSO”) decreased slightly from 41 days in 2004 to 38 days in 2005, and increased to 39 days in
2006. The Company expects DSO to improve in 2007 assuming increased sales of the ICL in the U.S. which
generally have shorter payment terms than U.S. cataract sales or all other products sold internationally.
Inventories at the end of fiscal 2006, 2005, and 2004 was $13.0 million, $14.7 million, and $15.1 million,
respectively. Day’s inventory on hand decreased from 186 days in 2004 and 235 days in 2005 to 162 days in 2006.
Net cash provided by (used in) investing activities was approximately $145,000, $4,077,000, and ($7,294,000),
for fiscal 2006, 2005, and 2004, respectively. The decrease from 2005 to 2006 is due primarily to changes related to
the purchase and sale of short term investments as the Company no longer holds the
35
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
investments. During 2006, the Company’s principal investments were in property and equipment. Investments in
property and equipment were $779,000, $1.2 million, and $1.7 million for fiscal 2006, 2005, and 2004,
respectively. The investments are generally made to upgrade and improve existing production equipment and
processes. Investments in property and equipment for 2006 were more than offset by proceeds of approximately
$1.2 million from the settlement of notes receivable of a former director.
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.
Net cash provided by financing activities was approximately $2,809,000, $12,298,000, and $12,547,000 for
fiscal 2006, 2005, and 2004, respectively. Cash provided by financing activities in 2006 resulted from the receipt of
$2.9 million of proceeds from stock option exercises. 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.
Credit Facilities
The Company and its subsidiaries have credit facilities with different lenders to support operations in the U.S.,
Switzerland and Germany, respectively.
On June 8, 2006 the Company signed a Credit and Security agreement with Wells Fargo Bank for a revolving
credit facility. The credit facility provides for borrowings of 85% of eligible accounts receivable with a maximum of
$3.0 million, carries an interest rate of prime plus 1.5%, and is secured by substantially all of the assets of the
Company’s U.S. operations. The term of the agreement is three years and it contains certain financial covenants
relating to minimum calculated net worth, net loss, liquidity and restrictions on Company investments or loans to
affiliates and investments in capital expenditures, which only apply if the Company borrows and/or maintains an
outstanding advance. No borrowings were outstanding as of December 29, 2006. As the Company does not satisfy
minimum financial covenants in its U.S. operations that are a condition to borrowing, no borrowings are available.
The Company intends to seek to renegotiate the conditions to borrowing under the agreement based on its most
recent financial projections.
On March 21, 2007, STAAR entered into a loan arrangement with Broadwood Partners, L.P. (“Broadwood”).
Pursuant to a Promissory Note (the “Note”) between STAAR and Broadwood, Broadwood loaned $4 million to
STAAR. The Note has a term of three years and bears interest at a rate of 10% per annum, payable quarterly. The
Note is not secured by any collateral, may be pre−paid by STAAR at any time without penalty, and is not subject to
covenants based on financial performance or financial condition (except for insolvency). Based on publicly available
information filed with the Securities and Exchange Commission (the “SEC”), on the date of the transaction
Broadwood Partners L.P. beneficially owned 2,492,788 shares of the Company’s common stock, comprising 9.7%
of the Company’s common stock as of March 21, 2007, and Neal Bradsher, President of Broadwood Partners, L.P.,
may have been deemed to beneficially own 2,518,688 shares of the Company’s common stock, comprising 9.8% of
the Company’s common stock as of that date.
The Company’s lease agreement with Farnam Street Financial, Inc., as amended on October 9, 2006, provides
for purchases of up to $1,500,000 of property, plant and equipment. In accordance with the requirements of
SFAS 13
36
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
“Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a three−year
term. Under the agreement, the Company has the option to purchase any item of the leased property, at the end of the
respective items lease terms, at a mutually agreed fair value. Approximately $573,000 in borrowings were available
under this facility as of December 29, 2006.
The Company’s lease agreement with Mazuma Capital Corporation, as amended on August 16, 2006, provides
for purchases of up to $301,000 of property, plant and equipment. In accordance with the requirements of SFAS 13
“Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a two−year term.
The Company is required to open a certificate of deposit as collateral in STAAR Surgical Company’s name at the
underwriting bank for 50% of the assets funded by Mazuma. As of December 29, 2006, the Company had a
certificate of deposit for approximately $150,000 recorded as “short−term investment — restricted” with a 12−month
term at a fixed interest rate of 4.5%. The agreement also provides that the Company may elect to purchase any item
of the leased property at the end of its lease term for $1. No borrowings were available under this facility as of
December 29, 2006.
The Company’s Swiss credit agreement, as amended on August 2, 2004, provides for borrowings of up to
3.0 million Swiss Francs “CHF” (approximately $2.4 million based on the rate of exchange on December 29,
2006) for use in the Company’s Swiss operations, permits either fixed−term or current advances, and does not have
a termination date. The interest rate on current advances is 6.25% and 6.0% per annum, respectively, at
December 29, 2006 and December 30, 2005, plus a commission rate of 0.25% payable quarterly. There were no
current advances outstanding at December 29, 2006. The base interest rate for fixed−term advances follows
Euromarket conditions for loans of a corresponding term and currency plus an individual margin (5.0% at
December 29, 2006 and 4.25% at December 30, 2005, respectively). Fixed−term borrowings outstanding under the
note at December 29, 2006 and December 30, 2005, respectively, were CHF 2.2 million (approximately
$1.8 million based on the rate of exchange at December 29, 2006) and CHF 2.2 million (approximately
$1.7 million based on the rate of exchange on December 30, 2005). 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 German subsidiary entered into a credit agreement on August 30, 2005. The renewed credit agreement
provides for borrowings of up to 100,000 EUR ($131,000 at the rate of exchange on December 29, 2006), at a rate
of 8.5% per annum and does not have a termination date. The credit facility is not secured. There were no
borrowings outstanding as of December 29, 2006 and December 30, 2005.
The Company was in compliance with the covenants of its foreign credit facilities as of December 29, 2006.
The following table represents the Company’s known contractual obligations as of December 29, 2006 (in
thousands):
Payments Due by Period
Contractual
Obligations
Notes payable
Capital lease obligations
Operating lease obligations
Purchase obligations
Other current−term liabilities
Open purchase orders
Total
Less
Than
1 Year
$ 1,802
647
1,344
600
927
1,278
$ 6,598
Total
$
1,802
1,720
4,254
1,289
927
1,278
$ 11,270
3−5
More
Than
Years
5 Years
1−3
Years
$
— $ — $ —
—
—
—
273
—
—
—
—
—
—
$ —
$ 273
1,073
2,637
689
—
—
$ 4,399
The table presented above excludes employment agreements for two employees of our Australian subsidiary.
37
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
On March 23, 2007 the Company executed a $4.0 million note with Broadwood Partners, LP. The obligation
has been excluded from the table because it was not outstanding at December 29, 2006.
While the Company’s international business generates positive cash flow and represents approximately 60% of
consolidated net sales, the Company has reported losses on a consolidated basis for several 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 these years the Company has
secured additional capital to sustain operations through private sales of equity securities.
The Company believes that in the near term its best prospect for returning its U.S. and consolidated operations
to profitability is through the growth in sales of the ICL in the U.S. combined with continued growth in international
markets. 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 2007.
The Company believes that as a result of its debt financings, along with expected cash from operations, it
currently has sufficient cash to meet its funding requirements at least through the first quarter of 2008. However,
given its history of losses and negative cash flows, it is possible that the Company will find it necessary to
supplement these sources of capital with additional financing to sustain operations until the Company returns to
profitability.
The credit facilities are subject to various financial covenants and if our losses continue, we risk defaulting on
the terms of our credit facilities. Our limited borrowing capacity could cause a shortfall in working capital or prevent
us from making expenditures to expand or enhance our business. A default on any of our loan agreements could
cause our long term obligations to be accelerated, make further borrowing difficult and jeopardize our ability to
continue operations.
If the Company is unable to rely solely on existing debt financing and 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 or
debt securities.
The Company has filed a “shelf” registration statement with the Securities and Exchange Commission, which
provides for the public offering and sale of up to $15 million in debt or equity securities pursuant to the Securities
Act of 1933, as amended. The registration statement became effective on August 8, 2006. The Company is not
obligated to sell any amount of securities under the registration statement, and as of the date of this report it has not
entered into any commitment to do so. Notwithstanding the availability of shelf registration, the Company’s ability
to raise financing through sales of securities depends on general market conditions and the demand for STAAR’s
common stock or debt securities. The conditions prevailing at the time the Company seeks to raise capital may
prevent it from selling securities under the shelf registration on favorable terms, or at all. If our common stock has a
low market price at a time when we sell equity securities, our existing shareholders could experience substantial
dilution. 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.
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 largely depend on the success of the ICL, proceeds from
option exercises, borrowings under the Company’s bank credit facilities and proceeds from the private placement of
common stock. Any withdrawal of support from its banks could have serious consequences on the Company’s
liquidity. The Company’s liquidity also depends, 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 affect 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
38
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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.
Non−GAAP Measures
The following financial measures included below are not prepared in accordance with GAAP: Cash Usage and
Standard Margin. A reconciliation of these non−GAAP financial measures to the most directly comparable GAAP
measures is presented as a table below. Non−GAAP financial measures should not be considered a substitute for, or
superior to, measures of financial performance prepared in accordance with GAAP.
Cash Usage — The Cash Usage financial measure is not prepared in conformity with GAAP and excludes the
purchase and sale of short−term investments from cash used in investing activities and net proceeds from private
placement from cash provided by financing activities. Cash Usage is not a measurement of liquidity under GAAP
and should not be considered as an alternative to net income, operating income, cash used in investing activities,
cash provided by financing activities, or the change in cash and cash equivalents on the Consolidated Balance Sheets
and may not be comparable with Cash Usage as defined by other companies.
The Company’s Cash Usage of $4,800,000 during fiscal 2006 is 52% below the Company’s Cash Usage of
$9,978,000 compared with the same period of 2005.
Increase (decrease) in Cash and Cash Equivalents
Add: purchase of short−term investments
Deduct: sale of short−term investments
Deduct: net proceeds from private placement
Cash Usage
Fiscal Year Ended
December 29,
2006
December 30,
2005
$
$
(4,950)
193
(43)
—
(4,800)
$
$
8,521
15,300
(20,425)
(13,374)
(9,978)
Standard Margin — Standard Margin is not a GAAP financial measure. Standard Margin represents the margin
associated with the direct costs of production and excludes other cost of sales. Included in other costs of sales are the
following: distribution costs, royalty expense, inventory provisions and all other cost of goods sold. Standard Margin
should not be considered an alternative to gross profit margin and may not be comparable with Standard Margin as
defined by other companies.
The Company’s Standard Margin for 2006 was 53.9%, an increase of 1.2% compared with 2005.
Gross Profit Margin
Add: distribution costs
Add: royalty expense
Add: inventory provisions
Add: all other cost of sales
Standard Margin
Fiscal Year Ended
December 29,
2006
December 30,
2005
47.0%
1.4%
0.9%
3.2%
1.4%
53.9%
46.4%
1.6%
0.7%
2.1%
1.9%
52.7%
Management believes Cash Usage and Standard Margin financial information provides meaningful
supplemental information regarding our performance and liquidity by excluding the items described above in order
to show the Cash Usage and Standard Margin from normal operations. STAAR believes that this financial
information is useful to our management and investors in assessing STAAR’s historical performance and liquidity
and when planning, forecasting and analyzing future periods.
39
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 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 Company’s products are marketed to
ophthalmic surgeons, hospitals, ambulatory surgery centers or vision centers, and distributors. IOLs may be
offered to surgeons and hospitals on a consignment basis. In accordance with SAB 104, the Company
recognizes revenue for consignment inventory when the IOL is implanted during surgery and not upon
shipment to the surgeon. 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 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 assessments of the adequacy of the reserves for uncollectible accounts.
• Stock−Based Compensation. We account for the issuance of stock options to employees and directors in
accordance with SFAS 123R and the issuance of stock options and warrants for services from
non−employees in accordance with SFAS 123, “Accounting for Stock−Based Compensation,” and the
Financial Accounting Standards Board (FASB) Emerging Issues Task Force Issue (EITF) No. 96−18,
“Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring Or In
Conjunction With Selling Goods Or Services,” by estimating the fair value of options and warrants issued
using the Black−
40
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on
grant date, risk−free interest rates, expected life of the option or warrant, expected volatility of our stock and
expected dividend yield. The amounts recorded in the financial statements for share−based expense could
vary significantly if we were to use different assumptions.
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 29, 2006, the valuation allowance fully
offsets the value of deferred tax assets on the Company’s balance sheet. Net increases to the valuation
allowance were $6,774,000, $5,490,000 and $6,097,000 in 2006, 2005 and 2004, 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 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.
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
41
•
•
•
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 for the year ended December 29, 2006, 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
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 for the year
ended December 29, 2006, and no impairment was identified. As of December 29, 2006, 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 $7.0 million as of December 29,
2006. 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. The Company reviews patents and
licenses for impairment in the same assessment discussed above in the discussion above regarding
Impairment of Long−Lived Assets. No impairment was identified during the review completed in the fourth
quarter of 2006.
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 had 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.
42
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,”
(FIN 48) which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that companies recognize
in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on de−recognition,
classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 effective January 1, 2007. We
are currently evaluating the effect of this new pronouncement.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (“SFAS 157”). SFAS 157
provides a new single authoritative definition of fair value and provides enhanced guidance for measuring the fair
value of assets and liabilities and requires additional disclosures related to the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 is effective for the Company as of December 29, 2007. The Company is
currently assessing the impact, if any, of SFAS 157 on its consolidated financial statements.
In November 2006, the FASB issued FASB Staff Position No. EITF 00−19−2, “Accounting for Registration
Payment Arrangements”, which specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included
as a provision of a financial instrument or other agreement, should be separately recognized and measured.
Additionally, this guidance further clarifies that a financial instrument subject to a registration payment arrangement
should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to
transfer consideration pursuant to the registration payment arrangement. This guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years.
We are assessing the impact of adopting EITF 00−19−2 and currently do not believe the adoption will have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (SFAS 159). SFAS 159 provides that companies may elect to measure specified financial
instruments and warranty and insurance contracts at fair value on a contract−by−contract basis, with changes in fair
value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some
companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently.
Companies may elect fair−value measurement when an eligible asset or liability is initially recognized or when an
event, such as a business combination, triggers a new basis of accounting for that asset or liability. The election is
irrevocable for every contract chosen to be measured at fair value and must be applied to an entire contract, not to
only specified risks, specific cash flows, or portions of that contract. SFAS 159 is effective as of the beginning of a
company’s first fiscal year that begins after November 15, 2007. Retrospective application is not allowed.
Companies may adopt SFAS 159 as of the beginning of a fiscal year that begins on or before November 15, 2007 if
the choice to adopt early is made after SFAS 159 has been issued and within 120 days of the beginning of the fiscal
year of adoption and the entity has not issued GAAP financial statements for any interim period of the fiscal year
that includes the early adoption date. Companies are permitted to elect fair−value measurement for any eligible item
within SFAS 159’s scope at the date they initially adopt SFAS 159. The adjustment to reflect the difference
between the fair value and the current carrying amount of the assets and liabilities for which a company elects
fair−value measurement is reported as a cumulative−effect adjustment to the opening balance of retained earnings
upon adoption. Companies that adopt SFAS 159 early must also adopt all of SFAS 157’s requirements at the early
adoption date. We are assessing the impact of adopting SFAS 159 and currently do not believe the adoption will
have a material impact on our consolidated financial statements.
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
43
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 $1.8 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 Swiss 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 $18,000.
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 29, 2006, 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.
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 and the identification of the material weakness in internal controls over financial reporting
described below, 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 were not 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.
As previously reported in Form 8−Ks filed on January 23, 2007 and March 14, 2007, the Audit Committee of the Company’s
Board of Directors commenced in January 2007, an independent investigation into reports to the Company’s management by
Guenther Roepstorff, president of Domilens GmbH, a subsidiary of STAAR located in Germany, that he admitted to the German
Federal Ministry of Finance that without STAAR’s knowledge he had
44
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
diverted property of Domilens with a book value of approximately $400,000 to a company under his control over a
four−year period between 2001 and 2004. Mr. Roepstorff made this admission in connection with an audit
conducted by the Ministry in 2006, which examined the financial records of Mr. Roepstorff, Domilens and the
company to which he diverted the property, Equimed GmbH (currently known as eyemaxx GmbH), covering the
four−year period. During the course of the investigation, the Company found that in addition to the diversions of
property admitted by Mr. Roepstorff, payments were made to Mr. Roepstorff disguised as prepayments to suppliers
and unauthorized borrowing occurred.
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.
Our management, including the CEO, does not expect that our disclosure controls and procedures or our internal
control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
on all internal control systems, our internal control system can provide only reasonable assurance of achieving its
objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, within our Company have been detected. These inherent limitations include the realities that judgments in
decision−making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of internal control is also based in part upon certain
assumptions about the likelihood of future events, and can provide only reasonable, not absolute, assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in circumstances, or the degree of compliance with the policies and
procedures may deteriorate.
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 29, 2006, 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.
A material weakness is a control deficiency, or a combination of control deficiencies that results in more than a
remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or
detected. In connection with the assessment described above, management has identified the following material
weakness as of December 29, 2006:
Failure to design and maintain controls over and in its German subsidiary sufficient to detect and prevent
management override and fraud
• Control Environment The Company did not maintain an effective control environment because of the
following: (a) the Company did not adequately and consistently reinforce the importance of adherence to
controls and the Company’s code of conduct; (b) the Company failed to institute all elements of an effective
program to help prevent and detect fraud by Company employees; and (c) the Company did not maintain
effective corporate and regional management oversight and monitoring of operations to detect
managements’ override of established financial controls and accounting policies, execution of improper
transactions and accounting entries to impact revenue and earnings, and reporting of these transactions to the
appropriate finance personnel or the Company’s independent registered public accounting firm.
As a result of the material weakness described above, management has concluded that our internal control over
financial reporting was not effective as of the end of the fiscal year ended December 29, 2006.
45
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
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.
Remediation of Material Weakness in Internal Control Over Financial Reporting
The Company has engaged in, and will continue to engage in remediation efforts to address the material
weakness in its internal control over financial reporting. Specific actions which have been or will be taken are
outlined below:
The Company has:
• obtained the immediate resignation of the president of Domilens GmbH
• appointed the V.P. Sales and Marketing — International, as interim president of Domilens
• enhanced monitoring and oversight from STAAR’s Swiss and U.S. operations
• held meetings to discuss the Company’s Code of Ethics and whistleblower policies with subsidiary
employees as a bridge to more formal training
The Company will assess the need to take additional actions including but not limited to the following:
• assign oversight of corporate compliance programs and training to its corporate legal counsel
• evaluate accounting and inventory systems to identify opportunities for enhanced controls
•
recruit a local controller who will have enhanced authority in Domilens and direct reporting to corporate
headquarters
re−educate employees in STAAR’s Code of Ethics
• evaluate the need for other employee changes
•
• enhance whistleblower program
• expand executive management’s ongoing communications regarding the importance of adherence to internal
•
controls and company policies
reinforce the certification process to emphasize senior manager’s accountability for maintaining an ethical
environment
take steps to fully integrate Domilens into the controls environment of STAAR and STAAR AG
implement an internal auditing function at STAAR and its subsidiaries, including Domilens
•
•
• standardize accounting policies and procedures globally
• evaluate and standardize SOX testing and controls
•
• evaluate such other actions as its advisors may recommend
institute global fraud prevention programs
Changes in Internal Control over Financial Reporting
There was no change during the fiscal quarter ended December 29, 2006, 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.
46
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 29, 2006.
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.
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 29, 2006 and at December 30, 2005
>Consolidated Statements of Operations for the years ended December 29, 2006, December 30, 2005, and
December 31, 2004
>Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss for the years ended
December 29, 2006, December 30, 2005, and December 31, 2004
>Consolidated Statements of Cash Flows for the years ended December 29, 2006, December 30, 2005, and
December 31, 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−5
F−6
F−7
F−8
F−9
F−31
F−32
47
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.9
10.10
10.11
10.12
Certificate of Incorporation, as amended to date(1)
By−laws, as amended to date(1)
1991 Stock Option Plan of STAAR Surgical Company(2)
1996 STAAR Surgical Company Non−Qualified Stock Plan(3)
1998 STAAR Surgical Company Stock Plan, adopted April 17, 1998(4)
Form of Certificate for Common Stock, par value $0.01 per share(11)
2003 Omnibus Equity Incentive Plan and form of Option Grant and Stock Option Agreement(10)
Registration Rights Agreement, dated June 4, 2004(15)
Registration Rights Agreement, dated March 31, 2005(18)
Joint Venture Agreement, dated May 23, 1988, among the Company, Canon Marketing Japan 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 Marketing Japan Inc., and Canon
Staar Company, Inc. dated September 28, 2001(8)
Indenture of Lease dated September 1, 1993, between the Company and FKT Associates and First
through Third Additions Thereto(7)
Second Amendment to Indenture of Lease dated September 21, 1998, between the Company and FKT
Associates(7)
Third Amendment to Indenture of Lease dated October 13, 2003, by and between the Company and
FKT Associates(13)
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(13)
Amendment No. 1 to Standard Industrial/Commercial Multi−Tenant Lease dated January 3, 2003, by
and between the Company and California Rosen(13)
Lease Agreement dated July 12, 1994, between STAAR Surgical AG and Calderari and Schwab
AG/SA(17)
Supplement #1 dated July 10, 1995, to the Lease Agreement of July 12, 1994, between STAAR
Surgical AG and Calderari and Schwab AG/SA(17)
Supplement #2 dated August 2, 1999, to the Lease Agreement of July 12, 1994, between STAAR
Surgical AG and Calderari and Schwab AG/SA(17)
10.13 Commercial Lease Agreement dated November 29, 2000, between Domilens GmbH and DePfa
10.14
10.15
†10.22
†10.23
†10.24
†10.25
†10.26
Deutsche Pfandbriefbank AG(17)
Patent License Agreement, dated May 24, 1995, with Eye Microsurgery Intersectoral Research and
Technology Complex(12)
Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and
Technology Complex(7)
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)
48
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
†10.27 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(17)
Stock Option Certificate dated May 30, 2002, between the Company and Volker Anhaeusser(17)
Stock Option Agreement dated November 13, 2001, between the Company and David R. Morrison(8)
Stock Option Certificate dated February 13, 2003, between the Company and Donald Duffy(17)
†10.28
†10.29
†10.30
†10.31
†10.32
†10.36 Offer of Employment dated July 12, 2002, from the Company to Nick Curtis(17)
†10.37 Amendment to Offer of Employment dated February 14, 2003 from the Company to Nick Curtis(17)
†10.38
†10.39 Amended and Restated Stock Option Certificate dated February 12, 2003, between the Company and
Stock Option Certificate dated February 14, 2003, between the Company and Nicholas Curtis(17)
Nicholas Curtis(17)
Employment Agreement dated March 18, 2005, between the Company and Tom Paul(17)
Form of Indemnification Agreement between the Company and certain officers and directors(17)
†10.40
†10.42
†10.43 Managing Director’s Contract of Employment, dated June 22, 1993, between Domilens and Guenther
†10.44
†10.45
†10.46
†10.47
†10.48
Roepstorff(17)
Supplementary Agreement #1 to the Managing Director’s Contract of Employment, dated
November 25, 1997, between STAAR Surgical AG and Guenther Roepstorff(17)
Supplementary Agreement #2 to the Managing Director’s Contract of Employment dated January 1,
1998, between Domilens and Guenther Roepstorff(17)
Supplementary Agreement #3 to the Managing Director’s Contract of Employment dated January 1,
2003, between Domilens and Guenther Roepstorff(17)
Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited CAN
006 391 928 and Philip Butler Stoney(14)
Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited CAN
006 391 928 and Robert William Mitchell(14)
#10.49 Assignment Agreement of the Share Capital of Domilens Vertrieb fuer medizinische Produkte GmbH
dated January 3, 2003, between STAAR Surgical AG and Guenther Roepstorff(9)
10.50 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(14)
10.51 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(14)
Stock Purchase Agreement dated June 4, 2004(15)
10.53
10.54 Master Credit Agreement dated August 2, 2004, between STAAR Surgical AG and UBS AG(16)
10.58
10.59
Loan Agreement between Deutsche Postbank AG and Domilens GmbH dated August 30, 2005(19)
Standard Industrial/Commercial Multi Tenant Lease — Gross dated October 6, 2005, entered into
between the Company and Z & M LLC(19)
Stock Purchase Agreement dated March 31, 2005(18)
10.60
10.61 Amendment No. 1 to Commercial Leases between Domilens GmbH and DePfa Deutsche
Pfandbriefbank AG related to Domilens headquarters facilities, dated as of December 13, 2005. (23)
#10.62 Credit and Security Agreement by and between STAAR Surgical Company and Wells Fargo Bank,
10.63
National Association acting through its Wells Fargo Business Credit Operating Division, dated
June 8, 2006. (24)
Promissory Note between STAAR Surgical Company and Broadwood Partners, L.P., dated March 21,
2007. (25)
10.64 Warrant Agreement between STAAR Surgical Company and Broadwood Partners, L.P., dated
March 21, 2007. (25)
49
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
14.1
21.1
23.1
31.1
31.2
32.1
Code of Ethics(17)
List of Significant Subsidiaries(17)
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 Current Report on Form 8−K, as filed on May 23, 2006.
(2) Incorporated by reference from the Company’s Registration Statement on Form S−8, File No. 033−76404,
as filed on March 11, 1994.
(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.
(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 29, 2000, as filed on March 29, 2001.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) Incorporated by reference to the Company’s Quarterly Report, for the period ended April 2, 2004, as filed on
May 12, 2004.
(15) Incorporated by reference to the Company’s Current Report on Form 8−K filed on June 9, 2004.
(16) Incorporated by reference to the Company’s Quarterly Report, for the period ended October 1, 2004, as filed
on November 10, 2004.
(17) Incorporated by reference to the Company’s Annual Report on Form 10−K, for the year ended December 30,
2005, as filed on March 30, 2005.
(18) Incorporated by reference to the Company’s Current Report on Form 8−K filed on April 5, 2005.
50
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
(19) Incorporated by reference to the Company’s Quarterly Report for the period ended September 30, 2005, as
filed on November 9, 2005.
(20) Incorporated by reference to the Company’s Quarterly Report for the period ended March 31, 2006, as filed
on May 10, 2006.
(20) Incorporated by reference to the Company’s Current Report on Form 8−K filed on June 14, 2006.
(21) Incorporated by reference to the Company’s Current Report on Form 8−K filed on March 21, 2007.
51
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
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 29, 2007
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
Title
/s/ David Bailey
President, Chief Executive Officer and Director
(principal executive officer)
Date
March 29, 2007
David Bailey
/s/ Deborah Andrews
Deborah Andrews
Chief Financial Officer
(principal accounting and financial officer)
March 29, 2007
/s/ Don Bailey
Chairman of the Board, Director
March 29, 2007
Don Bailey
Donald Duffy
/s/ Donald Duffy
Director
March 29, 2007
/s/ David Morrison
Director
March 29, 2007
David Morrison
/s/ David Schlotterbeck
Director
March 29, 2007
David Schlotterbeck
52
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2006,
December 30, 2005 and December 31, 2004
TABLE OF CONTENTS
>Report of Independent Registered Public Accounting Firm
>Report of Independent Registered Public Accounting Firm
>Consolidated Balance Sheets at December 29, 2006 and at December 30, 2005
>Consolidated Statements of Operations for the years ended December 29, 2006, December 30, 2005, and
December 31, 2004
>Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss for the years
ended December 29, 2006, December 30, 2005, and December 31, 2004
>Consolidated Statements of Cash Flows for the years ended December 29, 2006, December 30, 2005,
and December 31, 2004
>Notes to Consolidated Financial Statements
F−2
F−3
F−5
F−6
F−7
F−8
F−9
F−1
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited the accompanying consolidated balance sheets of STAAR Surgical Company and Subsidiaries
(“the Company”) as of December 29, 2006 and December 30, 2005, and the related consolidated statements of
operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the three years in the
period ended December 29, 2006. 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 29, 2006 and
December 30, 2005, and the consolidated results of their operations and their cash flows for each of the three years
in the period ended December 29, 2006, in conformity with accounting principles generally accepted in the
United States of America.
As more fully disclosed in Note 10 to the consolidated financial statements, effective December 31, 2005, the
Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share−Based
Payment.”
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 29,
2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 29, 2007 expressed an
unqualified opinion on management’s assessment of the effectiveness of internal control over financial reporting and
an adverse opinion on the effectiveness of internal control over financial reporting.
Los Angeles, California
March 29, 2007
/s/ BDO Seidman, LLP
F−2
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
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 Item 9A, Management’s Report on
Internal Control over Financial Reporting, that STAAR Surgical Company and Subsidiaries (“the Company”) did
not maintain effective internal control over financial reporting as of December 29, 2006, because of the effect of
management’s failure to design and maintain controls over and in its German subsidiary sufficient to detect and
prevent management override and fraud, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). The
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.
A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or
detected. The following material weakness has been identified and included in management’s assessment.
Management did not design and maintain controls over and in its German subsidiary sufficient to detect and prevent
management override and fraud. This material weakness was considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2006 financial statements, and this report does not affect our report
dated March 29, 2007 on those consolidated financial statements.
In our opinion, management’s assessment that STAAR Surgical Company and Subsidiaries did not maintain
effective internal control over financial reporting as of December 29, 2006, is fairly stated, in all material respects,
based on the COSO criteria. Also in our opinion, because of the effect of the material weakness described above on
the achievement of the objectives of the control criteria, the Company has not maintained effective internal control
over financial reporting as of December 29, 2006, based on the COSO criteria.
F−3
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
We do not express an opinion or any form of assurance on management’s statements referring to corrective
actions taken by the Company after the date of management’s assessment.
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 29, 2006 and
December 30, 2005 and the related consolidated statements of operations, changes in stockholders’ equity and
comprehensive loss, and cash flows for each of the three years in the period ended December 29, 2006, and our
report dated March 29, 2007 expressed an unqualified opinion thereon.
Los Angeles, California
March 29, 2007
/s/ BDO Seidman, LLP
F−4
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, 2006 and December 30, 2005
ASSETS
Current assets:
Cash and cash equivalents
Short−term investments — restricted
Accounts receivable trade, net
Inventories
Prepaids, deposits and other current assets
Total current assets
Investment in joint venture
Property, plant and equipment, net
Patents and licenses, net
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable
Accounts payable
Obligations under capital leases — current
Other current liabilities
Total current liabilities
Obligations under capital leases — long−term
Other long−term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000 shares authorized, none issued or outstanding
Common stock, $.01 par value; 60,000 and 30,000 shares authorized; issued and outstanding
25,618 and 24,819 shares
Additional paid−in capital
Accumulated other comprehensive income
Accumulated deficit
Notes receivable from former director, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
2006
2005
(In thousands, except
par value amounts)
7,758
150
6,524
12,939
1,923
29,294
397
5,846
4,439
7,534
260
47,770
1,802
5,055
500
7,574
14,931
957
122
16,010
$
$
$
12,708
—
5,100
14,699
1,763
34,270
283
5,595
4,920
7,534
153
52,755
1,676
4,014
36
5,809
11,535
116
738
12,389
—
—
256
117,312
889
(86,697)
31,760
—
31,760
47,770
248
112,434
146
(71,653)
41,175
(809)
40,366
52,755
$
$
$
$
$
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−5
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 29, 2006, December 30, 2005 and December 31, 2004
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses:
General and administrative
Marketing and selling
Research and development
Note reserves (reversals)
Total selling, general and administrative expenses
Operating loss
Other income (expense):
Equity in operations 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
2006
2005
(In thousands,
except per share amounts)
2004
$
56,282
29,849
26,433
$
51,303
27,517
23,786
$
51,685
25,542
26,143
10,891
22,395
7,080
(331)
40,035
(13,602)
114
293
(261)
(51)
95
(13,507)
1,537
—
$ (15,044)
9,727
18,552
5,573
746
34,598
(10,812)
158
453
(170)
413
854
(9,958)
1,239
(22)
$ (11,175)
9,253
20,302
6,246
500
36,301
(10,158)
(191)
219
(215)
99
(88)
(10,246)
1,057
29
$ (11,332)
$
(0.60)
$
(0.47)
$
(0.58)
25,227
23,704
19,602
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−6
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
Years Ended December 29, 2006, December 30, 2005 and December 31, 2004
Balance, at January 2, 2004
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
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
Net loss
Foreign currency translation adjustment
Total comprehensive loss
Common stock issued upon exercise of options
Stock−based compensation
Restricted stock grants
Proceeds from notes receivable, net
Accrued interest on notes receivable
Notes receivable reserve reversal
Balance, at December 29, 2006
Common
Stock
Shares
Common
Stock Par
Value
Additional
Paid−In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
(In thousands)
Accumulated
Deficit
Notes
Receivable
Total
18,403
$
184
$
85,948
$
572
$
(49,146)
$
(2,339)
$
35,219
—
—
250
11
—
2,000
—
—
—
20,664
—
—
36
13
—
4,100
6
—
—
—
—
24,819
—
—
753
—
46
—
—
—
25,618
$
—
—
3
—
—
20
—
—
—
207
—
—
—
—
—
41
—
—
—
—
—
248
—
—
8
—
—
—
—
—
256
—
—
826
60
231
11,626
—
—
—
98,691
—
—
130
77
203
13,333
37
(37)
—
—
—
112,434
—
—
2,882
1,996
—
—
—
—
$ 117,312
$
—
452
—
—
—
—
—
—
—
1,024
—
(878)
—
—
—
—
—
—
—
—
—
146
—
743
—
—
—
—
—
—
889
$
(11,332)
—
—
—
—
—
—
—
—
(60,478)
(11,175)
—
—
—
—
—
—
—
—
—
—
(71,653)
(15,044)
—
—
—
—
—
—
—
(86,697)
—
—
—
—
—
—
330
(95)
500
(1,604)
—
—
—
—
—
—
—
—
130
(81)
746
(809)
—
—
—
—
—
1,181
(41)
(331)
$
— $
(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
(15,044)
743
(14,301)
2,890
1,996
—
1,181
(41)
(331)
31,760
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−7
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 29, 2006, December 30, 2005 and December 31, 2004
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment
Amortization of intangibles
Loss on disposal of fixed assets
Equity in earnings of joint venture
Stock−based compensation expense
Common stock issued for services
Notes receivable reserve (reversal)
Deferred income taxes
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
2006
2005
(In thousands)
2004
$ (15,044)
$ (11,175)
$ (11,332)
1,891
481
169
(114)
1,841
—
(331)
179
(44)
—
(1,400)
1,896
(160)
1,042
947
(8,647)
(779)
—
(193)
43
—
1,181
(107)
—
145
(81)
2,890
—
2,809
743
(4,950)
12,708
7,758
$
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
$
See accompanying summary of accounting policies and notes to consolidated financial statements.
F−8
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2006 and December 30, 2005
Note 1 — Significant Accounting Policies
Organization and Description of Business
STAAR Surgical Company and Subsidiaries (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,
STAARVISC® 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 AquaFlow tm 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
Collamer IOLs, the ICL and the AquaFlow device. STAAR Surgical AG also controls 100% of Domilens GmbH, a
German sales subsidiary, which distributes both STAAR products and products from other ophthalmic
manufacturers.
Canon Staar Joint Venture
In 1988, the Company entered into a Joint Venture Agreement with Canon Inc. and Canon Marketing Japan
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 Marketing, 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 Marketing 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.
F−9
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 Marketing 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.
Investment in the Company’s joint venture, Canon Staar Co., Inc., is accounted for using the equity method of
accounting (see Note 7).
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.
Foreign Currency
In accordance with SFAS No 52, Foreign Currency Translation, 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 2006,
2005 and 2004, the net foreign translation gain (loss) was $743,000, ($878,000) and $452,000, respectively, and net
foreign currency transaction gain (loss), included in the statement of operations in other income (expense), net, was
($65,000), $334,000 and ($190,000), respectively.
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 Company’s products are marketed to ophthalmic surgeons, hospitals, ambulatory surgery centers or vision
centers, and distributors. IOLs may be offered to surgeons and hospitals on a consignment basis. In accordance with
SAB 104, the Company recognizes revenue for consignment inventory when the IOL is implanted during surgery
and not upon shipment to the surgeon.
The Company has ongoing programs that, under specified conditions, allow customers to return products and, in
accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists, records liabilities for estimated
returns and allowances at the time revenue is recognized. The Company’s liability for estimated returns considers
historical trends, the impact of new product launches, the entry of a competitor, product rationalization and the
various terms and arrangements offered, including sales with extended credit terms.
F−10
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 customers and
maintains a provision for estimated credit losses based upon its historical experience and any specific customer
collection issues that have been identified.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and, as such, include amounts based on informed estimates and judgments
of management with consideration given to materiality. For example, estimates are used in determining valuation
allowances for uncollectible trade receivables, obsolete inventory, deferred income taxes and tax reserves. Estimates
are also used in the evaluation of asset impairment, in determining the useful life of depreciable assets, and in
calculating stock−based compensation. Actual results could differ from those estimates.
Segment Reporting
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 16).
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be
cash equivalents. The Company maintains cash deposits with major banks which from time to time may exceed
federally insured limits. The Company periodically assesses the financial condition of the institutions and believes
that the risk of any loss is minimal.
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.
Fair Value of Financial Instruments
The carrying values reflected in the consolidated balance sheets for cash and cash equivalents, trade accounts
receivable, accounts payable, capital leases, and notes payable approximate their fair values because of the short
maturity of these instruments.
Inventories
Inventories are valued at the lower of cost, determined on a first−in, first−out basis, or market. Inventories
include the costs of raw material, labor, and manufacturing overhead. 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 to properly reflect inventory at the lower of cost or market.
F−11
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Leasehold improvements are amortized
over the lesser of the estimated useful lives of the assets or the related lease term. Major improvements are
capitalized and minor replacements, maintenance and repairs are charged to expense as incurred.
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 2006 and no impairment was identified. As of December 29, 2006, 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 $7.0 million and $6.6 million as of December 29, 2006 and
December 30, 2005, respectively. The Company capitalizes the costs of acquiring patents and licenses. Amortization
is computed on the straight−line basis over the estimated useful lives, since the pattern in which the economic
benefits realized cannot be precisely determined, which are based on legal and contractual provisions, and range
from 10 to 20 years. Aggregate amortization expense for amortized other intangible assets was $481,000, $480,000
and $688,000 for the years ended December 29, 2006, December 30, 2005 and December 31, 2004, respectively.
F−12
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the estimated amortization expense for these assets for each of the five succeeding
years (in thousands):
Fiscal
Year
2007
2008
2009
2010
2011
Total
$
481
481
481
380
380
$ 2,203
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 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 29, 2006,
December 30, 2005, and December 31, 2004.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as
incurred.
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.
Basic and Diluted Loss Per Share
The consolidated financial statements include “basic” and “diluted” per share information. Basic per share
information is calculated by dividing net loss by the weighted average number of shares outstanding. Diluted per
share information is calculated by also considering the impact of potential common stock on both net income and the
weighted number of shares outstanding. As the Company was in a loss position, potential common shares of
2.6 million, 3.9 million, and 3.1 million for the fiscal years ended December 29, 2006, December 30, 2005, and
December 31, 2004, respectively, were excluded from the computation as the shares would have had an
anti−dilutive effect.
F−13
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Based Compensation
Effective December 31, 2005, the Company adopted the fair value recognition provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share−Based Payment” (“SFAS 123R”),
using the modified prospective transition method and therefore has not restated results for prior periods. Under this
transition method, stock−based compensation expense for fiscal 2006 includes compensation expense for all
stock−based compensation awards granted prior to, but not yet vested as of December 30, 2005, based on the grant
date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for Stock−Based
Compensation” (“SFAS 123”). Stock−based compensation expense for all stock−based compensation awards
granted after December 30, 2005 is based on the grant−date fair value estimated in accordance with the provisions
of SFAS 123R. The Company recognizes these compensation costs on a straight−line basis over the requisite
service period of the award, which is generally the option vesting term of three to four years. Prior to the adoption of
SFAS 123R, the Company recognized stock−based compensation expense in accordance with Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March
2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107
(“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share−based payments for
public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. See
Note 10 to the Consolidated Financial Statements for a further discussion of stock−based compensation.
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
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.
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
Recent Accounting Pronouncements
2006
$ (15,044)
743
$ (14,301)
2005
$ (11,175)
(878)
$ (12,053)
2004
$ (11,332)
452
$ (10,880)
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,”
(FIN 48) which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that companies recognize
in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on de−recognition,
classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 effective January 1, 2007. We
are currently evaluating the effect of this new pronouncement.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (“SFAS 157”). SFAS 157
provides a new single authoritative definition of fair value and provides enhanced guidance for measuring the fair
value of assets and liabilities and requires additional disclosures related to the extent to which companies measure
F−14
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 is effective for the Company as of December 29, 2007. The Company is
currently assessing the impact, if any, of SFAS 157 on its consolidated financial statements.
In November 2006, the FASB issued FASB Staff Position No. EITF 00−19−2, “Accounting for Registration
Payment Arrangements”, which specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included
as a provision of a financial instrument or other agreement, should be separately recognized and measured.
Additionally, this guidance further clarifies that a financial instrument subject to a registration payment arrangement
should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to
transfer consideration pursuant to the registration payment arrangement. This guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years.
We are assessing the impact of adopting EITF 00−19−2 and currently do not believe the adoption will have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (SFAS 159). SFAS 159 provides that companies may elect to measure specified financial
instruments and warranty and insurance contracts at fair value on a contract−by−contract basis, with changes in fair
value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some
companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently.
Companies may elect fair−value measurement when an eligible asset or liability is initially recognized or when an
event, such as a business combination, triggers a new basis of accounting for that asset or liability. The election is
irrevocable for every contract chosen to be measured at fair value and must be applied to an entire contract, not to
only specified risks, specific cash flows, or portions of that contract. SFAS 159 is effective as of the beginning of a
company’s first fiscal year that begins after November 15, 2007. Retrospective application is not allowed.
Companies may adopt SFAS 159 as of the beginning of a fiscal year that begins on or before November 15, 2007 if
the choice to adopt early is made after SFAS 159 has been issued and within 120 days of the beginning of the fiscal
year of adoption and the entity has not issued GAAP financial statements for any interim period of the fiscal year
that includes the early adoption date. Companies are permitted to elect fair−value measurement for any eligible item
within SFAS 159’s scope at the date they initially adopt SFAS 159. The adjustment to reflect the difference
between the fair value and the current carrying amount of the assets and liabilities for which a company elects
fair−value measurement is reported as a cumulative−effect adjustment to the opening balance of retained earnings
upon adoption. Companies that adopt SFAS 159 early must also adopt all of SFAS 157’s requirements at the early
adoption date. We are assessing the impact of adopting SFAS 159 and currently do not believe the adoption will
have a material impact on our consolidated financial statements.
Note 2 — Short−Term Investments — Restricted
Short−term investments consist of a 12−month Certificate of Deposit with a 4.5% interest rate to collateralize
capital leases funded under a lease line of credit with Mazuma Capital Corporation (see Note 8).
F−15
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3 — Accounts Receivable — Trade
Accounts receivable consisted of the following at December 29, 2006 and December 30, 2005 (in thousands):
Domestic
Foreign
Less allowance for doubtful accounts and sales returns
2006
$ 2,880
4,334
7,214
690
$ 6,524
2005
$ 2,066
3,514
5,580
480
$ 5,100
Note 4 — Inventories
Inventories consisted of the following at December 29, 2006 and December 30, 2005 (in thousands):
Raw materials and purchased parts
Work in process
Finished goods
2006
$
690
1,669
10,580
$ 12,939
2005
$
859
2,259
11,581
$ 14,699
Note 5 — Prepaids, Deposits, and Other Current Assets
Prepaids, deposits, and other current assets consisted of the following at December 29, 2006 and December 30,
2005 (in thousands):
Prepaids and deposits
Other current assets
2006
$ 1,455
468
$ 1,923
2005
$ 1,367
396
$ 1,763
Note 6 — Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 29, 2006 and December 30, 2005 (in
thousands):
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
2006
$ 13,053
5,985
4,952
23,990
18,144
5,846
$
2005
$ 12,174
5,498
4,832
22,504
16,909
5,595
$
Depreciation expense for each of the years ended December 29, 2006, December 30, 2005, and December 31,
2004 was approximately $2.0 million.
F−16
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 7 — 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 Marketing Japan 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.
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
2006
6,507
2,986
1,143
778
10,368
5,461
483
228
$
$
2005
$ 5,679
1,242
1,025
709
9,656
5,171
460
316
$
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 operations of joint venture
2006
$ 228
2005
$ 316
50%
50%
$ 114
$ 158
2004
$ (382)
50%
$ (191)
The Company did not receive dividends during 2006 and 2005. Approximately $81,000 of dividends were
received during 2004.
The Company recorded sales of certain IOL products to CSC of approximately $67,000, $180,000 and $185,000
in 2006, 2005 and 2004, respectively.
The Company purchased preloaded injectors from CSC in the amount of $2.2 million, $2.0 million, and
$1.7 million in 2006, 2005, and 2004, respectively.
The Company owed CSC $702,000 and $566,000 as of December 29, 2006 and December 30, 2005,
respectively, for purchases of preloaded injectors.
Note 8 — Notes Payable
The Company and its subsidiaries have credit facilities with different lenders to support operations in the U.S.,
Switzerland and Germany, respectively.
On June 8, 2006 the Company signed a Credit and Security agreement with Wells Fargo Bank for a revolving
credit facility. The credit facility provides for borrowings of 85% of eligible accounts receivable with a maximum of
$3.0 million, carries an interest rate of prime plus 1.5%, and is secured by substantially all of the assets of the
Company’s U.S. operations. The term of the agreement is three years and it contains certain financial covenants
relating to minimum calculated net worth, net loss, liquidity and restrictions on Company investments or loans to
affiliates and investments in capital expenditures, which only apply if the Company borrows and/or maintains an
outstanding advance. As of December 29, 2006, there were no borrowings outstanding. As the Company does not
F−17
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
satisfy minimum financial covenants in its U.S. operations that are a condition to borrowing, no borrowings are
available.
The Company’s lease agreement with Farnam Street Financial, Inc., as amended on October 9, 2006, provides
for purchases of up to $1,500,000 of property, plant and equipment. In accordance with the requirements of
SFAS 13 “Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a
three−year term. Under the agreement, the Company has the option to purchase any item of the leased property, at
the end of the respective items lease terms, at a mutually agreed fair value. Approximately $573,000 in borrowings
were available under this facility as of December 29, 2006.
The Company’s lease agreement with Mazuma Capital Corporation, as amended on August 16, 2006, provides
for purchases of up to $301,000 of property, plant and equipment. In accordance with the requirements of SFAS 13
“Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a two−year term.
The Company is required to open a certificate of deposit as collateral in STAAR Surgical Company’s name at the
underwriting bank for 50% of the assets funded by Mazuma. As of December 29, 2006, the Company had a
certificate of deposit for approximately $150,000 recorded as “short−term investment — restricted” with a 12−month
term at a fixed interest rate of 4.5%. The agreement also provides that the Company may elect to purchase any item
of the leased property at the end of its lease term for $1. No borrowings were available under this facility as of
December 29, 2006.
The Company’s Swiss credit agreement, as amended on August 2, 2004, provides for borrowings of up to
3.0 million Swiss Francs “CHF” (approximately $2.5 million based on the rate of exchange on December 29,
2006) for use in the Company’s Swiss operations, permits either fixed−term or current advances, and does not have
a termination date. The interest rate on current advances is 6.25% and 6.0% per annum, respectively, at
December 29, 2006 and December 30, 2005, plus a commission rate of 0.25% payable quarterly. There were no
current advances outstanding at December 29, 2006. The base interest rate for fixed−term advances follows
Euromarket conditions for loans of a corresponding term and currency plus an individual margin (5.0% at
December 29, 2006 and 4.25% at December 30, 2005, respectively). Fixed−term borrowings outstanding under the
note at December 29, 2006 and December 30, 2005, respectively, were CHF 2.2 million (approximately
$1.8 million based on the rate of exchange at December 29, 2006) and CHF 2.2 million (approximately
$1.7 million based on the rate of exchange on December 30, 2005). 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 German subsidiary entered into a credit agreement on August 30, 2005. The renewed credit agreement
provides for borrowings of up to 100,000 EUR ($131,000 at the rate of exchange on December 29, 2006), at a rate
of 8.5% per annum and does not have a termination date. The credit facility is not secured. There were no
borrowings outstanding as of December 29, 2006 and December 30, 2005.
The Company was in compliance with the covenants of these credit facilities as of December 29, 2006.
F−18
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 9 — 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
2006
2005
2004
$
— $
17
1,341
1,358
— $
18
1,221
1,239
—
—
1,057
1,057
—
179
179
$ 1,537
—
—
—
$ 1,239
—
—
—
$ 1,057
As of December 29, 2006, the Company had $89.4 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 2026.
The Company has net income taxes payable at December 29, 2006 and December 30, 2005 of $830,000 and
$923,000, respectively. Included in the Company’s foreign tax provision is approximately $700,000 in additional
taxes that may be assessed by the German Ministry of Finance pursuant the Domilens Investigation (see Note 12).
The provision (benefit) for income before taxes differs from the amount computed by applying the statutory
federal income tax rate to loss before taxes as follows (in thousands):
2006
2005
2004
Computed benefit for taxes
based on income at statutory
rate
Increase (decrease) in taxes
resulting from:
Permanent differences
State taxes, net of federal
income tax benefit
Tax effect attributed to
foreign operations
Other
Valuation allowance
Effective tax provision (benefit)
$ (4,592)
34.0%
$ (3,386)
34.0%
$ (3,484)
34.0%
210
11
733
—
5,175
(1.6)
(0.1)
(5.4)
—
(38.3)
19
12
300
29
4,265
(0.2)
(0.1)
(3.0)
(0.3)
(42.8)
36
—
158
7
4,340
(0.3)
(0.0)
(1.5)
(0.1)
(42.4)
rate
$
1,537
(11.4)% $
1,239
(12.4)% $
1,057
(10.3)%
The state tax provision is composed of an increase to the state deferred tax asset and corresponding increase to
the valuation allowance of $1,256,000, $945,000, and $1,010,000 for 2006, 2005 and 2004 respectively. This results
in a total state tax provision of $17,000 for 2006, $18,000, for 2005 and zero state tax provision for 2004.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $13.7 million at
December 29, 2006. 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
F−19
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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. Approximately
$179,000 in deferred tax liabilities are classified in other current liabilities in the 2006 Consolidated Balance Sheet.
Significant components of the Company’s deferred tax assets (liabilities) as of December 29, 2006 and
December 30, 2005 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 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
Reserve for restructuring costs
Capitalized R&D
Contributions
Stock−based payments
Valuation allowance
Total non−current deferred tax assets (liabilities)
2006
2005
$
$
$
$
120
675
238
3
—
99
(1,314)
(179)
36,515
879
75
—
464
409
89
691
(39,122)
$
— $
133
663
260
3
46
—
(1,105)
—
30,157
880
28
517
511
420
44
—
(32,557)
—
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
2006
$ (15,824)
2,317
$ (13,507)
2005
$ (12,665)
2,707
(9,958)
$
2004
$ (12,887)
2,641
$ (10,246)
F−20
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10 — Stockholders’ Equity
Common Stock
During fiscal year 2006, the Company issued 46,000 shares of restricted stock to certain employees and a
consultant in consideration for future services to the Company. As of December 29, 2006, none of the shares were
vested.
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. During fiscal 2006, 2,039 of the shares 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.
Restricted shares are issued at fair market value on the date of grant, vest over a period of three or four years,
and are subject to forfeiture until vested or the service period is terminated. Prior to 2006, the cost of the restricted
stock was recorded as deferred equity compensation in Additional Paid−in Capital and amortized over the vesting
period. Beginning in 2006, the amortization is included in stock−based compensation.
Stock Based Compensation
As of December 29, 2006, the Company has multiple share−based compensation plans, which are described
below. The Company issues new shares upon option exercise once the optionee remits payment for the exercise
price. The compensation cost that has been charged against income for the 2003 Omnibus Plan and the 1998 Stock
Option Plan totaled $1,725,000 for the fiscal year ended December 29, 2006, which included $1,634,000,
respectively, for the implementation of SFAS 123R, and $91,000 for restricted stock grants. In addition, for the
fiscal year ended December 29, 2006, there was $116,000, of compensation cost charged against income for
consultant stock options. There was no income tax benefit recognized in the income statement for share−based
compensation arrangements as the Company fully offsets net deferred tax assets with a valuation allowance. In
addition, the Company capitalized $155,000 of SFAS 123R compensation to inventory for the fiscal year ended
December 29, 2006 and recognizes those amounts as expense under in Cost of Sales as the inventory is sold. See the
table below for comparative purposes of prior year amounts (in thousands, except per share data):
Net loss as reported
Add: Stock−based compensation included in reported net loss
Less: Stock−based compensation expense determined under the
fair−value method for all awards
Pro forma net loss
Net loss per share, basic and diluted, as reported
Pro forma net loss, basic and diluted, as reported
F−21
December 29,
2006
(15,044)
1,841
$
$
$
(1,841)
(15,044)
(.60)
N/A
Fiscal Year Ended
December 30,
2005
(11,175)
—
$
(1,038)
(12,213)
(.47)
(.52)
$
$
$
December 31,
2004
(11,332)
—
$
(739)
(12,071)
(.58)
(.62)
$
$
$
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Option Plans
In fiscal year 2003, the Board of Directors approved the 2003 Omnibus Equity Incentive Plan (the “2003 Plan”)
authorizing awards of equity compensation, including options to purchase common stock and restricted shares of
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. Each
year the number of shares reserved for issuance under the 2003 Plan is increased if necessary to provide that 2% of
the total shares of common stock outstanding on the immediately preceding December 31 will be reserved for
issuance. The 2003 Plan provides for various forms of stock−based incentives. To date, of the available forms of
awards under the 2003 Plan, the Company has granted only stock options and restricted stock. Options under the
plan are granted at fair market value on the date of grant, become exercisable over a three− or four−year period, or as
determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant.
Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the 2003
Plan). Restricted stock grants under the 2003 Plan generally vest over a period of three or four years. Pursuant to the
plan, options for 1,817,000 shares were outstanding at December 29, 2006 with exercise prices ranging between
$3.81 and $11.24 per share. There were 52,000 shares of restricted stock outstanding at December 29, 2006.
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 common stock or awards of common stock.
The options under the plan were granted at fair market value on the date of grant, become exercisable over a
three−year period, and expire 10 years from the date of grant. Pursuant to this plan, options for 500,000 were
outstanding at December 29, 2006, 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
options to purchase common stock or awards of 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 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 three−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 945,000 were outstanding at December 29, 2006 with exercise prices ranging between $2.96 and
$13.625 per share. No further awards may be made under this plan.
In fiscal year 1995, the Company adopted the 1995 Consultant Stock Plan, authorizing the granting of options to
purchase common stock or awards of common stock. Generally, options under the plan were 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 95,000 shares were outstanding at December 29, 2006 with exercise prices
ranging from $1.70 to $3.00 per share. No further awards may be made under this plan.
Under provisions of the Company’s 1991 Stock Option Plan, 2.0 million shares were reserved for issuance.
Generally, options under this plan were granted at fair market value at the date of the grant, become exercisable over
a three−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 shares were outstanding at December 29, 2006 with
exercise prices ranging from $9.56 to $10.18 per share. No further awards may be made under this plan.
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 shares were
outstanding at December 29, 2006 with exercise prices ranging between $9.375 and $10.63.
F−22
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the fiscal year ended December 29, 2006, officers, employees and others exercised 753,000 options
from the 1995, 1996, 1998, non qualified and 2003 stock option plans at prices ranging from $1.91 to $7.00 resulting
in net cash proceeds to the Company totaling $2,890,000.
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.
Assumptions
The fair value of each option award is estimated on the date of grant using a Black−Scholes option valuation
model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility
of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination
behavior. The expected term of options granted is derived from the historical exercise activity over the past
15 years, and represents the period of time that options granted are expected to be outstanding. The Company used
the shortcut method to calculate the expected term of its options granted during the first quarter of 2006 that had a
four year vesting life as it has no historical experience for the expected term of options with a four−year life. All
other options granted with a three year vesting life during the fiscal year ended December 29, 2006 had an expected
term of 5.2 years derived from historical exercise and termination activity. The Company has calculated a 10.5%
estimated forfeiture rate used in the model for fiscal year 2006 option grants based on historical forfeiture
experience. The risk−free rate for periods within the contractual life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.
Expected dividend yield
Expected volatility
Risk−free interest rate
Expected term (in years)
Fiscal Year Ended
December 29,
2006
December 30,
2005
0%
73%
4.17%
5.2&7
0%
70%
4.35%
4.3
A summary of option activity under the Plans as of December 29, 2006, December 30, 2005, and
December 31, 2004, and changes during the years then ended are presented below:
Options
Outstanding at December 30, 2005
Granted
Exercised
Forfeited or expired
Outstanding at December 29, 2006
Exercisable at December 29, 2006
Weighted−
Average
Exercise
Price
$
$
$
6.23
7.35
3.84
4.15
5.62
7.29
Shares
(000’s)
3,870
401
(753)
(46)
3,472
2,440
Weighted−
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(000’s)
5.6
4.3
$ 5,109
$ 3,615
F−23
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted−average grant−date fair value of options granted during the fiscal year ended December 29, 2006
was $4.96. The total fair value of options vested during fiscal year ended December 29, 2006 was $1,725,000. The
total intrinsic value of options exercised during the year ended December 29, 2006 was $2,038,000.
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 31, 2004
Options exercisable at December 30, 2005
Number of
Shares
3,219
531
(250)
(348)
3,152
1,044
(36)
(290)
3,870
2,535
2,728
Weighted
Average
Exercise
Price
$
$
$
$
$
$
$
$
$
$
$
6.84
7.76
3.32
8.27
7.12
4.40
3.65
9.55
6.23
7.27
6.77
A summary of the status of the Company’s non−vested shares as of December 29, 2006 and changes during the
period is presented below:
Nonvested
Shares
Nonvested at December 30, 2005
Granted
Vested
Forfeited
Nonvested at December 29, 2006
Weighted−
Average
Grant Date
Fair Value
2.99
$
4.86
1.98
3.71
3.30
$
Shares
(000’s)
1,142
401
(484)
(27)
1,032
As of December 29, 2006, there was $2.2 million of total unrecognized compensation cost related to
non−vested share−based compensation arrangements granted under the Plans. That cost is expected to be recognized
over a weighted−average period of 1.41 years.
F−24
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
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 29,
2006 (in thousands, except per share data):
Range of
Exercise
Prices
$ 1.70 to $ 2.15
$ 2.96 to $ 4.30
$ 4.64 to $ 6.92
$ 7.00 to $10.19
$10.60 to $13.63
$ 1.70 to $13.63
Number
Outstanding
at
12/29/06
45
1,319
616
664
828
3,472
Receivables from Former Directors
Options
Outstanding
Weighted−Average
Number
Remaining
Weighted−Average
Exercisable at Weighted−Average
Contractual Life
4.7 years
5.6 years
6.9 years
6.9 years
3.8 years
5.6 years
$
$
$
$
$
$
Exercise Price
12/29/06
Exercise Price
1.70
3.76
6.06
8.28
11.47
5.62
45
896
291
380
828
2,440
$
$
$
$
$
$
1.70
3.68
5.65
8.64
11.47
7.29
As of December 29, 2006 and December 30, 2005, notes receivable (excluding reserves) from a former
director totaling $0 and $2.0 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 were secured by stock
pledge agreements and matured on various dates through July 1, 2006.
During 2006, the Company settled the last of its notes receivable from a former director totaling $1,961,000
(including accrued interest) for a cash payment of $175,000 and proceeds from the sale of 120,000 shares of pledged
Company stock of $870,000, which was received on October 3, 2006. The deficiency on the notes was applied
against reserves recorded against the notes in 2005 and 2004 and in 2006, $331,000 of excess reserves was reversed.
Amounts are included in the Company’s Consolidated Statement of Operations — Note reserves (reversals).
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. Current and long−term
obligations under capital leases are classified in other current liabilities and other long−term debt in the Company’s
Consolidated Balance Sheets.
Estimated future minimum lease payments under leases having initial or remaining non−cancelable lease terms
in excess of one year as of December 29, 2006 were approximately as follows (in thousands):
Fiscal
Year
2007
2008
2009
2010
2011
Total minimum lease payments
Less amounts representing interest
F−25
Operating
Capital
Leases
1,344
1,199
762
675
274
4,254
—
4,254
$
$
$
Leases
$
647
590
418
65
—
$ 1,720
(263)
$ 1,457
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Rent expense was approximately $1.2 million for each of the years ended December 29, 2006, December 30,
2005, and December 31, 2004, respectively.
The Company had the following assets under capital lease at December 29, 2006 and December 30, 2005
(in thousands):
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
2006
$ 1,290
145
111
1,546
109
$ 1,437
2005
$ 14
—
—
14
7
7
$
Depreciation expense for assets under capital lease for each of the years ended December 29, 2006,
December 30, 2005, and December 31, 2004 was approximately $146,000, $4,000 and $4,000, 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 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
2006, 2005, and 2004 were approximately $502,000, $728,000, and $644,000, respectively.
As of December 29, 2006, estimated future annual purchase commitments under this contract are as follows
(in thousands):
Fiscal
Year
2007
2008
$
600
689
$ 1,289
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’ liability insurance through a third party carrier.
Tax Filings
The Company’s tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business.
These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or
potentially through the courts. Management believes the Company has adequately provided for any ultimate
F−26
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amounts that are likely to result from these audits; however, final assessments, if any, could be different than the
amounts recorded in the consolidated financial statements.
Employment Agreements
The Company’s Chief Executive Officer and certain other officers have as provisions of their employment
agreements certain rights, including continuance of cash compensation and benefits, upon a “change in control,”
which may include an acquisition of substantially all of its assets.
Litigation and Claims
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
Other current liabilities consisted of the following at December 29, 2006 and December 30, 2005 (in
thousands):
Accrued salaries & wages
Accrued income taxes
Commissions due to outside sales representatives
Payable related to acquisition of minority interest in Australia subsidiary
Accrued audit expenses
Accrued insurance
Other
No item in “other” above exceeds 5% of total other current liabilities.
Note 13 — Related Party Transactions
2006
$ 1,974
830
800
770
517
484
2,199
$ 7,574
2005
$ 1,934
923
654
—
287
484
1,527
$ 5,809
The Company has had significant related party transactions as discussed in Notes 7, 10, 11 and 17.
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 29, 2006 and December 30, 2005 were $116,000 and $110,000, 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 29, 2006, December 30, 2005, and December 31, 2004,
were $0, $2,000, and $13,000, respectively.
F−27
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 14 — Supplemental Disclosure of Cash Flow Information
Interest paid was $175,000, $181,000 and $159,000 for the years ended December 29, 2006, December 30,
2005, and December 31, 2004, respectively. Income taxes paid amounted to approximately $731,000, $1,047,000
and $1,602,000 for the years ended December 29, 2006, December 30, 2005, and December 31, 2004, respectively.
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
Note 15 — Net Loss Per Share
2006
2005
2004
$ 1,228
$
200
$
—
(331)
331
746
(746)
500
(500)
$
— $
—
—
—
— $
—
—
—
203
1,107
(542)
(768)
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
2006
25,227
—
25,227
2005
23,704
—
23,704
2004
19,602
—
19,602
Potential common shares of 2.6 million, 3.9 million, and 3.1 million for the fiscal years ended December 29,
2006, December 30, 2005, and December 31, 2004, respectively, were excluded from the computation as the shares
would have had an anti−dilutive effect.
Note 16 — Geographic and Product Data
The Company markets and sells its products in approximately 50 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
F−28
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
2006
2005
2004
$ 22,293
21,135
2,178
10,676
$ 56,282
$ 18,715
22,433
2,722
7,433
$ 51,303
$ 21,643
22,128
1,914
6,000
$ 51,685
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):
Cataract
Refractive
Glaucoma
Total
Net Sales by Surgical Line
2006
$ 43,099
12,514
669
$ 56,282
2005
$ 45,361
5,288
654
$ 51,303
2004
$ 46,772
4,066
847
$ 51,685
The composition of the Company’s long−lived assets, consisting of property and equipment, patents and
licenses, 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
2006
2005
$
8,153
7,208
1,140
1,318
$ 17,819
$
8,072
6,952
1,646
1,379
$ 18,049
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 17 — Subsequent Event
On March 21, 2007, the Company executed a promissory note to Broadwood Partners, L.P. (Noteholder), in the
amount of $4.0 million, the proceeds of which may be used for general corporate purposes. The note bears interest
at a rate of 10% per annum, payable quarterly, is unsecured, may be prepaid without penalty, and matures on
March 21, 2010. The note contains certain affirmative and negative covenants but no financial covenants (other than
avoidance of insolvency). The note provides for the issuance of 70,000 warrants upon execution of the note and
additional
F−29
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
warrants quarterly so long as the note is outstanding. The warrant agreement provides that the Company will register
the stock for resale with the SEC. Based on publicly available information filed with the Securities and Exchange
Commission (the “SEC”), on the date of the transaction Broadwood Partners L.P. beneficially owned 2,492,788
shares of the Company’s common stock, comprising 9.7% of the Company’s common stock as of March 21, 2007,
and Neal Bradsher, President of Broadwood Partners, L.P., may have been deemed to beneficially own 2,518,688
shares of the Company’s common stock, comprising 9.8% of the Company’s common stock as of that date.
STAAR’s activities as a sponsor of biomedical research are subject to review by the Bioresearch Monitoring
Program of the FDA Office of Regulatory Affairs (“BIMO”). On March 14, 2007, BIMO concluded a routine audit
of the Company’s clinical trial records as a sponsor of biomedical research in connection with the Company’s
Supplemental Pre−Market Approval application for the Toric ICL (“TICL”). At the conclusion of the audit the
Company received eight Inspectional Observations on FDA Form 483 noting noncompliance with regulations. The
Company is preparing its response to the Inspectional Observations and expects to address the concerns raised by
BIMO through voluntary corrective actions. Most of the observed instances of non−compliance took place during
the 2000−2004 period and the Company expects to show that some of these have already been addressed by
corrective actions made in response to BIMO’s observations of December 11, 2003 in connection with the
Company’s application for the ICL.
The Company does not believe that the Inspectional Observations affect the integrity of the Toric clinical study.
However, the determination of whether the Inspectional Observations affect the use of the Toric clinical study in the
Toric application will be at the discretion of the FDA Office of Device Evaluation (“ODE”). Obtaining FDA
approval of medical devices is never certain. The Company cannot assure investors that the ODE will grant approval
to the TICL, or that the scope of requested TICL approval could not be limited by the FDA or the Ophthalmic
Devices Panel.
Note 18 — Quarterly Financial Data (Unaudited)
Summary unaudited quarterly financial data from continuing operations for fiscal 2006 and 2005 is as follows
(in thousands except per share data):
December 29,
2006
Revenues
Gross profit
Net loss
Basic and diluted loss per share
December 30,
2005
Revenues
Gross profit
Net loss
Basic and diluted loss per share
1st Qtr.
$ 13,315
6,399
(3,362)
(.14)
1st Qtr.
$ 13,678
6,450
(2,338)
(.11)
2nd Qtr.
$ 14,561
7,040
(3,218)
(.13)
2nd Qtr.
$ 13,910
6,610
(2,110)
(.09)
3rd Qtr.
$ 13,139
6,401
(2,789)
(.11)
3rd Qtr.
$ 11,647
5,197
(3,302)
(.13)
4th Qtr.
$ 15,267
6,593
(5,675)
(.22)
4th Qtr.
$ 12,068
5,529
(3,425)
(.14)
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.
Significant Fourth Quarter Adjustments
During the fourth quarter of 2006, the Company recorded two significant adjustments. The Company took an
obsolescence charge of $807,000 against certain IOL inventory in anticipation of new product launches that are
expected to take place in 2007. The Company will continue to monitor the inventory reserve to ensure that the
F−30
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amount is appropriate. In addition to the inventory reserve the Company has reserved $700,000 for additional taxes
in connection with the findings at the Company’s German subsidiary. The Company will seek to reduce the amount
in discussions with the German Ministry of Finance.
F−31
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
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 29, 2007 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 29, 2006, and for each of the three
years in the period ended December 29, 2006. 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.
Los Angeles, California
March 29, 2007
By:
/s/ BDO Seidman, LLP
F−32
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Table of Contents
Column
A
Description
2006
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Allowance for doubtful accounts and sales returns
deducted from accounts receivable in balance sheet
Deferred tax asset valuation allowance
Notes receivable reserve
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
$
Column B
Balance at
Beginning
of Year
$
480
33,662
1,246
$ 35,388
$
460
28,172
500
$ 29,132
734
22,075
—
$ 22,809
F−33
Column C
Column D
Additions
Deductions
(In thousands)
Column E
Balance at
End of
Year
$
$
$
$
$
$
348
6,774
—
7,122
191
5,490
746
6,427
236
6,097
500
6,833
$
$
$
$
$
$
138
—
1,246
1,384
$
690
40,436
—
$ 41,126
171
—
—
171
510
—
—
510
$
480
33,662
1,246
$ 35,388
$
460
28,172
500
$ 29,132
Deferred tax asset valuation allowance
Notes receivable reserve
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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. 333−136213, No. 333−124022, No. 333−116901,
No. 333−111140, and No. 333−106989 of STAAR Surgical Company of our reports dated March 29, 2007,
relating to the consolidated financial statements and schedule and the ineffectiveness 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 29, 2007 relating to the financial statement schedule which
appears in this Form 10−K.
Los Angeles, California
March 29, 2007
By:
/s/ BDO Seidman, LLP
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
CERTIFICATIONS
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;
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 29, 2007
By:
/s/ David Bailey
David BaileyPresident, Chief Executive Officer
andDirector (principal executive officer)
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
CERTIFICATIONS
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;
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 29, 2007
By:
/s/ Deborah Andrews
Deborah AndrewsChief Financial Officer(principal
accounting andfinancial officer)
Source: STAAR SURGICAL CO, 10−K, March 29, 2007
Exhibit 32.1
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 29, 2006 (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.
Dated: March 29, 2007
By:
/s/ David Bailey
Dated :March 29, 2007
David BaileyPresident, Chief Executive Officerand
Director(principal executive officer)
By:
/s/ Deborah Andrews
Deborah AndrewsChief Financial Officer
(principalaccounting 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.
_______________________________________________
Created by 10KWizard www.10KWizard.com
Source: STAAR SURGICAL CO, 10−K, March 29, 2007