UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended January 3, 2014
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-11634
For the Transition period from to
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)
Common Stock, $0.01 par value
(Name of each exchange on which registered)
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 No
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 No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 28, 2013, the last business
day of the registrant’s most recently completed second fiscal quarter, was approximately $260,175,508 based on the closing price per share of $10.15 of
the registrant’s Common Stock on that date.
The number of shares outstanding of the registrant’s Common Stock as of February 28, 2014 was 37,966,937.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2014 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.
STAAR SURGICAL COMPANY
TABLE OF CONTENTS
PART 1
Page
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
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
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors and Executive Officers and corporate governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and director independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
2
15
28
28
28
28
29
31
32
45
45
45
46
47
48
48
48
48
48
49
1
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
STAAR Surgical Company designs, develops, manufactures and sells implantable lenses for the eye and delivery systems used to
deliver lenses into the eye. We are the leading maker of lenses used worldwide in corrective or “refractive” surgery, and we also make
lenses for use in surgery that treats cataracts. All of the lenses we make are foldable, which permits the surgeon to insert them through a
small incision during minimally invasive surgery.
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®, Visian®, Collamer®, CentraFlow®, AquaPort®, nanoFLEX®™, nanoPOINT™, Epiphany®™, and AquaFlow™
are trademarks or registered trademarks of STAAR in the United States (U.S.) and other countries. Collamer® is the brand name for
STAAR’s proprietary collagen copolymer lens material.
A glossary explaining many of the technical terms used in this report begins on page 14. The reader may also find it helpful to
refer to the discussion of the structure and function of the human eye that begins on page 3.
Operations
STAAR has significant operations globally. Activities outside the U.S. accounted for 82% of our total sales in fiscal year 2013,
primarily due to the pacing of product approvals and commercialization that tend to occur first outside the U.S. STAAR sells its products
in more than 60 countries, with direct distribution in the United States, Canada, Japan and Spain, and independent distribution in the
remainder of the world.
STAAR maintains operational and administrative facilities in the United States, Switzerland and Japan. While STAAR has
initiated a project to consolidate all of its manufacturing to its Monrovia, California facility, its current global operations are as follows:
• United States. STAAR operates its global administrative headquarters and a manufacturing facility in Monrovia, California. The
Monrovia manufacturing facility principally makes Collamer and silicone intraocular lenses (IOLs), and injector systems for its
IOLs. We also manufacture the Visian implantable Collamer lenses (ICLs) and preloaded IOL injectors. STAAR manufactures
the raw material for Collamer lenses (both IOLs and ICLs) and the AquaFlow Device (for the treatment of glaucoma) in a
facility in Aliso Viejo, California.
• Switzerland. STAAR operates an administrative, manufacturing and distribution facility in Nidau, Switzerland under its wholly
owned subsidiary, STAAR Surgical AG. The Nidau manufacturing facility makes STAAR’s ICL products and also
manufactures the AquaFlow Device. After consolidating manufacturing in Monrovia, California, STAAR plans to continue to
maintain an administrative and distribution facility in Switzerland.
• Japan. STAAR operates administrative and distribution facilities in Japan under its wholly owned subsidiary, STAAR Japan
Inc. STAAR Japan’s administrative facility is located in Shin-Urayasu and its distribution facility is located in Ichikawa City.
STAAR final packages its silicone preloaded IOL injectors at the Ichikawa City facility.
2
The global nature of STAAR’s business operations subjects it to risks, including the effect of changes in currency exchange rates,
differences in laws, including laws protecting intellectual property and regulating medical devices, political risks and the challenge of
managing foreign subsidiaries. Our global manufacturing consolidation plan also exposes us to the risk of unexpected costs and possible
supply interruptions. See “Item 1A. Risk Factors —Risks Related to Our Business — The global nature of our business may result in
fluctuations and declines in our sales and profits”; “—The success of our international operations depend on our successfully managing
our foreign subsidiaries”; “—Non-compliance with anti-corruption laws could lead to penalties or harm our reputation”; and “—We
may not realize the expected benefits of our manufacturing consolidation project and tax strategies.”
The Human Eye
The following discussion provides background information on the structure, function and some of the disorders of the human eye
to enhance the reader’s understanding of our products described in this report. 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 interior surface of the cornea is lined with a single layer of flat, tile-like endothelial cells, whose function is to maintain the
transparency of the cornea. The iris is a pigmented 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 natural 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 medical term for the natural lens that is present
in the eye from birth is “crystalline lens.” The retina is a layer of nerve tissue in the back of the eye 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, 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 anterior chamber, which also contains aqueous humor, is the space in the eye
behind the cornea and in front of the iris. 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. One of the most prevalent ocular disorders is cataracts.
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 generally are 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 known 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 refractive disorder that limits a person’s ability to see in the near and middle distance range as the natural crystalline lens
loses its elasticity, reducing the eye’s ability to accommodate or adjust its focus for varying distances.
Financial Information about Segments and Geographic Areas
STAAR’s principal products are ICLs and IOLs used in ophthalmic surgery. Because STAAR generates 100% of its sales from
the ophthalmic surgical product segment, it 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
In designing our products we have the following goals:
• To improve patient outcomes;
• To minimize patient risk; and
• To simplify ophthalmic procedures or post-operative care for the surgeon and the patient.
3
Visian ICL (ICLs). Refractive surgery corrects the types of visual disorders that glasses or contact lenses have traditionally treated
(myopia, hyperopia, astigmatism and presbyopia). The field of refractive surgery includes both lens-based procedures, using products
like our ICL, and laser-based procedures like LASIK. The ICL product line treats a wide range of refractive errors within commonly
known vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism.
The ICL folds for minimally invasive implantation behind the iris and in front of the natural crystalline lens, using techniques
similar to those used to implant an IOL during cataract surgery, except that the natural lens remains intact in the eye. 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 surgeon typically implants the ICL using topical anesthesia on an outpatient basis. The patient usually recovers vision
within one to 24 hours.
The ICL is the only posterior chamber phakic IOL (PIOL) approved for sale in the U.S., and we believe it is the world’s largest
selling phakic IOL. We believe that our leadership in commercializing this technology results from a number of factors, including
proprietary design features and the biocompatibility of the patent-protected Collamer material. STAAR believes that the
biocompatibility of the Collamer material used for the ICL (and Toric ICL –TICL) is a significant factor in the ability to place this lens
safely in the posterior chamber of the eye. Compared to lenses placed in the anterior chamber, we believe that placement in the posterior
chamber provides superior optical results and superior cosmetic appearance, and poses less risk of damage to the cornea.
The ICL has been implanted into more than 400,000 eyes worldwide. The FDA approved the ICL for myopia for use in the U.S.
in December 2005. In September 2011, STAAR launched the ICL with CentraFLOW technology, which uses a proprietary port in the
center of the ICL optic. The port is of a size intended to optimize the flow of fluid within the eye without affecting the quality of vision,
and eliminates the need for the surgeon to perform a YAG peripheral iridotomy procedure days before the ICL implant. By simplifying
the procedure and increasing patient comfort, the CentraFLOW technology makes the superior visual outcomes of the ICL available
through a surgical implantation experience closer to LASIK. Outside the U.S., countries where we may sell the ICL and the TICL, which
corrects for both astigmatism and myopia, include the following: the countries that require the European Union CE Mark, China,
Canada, Korea, Japan, India, Brazil, the Middle East and Singapore. We sell the ICL with CentraFLOW technology in countries that
require the European Union CE Mark, Korea, Japan, India and certain countries in the Middle East. STAAR submitted its application for
U.S. approval of the TICL to the FDA in 2006 which is currently under review (see “Regulatory Matters – Regulatory Requirements in
the United States – Status of Toric ICL Submission”).
The Hyperopic ICL, which treats far-sightedness, is approved for use in countries that require the European Union CE Mark and
in Canada.
The ICL is available for myopia in the United States in four lengths and 27 powers for each length. Outside the U.S., the ICL is
available for myopia and hyperopia and is available in multiple models and lengths totaling hundreds of different types of inventoried
lenses. This requires us to carry a significant amount of inventory to meet the customer preference for rapid delivery. Outside the U.S.
the Toric ICL is available for myopia and hyperopia in the same powers and lengths and also carries additional parameters of cylinder
and axis. As a result, we often make the Toric ICL to order, though we were still able to deliver approximately 76% of our Toric ICLs
from stock during 2013.
Sales of ICLs (including TICLs) accounted for approximately 61% of our total sales in fiscal 2013, 55% of our total sales in fiscal
2012, and 51% of our total sales in fiscal 2011.
Minimally Invasive Intraocular Lenses (IOLs). We produce and market a line of foldable IOLs for use in minimally invasive
cataract surgical procedures. Because these lenses fold, surgeons can implant them into the eye through an incision less than 3mm in
length, and for one model as small as 2.2 mm. Surgeons prefer foldable lenses and small incisions because clinical evidence has shown
that larger incisions can induce corneal astigmatism, extend healing times, and increase the possibility of infection. Once inserted, the
IOL unfolds naturally to replace the cataractous lens.
In most countries government agencies reimburse the cost of cataract surgery and IOLs. Some countries permit ophthalmic
surgeons and surgical centers to collect an additional fee from the cataract patient for products and services that go beyond standard
treatment. STAAR’s strategic direction is to offer IOLs that fall within the categories that offer an opportunity to increase average selling
prices. For example, the U.S. Center for Medicare and Medicaid Services (CMS) allows the provider to receive an additional payment
from the patient for the premium lens and associated services. STAAR’s Toric IOL falls in this category.
4
Currently, our foldable IOLs are manufactured from both our proprietary Collamer material and silicone. STAAR offers both
materials in two differently configured styles: the single-piece design where both the optic and haptics are made of the same material and
the three-piece design where Polyimide loop haptics are attached to the optic. We believe that the physical and optical properties of
Collamer, which has a high water content, gives it distinct advantages as a material for prosthetic IOLs used in cataract surgery. The
selection of one style over the other is primarily based on the preference of the ophthalmologist. STAAR also sells aspheric IOLs made
of silicone and Collamer, which use optical designs that produce a clearer image than traditional spherical lenses, especially in low light.
For example, the STAAR nanoFLEX IOL is a single piece Collamer aspheric optic and can be delivered through a 2.2 mm
micro-incision using STAAR’s nanoPOINT Injection System.
We have developed and currently market, principally in the U.S., 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.
Also, in Japan, Europe and China, we sell a “Preloaded Injector” with a silicone or acrylic IOL packaged and shipped in a
pre-sterilized, disposable injector ready for use in cataract surgery. We believe the Preloaded Injector offers surgeons improved
convenience and reliability. The acrylic-lens-based Preloaded Injector uses a lens supplied by a third party. The supplier also assembles
and sells the acrylic Preloaded Injector under its own brand, using injector parts purchased from our subsidiary, STAAR Japan. STAAR
Japan’s agreement with the supplier provides for the sale of the acrylic Preloaded Injector in additional territories by mutual agreement
of the two companies.
Sales of IOLs accounted for approximately 33% of our total sales in fiscal 2013, 41% of our total sales in fiscal 2012, and 44% of
our total sales in fiscal 2011.
Other Surgical Products
We also sell other related instruments and devices that we manufacture or that are manufactured by others, but we have
deemphasized these products in the past few years due to their relatively lower overall gross profit margins. For example, in 2012 we
exited the surgical pack business. Sales of other surgical products accounted for approximately 5% of our total sales in fiscal 2013, 4% of
our total sales in fiscal 2012, and 5% of our total sales in fiscal 2011.
Sources and Availability of Raw Materials
STAAR uses a wide range of raw materials in the production of its products. STAAR purchases most of the raw materials and
components 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 or materials and are available from a
variety of sources although we do not typically pursue regulatory and quality certification of multiple sources of supply. Due to the
production capacity constraints with our third party supplier of acrylic IOLs, we are backlogged for those products. We continue to
discuss increasing supply from our supplier while also seeking alternative suppliers.
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, copyrights, and trade secrets. 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 January 3, 2014, we owned
approximately 79 United States and foreign patents and had approximately 11 patent applications pending. In addition, as of January 3,
2014, our Japanese subsidiary owned approximately 75 Japanese and foreign patents and had approximately 10 patent applications
pending.
We consider our patents to be significant when they protect the exclusivity of our material products in the marketplace or provide
an opportunity to obtain material royalties or cross-licenses of intellectual property from other manufacturers. Because we have limited
knowledge of the research and development efforts and strategic plans of our competitors, we can only estimate the value of our patents
and the significance of any particular patent’s expiration. Competitors may be able to design products that avoid infringing on patents
that we regard as valuable, or they may find patents that we regard as less significant to be obstacles to their development of competing
products. Our internal assessments of our patents include confidential information, the disclosure of which would cause significant
competitive harm to STAAR.
Our material patents generally fall within three areas of technology: (1) design of a posterior chamber phakic intraocular lens used
to treat refractive errors of the eye (ICLs); (2) the Collamer lens material; and (3) lens delivery systems for folding intraocular lenses
(injectors and cartridges, both stand-alone and preloaded, used with ICLs and IOLs).
5
STAAR has several patents covering design features that we believe are important to the safety and effectiveness of its ICLs, and
that we believe would be necessary or desirable for any competing posterior chamber phakic IOL. These patents expire between 2014
and 2016. Collamer belongs to a family of materials known as collagen copolymers. Collagen copolymers are compounds formed by
joining molecules of collagen derived from biological sources with synthetic monomer molecules. The patents that underlie the specific
formulation and manufacturing methods for Collamer expire between 2014 and 2016, with the last blocking patent expiring in 2017.
Over the past two years, we have filed patent applications covering new lens designs, and new lens delivery systems.
STAAR also owns numerous patents covering the technology of foldable lens delivery systems, including injectors, cartridges
and preloaded injectors and their specific design features. This group of patents includes relatively recent patents with up to 10 years of
life remaining. However, patents covering the more fundamental lens delivery technologies began expiring in 2013 and will continue in
2014.
Worldwide, we sell all of our major products under trademarks we consider to be important to our business. The scope and
duration of trademark protection varies widely throughout the world. In some countries, trademark protection continues only as long as
the mark is used. Other countries require registration of trademarks and the payment of registration fees. Trademark registrations are
generally for fixed but renewable terms.
We protect our proprietary technology, in part, through confidentiality and nondisclosure agreements with employees,
consultants and other parties. Our confidentiality agreements with employees and consultants generally contain standard provisions
requiring those individuals to assign to STAAR, without additional consideration, inventions conceived or reduced to practice by them
while employed or retained by STAAR, subject to customary exceptions.
Seasonality
Seasonality does not materially affect our sales.
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.
We sell our products directly through our own sales representatives in the U.S., Canada, Japan and Spain and, supplemented by
independent distributors, in approximately 60 countries worldwide. We maintain a global marketing team, as well as regional marketing
personnel to support the promotion and sale of our products. The global marketing department supports selling efforts by developing and
providing promotional materials, educational courses, speakers’ programs, participation in trade shows and technical presentations.
Where we distribute products directly, we rely on local sales representatives to help generate sales by promoting and demonstrating our
products with physicians. In the U.S., we also rely on independent sales representatives to sell our products under the supervision of
directly employed sales managers. In Japan, we also sell through a local distributor.
A single customer, WooJeon Medical Co., Ltd., our Korean distributor, has accounted for more than 10% of our consolidated net
revenue in each of the last three fiscal years. WooJeon generated the following amounts and percentages of revenue in those years:
Revenue Generated by WooJeon
Net Revenue
($, in
thousands)
$
$
$
7,743
6,713
8,142
Fiscal Year
2013
2012
2011
Net Revenue
as Percentage
of
Consolidated
Net Revenue
10.7%
10.5%
13.0%
6
Backlog
The dollar amount of STAAR’s backlog orders is not significant in relation to total annual sales. We generally keep sufficient
inventory on hand to ship product when ordered.
The ICL is manufactured to address refractive prescriptions across a broad range of correction, resulting in a large number of
Stock Keeping Units (SKUs). The challenge of maintaining inventory in all models can result in a backlog in customer orders. Backlog
is not currently at a significant level in relation to our total annual sales. However, unexpectedly large orders for ICLs could increase our
backlog. STAAR believes it has sufficient capacity to ramp up production levels to meet demand and that any backlogs will be
temporary. However, delays in filling orders can result in lost sales if alternative refractive treatments are available to the patient.
Because Toric ICLs treat an even greater variety of refractive errors and at times must be custom made for the patient, customers are
accustomed to a special order procedure and do not expect immediate delivery of Toric ICLs from inventory.
Our pre-loaded single piece acrylic IOL has experienced backlogs due to manufacturing capacity constraints occurring at our
third-party acrylic lens supplier. Although the supplier is working to resolve the issue, and plans to do so by the second half of fiscal year
2014, there is no guaranty of increased supply to us. While we continue to exploring alternatives, to date we have been unable to identify
and validate an alternative supplier.
Government Contracts
No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election
of the U.S. Government.
Competition
Competition in the ophthalmic surgical product market is intense and is primarily driven by technological innovation and the
regulatory approval required to commercialize it in the key markets around the world. The development of new or improved products
may make existing products less attractive, reduce them to commodity status or even make them obsolete. To remain competitive,
companies such as STAAR must devote continued efforts and significant financial resources to enhance their existing products and to
develop new products.
In the refractive market, our ICL technology competes with other elective surgical procedures such as laser vision correction or
LASIK, for those consumers who are looking for an alternative to eyeglasses or contact lenses to correct their vision.
We believe our primary competition in selling the ICL to patients seeking surgery to correct refractive conditions lies not in
similar products to the ICL, but in the much better known and widely available laser surgical procedures. Novartis (formerly Alcon),
Abbott Medical Optics (formerly Advanced Medical Optics or AMO), and Valeant (formerly Bausch & Lomb or B&L) all market
excimer lasers for corneal refractive surgery and promote their sales worldwide.
Phakic implants that compete with the ICL are also available in the marketplace. The three principal types of phakic IOLs
(PIOLs) are (1) posterior chamber designs like the ICL, (2) iris clip anterior chamber PIOLs like the Artisan® and Artiflex® lenses made
by Ophtec (Artisan® is distributed in the U.S. by AMO under the Verisyse® brand), and (3) angle-supported anterior chamber PIOLs
like the Cachet™ made by Alcon and sold outside the U.S. We believe the ICL has compelling clinical advantages over the other lenses,
which are reflected in our estimated 75% market share of the global phakic IOL market. The ICL is the only foldable, minimally invasive
PIOL approved for sale in the U.S.
As with the refractive market, the global cataract market is highly concentrated, with the top three competitors (Novartis, Abbott
and Valeant) combined accounting for approximately 70% of total market revenue, according to internal estimates and a 2013 report by
Market Scope, LLC, a publisher of ophthalmic industry analysis.
Regulatory Matters
Nearly all countries where we sell our products have regulations requiring premarket clearance or approval of medical devices.
Various federal, state, local and foreign laws also apply to our operations, including, among other things, working conditions, laboratory,
clinical, and manufacturing practices, and the use and disposal of hazardous or potentially hazardous substances.
7
The requirements for clearance or approval to market medical products vary widely by country. The requirements range from
minimal requirements to requirements comparable to those established by the U.S. Food and Drug Administration (FDA). For example,
many countries in South America and the Middle East have minimal regulatory requirements, while many others, such as Japan, have
requirements of similarly stringency to those of the FDA. Obtaining clearance or approval to distribute medical products is costly and
time-consuming in virtually all of the major markets where we sell medical devices. We cannot give any assurance that any new medical
devices we develop will be cleared or approved in a timely or cost-effective manner, if at all. The regulatory requirements in our most
important current markets, the U.S., Europe and Japan, are discussed below.
Regulatory Requirements in the United States.
Under the federal Food, Drug & Cosmetic Act, as amended (the Act), the FDA has the authority to regulate, among other things,
the design, development, manufacturing, preclinical and clinical testing, labeling, product safety, marketing, sales, distribution,
pre-market clearance and approval, recordkeeping, reporting, advertising, promotion, post-market surveillance, and import and export of
medical devices.
Most of our products are medical devices intended for human use within the meaning of the Act and, therefore, are subject to FDA
regulation.
Each medical device we seek to commercially distribute in the United States must first receive clearance to market under a
notification submitted pursuant to Section 510(k) of the Act, known as the 510(k) premarket notification, or pre-market approval (PMA)
from the FDA, unless specifically exempted by the agency. The FDA classifies all medical devices into one of three classes. The FDA
establishes procedures for compliance based upon the device’s classification as Class I (general controls, such as establishment
registration and device listing with FDA, 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). Devices deemed to pose lower risk
are categorized as either Class I or II, which require the manufacturer to submit to the FDA a 510(k) pre-market notification requesting
clearance of the device for commercial distribution in the United States. Some low risk devices are exempt from this requirement. Class
III devices are deemed by the FDA to pose the greatest risk and are the most extensively regulated. These devices include
life-supporting, life sustaining, or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared
device. 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. The FDA reviews device applications and notifications through its Office of
Device Evaluation, or “ODE.”
510(k) Clearance. Our lens injector systems are Class I devices subject to the 510(k) pre-market review and clearance process. A
medical device that is substantially equivalent to either a previously-cleared medical device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA, or is a device that has been
reclassified from Class III to either Class II or I may be eligible for the FDA’s 510(k) pre-market notification process. FDA clearance
under Section 510(k) of the Act does not imply that the safety, reliability and effectiveness of the medical device has been approved or
validated by the FDA. The review period and FDA determination as to substantial equivalence generally takes from three to twelve
months from the date the application is submitted and filed. However, the process may take significantly longer, and clearance is never
assured. Although many 510(k) pre-market notifications are cleared without clinical data, in some cases, the FDA requires significant
clinical data to support substantial equivalence. In reviewing a pre-market notification, the FDA may request additional information
including clinical data, which may significantly prolong the review process.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, will require a new 510(k) clearance or could require pre-market approval. The FDA
requires each manufacturer to make its own initial determination as to whether a change meets this threshold. However, the FDA can
review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s
determination, the FDA can require the manufacturer to cease marketing or recall the modified device until 510(k) clearance or a PMA
is obtained. We have modified aspects of some of our devices since receiving 510(k) clearance, and have determined that no new
clearance or approval was required. If the FDA requires us to seek 510(k) clearance or pre-market approval for any modifications to a
previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance or
approval. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
8
The FDA is currently considering proposals to reform its 510(k) marketing clearance process and such proposals could include
increased requirements for clinical data and a longer review period. In response to industry and healthcare provider concerns regarding
the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and in
January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices.
The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient
safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act (FDASIA), Congress reauthorized the
Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device
Regulatory Improvements” and miscellaneous reforms which are further intended to clarify and improve medical device regulations
both pre- and post-approval. We cannot predict which of the 510(k) marketing clearance reforms currently being discussed and/or
proposed might be enacted, finalized or implemented by the FDA and whether the FDA will propose additional modifications to the
regulations governing medical devices in the future. Any such modification could have a material adverse effect on our ability to
commercialize our products.
Premarket Approval. Our IOLs, ICLs, and AquaFlow Devices are Class III devices subject to the PMA approval process. When
510(k) clearance is not available, the more rigorous PMA process requires us to demonstrate independently that the new medical device
is safe and effective for its intended use. A PMA must be supported by, among other things, extensive technical, pre-clinical, clinical
testing, manufacturing and labeling data to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
After a PMA application is submitted and filed, the FDA begins an in-depth review of the submitted information, which typically
takes between one and three years, but may take significantly longer. During the review period, the FDA may request additional
information or clarification of information already provided. In addition to its own review, the FDA may organize an independent
advisory panel of experts to review the PMA whenever a device is the first of its kind or the FDA otherwise determines panel review is
warranted. The FDA holds panels on a regular basis, but the need to schedule panel review usually adds some weeks or months to the
review process. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with
Quality System Regulation (QSR) which imposes elaborate design development, testing, control, documentation and other quality
assurance procedures in the design and manufacturing process. The FDA may approve a PMA application with post-approval conditions
intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and
distribution and collection of long-term follow-up from patients in the clinical study that supported approval. Failure to comply with the
conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval.
If a manufacturer plans to make significant modifications to the manufacturing process, labeling, or design of an approved PMA
device, the manufacturer must submit an application called a “PMA Supplement” regarding the change. The FDA generally reviews
PMA Supplements on a 180-day agency timetable, which may be extended if significant questions arise in review of the supplement. A
manufacturer may implement certain changes prior to the FDA’s review of the PMA Supplement. The FDA designates some PMA
Supplements as “panel track” supplements, which means that the agency believes review by an advisory panel may be warranted.
Designation as a panel-track supplement does not necessarily mean that panel review will actually occur.
Clinical or Market Trials. A clinical trial is typically required to support a PMA application and is sometimes required for a 510(k)
pre-market notification. Clinical trials generally require submission of an application for an Investigational Device Exemption (IDE) to
the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is
safe to test the device in humans and that the investigational protocol is scientifically sound. The IDE application must be approved in
advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more
abbreviated IDE requirements. Clinical trials for a significant risk device may begin once the IDE application is approved by the FDA as
well as the appropriate institutional review boards (IRBs) at the clinical or market trial sites, and the informed consent of the patients
participating in the clinical trial is obtained. After a trial begins, the FDA may place it on hold or terminate it if, among other reasons, it
concludes that the clinical subjects are exposed to an unacceptable health risk. Any trials we conduct in the U.S. must be conducted in
accordance with FDA regulations as well as other federal regulations and state laws concerning human subject protection and privacy.
Moreover, the results of a clinical trial may not be sufficient to obtain clearance or approval of the product.
Oversight of compliance with quality, medical device reporting and other regulations. Both before and after we receive
pre-market clearance or approval and release a product commercially, we have ongoing responsibilities under FDA regulations. The
FDA reviews design and manufacturing practices, labeling and record keeping, and manufacturers’ required reports of adverse
experiences and other information to identify potential problems with marketed medical devices. We are also subject to periodic
inspection by the FDA for compliance with the FDA’s quality system regulations and requirements, such as restrictions on advertising
and promotion. The Good Manufacturing Practice (GMP) regulations for medical devices known as the QSR, govern the methods used
in, and the facilities and controls used for, the design, manufacture, packaging and servicing of all finished medical devices intended for
human use.
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The FDA’s Bioresearch Monitoring Program (BIMO), reviews our activities as a sponsor of clinical research. BIMO conducts
facilities inspections as part of a program designed to ensure that data and information contained in requests for IDEs, PMA applications
and 510(k) submissions are scientifically valid and accurate. Another objective of the program is to ensure that human subjects are
protected from undue hazard or risk during the course of scientific investigations.
If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices
are ineffective or pose an unreasonable health risk, the FDA could require us to notify health professionals and others that the devices
present unreasonable risk or substantial harm to public health, order a recall, repair, replacement, or refund of the devices, detain or seize
adulterated or misbranded medical devices, or ban the medical devices. The FDA may also issue warning letters or untitled letters,
refuse our request for 510(k) clearance or PMA approval, revoke existing 510(k) clearances or PMA approvals previously granted,
impose operating restrictions, enjoin and restrain certain violations of applicable law pertaining to medical devices and assess civil or
criminal penalties against our officers, employees, or us. The FDA may also recommend prosecution to the Department of Justice. For
example, in 2007 we received a warning letter following a BIMO inspection that identified negative inspectional observations. Prior to
the inspection and the warning letter, we submitted a PMA supplement for the TICL to the FDA on April 28, 2006, which the agency
designated as a panel-track supplement. In August 2007, following negative inspectional observations and the Warning Letter the FDA
Office of Device Evaluation placed an integrity hold on our TICL application. Over a two-year period we took a number of corrective
actions to address BIMO’s concerns and to remove the integrity hold, including engaging an independent third party to conduct a 100%
audit of patient records in the TICL clinical study, along with an audit of clinical systems to ensure accuracy and completeness of data
before resubmitting the application. On July 21, 2009, the FDA notified us that as a result of our corrective actions the FDA had
removed the integrity hold on the application for approval of the TICL, and would resume its consideration of the application. During
August and September 2009, we and the FDA resolved a number of questions related to the TICL supplement in an interactive
process. On February 3, 2010, we received a letter of deficiency from the FDA outlining additional questions. On August 2, 2010, we
responded to the FDA’s deficiency letter. After that response, we were in dialogue with the agency, working interactively to resolve a
series of follow-up questions. On April 22, 2011, we responded to the questions from the agency, which concerned the basis for an
increase in the number of reported patient follow-up visits following the independent third party audit of the clinical data, and have
responded to additional follow-up questions after that date. On November 29, 2011, we received a letter of deficiency from the FDA
further questioning the clinical data, specifically the inclusion of patient data that was obtained outside the study windows, requesting
additional information on the lens design and a validation report for the Toric ICL power calculation software. After further interactions
with the FDA throughout 2012, on November 15, 2012, we submitted (1) clinical data showing no statistical difference in the clinical
outcomes with or without the patient data that was obtained outside the study windows, (2) engineering data regarding the lens design,
and (3) a validation report for the Toric ICL power calculation software. The FDA has organized an advisory panel meeting to review
the PMA supplement, which is scheduled for March 14, 2014. We cannot predict when, or if, the FDA may grant approval of the Toric
ICL.
Our ability to continue our U.S. business depends on the continuous improvement of our quality systems and our ability to
demonstrate compliance with FDA regulations. Accordingly, our management expects to continue to devote significant resources and
attention to those efforts for the foreseeable future.
Healthcare Fraud and Abuse Laws and Regulations
Even though we do not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payers,
certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are applicable to our business.
We are subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we
conduct our business. The regulations that may affect our ability to operate include, without limitation:
• the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering,
soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item
or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare
programs such as the Medicare and Medicaid programs;
• the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or
causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government, and
which may apply to entities that provide coding and billing advice to customers;
• federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements
relating to healthcare matters;
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• the federal physician sunshine requirements under the Health Care Reform Law, which requires manufacturers of drugs,
devices, biologics, and medical supplies to report annually to the Centers for Medicare & Medicaid Services information
related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and
ownership and investment interests held by physicians and other healthcare providers and their immediate family members;
• the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for
Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the
security and privacy of protected health information; and
• state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or
services reimbursed by any third-party payer, including commercial insurers; state laws that require device companies to
comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the
federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral
sources; state laws that require device manufacturers to report information related to payments and other transfers of value to
physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of
health information in certain circumstances, which may differ from each other and may not have the same effect, thus
complicating compliance efforts.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that
some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform
legislation has strengthened these laws. For example, the recently enacted Health Care Reform Law, among other things, amends the
intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to
have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government
may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the False Claims Act.
Achieving and sustaining compliance with these laws may prove costly. In addition, any action against us for violation of these
laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention
from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other
governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the
exclusion from participation in federal and state healthcare programs, imprisonment, or the curtailment or restructuring of our
operations, any of which could adversely affect our ability to operate our business, our reputation and our financial results.
Regulatory Requirements outside the United States.
CE Marking. In the European Economic Area (EEA), which is comprised of the 28 Member States of the European Union plus
Norway, Iceland, and Liechtenstein, medical devices must comply with the essential requirements of the EU Medical Devices Directive
(Council Directive 93/42/EEC). Compliance with the essential requirements of the EU Medical Device Directive is a prerequisite to be
able to affix a Conformité Européenne Mark (CE Mark), without which medical devices cannot be marketed or sold in the EEA. To
demonstrate compliance with the essential requirements, medical device manufacturers must undergo a conformity assessment
procedure, which varies according to the type of medical device and its classification.
The method of assessing conformity varies depending on the class of the product, but normally involves a combination of
self-assessment by the manufacturer and a third-party assessment by a “Notified Body.” Notified Bodies are a group of private
quality-monitoring organizations that are accredited to review medical devices and to monitor quality systems and adverse event
reporting. The independent Notified Bodies perform, on a privatized basis, functions similar to the FDA in the U.S. and the PMDA in
Japan. Our facilities in the U.S., Japan and Switzerland are all subject to regular inspection by a designated Notified Body. Other
countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to
medical devices, and a number of countries outside of Europe permit importation of devices bearing the CE Mark.
We have affixed the CE Mark to all of our principal products including ICL and TICL products, IOLs, injector systems and our
AquaFlow Device.
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Medical Device Regulation in Japan. The Japanese Ministry of Health, Labor, and Welfare (MHLW) regulates the sale of
medical devices under Japan’s Pharmaceutical Affairs Law (PAL). The Pharmaceutical and Medical Devices Agency (PMDA), a
quasi-governmental organization, performs many of the medical device review functions for MHLW. Medical devices generally must
undergo thorough safety examinations and demonstrate medical efficacy before the MHLW grants shonin (pre-market device approval)
or ninsho (certification). Manufacturers and resellers (referred to as Marketing Authorization Holders or MAHs) must also satisfy
certain requirements before the MHLW grants a business license, or kyoka. Requirements for manufacturers and MAHs include
compliance with Japanese regulations covering GQP (good quality control practice) and GVP (good vigilance practice), which largely
include conformity to the ISO 13485 standard and are similar to good manufacturing practice and post-market surveillance requirements
in the U.S., as well as the assignment of internal supervisors over marketing, quality assurance and safety control.
Approval for a new medical device that lacks a substantial equivalent in the Japanese market will generally require the submission
of clinical trial data. Only a licensed MAH can apply for premarket device approval in Japan, and in most cases, the clinical trial data
must include data gathered from Japanese subjects. For example, STAAR Japan conducted a separate clinical trial in Japan for the
shonin application for the ICL. Also, approval for a new medical device will require the manufacturer to undertake to reexamine the
safety and efficacy of the device with a review of postmarket data gathered within a certain period - normally four years - after approval.
The specific postmarket reexamination requirement for a medical device is announced at the time of approval.
STAAR Japan currently holds shonin approval for the ICL and Toric ICL, preloaded injectors and their associated lenses, and
kyoka licensing as a manufacturer and MAH of medical devices. The sponsor of a clinical trial submitted to the MHLW must strictly
follow Good Clinical Practice (GCP) standards, and must follow the trial with standard Good Postmarket Study Practice (GPSP)
reporting and a follow-up program. MHLW and PMDA also assess the quality management systems of manufacturers and the
conformity of products to the requirements of PAL. STAAR is subject to inspection for compliance by these agencies. A company’s
failure to comply with PAL can result in severe penalties, including revocation or suspension of a company’s business license and
possible criminal sanctions.
Third Party Coverage and Reimbursement
Health care providers generally rely on third-party payers, including governmental payers such as Medicare and Medicaid,
private insurance plans and workers’ compensation plans, to cover and reimburse the cost of medical devices and related
services. These third-party payers may deny coverage or reimbursement for a medical device if they determine that the product or
procedure using the product was not medically appropriate or necessary and are increasingly challenging the price of medical devices
and services.
Our ICL products generally are not covered by third-party payers, and patients incur out-of-pocket costs for these products and
related procedures using our products. Our IOL products used in cataract procedures generally are covered by third-party payers,
including Medicare, in whole or in part depending upon a variety of factors, including the specific product used and geographic location
where the procedure using the covered product is performed. The market for some of our IOL products therefore is influenced by
third-party payers’ policies.
In the United States, the Centers for Medicare & Medicaid Services, the agency responsible for administering the Medicare
program, or CMS, sets coverage and reimbursement policies for the Medicare program. CMS may modify its coverage and
reimbursement policies related to IOLs, including our IOLs, as well as cataract procedures using IOLs, at any time. Since the enactment
of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the
Health Care Reform Law, there have been an increasing number of legislative initiatives in the United States to contain health care
coverage and reimbursement by governmental and other payers. These new laws, as well as future laws that may be enacted, may result
in additional reductions in Medicare and other health care funding, which could have a material adverse effect on our customers and
thus, our financial operations.
In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have
instituted cost containment initiatives similar to those in the United States. For example, price reductions have been mandated in several
European countries, including Germany, Italy and Spain. There can be no assurance that third-party coverage and reimbursement will
be available or adequate, or that such policies or any future legislation or regulation will not adversely affect the demand for our IOLs or
our ability to sell these products at the prices they want.
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Research and Development
We focus on furthering technological advancements in the ophthalmic products industry through the development of innovative
premium ophthalmic products (lenses and delivery systems there for), materials and designs. We maintain active internal research and
development programs, which also include clinical activities and regulatory affairs and are comprised of approximately 26 employees.
In order to achieve our business objectives, we will continue our investment in research and development.
During the last few years STAAR has regularly introduced new products from its pipeline of research and development projects.
For example, during 2013 we began introducing the nanoFLEX Toric Collamer IOL in selected countries that accept the CE Mark.
During 2012, we introduced the KS-SP Preloaded Hydrophobic Acrylic Injector System in Japan and limited markets in Europe. During
2011, we introduced the ICL V4c with CentraFLOW technology in Europe and other territories that recognize the CE Mark, and
launched the Toric ICL in Japan. During 2010, we introduced the nanoPOINT 2.0 microincision injector for the ICL and launched an
expanded range of ICL products in countries that accept the CE Mark.
During 2014, our goal is to continue our focus on research and development in the following areas:
•
•
•
•
Enhancements to the ICL that may simplify the procedure and further improve its efficacy;
Development of preloaded injector systems for Collamer ICLs and IOLs;
Development of a global hydrophobic acrylic IOL platform; and
Development of presbyopia-correcting IOLs and ICLs.
Research and development expenses were approximately $6.7 million, $6.4 million, and $5.9 million for our 2013, 2012, and
2011 fiscal years, respectively. We expect to invest approximately 9-10% of sales for research and development in 2014.
Environmental Matters
We are 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 affect materially our capital expenditures, earnings or competitive position. We 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.
Employees
As of March 1, 2014, we employed approximately 335 persons.
Code of Ethics
STAAR has adopted a revised Code of Business Conduct and Ethics that applies to all of its directors, officers, and employees.
The Code of Business Conduct and Ethics is posted on our website, www.staar.com — Investor Information: Corporate Governance.
Additional Information
We make available free of charge through our website, www.staar.com, our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to any 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 100 F Street, NE, 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 STAAR and other issuers that file electronically with the SEC at http://www.sec.gov.
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Glossary
The following glossary is intended to help the reader understand some of the terms used in this Report.
acrylic – a broadly used family of plastics. Acrylic materials used in IOLs have been both water repelling (hydrophobic) and
water-absorbing ( hydrophilic ). The most popular IOLs in the U.S., Europe and Japan are made of a flexible, water-repellent acrylic
material.
aspheric – aspheric lenses are lenses that are designed in a shape that creates a more clearly focused image than traditional
spheric lenses. By reducing spherical aberrations, IOLs that feature aspheric optics generally deliver better night vision and contrast
sensitivity than spheric IOLs.
collagen copolymer - collagen copolymers are compounds formed by joining molecules of collagen derived from biological
sources with synthetic monomer molecules. STAAR’s Collamer® is a collagen copolymer engineered specifically for use in implantable
lenses.
contrast sensitivity - the ability to visually distinguish an object from its background.
crystalline lens – the natural lens that is present in the eye at birth, which is a clear structure, located behind the iris that changes
shape to focus light onto the retina.
excimer laser – a specialized ultraviolet laser used in ophthalmology to cut or shape eye tissue. The excimer laser is used during
LASIK and PRK surgery.
foldable IOL – an intraocular lens made of flexible material, which can be inserted with an injector system through a small
incision in minimally invasive cataract surgery.
haptic – the part of an IOL that contacts the structures of the eye and holds the IOL in place. IOLs in which the haptic is also a part
of the optic material is called a single-piece IOL, while IOLs in which the haptics are attached to the optic is called a three-piece IOL.
hyperopia – the refractive disorder commonly known as farsightedness, which occurs when the eye’s lens focuses images behind
the plane of the retina. A person with hyperopia cannot see close objects without glasses or contact lenses. Because presbyopia often
results in the need for reading glasses, it is sometimes confused with farsightedness.
intraocular – within the eye.
injector or injector system – a device in the form of a syringe that is used to deliver a foldable IOL into the eye through a slender
nozzle in minimally invasive cataract surgery.
iridotomy – a small hole created in the iris, usually made with a YAG laser. Prior to implantation of some ICL models a YAG
peripheral iridotomy is made in an obtrusive area at the periphery of the iris to ensure continued fluid flow in the eye after
implantation. The ICL V4c model has a central port for fluid flow, which eliminates the need for an iridotomy or iridectomy.
LASIK – an acronym for laser-assisted in-situ keratomileusis, a surgical operation that reshapes the cornea to correct
nearsightedness, farsightedness, or astigmatism. LASIK involves first the cutting of a hinged flap to separate the surface layer of the
cornea, using a microkeratome (a special blade) or a laser. An excimer laser is then used to burn tissue away and reshape the inner
cornea, after which the flap is returned to position.
myopia – the refractive disorder also known as nearsightedness, which occurs when the eye’s lens focuses images in front of the
retina rather than on the retinal surface. A person with myopia cannot clearly see distant objects without glasses or contact lenses.
ophthalmologist – a surgeon who specializes in the diseases and disorders of the eye and the visual pathway related to it.
ophthalmic – of or related to the eye.
optic – the central part of an IOL, the part that functions as a lens and focuses images on the retina.
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Preloaded Injector - a silicone or acrylic IOL packaged and shipped in a pre-sterilized, disposable injector. This differs from the
conventional method of packaging IOLs, which requires the surgeon or an assistant to manually load each lens into an injector before
surgery.
presbyopia – an age-related condition in which the crystalline lens loses its ability to focus on both near and far objects. People
who have had normal vision will typically begin to need glasses for reading or other close tasks at some point after age 40 due to
presbyopia.
QSR - The FDA’s Quality System Regulation, or current Good Manufacturing Practice (cGMP) includes requirements related to
the methods used in, and the facilities and controls used for, designing, manufacturing, packaging, labeling, storing, installing, and
servicing of medical devices intended for human use. The regulation sets forth the framework for medical device manufacturers to
follow in achieving quality requirements.
refractive market – as used in this report “refractive market” means the overall market volume for refractive surgical procedures
of all kinds, including LASIK, PRK, the Visian ICL product family and other phakic IOLs. As used in this report, the term does not does
not include sales of non-surgical products like eyeglasses and contact lenses.
silicone – a type of plastic often used in implantable devices that is inert, generally flexible and water-repelling.
single-piece IOL – in a single piece IOL the haptics and the optic are fashioned from a single piece of lens material.
three-piece IOL – a three-piece IOL has a central, disk-shaped optic and two spring-like haptics attached at either side. The
haptics are positioned against structures of the eye to hold the IOL in place.
toric – refers to the shape of a lens designed to correct astigmatism, which has greater refractive power in some sections of the
lens than others.
YAG – an acronym for yttrium-aluminum-garnet, a mineral crystal. Lasers using neodymium-doped yttrium aluminium garnet
crystals (Nd:YAG) generate a high-energy beam that can be used in a number of ophthalmic procedures, including creating iridotomies
before implantation of some models of the ICL.
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 10-K
contains forward-looking statements, which are subject to a variety of risks and uncertainties. We have identified below the known,
significant risk factors that could affect our business and affect the expectations reflected in our forward-looking statements.
Risks Related to Our Business
We compete with much larger companies.
Our competitors, including Novartis (formerly Alcon), Abbott (formerly Advanced Medical Optics, or AMO) and Valeant
(formerly Bausch & Lomb) have much greater financial resources than we do and some of them have large international markets for a
full suite of ophthalmic products. Their greater resources for research, development and marketing, and their greater capacity to offer
comprehensive products and equipment to providers, make it difficult for us to compete. In the past, we have lost significant market
share in IOL sales to some of our competitors.
FDA compliance issues have delayed approvals and we expect to devote significant resources to maintaining compliance in
the future.
The FDA’s Center for Devices and Radiological Health regularly inspects our facilities to determine whether we are in
compliance with the FDA Quality System Regulation, which governs such things as manufacturing practices, validation, testing, quality
control, product labeling and complaint handling, and in compliance with FDA Medical Device Reporting regulations and other FDA
regulations. The FDA also regularly inspects for compliance with regulations governing advertising and promotional activities as well as
clinical investigations.
While we believe that we are substantially in compliance with the FDA’s Quality System Regulations, past quality system
deficiencies observed at certain of our facilities have led to FDA Warning Letters and delays in product approvals until we resolved
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agency concerns. For example, in 2007, we received a Warning Letter identifying deficiencies in clinical study procedures, practices and
documentation related to the Toric ICL, or TICL. As a result, the FDA placed an integrity hold on the TICL PMA supplement
application in August 2007, which was lifted in July 2009. However, the PMA supplement remains pending, with an FDA advisory
panel scheduled on March 14, 2014, and we cannot provide any assurance that we will ultimately obtain approval.
Our ability to continue our U.S. business depends on the continuous improvement of our quality systems and constant vigilance in
our compliance with FDA regulations. Accordingly, our management expects to continue to devote significant resources and attention to
those efforts for the foreseeable future. We cannot ensure that our efforts will be successful. 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 .”
FDA approval of the Visian Toric ICL, which could have a significant U.S. market, has been considerably delayed.
An important part of our ICL product portfolio is the TICL, a variant of the ICL that corrects both astigmatism and myopia in a
single lens and that has been marketed outside the U.S. since 2001. We believe the TICL has a significant potential market in the U.S.
and could accelerate growth of the overall refractive product line. We submitted a supplemental PMA for the TICL in April 2006, which
remains subject to FDA review and a number of pending questions under discussion with the agency. Without the Toric ICL, the ICL
product line is not likely to reach its full market potential in the U.S. The FDA has organized an advisory panel meeting to review the
PMA supplement, which is scheduled for March 14, 2014. We cannot predict the results of the advisory panel or when, or if, the FDA
may grant approval of the Toric ICL.
The global nature of our business may result in fluctuations and declines in our sales and profits.
The results of operations and the financial position of our Japanese subsidiary are reported in Japanese yen and then translated
into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to translation risk.
Year over year fluctuations in the exchange rate between the Japanese yen and the U.S. dollar had a $3.8 million impact on Japanese yen
translated sales for the fiscal year ended January 3, 2014. In addition, we are exposed to transaction risk because some of our sales and
expenses are incurred in a currency different from the U.S. dollar. Our most significant currency exposures are to the Japanese yen, the
euro, and the Swiss Franc, and the exchange rates between these currencies and the U.S. dollar may fluctuate substantially.
As manufacturing has shifted from Japan to the U.S. there will be increased foreign currency exposure to the Japanese yen. We have not
attempted to offset our exposure to these risks by investing in derivatives or engaging in other hedging transactions.
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 U.S. face a number of risks and potential costs, enjoy less stringent protection of intellectual
property and face 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. For example, sales in certain Asian and developing markets may
result in lower margins and higher exposure to intellectual property infringement or counterfeits. We price some of our products in U.S.
dollars, and as a result changes in exchange rates can make our products more expensive in some offshore markets and reduce our sales.
Inflation in emerging markets also makes our products more expensive there and increases the credit risks to which we are exposed.
We 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 detrimental if any key employee or employees went to work for competitors. Our future success
depends on our ability to identify, attract, train, motivate and retain other highly skilled personnel. Failure to do so may adversely affect
our results. We do not maintain insurance policies to cover the cost of replacing the services of any of our key employees who may
unexpectedly die or become disabled.
We have a history of losses that could continue in the future.
During 2011, we achieved net income from continuing operations after reporting losses for more than ten years. For 2012,
we reported a loss from continuing operations on a GAAP basis. For 2013, we reported income from continuing operations. Our future
profitability is challenged by the competitive nature of our industry and the other risks to our business detailed herein. We have an
accumulated deficit of $132.1 million as of January 3, 2014.
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We rely and depend on independent distributors in international markets.
Except for the U.S., Canada, Japan, and Spain, we sell our products through independent distributors who generally control the
importation and marketing of our product within their territories. We generally grant exclusive rights to these distributors and rely on
them to understand local market conditions, to diligently sell our products and to comply with local laws and regulations. Our
agreements with distributors and local laws can make it difficult for us to quickly change from a distributor who we feel is
underperforming. If we do terminate an independent distributor, we may lose customers who have been dealing with that distributor.
Because we do not have local staff in most of the areas covered by independent distributors, it may be difficult for us to detect failures in
our distributors’ performance or compliance. Actions by independent distributors that are beyond our control could result in flat or
declining sales in that territory, harm to the reputation of our company or its products, or legal liability. For example, in 2012, sales to our
independent distributor in Korea, our largest market, declined by 18% compared to 2011, but in 2013 increased by 15% over 2012.
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 our business is challenging. While we seek to integrate our foreign subsidiaries fully into our operations, direct
supervision of every aspect of the subsidiaries’ operations is impossible, and as a result we rely on the local managers and staff of these
subsidiaries. Cultural factors, language differences and the local legal climate can result in misunderstandings among internationally
dispersed personnel, and increase the risk of failing to meet U.S. and foreign legal requirements, including with respect to the
Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices Act (FCPA). The risk that unauthorized conduct may go undetected
will always be greater in foreign subsidiaries.
Non-compliance with anti-corruption laws could lead to penalties or harm our reputation.
We are subject to anti-corruption laws in the jurisdictions in which we operate, including the FCPA. Any failure to comply with
these laws, even if inadvertent, could result in significant penalties or otherwise harm our reputation and business. Our reliance on
foreign subsidiaries and independent distributors demands a high degree of vigilance in maintaining our policy against participation in
corrupt activity. In many of our markets outside the U.S., doctors and hospital administrators may be deemed government officials.
Other U.S. companies in the medical device and pharmaceutical field have faced criminal penalties under the FCPA for allowing their
agents to deviate from appropriate practices in doing business with such individuals.
Unfavorable economic conditions hurt sales of our refractive products.
Refractive surgery is an elective procedure generally not covered by health insurance. Patients must pay for the procedure,
frequently through installment financing arrangements. They can defer the choice to have refractive surgery if they lack the disposable
income to pay for it or do not feel their income is secure. Laser refractive surgery experienced a significant decrease in demand globally
with the recession that began in mid-2008, and has not fully recovered. While ICL sales have continued to grow globally, we believe that
negative economic conditions have slowed growth, especially in the U.S. Economic stagnation, lack of consumer confidence or new
recessions in any of our key markets, including but not limited to Korea, China, Japan, or Spain, could further slow ICL sales growth or,
if severe, cause declines in sales. Because the ICL is our fastest growing and highest gross margin product, restricted growth or a decline
in its sales could materially harm our business.
Negative publicity concerning complications of laser eye surgery could reduce the demand for our refractive products as well.
Negative publicity about laser eye surgery has appeared in several refractive surgery markets. In February 2012, it was widely
reported throughout the Asia Pacific region that Dr. Ray Tsai, a prominent ophthalmologist in Taiwan questioned the safety of LASIK
surgery, and would no longer perform the procedure. The resulting publicity broadened public awareness of the potential complications
of refractive surgery and potential patient dissatisfaction, in particular as a result of LASIK and other corneal laser-based procedures. We
believe this negative publicity decreased patient interest in the Asia Pacific region in LASIK as well as all other refractive procedures.
Depending on the nature and severity of future negative publicity about refractive surgery, the growth of ICL sales could be limited or
sales could decline as a result. Because nearly all candidates for refractive surgery can achieve acceptable vision through the use of
spectacles or contact lenses, for most patients the decision to have refractive surgery is a lifestyle choice that depends on high confidence
in achieving a satisfactory outcome. On April 25, 2008, the FDA Ophthalmic Devices Panel held a public meeting to discuss reports of
medical complications and customer satisfaction following refractive surgery. In October 2009 the FDA, in collaboration with the
National Eye Institute and the U.S. Department of Defense, began a major study on the quality of life for patients after LASIK surgery,
which is ongoing. The results of this study could amplify concerns about complications of laser refractive surgery. While these concerns
could encourage patients and doctors to select the ICL as an alternative, they could also decrease patient interest in all refractive surgery,
including ICL.
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We may not realize the expected benefits of our manufacturing consolidation project and tax strategies.
Since 2011 we have invested significant resources in a manufacturing consolidation project and a tax strategy initiative, and we
have invested nearly $6 million dollars to complete the projects. The goal of these projects is to increase profit margins by improving
manufacturing efficiency, simplifying administrative and regulatory functions, and reducing tax liabilities. We cannot assure that we
will achieve the expected benefits of these initiatives. Among other things, costs could exceed current estimates, product manufacturing
transfers could be affected by delays or cause supply interruptions, changes in tax laws could reduce or eliminate expected benefits of
some of our tax strategies, tax authorities may challenge our tax strategy, or future profit margins could be affected by a variety of factors
unrelated to our level of manufacturing efficiency. In June 2013, we completed transferring IOL manufacturing from Japan to our
Monrovia, California facility. We expect to complete transferring ICL manufacturing from Switzerland to our Monrovia, California
facility by the end of the second quarter of 2014. Completion of the consolidation plans in 2014 of our Swiss facility may be delayed,
though not currently expected, and this could result in disruption to our business and delays in our use of tax loss carry forwards, which
would adversely affect our results.
Our manufacturing consolidation plan exposes us to risk.
Transferring the manufacturing of medical devices is more expensive, time-consuming and riskier than similar transfers in less
regulated industries. In our major markets, regulatory approval to sell our products is generally limited to the current manufacturing site,
and changing the site will require applications to and approval from regulatory bodies prior to commercialization. To satisfy our own
quality standards as well as regulations, we must follow strict protocols to confirm that products made at a new site are equivalent to
those made at the currently approved site. Even minor changes in equipment, supplies or processes require validation. While we have
placed a priority on maintaining the continuity and quality of our product supply, including increasing our inventory as safety stock
during the consolidation, unanticipated delays or difficulties in the transfer process could interrupt our supply of products. Any sustained
interruption in supply could cause us to lose market share and harm our business. In addition, after we complete our consolidation plan,
we will no longer have an alternative source of supply for the products we manufacture (for example, Collamer and silicone IOLs,
Collamer ICLs and delivery systems) in the event of an earthquake or other event that disrupts our manufacturing activities in California.
We have described our manufacturing consolidation initiative and provided an update to our progress in the “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Overview—Other Highlights—Manufacturing
Consolidation Project and Tax Strategy” section of this Report.
Disruptions in our supply chain or failure to adequately forecast product demand could result in significant delays or lost
sales.
The loss of a material supplier could significantly disrupt our business. In some cases, we obtain components used in certain of
our products from single sources. We and our third-party manufacturers and suppliers are required to comply with the FDA’s QSR,
which covers the methods and documentation of the design, testing production, control, quality assurance, labeling, packaging,
sterilization, storage, and shipping of our products. If we experience difficulties acquiring sufficient quantities of required materials or
products from our existing suppliers, or if our suppliers are found to be non-compliant with the FDA's QSR or other applicable laws,
obtaining the required regulatory approvals to use alternative suppliers may be a lengthy and uncertain process during which we could
lose sales.
Our sources of supply for raw materials may be threatened by shortages 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 the substitute supplier’s regulatory compliance and the quality standards of the replacement material could significantly delay
production and materially reduce our sales. We mitigate this risk by maintaining adequate inventory of raw materials when practical and
identifying secondary suppliers, but we cannot entirely eliminate the risk. 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, we obtain the proprietary collagen-based raw material used to manufacture our IOLs, ICLs and the AquaFlow
Device internally from a sole source, 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 STAAR. The loss of our external supply source for silicone could also cause us material harm.
Further, any failure by us to forecast demand for, or to maintain an adequate supply of the raw material and finished product
could result in an interruption in the supply of certain products and a decline in the sale of that product. The manufacturing process to
create the raw material necessary to produce some of our products is technically complex and requires significant lead-time. If our
suppliers are unable to meet our manufacturing requirements, we may not be able to produce a sufficient amount of materials or products
in a timely manner, which could cause a decline in our sales. For example, our supply of acrylic lenses from a third party
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supplier is limited by their manufacturing capacity constraints, which will continue to result in backlog in demand. Delays in filling
orders (for example, if this supplier remains unable to meet our demand for acrylic lenses and we are unable to secure an alternative
supply) can result in lost sales if alternative lenses are available to the patient. If we are unable to ramp up production to meet increased
demand we may not achieve our growth targets.
We could experience losses due to product liability claims.
We have been subject to product liability claims in the past and may experience such claims in the future. 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 that exceeds our insurance coverage could materially harm our business, financial condition and results of operations.
Even if a product liability loss is covered by an insurance policy, we must generally pay for losses until they reach the level of the
policy’s stated deductible or retention amount after which the insurer begins paying. 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 may have limited ability to fully use our recorded tax loss carryforwards.
We have accumulated approximately $121.7 million of U.S. federal tax net operating loss carryforwards as of January 3, 2014,
which can be used to offset taxable income in future quarters if our U.S. operations become profitable. If unused, these tax loss
carryforwards will begin to expire between 2017 and 2032. Currently, when we generate profits on a consolidated basis, those profits are
generated outside the U.S. and are subject to income taxes that we cannot offset with U.S. loss carryforwards. As part of our global
consolidation strategy we expect to increase our profits enabling us to begin utilizing our tax loss carryforwards in the U.S., but
unexpected changes in tax laws or delays and complications in our consolidation efforts could prevent us from realizing the benefits of
this tax strategy. Moreover, under the current tax laws, if we were to experience a significant change in ownership, Internal Revenue
Code Section 382 may restrict the future utilization of these tax loss carryforwards even if our U.S. operations generate significant
profits.
We are subject to international tax laws that could affect our financial results.
We conduct international operations through our subsidiaries. Tax laws affecting international operations are highly complex and
subject to change. Our payment of income tax in the different countries where we operate depends in part on internal settlement prices
and administrative charges among STAAR and our subsidiaries. These arrangements require judgments by us and are subject to risk that
tax authorities will disagree with those judgments and impose additional taxes, penalties or interest on us. In addition, transactions that
we have arranged in light of current tax rules could have unforeseeable negative consequences if tax rules change.
We have only limited working capital and limited access to financing.
We began generating cash from operations in 2009 after six consecutive years when our cash requirements exceeded the level of
cash generated by operations. We may not be able to sustain positive cash flow, and unexpected cash needs could exceed the amount of
cash we generate. While we believe our capital resources and funds generated by operations are sufficient to operate our business and
satisfy our obligations, if unexpected events increase our expenses or harm the performance of our business we may need to seek
additional financing. We may also be presented with opportunities to expand our business that require additional financing. Should we
need additional working capital, our ability to raise financing through sales of equity securities depends on general market conditions
and the demand for our 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 sales our existing stockholders could experience substantial dilution. Because of our history of
losses, we may also have difficulty obtaining debt financing on acceptable terms or renewing existing debt facilities. An inability to
secure additional financing if it is needed in the future could require us to forego opportunities for expansion, reduce existing operations,
or even jeopardize our ability to continue operations.
The terms of our debt facilities impose restrictions on our business.
Our current or future indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate and, consequently, may place us at a competitive disadvantage to our competitors. The operating and
financial restrictions and covenants in our debt facilities may adversely affect our ability to finance future operations or capital needs or
to engage in new business activities.
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Because most of our products have single manufacturing site approvals, if we suffer loss to our facilities due to catastrophe,
or if any of our manufacturing sites fail to be in compliance with these approvals, our operations could be seriously harmed.
We depend on the continuing operation of our manufacturing facilities in California and Switzerland, which have little
redundancy or overlap among their activities as most of our products are approved for manufacturing only at one of these sites. Our
facilities could suffer catastrophic loss due to fire, flood, earthquake, terrorism or other natural or man-made disasters and we would
need to obtain additional regulatory approvals in order to manufacture our product at any second manufacturing site. Our California and
Japanese facilities are in areas where earthquakes could cause catastrophic loss. If any of these facilities were to experience a
catastrophic loss, or if one of our manufacturing facilities is found not to be in compliance with regulatory requirements, it could disrupt
our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility, as well as lost
customers or sales. We plan to complete the consolidation of our Swiss manufacturing in to our Monrovia, California facility in 2014,
which will increase our exposure to a disaster that occurs in that area. Our insurance for property damage and business interruption may
not be sufficient to cover any particular loss. We do not carry insurance or reserve funds for interruptions or potential losses arising from
earthquakes or terrorism.
Our defined benefit pension plans are currently underfunded and we may be subject to significant increases in pension
benefit obligations under those pension plans.
We sponsor two defined benefit pension plans through our wholly owned Swiss and Japanese subsidiaries, which we refer to as
the Swiss Plan and the Japan Plan, respectively. Both plans are underfunded and may require significant cash payments. During 2013,
we contributed $239,000 to our Swiss Plan, and although we did not contribute to our Japan Plan, we made benefit payments of
$123,000.
Beginning October 1, 2009, as part of the Amendment of the Japan Plan discussed in Note 10 to the consolidated financial
statements included in this report, STAAR Japan has maintained and administered the Japan Plan, including paying the pension benefits
as they are due solely from its operating cashflows. STAAR Japan is not required to make any contributions to the Japan Plan in order to
meet future pension benefit obligations, and does not expect to do so. As a result, STAAR Japan has no plan assets now and does not
expect to have any in the future.
We determine our pension benefit obligations and funding status using many assumptions, such as inflation, investment rates,
mortality, turnover and interest rates, as applicable, any of which could prove to be different than projected. If the investment
performance does not meet our expectations, or if other actuarial assumptions are modified, or not realized, we may be required to
contribute more than we currently expect and increase our future pension benefit obligations to be funded from our operations.
Our pension plans in the aggregate are underfunded by approximately $2.6 million ($1.0 million for the Japan Plan and $1.6
million for the Swiss Plan) as of January 3, 2014.
If our cash flow from operations is insufficient to fund our worldwide pension obligations, we may be materially and adversely
harmed and have to seek additional capital.
Our activities involve hazardous materials and emissions and may subject us to environmental liability.
Our manufacturing, research and development activities involve the use of hazardous materials. Federal, state and local laws and
regulations govern the use, manufacturing, storage, handling and disposal of these materials and certain waste products in the places
where we have operations. 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 an 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.
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 depend on information technology networks and systems, including the Internet, to process, transmit and store electronic
information. In particular, our information technology infrastructure handles 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.
Also, certain of our information technology systems are not redundant, and our disaster recovery planning is not sufficient for every
eventuality. Despite any precautions we may take, such problems could result in, among other consequences, interruptions in our
services, which could harm our reputation and financial results.
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Changes in accounting standards could affect our financial results.
The accounting rules applicable to public companies like us 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, which could significantly change our
reported results of operations or financial condition.
Our publicly filed SEC reports may be reviewed by the SEC.
The reports of publicly traded companies are subject to review by the SEC from time to time for the purpose of assisting
companies in complying with applicable disclosure requirements and to enhance the overall effectiveness of companies' public filings,
and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. The SEC
reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports
will comply in all material respects with the published rules and regulations of the SEC, we could be required to modify or reformulate
information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such
reports could be significant and could result in material liability to us and have a material adverse impact on the trading price of our
common stock.
Acquisitions of technologies, products, and businesses could disrupt our business, involve increased expenses and present
risks not contemplated at the time of the transactions.
We may consider and, as appropriate, make acquisitions of technologies, products and businesses that we believe are
complementary to our business. Acquisitions typically entail many risks and could result in difficulties in integrating the operations,
personnel, technologies and products acquired, some of which may result in significant charges to earnings. Issues that must be
addressed in acquiring and integrating the acquired technologies, products and businesses into our own include:
• conforming standards, controls, procedures and policies, operating divisions, business cultures and compensation
structures;
• retaining key employees;
• retaining existing customers and attracting new customers;
• consolidating operational infrastructure, including information technology, accounting systems and administration;
• mitigating the risk of unknown liabilities; and
• managing tax costs or inefficiencies associated with integrating operations.
If we are unable to successfully integrate our acquisitions with our existing business, we may not obtain the advantages that the
acquisitions were intended to create, which may materially adversely affect our business, and our ability to develop and introduce new
products. Actual costs and sales synergies, if achieved at all, may be lower than we expect and may take longer to achieve than we
anticipate. Furthermore, the products of companies we acquire may overlap with our products or those of our customers, creating
conflicts with existing relationships or with other commitments that are detrimental to the integrated businesses.
The increased use of social media platforms and mobile technologies presents new risks and challenges.
New technologies are increasingly used to communicate about our products and the health conditions they are intended to treat.
The use of these media requires specific attention and monitoring. For example, patients may use these channels to comment on the
effectiveness of a product and to report an alleged adverse event. Negative posts or comments about us or our business on any social
networking web site could harm our reputation. In addition, our employees may use the social media tools and mobile technologies
inappropriately, which may give rise to liability, or which could lead to the exposure of sensitive information. In either case, such uses of
social media and mobile technologies could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to the Ophthalmic Products Industry
If we recall a product, the cost and damage to our reputation could harm our business.
Medical devices must be manufactured to the highest standards and tolerances, and often incorporate newly developed
technology. From time to time defects or technical flaws in medical devices may not come to light until after the products are
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sold or consigned. In those circumstances, like others in our industry, we may, on our own initiative, initiate actions, including a
non-reportable market withdrawal or a reportable product recall, for the purpose of correcting a material deficiency, improving device
performance, or other reasons. In addition, the FDA and similar foreign health or governmental agencies have the authority to require an
involuntary recall of commercialized products in the event of material deficiencies or defects in design, manufacturing or labeling or in
the event that a product poses an unacceptable risk to health. In the case of the FDA, the authority to require a recall must be based on an
FDA finding that there is a reasonable probability that a device intended for human use would cause serious, adverse health
consequences or death.
We have voluntarily recalled our products and similar recalls could take place again. We may also be subject to recalls initiated by
manufacturers of products we distribute. We believe that in recent years we have been less affected by recalls than most of our U.S.
competitors, but cannot eliminate the risk of a material recall in the future. 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 professionals to discontinue using our products.
Companies are required to maintain certain records of actions, even if they determine such actions are not reportable to the FDA.
If we determine that certain actions do not require notification of the FDA, the FDA may disagree with our determinations and require us
to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales.
In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted or failing to timely report
or initiate a reportable product action. Moreover, depending on the corrective action we take to redress a product’s deficiencies or
defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may
market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a
timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory
enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, or civil or criminal fines.
If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to
medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA regulations, we are required to report to the FDA any incident in which our product may have caused or
contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause
or contribute to death or serious injury. In addition, all manufacturers placing medical devices in European Union markets are legally
bound to report any serious or potentially serious incidents involving devices they produce or sell to the relevant authority in whose
jurisdiction the incident occurred. We anticipate that in the future we will experience events that would require reporting to the FDA
pursuant to the MDR regulations. Any adverse event involving our products could result in future voluntary corrective actions, such as
product actions or customer notifications, or agency actions, such as inspection, mandatory recall or other enforcement action. Any
corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time
and capital, distract management from operating our business, and may harm our reputation and financial results.
The decision to file an MDR involves a judgment by us as the manufacturer. We have made decisions that certain types of events
are not reportable under the MDR regulations; however, there can be no assurance that the FDA will agree with our decisions. If we fail
to report MDRs to the FDA within the required timeframes, or at all, or if the FDA disagrees with any of our determinations regarding
the report ability of certain events, the FDA could take enforcement actions against us, which could have an adverse impact on our
reputation and financial results.
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 superior product, or if we announce a new product of our own. If we fail to
make sufficient investments in research and development or if we focus on technologies that do not lead to better products, our current
and planned products could be surpassed by more effective or advanced products. In addition, we must manufacture these products
economically and market them successfully by demonstrating to a sufficient number of eye-care professionals the overall benefits of
using them.
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Resources devoted to research and development may not yield new products that achieve commercial success.
We spent about 9.3% of our sales on research and development during the fiscal year ended January 3, 2014, and we expect to
spend similar amounts 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. Any of the products currently under development
may fail to become commercially successful.
Changes in coverage and reimbursement for our products by third-party payers and the new Medical Device Tax could reduce
sales of our products or make them less profitable.
Certain of our products, such as our IOLs, are used in procedures that are typically covered by health insurance, HMO plans,
Medicare, Medicaid, or other governmental sponsored programs both in and outside the U.S. Third-party payers in both government and
the private sector continue to seek to manage costs by restricting the types of procedures they cover to those viewed as most
cost-effective and by capping or reducing reimbursement rates. Whether they limit reimbursement rates for our products or limit the
surgical fees for a procedure that uses our products, these policies can reduce the sales volume of our covered products, their selling
prices or both. Future cost cutting initiatives could result in unexpected reductions in the reimbursement rates for IOLs and related
products.
In some countries government insurers have sought to control costs by limiting the total number of procedures they will
reimburse. In the U.S. the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act,
or collectively, the Health Care Reform Law, is expected to significantly change the system of public and private health care
reimbursement. The Health Care Reform Law includes, among other things, a 2.3% excise tax on medical devices sold in the U.S., which
applies to sales of our IOLs. In addition, other legislative changes have been proposed and adopted since the Health Care Reform Law
was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, creates the Joint
Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not
achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic
reduction to several government programs. This included aggregate reductions to Medicare payments to providers of up to 2% per fiscal
year, which went into effect on April 1, 2013. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law,
which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer
treatment centers.
Future legislation will likely consider further changes that may impact availability and/or pricing for cataract surgery where our
IOLs are used. 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 significantly and adversely affect our business.
We are subject to extensive government regulation worldwide, which increases our costs and could prevent us from selling our
products.
We are regulated by regional, national, state and local agencies. In the U.S. our regulators include the FDA, the Department of
Justice, the Federal Trade Commission, the Office of the Inspector General of the U.S. Department of Health and Human Services, the
Centers for Medicare & Medicaid 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 subject to similar regulatory regimes in other key regions of Europe and Asia, in particular Japan. Regulations worldwide
are becoming more stringent. We have described in detail the regulations governing approval of medical devices and their
manufacturing in the “Item 1. Business–Regulatory Matters” section of this Annual Report. We are also subject to government
regulation over the prices we charge and any rebates we may offer to customers. Complying with government regulation substantially
increases the cost of developing, manufacturing and selling our products.
23
Competing in the ophthalmic products industry requires us to introduce new or improved products and processes continuously,
and to submit these to the FDA and other regulatory bodies for clearance or approval. Obtaining clearance or approval can be a long and
expensive process, and clearance or approval is never certain. For example, the FDA or another country’s regulatory agency, could
require us to conduct an additional clinical trial prior to granting clearance or approval of a product and such clinical trial could take a
long time and have substantial expense. In addition, our operations are subject to periodic inspection by the FDA and international
regulators. 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.
Our new products could take a significantly longer time than we expect to gain regulatory clearance or approval and may never
gain clearance or approval. The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
• we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their intended uses;
• the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;
and
• the manufacturing process or facilities we use may not meet applicable requirements.
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 clears or approves a product, the clearance or 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 timely regulatory clearance or approval of our new products, or if the clearance or approval
is too narrow, we will not be able to market these products, which would eliminate or reduce our potential sales and earnings.
In addition, the FDA and other regulatory authorities may change their clearance and approval policies, adopt additional
regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under
development or impact our ability to modify our currently cleared products on a timely basis. For example, in response to industry and
healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an
evaluation of the program, and in January 2011, announced several proposed actions intended to reform the review process governing
the clearance of medical devices. The FDA intends these reform actions to improve the efficiency and transparency of the clearance
process, as well as bolster patient safety. In addition, as part of FDASIA, Congress reauthorized the Medical Device User Fee
Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and
miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-approval.
Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities
under FDA regulations. The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in
enforcement actions such as warning letters, fines, injunctions, civil penalties, termination of distribution, recalls or seizures of products,
delays in the introduction of products into the market, total or partial suspension of production, refusal to grant future clearances or
approvals, withdrawals or suspensions of current clearances or approvals resulting in prohibitions on sales of our products, and criminal
penalties. Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse
effect on our reputation, business, results of operations and financial condition.
Modifications to our products may require new 510(k) clearances or PMA approvals, or may require us to cease marketing
or recall the modified products until clearances or approvals are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a PMA. The FDA
requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The
FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have modified some of our
510(k) cleared products, and have determined based on our review of the applicable FDA guidance that in certain instances new 510(k)
clearances or pre-market approvals are not required. If the FDA disagrees with our determination and requires us to submit new 510(k)
notifications or PMAs for modifications to our previously cleared products for which we have concluded that new clearances or
approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or
approval, and we may be subject to significant regulatory fines or penalties.
24
Furthermore, the FDA’s ongoing review of the 510(k) program may make it more difficult for us to make modifications to our
previously cleared products, either by imposing more strict requirements on when a manufacturer must submit a new 510(k) for a
modification to a previously cleared product, or by applying more onerous review criteria to such submissions. Specifically, on July 9,
2012, FDASIA was enacted, which, among other requirements, obligates the FDA to prepare a report for Congress on the FDA’s
approach for determining when a new 510(k) will be required for modifications or changes to a previously cleared device. After
submitting this report, the FDA is expected to issue revised guidance to assist device manufacturers in making this determination. Until
then, manufacturers may continue to adhere to the FDA’s 1997 Guidance on this topic when making a determination as to whether or not
a new 510(k) is required for a change or modification to a device, but the practical impact of the FDA’s continuing scrutiny of these
issues remains unclear.
Laws pertaining to healthcare fraud and abuse could materially adversely affect our business, financial condition and
results of operations.
We are subject to various federal, state and foreign laws pertaining to healthcare fraud and abuse, including anti-kickback laws,
physician self-referral laws and false claims laws. Violations of these laws are punishable by criminal and civil sanctions, including, in
some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans
Administration health programs and TRICARE. Similarly, if the physicians or other providers or entities with which we do business are
found to be non-compliant with applicable laws, they may be subject to sanctions, which could indirectly have a negative impact on our
business, financial condition and results of operations. While we believe that our operations are in material compliance with such laws,
because of the complex and far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or
more of our practices to be in compliance with these laws. These laws and regulations act to limit our marketing practices, require the
dedication of resources to ensure compliance, and expose us to additional liabilities.
In addition, the recent Health Care Reform Law, among other things, amends the intent requirement of the federal Anti-Kickback
Statute and certain criminal healthcare fraud statutes so that a person or entity no longer needs to have actual knowledge of the statute or
specific intent to violate it in order to have committed a violation. The Health Care Reform Law also provides that the government may
assert that a claim including items or services resulting from a violation of these statutes constitutes a false or fraudulent claim for
purposes of the civil False Claims Act or the civil monetary penalties statute.
There has also been a recent trend of increased federal and state regulation of payments made to physicians. The Health Care
Reform Law imposed new reporting requirements on device manufacturers for payments made by them and in some cases, their
distributors, to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate
family members, commonly known as the Physician Payment Sunshine Act. Failure to submit required information may result in civil
monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for
all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual
submission. Device manufacturers were required to begin collecting data on August 1, 2013 and must submit reports to CMS by
March 31, 2014, and by the 90th day of each subsequent calendar year.
Certain states also mandate implementation of commercial compliance programs, impose restrictions on device manufacturer
marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting
commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different
compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may violate one or
more of the requirements.
Any violations of these laws or regulations could result in a material adverse effect on our business, financial condition and
results of operations. In addition, changes in these laws, regulations, or administrative or judicial interpretations, may require us to
further change our business practices or subject our existing business practices to legal challenges, which could have a material adverse
effect on our business, financial condition and results of operations.
Investigations and allegations, whether or not they lead to enforcement action or litigation, can materially harm our business
and our 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 distribute our products commercially and could materially harm our business.
25
From time to time we are subject to formal and informal inquiries by regulatory agencies, which could lead to investigations or
enforcement actions. Even when an inquiry results in no evidence of wrongdoing, is inconclusive or is otherwise not pursued, the agency
generally is not required to notify us of its findings and may not inform us that the inquiry has been terminated.
As required by the Sarbanes-Oxley Act of 2002, we maintain a hotline for employees to report any violation of laws, regulations
or company policies anonymously, which is intended to permit us to identify and remedy 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. In response to reports
that our policies or applicable laws or regulations have been violated, we may find it necessary to conduct our own internal
investigations, which may be extensive. Even without a finding of misconduct, negative publicity about investigations or allegations of
misconduct could harm our reputation with professionals and the market for our common stock. Responding to investigations or
conducting internal investigations can be costly, time-consuming and disruptive to our business.
Strikes, slow-downs or other job actions by doctors can reduce sales of cataract-related products.
In many countries where we sell our products, doctors, including ophthalmologists, are employees of the government,
government-sponsored enterprises or large health maintenance organizations. In the past, 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 affects sales of our
products. Depending on the importance of the affected region to our business, the length of the action and its pervasiveness, job actions
by doctors can materially reduce our sales and earnings.
We depend on proprietary technologies, but may not be able to protect our intellectual property rights adequately.
We rely on patents, trademarks, trade secrecy laws, contractual provisions and confidentiality procedures and copyright 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. Any of our pending patent applications may fail to result in an issued patent or fail to 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 open to dispute. Any litigation or claims against us, whether or not successful, could result in substantial costs and harm our
reputation. Intellectual property litigation or claims could force us to do one or more of the following:
•
•
•
cease selling or using any of our products that incorporate the challenged intellectual property, which would adversely affect
our sales;
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
redesign our products to avoid infringing the intellectual property rights of a third party, which may be costly and
time-consuming or impossible to accomplish.
We may not successfully develop and launch replacements for our products that lose patent protection.
Most of our products are covered by patents that, if valid, 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. Generally, the legal
life of a patent in the U.S. is 20 years from application. When our patents covering our products expire, some of which will expire this
year, our competitors may introduce products using the same technology. As a result of this possible increase in competition, we may
need to reduce our prices to maintain sales of our products, which would make them 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.
26
Risks Related to Ownership of Our Common Stock
Our charter documents 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 could be deemed in the interest
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;
• the above limitations on stockholder action can be changed only by a 66-2/3% supermajority vote of stockholders; and
• stockholders must give advance notice to nominate directors or propose other business.
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 prevent 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. Also, we have filed a universal “shelf
registration statement” with the Securities and Exchange Commission. The shelf registration statement covers the future public offering
and sale of up to $200 million in equity or debt securities or any combination of such securities. While we currently have no plans to
issue any securities under the shelf registration, sales of common or preferred stock under the shelf registration or in other transactions
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. The closing price of our common stock ranged from $5.20 to $16.23 per share during the
year ended January 3, 2014. Our stock price could continue to experience significant fluctuations in response to factors such as market
perceptions, 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 common
stock.
Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it
appreciates in value.
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 do not expect 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 our 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 a result, the success of an
investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will
appreciate in value or even maintain the price at which stockholders have purchased their shares.
27
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. STAAR Japan maintains executive offices in Shin-Urayasu, Japan and
a final packaging and distribution facility in Ichikawa City, Japan. We believe our operating facilities in the U.S., Switzerland and Japan
are suitable and adequate for our current and future planned requirements. The Company could increase capacity in our Monrovia,
California facility by adding additional shifts.
Item 3. Legal Proceedings
From time to time we are subject to various claims and legal proceedings arising out of the normal course of our business. These
claims and legal proceedings may relate to contractual rights and obligations, employment matters, and claims of product liability. We
maintain insurance coverage for product liability claims but may not be insured against other potentially material claims. While we not
aware of any claims 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.
Item 4. Mine Safety Disclosures
None.
28
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the Nasdaq Global Market (Nasdaq) under the symbol “STAA.” The following table sets forth the
high and low per share sale prices of our common stock as reported by Nasdaq.
Period
Year ended January 3, 2014
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year ended December 28, 2012
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Holders
$
$
High
Low
16.23 $
13.23
10.51
6.25
7.71 $
8.43
11.21
11.37
12.41
10.41
5.31
5.20
5.05
5.14
7.38
9.65
As of February 28, 2014, there were approximately 434 record holders of our Common Stock.
Dividends
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.
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended (the Exchange Act), or incorporated by reference into any filing of STAAR Surgical Company under the Securities Act of 1933,
as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison from January 2, 2009 through January 3, 2014 of the total performance of the following:
•
•
•
STAAR Surgical Company;
the Nasdaq Stock Market;
a peer group we have selected consisting of 12 companies within our industry or closely related industries: Anika
Therapeutics (ANIK); Cutera Inc. (CUTR); Cynosure Inc. (CYNO); Integra LifeSciences Holdings Corp. (IART);
Iridex Corp. (IRIX); LCA Vision Inc. (LCAV); Merit Medical Systems, Inc. (MMSI); Palomar Medical Technologies
Inc. (PMTI); Solta Medical Inc. (SLTM); Synergetics USA Inc. (SURG); Syneron Medical Ltd. (ELOS); and Volcano
Corporation (VOLC).
Returns in the graph below reflect historical results; we do not intend to suggest they predict future performance. The data
assumes $100 was invested on January 2, 2009 in STAAR common stock and in each of the composite indices, and that dividends (if
any) were reinvested. We have never paid dividends on our common stock and have no present plans to do so.
29
Prepared by Zacks Investment Research, Inc. Used with Permission. All rights reserved.
Total Returns Index for Fiscal Years: 2008
100.00
2009
128.63
2010
253.11
2011
435.27
2012
241.49
2013
668.05
100.00
100.00
140.40
111.77
165.70
140.01
164.30
121.00
189.26
125.66
267.50
152.93
STAAR Surgical Company
The Nasdaq Stock Market (US and
Foreign Companies)
Proxy Peer Group
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 $100.00 on January 2, 2009.
30
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data with respect to the five most recent fiscal years ended January
3, 2014, December 28, 2012, December 30, 2011, December 31, 2010, and January 1, 2010. 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 January 3, 2014 and December 28, 2012 are derived from our consolidated financial statements, which have been audited by
BDO USA, LLP, our independent registered public accounting firm, as indicated in their report included in this Annual Report. The
selected consolidated statement of operations data set forth below for the periods ended December 31, 2010 and January 1, 2010 and the
consolidated balance sheet data set forth below at December 30, 2011, December 31, 2010, and January 1, 2010, are derived from
audited consolidated financial statements of the Company not included in this Annual Report. We have adjusted all prior periods
presented to account for Domilens Gmbh divestiture on March 2, 2010 and present Domilens as a discontinued operation. 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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.s”
Fiscal Year Ended
January 3,
2014
December 28, 2012
December 30, 2011
(In thousands except per share data)
December 31, 2010
January 1, 2010
Statement of Operations
Net sales
Cost of sales
Gross profit
$
General and administrative
Marketing and selling
Research and development
Medical device tax
Other general and administrative expenses
Operating income (loss)
Total other income (expense), net
Income (loss) before income taxes
Income tax provision
Income (loss) from continuing operations
Income from discontinued operations, net of
income taxes
Net income (loss)
Income (loss) per share from continuing
operations – basic
Income (loss) per share from continuing
operations – diluted
Income per share from discontinued operations,
basic and diluted
Net income (loss) per share – basic
Net income (loss) per share – diluted
$
$
72,215 $
21,906
50,309
16,568
23,888
6,708
203
2,242
700
414
1,114
716
398
63,783 $
19,492
44,291
15,150
21,281
6,444
—
2,636
(1,220)
701
(519)
1,244
(1,763)
62,765 $
20,396
42,369
14,932
17,726
5,868
—
1,060
2,783
(79)
2,704
1,356
1,348
54,958 $
19,882
35,076
14,778
17,176
5,724
—
—
(2,602)
(1,079)
(3,681)
432
(4,113)
$
—
398 $
—
(1,763) $
—
1,348 $
4,166
53 $
$
$
$
0.01
$
(0.05)
$
0.04
$
(0.12)
$
0.01
$
(0.05)
$
0.04
$
(0.12)
$
—
$
0.01 $
0.01 $
—
$
(0.05) $
(0.05) $
—
$
0.04 $
0.04 $
0.12
$
(.00) $
(.00) $
51,060
19,737
31,323
15,009
15,300
5,893
—
—
(4,879)
(869)
(5,748)
1,154
(6,902)
702
(6,200)
(0.21)
(0.21)
0.02
(0.19)
(0.19)
Weighted average shares outstanding-basic
36,706
36,253
35,434
34,825
32,498
Weighted average shares outstanding –diluted
38,607
36,253
36,878
34,825
32,498
Balance Sheet Data
Working capital
Total assets
Other long-term liabilities
Stockholders’ equity
$
31,663 $
61,931
4,667
38,852
26,125 $
54,759
5,068
31,742
24,638 $
49,006
5,532
29,458
16,539 $
40,585
4,711
22,427
13,466
58,681
3,887
21,070
31
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 1A. 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’s strategy is to be valued as a leading global provider of innovative intraocular lens system technologies. STAAR
employs a commercialization strategy that focuses on achieving sustainable profitable growth.
Performance Against 2013 Key Operational Metrics
Two principal strategic goals guided STAAR’s key operational metrics in 2013: to lay the groundwork for further growth and to
achieve and maintain profitability. In pursuit of these goals, STAAR aligned its business initiatives during 2013 along five key
operational metrics that it used to gauge its performance during the year. These metrics are as follows:
• Increase total revenue by 12% to 14% for the full year (increased on July 31, 2013 from the previous 8% to 10% metric). As
discussed below in “—Results of Operations,” our total revenue increased by 13% in 2013.
• Increase gross profit margins by 250 basis points for the full year. As discussed below in “—Results of Operations,” gross
profit margins increased by 30 basis points in fiscal year 2013.
• Achieve profitability in each quarter of 2013. As discussed below in “—Results of Operations,” we achieved profitability on
a GAAP basis in each of the first three quarters of 2013 but were not profitable in the fourth quarter of 2013.
• Manage the manufacturing consolidation with no material disruption to customer supply requirements or quality. Our
consolidation efforts continue to proceed substantially according to our plans. On July 31, 2013, we revised this metric by
extending the transfer of Swiss operations until the middle of 2014 to assure that we can meet higher than anticipated demand
for the Visian ICL product line. As of the end of February 2014, 100% of all IOL production, and approximately 75% of ICLs
and 30% of TICLs are manufactured in our Monrovia, California facility.
32
Other Highlights
General
In 2013, we grew the business while increasing our investment in the future by expanding our Monrovia, California facility,
substantially completing the development of our preloaded ICL product, obtaining additional regulatory approvals for products and
leveraging our past sales and marketing successes. During 2013, total procedures and sales increased in all of our top twelve global
markets compared to 2012. We moved parts of our operations into 26,000 square foot facility contiguous to our existing Monrovia
facility. The effect of foreign currency exchange negatively impacted our financial performance in 2013. Our expanded digital
marketing efforts, including social media, showed promise and we will continue those efforts in 2014. We expect to commercially
launch our pre-loaded ICL product by the second quarter of 2014.
Global Visian ICL and TICL Sales
STAAR is the only company with approval to sell a posterior chamber phakic IOL, known as the ICL in the U.S. In 2013, global
sales of the ICL products represented approximately 61% of STAAR’s business. We focus our ICL marketing and sales efforts in the
top twelve refractive markets, based on the success of our focused market strategy since 2010. These markets include the U.S., Japan,
Korea, China, India, Spain, Middle East, Germany, France, Italy, U.K., and Latin America.
In September 2011, we launched the V4c model of the ICL with CentraFLOW technology, featuring the KS-AquaPORT in
countries that recognize the CE Mark. The CentraFLOW technology uses a proprietary port in the center of the ICL optic of a size
intended to optimize the flow of fluid within the eye, and eliminates the need for the surgeon to perform a YAG peripheral iridotomy
procedure days before the ICL implant. By simplifying the procedure and increasing patient comfort, the ICL with CentraFLOW
technology makes the superior visual outcomes of the ICL available through a surgical implantation experience closer to LASIK, which
we believe attracts new surgeons and patients to the product.
The launch of ICLV4c follows the September 2010 introduction of the ICLV4b model, which offers an expanded range of
correction, in territories that recognize the CE Mark. The expanded range includes ICLs with lower levels of myopia correction in
quarter-diopter increments, Toric hyperopic ICLs to treat astigmatism and far-sightedness, and Toric ICLs in the low to zero range of
myopia to treat patients primarily affected by astigmatism. These product line extensions more than double the number of patients who
could benefit from products in Europe and other territories that accept the CE Mark.
In 2013, the ICL with CentraFLOW technology received regulatory approval in Korea, India and Argentina (in March 2014 we
received approval in Japan). We believe these approvals helped increase sales, improved the competitiveness of the ICL product line
and will help move us closer to our goal of positioning the ICL and TICL throughout the world as primary choices for refractive
surgery. ICL products now address, in countries where approved, all degrees of refractive error that can be treated with laser eye
surgery, as well as moderate and severe errors beyond the effective range of laser eye surgery.
In some key markets of the Asia Pacific region, as well as the U.S., STAAR has not yet introduced the ICLV4b model. In those
countries, STAAR is seeking approval of the ICL with CentraFLOW technology and plans to move directly to that model as quickly as
regulatory timelines allow.
STAAR’s ability to maintain or accelerate the rate of growth in ICL sales will partly depend on continued improvement in
worldwide economic conditions and progress with regulatory agencies. ICL surgery is a relatively expensive elective procedure and is
seldom reimbursed by insurers or government agencies. STAAR believes that the global recession reduced overall demand for
refractive surgery particularly in the U.S., and it has been reported that consumer spending and consumer confidence has not returned to
pre-recession levels.
We consider ICL sales growth in the U.S. market important because of the size of the U.S. refractive surgery market and the
perceived worldwide leadership of the U.S. in adopting innovative medical technologies. The ICL was approved by the FDA for
treatment of myopia on December 22, 2005. STAAR submitted a Pre-Market Approval Application supplement for the Toric ICL to the
FDA on April 28, 2006. The FDA has organized an advisory panel meeting to review the PMA supplement for March 14, 2014. We
cannot predict when, or if, the FDA may grant approval of the Toric ICL. (See, “Item 1.—Business—Regulatory Matters—Regulatory
Requirements in the United States.” ). On October 9, 2012, STAAR submitted a clinical study protocol regarding the ICL with
CentraFLOW technology. On December 12, 2013, we met with the FDA in Washington D.C. to discuss the protocol and we remain in
dialogue with the FDA regarding a revised proposed protocol.
33
Research and Development efforts continued on developing a presbyopia-correcting ICL for myopic and astigmatic patients.
Currently efforts focus on one presbyopia-correcting technology early onset and progression of presbyopia by providing an additional
1.0 to 2.0 diopter of near correction, and another technology for patient in their forties and older that require a greater addition to correct
presbyopia.
Global IOL Sales.
STAAR pioneered the development of folding lenses for use in cataract surgery, and IOLs represented approximately 33% of
STAAR’s business in 2013.
In September 2011, STAAR launched its nanoFLEX Collamer Single Piece IOL which can be injected through a 2.2 mm incision
with the nanoPOINT Injector System, in the territories that recognize the CE Mark. STAAR received CE Mark approval to market its
nanoFLEX Toric IOL in November 2011, and began marketing the lens in 2013. nanoFLEX is STAAR’s largest selling IOL product in
the U.S. market and STAAR believes the lens can receive favorable commercial acceptance outside the U.S. STAAR hopes that the
biocompatibility and excellent optical properties of Collamer, with which surgeons have become acquainted through the ICL, will build
interest in the nanoFLEX IOL worldwide. Availability of the toric version of the lens, which corrects pre-existing astigmatism at the
time of cataract surgery, is expected to increase interest in the nanoFLEX technology outside the U.S.
In May 2012, STAAR included in its Annual Report to the FDA notification of changes to the design for the nanoFLEX IOL. On
September 25, 2012, the FDA responded that we should submit these changes as a PMA Supplement. On November 19, 2012, STAAR
amended its Annual Report to not include the modified nanoFLEX. We continue to assess our options regarding the modified nanoFLEX
IOL in the U.S., while we continue to sell the current version.
STAAR has marketed its silicone toric IOL since 1998 and believes that the addition of the nanoFLEX Toric will make the
product line more competitive with acrylic toric IOLs now in the market. Among other things, the nanoFLEX Toric features an aspheric
optic, and we believe the bio-adhesive nature of the Collamer material will provide excellent rotational stability, an essential
characteristic for toric lenses.
In the fourth quarter of 2012, STAAR launched in Japan and select markets in Europe a hydrophobic acrylic, bluelight filter,
preloaded IOL, featuring the popular single-piece IOL format, known as the KS-SP. The market favorably received the KS-SP and we
received higher demand than originally forecasted. Due to manufacturing capacity constraints occurring at our third-party acrylic lens
supplier, we have been experiencing a backlog for the KS-SP, as well as the KS-Xs, throughout all of 2013 and although improved, it
continues to this day. The supplier cannot estimate whether or when their expanding manufacturing capabilities will be able to meet our
increasing supply requirements. While we are exploring supply alternatives, there is no guaranty we will identify and validate an
alternative supplier.
Among STAAR’s initiatives to grow its IOL business are the following:
• we plan to expand our preloaded IOL offering to our collamer IOL line;
• we plan to seek further regulatory approvals in an effort to build a global product franchise for Collamer IOLs; and
• we are researching presbyopia-correcting designs that leverage the unique optical properties of the Collamer material.
STAAR cautions that the successful development and introduction of new products is subject to risks and uncertainties, including
the risk of unexpected delays and, in some cases, approval of regulatory authorities.
Manufacturing Consolidation Project and Tax Strategy. Since 2011, STAAR has devoted significant resources to two
initiatives: a project to consolidate global manufacturing, and development of a strategy to optimize our global organization for tax
purposes. The goal of these strategies is to further improve upon gross profit margins by streamlining operations, thereby reducing costs
and to increase profits in the U.S. to enable us to utilize our $121.7 million in net operating loss carryforwards, and at the same time,
reduce income taxes in foreign jurisdictions where we pay tax.
34
We developed a plan to consolidate our manufacturing in a single site in Monrovia, California by the middle of 2014, (originally
scheduled for completion by the end of 2013), which is expected subsequently to yield significant savings in cost of goods and to lower
our global administrative and regulatory costs. In 2013, we ceased manufacturing efforts in our Japan facility. Now all IOLs are
manufactured in the U.S.
In December 2012, the Company began manufacturing the first ICLs in the U.S., whereas they were previously exclusively
manufactured in Switzerland. Sixty percent of ICLs manufactured through February 2014 were U.S.-manufactured, with the remainder
manufactured in Switzerland. Our manufacturing consolidation project, which is subject to significant risks, is further described under
“Item 1A. Risk Factors—Risks Related to Our Business—Our manufacturing consolidation plan exposes us to risk.”
STAAR has spent approximately $6 million on its manufacturing consolidation initiatives over a three and a half-year period and
spent approximately $2.2 million during 2013. Expenditures to date have largely consisted of severance, employee costs, and
professional fees to advisors and consultants.
During the first half of 2013, we moved parts of our operations into the building immediately adjacent to our current facility in
Monrovia, California, which we leased in August 2012. The new building, approximately 26,000 square feet, which is accessible from
the current facility via two hallways, allows the Company to accommodate the needs associated with our previously announced
manufacturing consolidation to Monrovia, as well as provide space for additional growth.
In addition, as STAAR’s profitability grows, its liability for income taxes in various jurisdictions has also increased. STAAR has
developed a strategy to reduce its future tax liabilities as its business grows. Among other things, STAAR seeks to utilize the
approximately $121.7 million in net operating losses that it has accumulated in the U.S.
However, we cannot assure that we will achieve the expected benefits of these initiatives. Among other things, costs could exceed
current estimates, product manufacturing transfers can result in delays or supply interruptions, changes in tax laws could reduce or
eliminate expected benefits of some or our tax strategies, and future profit margins can be affected by a variety of factors unrelated to our
level of manufacturing efficiency.
Backlog. The ICL is manufactured to precisely address refractive prescriptions across a broad range of correction, resulting in a
large number of Stock Keeping Units (SKUs). The challenge of maintaining inventory in all models can result in a backlog in customer
orders. While the dollar amount of backlog orders is not currently significant in relation to our total annual sales, unexpectedly large
orders for ICLs could increase our backlog. STAAR believes it has sufficient capacity to ramp up production levels to meet demand and
that any backlogs will be temporary. However, delays in filling orders can result in lost sales if alternative refractive treatments are
available to the patient. Because Toric ICLs treat an even greater variety of refractive errors and at times must be custom made for the
patient, they are accustomed to a special order procedure and do not expect immediate delivery of Toric ICLs from inventory. In
connection with our manufacturing consolidation project, we have built a safety stock of inventory of our primary products within the
ICL and IOL product lines.
Our pre-loaded single piece acrylic IOL has experienced backlogs for the past year and remains on backlog today due to supply
constraints occurring at our third-party acrylic lens vendor. Although the supplier is working to resolve the issue, they cannot estimate
whether or when their manufacturing capabilities will be able to meet our increasing supply need. While we are exploring supply
alternatives, there is no guaranty we will identify and validate an alternative supplier.
Status of U.S. TICL Submission.
As discussed above under the caption “Item 1. Business — Regulatory Matters,” STAAR submitted a Pre-Market Approval
Application (PMA) supplement for the TICL to the FDA on April 28, 2006, which the agency has designated as a panel-track
supplement. Since then, the FDA has raised a number of questions regarding the TICL clinical study and associated data. We have
engaged in an interactive process with the FDA to respond to their questions. The FDA has scheduled an advisory panel meeting to
review the PMA supplement on March 14, 2014. The U.S. represents the largest refractive procedure market and STAAR will continue
to seek approval. STAAR cannot predict when, or if, the FDA may grant approval of the Toric ICL.
35
Results of Operations
The following table sets forth the percentage of total sales represented by certain items reflected in the Company’s consolidated
statement of operations for the period indicated and the percentage increase or decrease in such items over the prior period.
January
3,
2014
Percentage of Net Sales
December
28,
2012
December
30,
2011
Percentage Change
2013 vs.
2012
2012 vs.
2011
Net sales
Cost of sales
Gross profit
General and
administrative
Marketing and selling
Research and
development
Medical device tax
Other general and
administrative
expenses
Operating income (loss)
Total other income
(expense), net
Income (loss) before
income taxes
Provision for income
taxes
Net income (loss)
100.0 %
30.3 %
69.7 %
22.8 %
33.1 %
9.3 %
0.3 %
3.1 %
1.1 %
0.7 %
1.8 %
1.0 %
0.8 %
* Denotes change is greater than 100%
100.0 %
30.6 %
69.4 %
23.7 %
33.4 %
10.1 %
—
4.1 %
(1.9)%
1.1 %
(0.8)%
2.0 %
(2.8)%
100.0 %
32.5 %
67.5 %
23.8 %
28.2 %
9.3 %
—
1.7 %
4.4 %
(0.1)%
4.3 %
2.2 %
2.1 %
13.2 %
12.4 %
13.6 %
(9.4)%
(12.3)%
(4.1)%
*
14.9 %
*
(40.9)%
*
42.4 %
*
1.6 %
(4.4)%
4.5 %
1.5 %
20.1 %
9.8 %
—
*
*
*
*
(8.3)%
*
The following table presents our net sales, by product, for the fiscal years presented (dollars in thousands):
% of
Total
2013
% of
Total
2012
% of
Total
2011
61.2 % $
33.4 %
44,128
24,153
55.0 % $
40.7 %
35,080
25,971
51.1 % $
43.9 %
32,074
27,547
94.6 %
5.4 %
100.0 % $
68,281
3,934
72,215
95.7 %
4.3 %
100.0 % $
61,051
2,732
63,783
95.0 %
5.0 %
100.0 % $
59,621
3,144
62,765
ICL
IOL
Core Product
Sales
Other
Total Sales
Net sales for 2013 were $72.2 million, a 13.2% increase over the $63.8 million reported in fiscal 2012. The increase in net sales
was due to a 26% increase in ICL sales and a 44% increase in other product sales, partially offset by a 7% decrease in IOL
sales. Changes in foreign currency negatively impacted net sales by $3.8 million.
Net sales for 2012 were $63.8 million, a 1.6% increase over the $62.8 million reported in fiscal 2011. The increase in net sales
was due to a 9.4% increase in ICL sales, which was largely offset by a 5.7% decrease in IOL sales and a 13.2% decrease in other product
sales. Changes in foreign currency did not materially impact our net sales for the year.
Total ICL sales for 2013 were $44.1 million, a 26% increase over the $35.1 million reported in fiscal 2012. ICL unit volume
grew in each of the Company’s top 12 markets and sales increased in 11 out of 12 markets with the only exception being Japan whose
sales declined 4% due to the negative impact of foreign currency. ICL sales represented 61% of our total sales for fiscal 2013. Toric ICL
sales represented 47% of total ICL sales, where approved.
36
Total ICL sales for 2012 were $35.1 million, a 9.4% increase over the $32.1 million in fiscal 2011. Unit volume increased 3% and
average selling prices increased 6%. ICL sales growth was lower than anticipated due to an 18% decrease in ICL sales in
Korea. Outside of Korea, ICL sales grew 18%. ICL sales represented 55% of our total sales for fiscal 2012. Toric ICL sales
represented 49% of total ICL sales, where approved.
Total IOL sales were $24.2 million for fiscal 2013, a 7.0% decrease from fiscal 2012 sales of $26.0 million. The decrease in IOL
sales was primarily due to the negative impact of changes in foreign currency which reduced net sales of IOLs by $3.2 million. IOL
sales represented 33% of the Company’s total sales in fiscal 2013. Preloaded IOL sales represented 76% of total IOL sales in fiscal 2013.
Total IOL sales were $26.0 million for fiscal 2012, a 5.7% decrease from fiscal 2011 sales of $27.5 million. The primary reason
for the decrease was a 25% decrease in U.S. IOL sales volume. The effect of the decrease in unit volume was partially offset by an 11%
increase in average selling prices. Preloaded IOL sales in international markets decreased 1%, despite a 5% increase in unit volume,
because of a 6% decline in average selling prices due to a mix shift to preloaded acrylic IOLs which have lower average selling prices
than most other IOL models. IOL sales represented 41% of the Company’s total sales in fiscal 2012. Preloaded IOL sales represented
76% of total IOL sales in fiscal 2012.
Other product sales, which have been deemphasized in recent years due to their low margins, increased to $3.9 million in fiscal
2013 from $2.7 million in fiscal 2012. The increase in other product sales is due to an increase in preloaded injector part sales to a third
party manufacturer for product they sell to their customers. Other product sales represented 5.4% and 4.3% of the Company’s total sales
in fiscal 2013 and 2012, respectively.
The following table presents our gross profit and gross profit margin for the fiscal years presented (dollars in thousands):
Gross Profit
Gross Profit Margin
$
50,309
$
69.7 %
44,291
$
69.4 %
42,369
67.5 %
2013
2012
2011
Gross profit in fiscal 2013 was $50.3 million compared with $44.3 million in fiscal 2012. The increase in gross profit and gross
profit margin was largely attributable to the 26% increase in ICL sales. Gross margin was negatively impacted by the increased sales of
injector parts which reduced gross margin by 140 basis points and higher costs in Japan for U.S. dollar sourced products due to a weaker
yen which reduced gross margin by 120 basis points.
Gross profit in fiscal 2012 was $44.3 million compared with $42.4 million in fiscal 2011. The increase in gross profit and gross
profit margin was largely attributable to a higher mix of ICL sales and improved margins on IOL sales.
The following table presents our general and administrative expense for the fiscal years presented (dollars in thousands):
General and Administrative Expense
Percentage of Sales
$
16,568
$
22.8 %
15,150
$
23.7 %
14,932
23.8 %
2013
2012
2011
General and administrative (G&A) expense in fiscal 2013 was $16.6 million or 22.8% of sales, compared with $15.1 or 23.7% of
sales in fiscal 2012. Although G&A expense has decreased as a percentage of sales, the increase in dollars was primarily due to an
increased compensation expense and the costs associated with the new facility in California.
General and administrative expense in fiscal 2012 was $15.1 million or 23.7% of sales, compared with $14.9 million or 23.8% of
sales in fiscal 2011. Although G&A expense has decreased as a percentage of sales, the increase in dollars was primarily due to an
increase in stock based compensation expense.
The following table presents our marketing and selling expense for the fiscal years presented (dollars in thousands):
Marketing and Selling Expense
Percentage of Sales
$
23,888
$
33.1 %
21,281
$
33.4 %
17,726
28.2 %
2013
2012
2011
37
Marketing and selling expense in fiscal 2013 was $23.9 million or 33.1% of sales, compared with $21.3 or 33.4% of sales in fiscal
2012. The increase in expense is due to increased compensation and travel costs primarily due to increased headcount, increased
commissions due to increased sales, increased tradeshow expenses, and increased promotional activities including social media
marketing efforts.
Marketing and selling expense in fiscal 2012 was $21.3 million or 33.4% of sales, compared with $17.7 million or 28.2% of sales
in fiscal 2011. The increase in sales and marketing expense was due to the addition of 17 employees during 2012 to support the
Company’s ICL growth initiatives in Asia Pacific, Europe, and the U.S. and to support global marketing efforts.
The following table presents our research and development expense for the fiscal years presented (dollars in thousands):
Research and Development Expense
Percentage of Sales
$
6,708
$
9.3 %
6,444
10.1 %
$
5,868
9.3 %
2013
2012
2011
Research and development expenses consist primarily of compensation and related costs for personnel responsible for the
research and development of new and existing products and the regulatory and clinical activities required to acquire and maintain
product approvals globally. These costs are expensed as incurred.
Research and development expense in fiscal 2013 was $6.7 million or 9.3% of sales, compared with $6.4 million or 10.1% of
sales in fiscal 2012. The increase in expense is due to new product development and costs of preparing for the Toric ICL Panel meeting
scheduled by the FDA for March 14, 2014.
Research and development expense in fiscal 2012 was $6.4 million or 10.1% of sales, compared with $5.9 million or 9.3% of
sales in fiscal 2011. The increase in expense is due to an increase in compensation costs, including stock-based compensation and due
to new product development activities.
The following table presents other general and administrative expenses for the fiscal years presented (dollars in thousands):
Other General and Administrative Expenses
Percentage of Sales
$
2,242
$
3.1 %
2,636
$
4.1 %
1,060
1.7 %
2013
2012
2011
Other general and administrative expenses in fiscal 2013 of $2.2 million compared with $2.6 million in fiscal 2012 represent costs
associated with the Company’s project to consolidate its manufacturing operations to the U.S. During 2013, the Company completed
the consolidation and closure of Japan manufacturing and the Company anticipates that the transfer of Swiss manufacturing will be
completed by mid-2014. The Company estimates that manufacturing consolidation expenses will decrease in 2014 to less than
$500,000.
Other general and administrative expenses in fiscal 2012 of $2.6 million compared with $1.1 million in fiscal 2011 represent costs
associated with the Company’s plans to consolidate its manufacturing operations. This expense was higher than originally planned for
the year due to a change in the timing of severance accruals.
The following table presents our other income (expense), net for the fiscal years presented (dollars in thousands):
Other Income (Expense), net
Percentage of Sales
$
$
414
0.7 %
$
701
1.1 %
(79)
(0.1)%
2013
2012
2011
38
Other income (expense), net generally relates to interest expense on notes payable and capital lease obligations, gains or losses on
foreign currency transactions, royalty income, and fair value adjustments of outstanding warrants. The table below summarizes the year
over year changes in other income (expense), net (in thousands).
Favorable (Unfavorable)
2013 v. 2012
2012 v. 2011
$
Interest income
Interest expense
Exchange gains (losses)
Royalty income
Fair value adjustment of warrants (3)
Other
Net change in other income (expense), net $
—
121
(72)
85
(308)
(113)
(287)
$
$
27
232(1)
25
(58)
452
102(2)
780
(1) Decrease in interest expense is due to the fulfillment of certain capital lease obligations.
(2) Other income resulted from the release of restricted cash which was set aside for the payment of potential taxes of our former
German subsidiary.
(3) Relates to the fair value of 70,000 warrants issued to Broadwood Partners, L.P. on March 21, 2007. The warrants expired
unexercised on March 21, 2013.
The following table presents our provision for income taxes for the fiscal years presented (in thousands):
Provision for Income Taxes
$
716 $
1,244 $
1,356
2013
2012
2011
The provision for income taxes decreased from 2012 to 2013 primarily due to our release of the valuation allowance of our
STAAR Japan subsidiary as of the third quarter ended September 27, 2013, which resulted in a tax benefit of $433,000 recognized
during fiscal year 2013. We maintained a full valuation allowance for STAAR Japan in 2012 and 2011.
The provision for income taxes decreased from 2011 to 2012, as a result of a decrease in income in jurisdictions in which we pay
taxes.
We do not expect to begin to see the tax benefits associated with our manufacturing consolidation project until 2014 when
manufacturing is projected to be fully consolidated.
See Critical Accounting Policies included later in this Item 7 for additional information about our provision for income taxes.
A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Note 9 of Notes to the Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Liquidity and Capital Resources
We have historically financed our operations primarily through operating cash flows, the issuance of common stock and proceeds
from stock option exercises, borrowings under line of credit and by relying on equipment and other commercial financing. During 2014,
and for the foreseeable future, we will be highly dependent on our net product revenue to supplement our current liquidity and fund our
operations. We may, in the future elect, to supplement this with further debt or commercial borrowing.
We believe our current cash balances coupled with cash flow from operating activities will be sufficient to meet our working
capital requirements for the foreseeable future, including the remaining cost and capital associated with our plans to consolidate
manufacturing. Our need for working capital, and the terms on which financing may be available, will depend in part on its degree of
success in maintaining positive cash flow through the strategies described above under the caption “ —Overview—Strategy .”
39
Our financial condition as of January 3, 2014 for each of the years indicated included the following (in millions):
2013
2012
2011
2013 v. 2012
2012 v. 2011
Cash and cash equivalents
Current assets
Current liabilities
Working capital
$
$
$
22.9 $
50.1 $
18.4
31.7 $
21.7 $
44.1 $
17.9
26.2 $
16.6 $
38.7 $
14.0
24.7 $
1.2 $
6.1 $
1.0
5.1 $
5.1
5.4
3.9
1.5
Overview of changes in cash and cash equivalents and other working capital accounts.
Net cash provided by operating activities was $3.4 million, $3.2 million, and $5.3 million for fiscal years 2013, 2012, and 2011
respectively. For 2013, net cash provided by operating activities consisted of $0.4 million net income, $7.4 million non-cash expenses
and $4.4 million used for working capital. For 2012, net cash provided by operating activities consisted of net loss of $1.8 million, $5.4
million in non-cash expenses and $0.4 million used for working capital. For 2011, net cash provided by operating activities consisted of
net income of $1.3 million, $4.6 million in non-cash expenses and $0.6 million used for working capital.
Net cash used in investing activities was $3.4 million, $2.1 million, and $0.9 million, for fiscal years 2013, 2012, and 2011,
respectively, and relate primarily to the acquisition of property, plant and equipment. The increase in investment in property, plant and
equipment during 2013, relative to 2012, and during 2012, relative to 2011, is due to investments made in connection with the
Company’s consolidation of its manufacturing operations to the U.S. In addition, during 2013, the Company made investments in
leasehold improvements related to the expansion of the Company’s Monrovia, CA facility.
Net cash provided by financing activities was $2.4 million, $4.3 million, and $2.8 million for fiscal years 2013, 2012 and 2011,
respectively. For 2013, net cash provided by financial activities consisted of $0.8 million of repayment of capital lease lines of credit and
$3.3 million in proceeds from exercise of stock options. For 2012, net cash provided by financing activities consisted of $3.5 million
increase in line of credit and $1.5 million in proceeds from exercise of stock options, partially offset by $0.7 million in capital lease
repayments. For 2011, net cash provided by financing activities consisted of $3.3 million in proceeds from exercise of stock options,
partially offset by $0.6 million in capital lease repayments.
Accounts receivable was $10.7 million as of January 3, 2014 and $8.5 million as of December 28, 2012. Days’ Sales Outstanding
(“DSO”) was 55 days in 2013 and 49 days in 2012. The Company expects to maintain DSO within a range of 45 to 50 days during the
course of fiscal 2014.
Inventories at the end of fiscal 2013 and 2012 were $12.5 million and $11.7 million, respectively. Days’ inventory on hand (“DOH”)
was 159 days in 2013 and 145 days in 2012 for finished goods, including consignment inventory. We planned for this increase to
provide safety stock during our manufacturing consolidation project.
Shelf Registration
In August 2011, STAAR filed a universal “shelf registration statement” with the Securities and Exchange Commission
(SEC). The shelf registration statement covers the future public offering and sale of up to $75 million in equity or debt securities or any
combination of such securities. STAAR has not issued any securities under that shelf registration statement which will expire in August
2014. On February 26, 2014, STAAR filed a universal shelf registration statement with the SEC covering the future public offering and
sale of up to $200 million in equity or debt securities or any combination of such securities. STAAR currently has no plans to issue any
securities under the shelf registration statement. Among the purposes for which STAAR could use the proceeds of securities sold in the
future under the shelf registration statement are working capital, capital expenditures, expansion of sales and marketing, and continuing
research and development. STAAR could also use a portion of the net proceeds to acquire or invest in businesses, assets, products and
technologies that are complementary to our own, although we are not currently contemplating or negotiating any such acquisitions or
investments. The availability of financing in the public capital markets through the shelf registration statement depends on a number of
factors in place at the time of financing, including the strength of STAAR’s business performance, general economic conditions and
investment climate, and investor perceptions of those factors. If STAAR seeks financing under the shelf registration statement in the
future, we cannot assure that such financing will be available on favorable terms, if at all.
Credit Facilities, Contractual Obligations and Commitments
Credit Facilities
The Company has credit facilities with different lenders to support operations as detailed below.
40
Line of Credit
The Company’s wholly owned Japanese subsidiary, STAAR Japan, has an agreement, as amended on December 28, 2012, with
Mizuho Bank which provides for borrowings of up to 500,000,000 Yen (approximately $4.8 million based on the rate of exchange on
January 3, 2014), at an interest rate equal to the Tokyo short-term prime interest rate (approximately 1.475% as of January 3, 2014) and
may be renewed annually (the current line expires on April 4, 2014). The credit facility is not collateralized. In case of default, the
interest rate will be increased to 14% per annum. While no assurance can be given, the Company believes the credit line will be renewed
in fiscal 2014. The Company had 500,000,000 Yen outstanding on the line of credit as of January 3, 2014 and December 28, 2012,
(approximately $4.8 million and $5.8 million based on the foreign exchange rates on January 3, 2014 and December 28, 2012,
respectively) which approximates fair value due to the short-term maturity and market interest rates of the line of credit. As of January
3, 2014, there were no available borrowings under the line.
In August 2010, the Company’s wholly owned Swiss subsidiary, STAAR Surgical AG, entered into a credit agreement with
Credit Suisse (the Bank). The credit agreement provides for borrowings of up to 1,000,000 CHF (Swiss Francs) ($1.1 million at the rate
of exchange on January 3, 2014), to be used for working capital purposes. Accrued interest and 0.25% commissions on average
outstanding borrowings is payable quarterly and the interest rate will be determined by the Bank based on the then prevailing market
conditions at the time of borrowing. The credit agreement is automatically renewed on an annual basis based on the same terms assuming
there is no default. The credit agreement may be terminated by either party at any time in accordance with its general terms and
conditions. The credit facility is not collateralized and contains certain conditions such as providing the Bank with audited financial
statements annually and notice of significant events or conditions as defined in the credit agreement. The Bank may also declare all
amounts outstanding to be immediately due and payable upon a change of control or a “material qualification” in STAAR Surgical
independent auditors’ report, as defined. There were no borrowings outstanding as of January 3, 2014 and the full amount of the line was
available for borrowing.
Covenant Compliance
The Company is in compliance with the covenants of its credit facilities and line of credit as of January 3, 2014.
Contractual Obligations
The following table represents the Company’s known contractual obligations as of January 3, 2014 (in thousands):
Contractual Obligations
Total
1 Year
Payments Due by Period
2-3
Years
4-5
Years
More
Than
5 Years
Line of credit
Capital lease obligations
Operating lease obligations
Pension benefit payments
Firm commitments
Severance
Open purchase orders
Total
Critical Accounting Policies
$
$
4,750 $
451
8,007
1,434
1,864
731
235
17,472 $
4,750 $
303
2,058
99
1,464
731
235
9,640 $
— $
148
3,533
244
400
—
—
4,325 $
— $
—
1,988
315
—
—
—
2,303 $
—
—
428
776
—
—
—
1,204
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of
America requires management to make significant 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, allowances
for doubtful accounts and sales return, 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.
We believe the following represent our critical accounting policies.
41
•
Revenue Recognition and Accounts Receivable. We recognize 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 or determinable;
and collectability is reasonably assured. The Company records revenue from non-consignment product sales when title and risk of
ownership has been transferred, which is typically at shipping point, except for our STAAR Japan subsidiary, which is typically
recognized when the product is received by the customer. STAAR Japan does not have significant deferred revenues as delivery to
the customer is generally made within the same or the next day of shipment. Our 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. We maintain title and risk of loss on consigned inventory. We recognize revenue for consignment inventory
when we are informed the IOL has been implanted and not upon shipment to the surgeon. We believe our revenue recognition policies
are appropriate. We present sales tax we collect from our customers on a net basis (excluded from our revenues).
We ship ICLs only for use by surgeons who have already been certified, or for use in scheduled training surgeries.
We sell certain injector parts to an unrelated customer and supplier (collectively referred to as “supplier”) whereby these injector part
sales are either made as a final sale to the supplier or, are sold to be reprocessed by the supplier into finished goods inventory (a
preloaded acrylic IOL). These finished goods are then sold back to us at an agreed upon, contractual price. We make a profit margin
on either type of sale with the supplier and each type of sale is made under separate purchase and sales orders between the two of us
resulting in cash settlement for the orders sold or repurchased. For parts that are sold as a final sale, we recognize a sale consistent
with our routine revenue recognition policies as disclosed and those sales are included as part of other sales in total net sales. For the
injector parts that are sold to be reprocessed into finished goods, we do not recognize revenue on these sales in accordance with ASC
845-10, Purchases and Sales of Inventory with the Same Counterparty. Instead, we record the transaction at its carrying value,
deferring any profit margin in inventory, until the finished good inventory is sold to an end-customer (not the supplier) at which point
we record the sale and the related cost of sale, including the release of the deferred cost of sale in inventory, related to these finished
goods.
For all sales, we are the principal in the transaction as we, among other factors, are the primary obligor in the arrangement, bear
general inventory risk, credit risk, have latitude in establishing the sales price and bear authorized sales returns inventory risk.
Therefore, sales are recognized gross with corresponding cost of sales in the statement of operations instead of a single, net
amount. Cost of sales includes cost of production, freight and distribution, royalties, and inventory provisions, net of any purchase
discounts.
We generally permit returns of product if the product is returned within the time allowed by our return policies, and in good condition.
We provide allowances for sales 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 our expectations, we cannot guarantee that we will continue to
experience the same return rates that we have in the past. Measurement of such returns requires consideration of, among other factors,
historical returns experience and trends, including the need to adjust for current conditions and product lines, the entry of a competitor,
and judgments about the probable effects of relevant observable data. We consider all available information in our quarterly
assessments of the adequacy of the allowance for sales returns. Sales are reported net of estimated returns. If the actual sales returns
are higher or lower than estimated by management, additional reduction or increase in sales may occur.
We maintain provisions for uncollectible accounts based on estimated losses resulting from the inability of our 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. We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer
payment history and current creditworthiness, as determined by our review of our customers’ current credit information. We
continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon
our historical experience and any specific customer collection issues that have been identified. We write off amounts determined to be
uncollectible against the allowance for doubtful accounts. While such credit losses have historically been within our expectations and
the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have 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. We consider all available information in our 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 by estimating the fair value of
options issued using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares
on grant date, risk-free interest rates, expected term of the option, expected volatility of our stock and expected dividend yield. The
amounts recorded in the financial statements for share-based compensation could vary significantly if we were to use different
assumptions. We also issue restricted stock units, or RSUs, to certain executives which contain both a performance and a
42
service condition such that they vest if the internally established revenue target is met or exceeded and the grantee is still employed
with us on the measurement date, which is typically one year after the grant date. We recognize compensation cost for the RSUs if
and when it is probable that the performance condition will be achieved, net of an estimate of pre-vesting forfeitures, over the requisite
service period based on the grant-date fair value of the stock. We reassess the probability of vesting at each reporting period and
adjust compensation cost based on our probability assessment.
• Income Taxes. We account for income taxes, on a jurisdiction-by-jurisdiction basis, 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 in the jurisdictions in which they arise. 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.
We expect to continue to maintain a full valuation allowance in the U.S. on future tax benefits until, and if, 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, we are regularly audited by federal, state and foreign tax authorities, and subject to periodic inquiries
from those tax authorities regarding the amount of taxes due. These inquiries may relate to the timing and amount of deductions and
the allocation of income among various tax jurisdictions. We believe that our tax positions comply with applicable tax law and intend
to defend our positions, if necessary. Our effective tax rate in a given financial statement period could be impacted if we prevailed in
matters for which reserves have been established, or were required to pay amounts in excess of established reserves.
• Inventories. We provide estimated inventory allowances for excess, slow moving, expiring 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. We value our inventory at the lower of cost or net
realizable market values. We regularly review inventory quantities on hand and record 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 our 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, we determine
that our inventory was overvalued, we would be required to recognize such costs in cost of sales at the time of such determination.
Likewise, if we determine that our inventory was undervalued, cost of sales in previous periods could have been overstated and we
would be required to recognize such additional operating income at the time of sale. While such inventory losses have historically
been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same loss
rates that we have in the past. Therefore, although we make 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 our inventory and our 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 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 use of the underlying assets; and significant adverse industry or market economic trends. In reviewing for impairment, we
compare the carrying value of such assets to the estimated undiscounted future net 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, we 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. Our policy is consistent with current accounting guidance as
prescribed by ASC 360-10-35, Accounting for the Impairment or Disposal of Long-Lived Assets.
43
• Goodwill. Goodwill, which has an indefinite life, is not amortized, 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 reduce the fair value of a reporting unit
below its carrying amount. Certain factors which may occur and indicate that 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 our 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, we 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, including the use of experts.
• Definite-Lived Intangible Assets. We also have other intangible assets mainly consisting of patents and licenses, certain acquired
rights, developed technologies and customer relationships. We capitalize the cost of acquiring patents and licenses. We acquired
certain customer relationships, acquired rights and developed technologies in the acquisition of our STAAR Japan subsidiary which
was completed on December 29, 2007. Amortization is computed on the straight-line basis over the estimated useful lives of the
assets, which is our best estimate of the pattern of the economic benefit, which are based on legal, contractual and other provisions,
and range from 10 to 21 years for patents, certain acquired rights and licenses, 10 years for customer relationships and 3 to 10 years for
developed technology. We review intangible assets for impairment in the assessment discussed above regarding Impairment of
Long-Lived Assets.
• Employee Defined Benefit Plans. We have maintained a passive pension plan (the “Swiss Plan”) covering employees of its Swiss
subsidiary. We determined that the features of the Swiss Plan conform to the features of a defined benefit plan. As a result, we
adopted the recognition and disclosure requirements of Accounting Standards Codification (ASC) 715, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.
In connection with our acquisition of the remaining interest in STAAR Japan, Inc., we assumed the net pension liability under STAAR
Japan’s noncontributory defined benefit pension plan substantially covering all of the employees of STAAR Japan. STAAR Japan
adopted the recognition and disclosure requirements of Accounting Standards Codification for Defined Benefit Plans - Pension on
December 29, 2007, the date of the acquisition. STAAR Japan is not required, and we do not intend to provide any future contributions
to this pension plan to meet benefit obligations and will therefore not have any plan assets. Benefit payments are made to
beneficiaries from operating cash flows as they become due.
Defined Benefits Plans - Pension requires recognition of the funded status, or difference between the fair value of plan assets and the
projected benefit obligations of the pension plan on the statement of financial position with a corresponding adjustment to
accumulated other comprehensive income. If the projected benefit obligation exceeds the fair value of plan assets, then that difference
or unfunded status represents the pension liability. We record a net periodic pension cost in the consolidated statement of operations.
The liabilities and annual income or expense of both plans are determined using methodologies that involve several actuarial
assumptions, the most significant of which are the discount rate, and the expected long-term rate of asset return. Assumptions of
expected asset returns and market-related values of plan assets are applicable to the Swiss Plan only. We have contracted with the
Allianz Suisse Life Insurance Company's BVG Collective Foundation (“Foundation”) to manage our Swiss Plan. The Swiss pension
funds are legally independent from the employer and are regulated by Swiss federal law. The investment strategy is determined by the
Foundation and this applies to all its members. However, the funds contributed by an employer are specifically earmarked only for its
employees. The unfunded obligations of a plan are not borne by the remaining participating employers. Vested benefits have to be
paid to terminated employees and they are generally rolled over into the pension fund of their new employer. Since the Swiss Plan
assets are comingled with other plans' assets within the Foundation, the individual allocation of the assets cannot be determined. The
Foundation typically invests in bonds, equities, mortgage and real estate.
The fair values of plan assets are determined based on prevailing market prices. The amounts recorded in the financial statements
pertaining to our employee defined benefit plans could vary significantly if we were to use different assumptions.
44
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 our 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 could significantly affect our
operating results. As more manufacturing has shifted from Japan to the U.S. there will be increased foreign currency exposure to the
Japanese yen. We do not currently engage in hedging transactions to offset changes in currency or fluctuations in foreign currencies.
Inflation
Management believes inflation has not had a significant impact on our operations during the past three years.
Recent Accounting Pronouncements
See “Part II. Item 8. “Financial Statements and Supplementary Data – Note 1 – Organization and Description of Business and
Accounting Policies – Recent Accounting Pronouncements ” of this Annual Report on Form 10-K.
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 risks,
opportunity, and costs and does not generally enter into interest rate or foreign exchange rate hedge instruments.
Interest rate risk. As of January 3, 2014, STAAR had $4.8 million of foreign debt. Our $4.8 million of foreign debt bears an
interest rate that is equal to the Tokyo short-term prime interest rate (approximately 1.475% as of January 3, 2014). Thus, our interest
expense would fluctuate with any change in the prime interest rate. If the Tokyo prime rate were to increase or decrease by 1% for the
year, our annual interest expense would increase or decrease by approximately $48,000.
Foreign currency risk. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies in which we transact
business could adversely affect our financial results. Cost of goods sold and selling, general, and administrative expenses that
correspond with these sales are largely denominated in the same currency, thereby limiting our transaction risk exposure.
Our international subsidiaries operate in and are net recipients of currencies other than the U.S. dollar and, as a result, our sales
benefit from a weaker dollar and are reduced by a stronger dollar relative to major currencies worldwide (primarily, the Euro and the
Japanese Yen). Accordingly, changes in exchange rates, and particularly the strengthening of the U.S. Dollar, may negatively affect our
consolidated sales and gross profit as expressed in U.S. dollars. Additionally, expenses of our Swiss subsidiary are largely denominated
in Swiss Francs and a strong Swiss Franc negatively impacts our earnings. Fluctuations during any given reporting period result in the
re-measurement of our foreign currency denominated cash, receivables, and payables, generating currency transaction gains or losses
and are reported in total other expenses in our consolidated statements of operations. 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
None.
45
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. The report of BDO USA, LLP, our independent registered public accounting firm, regarding
its audit of STAAR’s internal control over financial reporting follows below. This section should be read in conjunction with the
certifications and the BDO USA, LLP report for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of
our management, including our CEO and CFO, of the effectiveness of the design and operation of the disclosure controls and procedures
of the Company. Based on that evaluation, our CEO and CFO concluded, as of the end of the period covered by our Form 10-K for the
fiscal year ended January 3, 2014, that our disclosure controls and procedures were effective. For purposes of this statement, the term
“disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act (15 U.S.C. 78a et seq)
is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by the issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including
its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change during the fiscal quarter ended January 3, 2014 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company. The
Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and
may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial
reporting may vary over time. The Company’s processes contain self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
The Company’s management including the CEO and CFO assessed the effectiveness of the Company’s internal control over
financial reporting as of January 3, 2014, based on the criteria for effective internal control described in Internal Control — Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment,
management concluded that the Company’s internal control over financial reporting was effective as of January 3, 2014.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited STAAR Surgical Company and Subsidiaries’ (“Company”) internal control over financial reporting as of
January 3, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). STAAR Surgical Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of internal control over financial reporting,
included in the accompanying Item 9A, Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
46
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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, STAAR Surgical Company and Subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of January 3, 2014, based on the COSO criteria .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of STAAR Surgical Company and Subsidiaries as of January 3, 2014 and December 28, 2012, and the
related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three
years in the period ended January 3, 2014 and our report dated March 12, 2014 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Los Angeles, California
March 12, 2014
Item 9B. Other Information
Compensatory Arrangements of Certain Officers:
The Compensation Committee engaged the Radford group as its compensation consultant to evaluate our compensation
philosophy and structure. After reviewing Radford’s evaluation and recommendations, on March 7, 2014, as part of the annual
executive performance review process, our Compensation Committee recommended, and the Board of Directors awarded, the following
2014 salaries and bonus targets of certain executives: Barry G. Caldwell, President and CEO, 2014 salary of $512,000, and bonus target
of 75%, Stephen Brown, Vice President and CFO, 2014 salary of $305,000, and bonus target of 40%, Samuel Gesten, Vice President and
General Counsel, 2014 salary of $323,000, and bonus target of 45%, Robin Hughes, Vice President, Research & Development and
Regulatory, 2014 salary of $325,000, and bonus target of 40%, and James Francese, Vice President, Marketing, 2014 salary of $268,000,
and bonus target of 40%.
47
PART III
Item 10. Directors and Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the section entitled “Proposal One —Election of
Directors ” contained in the proxy statement (the “Proxy Statement”) for the 2014 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days of the close of the fiscal year ended January 3, 2014.
Item 11. Executive Compensation
The information required by this item 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 required by this item 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 and Director Independence
The information required by this item 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 required by this item is incorporated herein by reference to the section entitled “Proposal Three— Ratification of
the Appointment of Independent Registered Public Accounting Firm” contained in the Proxy Statement.
48
PART IV
Item 15. Exhibits and Financial Statement Schedules
(1)
(2)
We have filed the following documents as part of this Annual Report on Form 10-K:
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedules required by Regulation S-X are filed as an exhibit to this report:
II. Schedule II — Valuation and Qualifying Accounts and Reserves
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-35
All other schedules have been omitted because they are not required, not applicable, or the required information is otherwise included.
(3) Exhibits
3.1
3.2
†4.3
4.4
†4.5
10.3
10.4
10.5
10.6
10.7
Certificate of Incorporation, as amended to date.(1)
By-laws, as amended to date.(2)
1998 STAAR Surgical Company Stock Plan, adopted April 17, 1998.(3)
Form of Certificate for Common Stock, par value $0.01 per share.(4)
Amended and Restated 2003 Omnibus Equity Incentive Plan and form of Option Grant and Stock Option Agreement.(5)
Indenture of Lease dated September 1, 1993, by and between the Company and FKT Associates and First through Third
Additions Thereto.(6)
Second Amendment to Indenture of Lease dated September 21, 1998, between the Company and FKT Associates.(6)
Third Amendment to Indenture of Lease dated October 13, 2003, by and between the Company and FKT Associates.(7)
Fourth Amendment to Indenture of Lease dated September 30, 2006, by and between the Company and FKT Associates.(1)
Indenture of Lease dated October 20, 1983, between the Company and Dale E. Turner and Francis R. Turner and First through
Fifth Additions Thereto.(8)
10.8
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.(7)
10.9
Seventh Lease Addition to Indenture of Lease dated September 30, 2006, by and between the Company and Turner Trust UTD
Dale E. Turner March 28, 1984.(1)
10.10
Amendment No. 1 to Standard Industrial/Commercial Multi-Tenant Lease dated January 3, 2003, by and between the
Company and California Rosen LLC.(7)
10.11
10.12
Lease Agreement dated July 12, 1994, between STAAR Surgical AG and Calderari and Schwab AG/SA.(9)
Supplement #1 dated July 10, 1995, to the Lease Agreement of July 12, 1994, between STAAR Surgical AG and Calderari
and Schwab AG/SA.(9)
10.13
Supplement #2 dated August 2, 1999, to the Lease Agreement of July 12, 1994, between STAAR Surgical AG and Calderari
and Schwab AG/SA.(9)
10.20
Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and Technology
Complex.(10)
†10.42 Form of Indemnification Agreement between the Company and certain officers and directors.(9)
10.59
Standard Industrial/Commercial Multi Tenant Lease — Gross dated October 6, 2005, entered into between the Company and
Z & M LLC.(11)
10.64
Warrant Agreement between STAAR Surgical Company and Broadwood Partners, L.P., dated March 21, 2007.(12)
†10.66 Executive Employment Agreement by and between the Company and Barry G. Caldwell, dated as of November 27, 2007.(13)
10.69
Warrant Agreement between STAAR Surgical Company and Broadwood Partners, L.P., dated December 14, 2007.(14)
49
†10.70
Amended and Restated Executive Employment Agreement by and between the Company and Barry G. Caldwell, dated
December 31, 2008.(15)
†10.76
†10.77
Employment Agreement effective November 22, 2002 by and between the Company and Deborah Andrews.(16)
Letter of the Company dated April 11, 2007 to Deborah Andrews, Vice President and Chief Financial Officer, regarding
compensation.(16)
10.80
10.81
10.82
Credit Agreement between STAAR Japan Inc. and Mizuho Bank Inc., dated October 31, 2007.(17)
Amended Credit Agreement between STAAR Japan Inc. and Mizuho Bank Ltd., dated June 30, 2009.(17)
Basic Agreement on Unsterilized Intraocular Lens Sales Transactions between Canon Staar Co., Inc. and Nidek Co., Ltd.,
dated May 23, 2005.(18)
10.83
Basic Agreement on Injector Product Sales Transactions between Canon Staar Co., Inc. and Nidek Co., Ltd., dated May
23, 2005.(18)
10.84
Memorandum of Understanding Concerning Basic Agreements for Purchase and Sale between STAAR Japan Inc. and
Nidek Co., Ltd., dated December 25, 2008.(18)
10.85
Acrylic Preset supply Warranty Agreement between STAAR Japan Inc. and Nidek Co., Ltd., dated December 25,
2008.(18)
10.86
†10.88
†10.89
10.90
Framework Agreement for Loans between Credit Suisse and STAAR Surgical AG, dated August 12, 2010. (19)
Form of Executive Severance Agreement.(20)
Form of Executive Change In Control Agreement.(20)
Standard Industrial/Commercial Single – Tenant Lease – Net dated August 17 , 2012, by and between the Company and
Pacific Equity Partners, LLC.(21)
†10.91
Letter of the Company dated March 27, 2012 to Samuel Gesten, Vice President and General Counsel, regarding
compensation.(23)
†10.92
Letter of the Company dated August 10, 2012 to James Francese, Vice President, Global Marketing, regarding
compensation. (23)
10.93
†10.94
Amended Credit Agreement between STAAR Japan Inc. and Mizuho Bank Ltd., dated December 28, 2012. (23)
Amendment No. 2 to Amended and Restated Executive Employment Agreement by and between the Company and Barry
G. Caldwell, dated December 7, 2012. (23)
†10.95
Letter of the Company dated May 8, 2007 to Robin S. Hughes, Vice President of Marketing, regarding compensation.
(23)
†10.96
Letter of the Company dated August 7, 2013 to Stephen Brown, Vice President of Finance, and Chief Financial Officer,
regarding compensation.(22)
†10.97
14.1
21.1
23.1
31.1
Form of Restricted Stock Unit award agreement.*
Code of Business Conduct and Ethics.(9)
List of Subsidiaries.*
Consent of BDO USA, 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.*
31.2
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.*
32.1
Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
*
†
#
(1)
(2)
(3)
(4)
(5)
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.
Incorporated by reference to the Company’s Annual Report on Form 10-K, for the year ended December 28, 2007, as filed on
March 12, 2008.
Incorporated by reference from the Company’s Current Report on Form 8-K, as filed on May 23, 2006.
Incorporated by reference to the Company’s Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1998,
filed on May 1, 1998.
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.
Incorporated by reference to the Company’s Proxy Statement for its Annual Meeting of Stockholders held on May 13, 2013,
filed with the Commission on March 26, 2013.
50
(6)
(7)
(8)
(9)
(10)
(11)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
Incorporated by reference to the Company’s Annual Report on form 10-K for the year ended December 29, 2000, as filed
on March 9, 2001.
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.
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.
Incorporated by reference from the Company’s Quarterly Report on Form 10-Q, for the period ended June 29, 2012, as filed
on August 8, 2012.
Incorporated by reference to the Company’s Annual Report on form 10-K for the year ended January 3, 1997, as filed on
April 2, 1997.
Incorporated by reference to the Company’s Annual Report on form 10-K for the year ended December 29, 2000, as filed
on March 28, 2002.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2005, as
filed on November 9, 2005.
Incorporated by reference to the Company’s Current Report on form 8-K filed on March 21, 2007.
Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 4, 2007.
Incorporated by reference to the Company’s Current Report on form 8-K filed on December 17, 2007.
Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 8, 2009.
Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 1, 2009.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended October 2, 2009, as filed
on November 12, 2009.
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended January 1, 2010.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended October 1, 2010, as filed
on November 10, 2010.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2011, as
filed on November 2, 2011.
Incorporated by reference to the Company’s Current Report on Form 8-K files on August 23, 2012.
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on September 9, 2013.
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 28, 2012, as filed
on March 12, 2013.
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 12, 2014
STAAR SURGICAL COMPANY
By:
/s/ Barry G. Caldwell
Barry G. Caldwell
President and Chief Executive Officer
(principal executive officer)
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
Date
/s/ Barry G. Caldwell
Barry G. Caldwell
/s/ Stephen P. Brown
Stephen P. Brown
/s/ Mark B. Logan
Mark B. Logan
/s/ John C. Moore
John C. Moore
/s/ Richard A. Meier
Richard A. Meier
/s/ Don Bailey
Don Bailey
/s/ Charles Slacik
Charles Slacik
/s/ Kathryn Tunstall
Kathryn Tunstall
President, Chief Executive Officer and Director
(principal executive officer)
March 12, 2014
Vice President, Chief Financial Officer
(principal accounting and financial officer)
March 12, 2014
Chairman of the Board, Director
March 12, 2014
Director
Director
Director
Director
Director
March 12, 2014
March 12, 2014
March 12, 2014
March 12, 2014
March 12, 2014
52
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014, December 28, 2012, and December 30, 2011
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at January 3, 2014 and December 28, 2012
Consolidated Statements of Operations for the years ended January 3, 2014, December 28, 2012, and
December 30, 2011
Consolidated Statements of Comprehensive Income (Loss) for the years ended January 3, 2014, December
28, 2012, and December 30, 2011
Consolidated Statements of Stockholders’ Equity for the years ended January 3, 2014, December 28, 2012,
and December 30, 2011
Consolidated Statements of Cash Flows for the years ended January 3, 2014, December 28, 2012, and
December 30, 2011
Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts and Reserves
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-35
F-1
STAAR SURGICAL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited the accompanying consolidated balance sheets of STAAR Surgical Company and Subsidiaries (the “Company”)
as of January 3, 2014 and December 28, 2012, and the related consolidated statements of operations, comprehensive income (loss),
stockholders’ equity, and cash flows for each of the three years in the period ended January 3, 2014. In connection with our audits of the
consolidated financial statements, we have also audited the consolidated financial schedule listed in Item 15. These financial statements
and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and schedule 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 presentation of the financial statements and schedule. 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 financial position
of STAAR Surgical Company and Subsidiaries as of January 3, 2014 and December 28, 2012, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended January 3, 2014, in conformity with accounting principles
generally accepted in the United States of America.
Also, in our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
STAAR Surgical Company and Subsidiaries’ internal control over financial reporting as of January 3, 2014, based on criteria established
in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 12, 2014 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Los Angeles, California
March 12, 2014
F-2
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 2014 and December 28, 2012
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable trade, net
Inventories, net
Prepaids, deposits and other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Deferred income taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit
Accounts payable
Deferred income taxes
Obligations under capital leases
Other current liabilities
Total current liabilities
Obligations under capital leases
Deferred income taxes
Asset retirement obligations
Pension liability
Total liabilities
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.01 par value; 60,000 shares authorized:
37,911 and 36,423 shares issued and outstanding at January 3,
2014 and December 28, 2012, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
2013
2012
(In thousands, except
par value amounts)
22,954 $
10,731
12,514
3,503
373
50,075
7,405
1,380
1,786
626
659
61,931 $
4,750 $
6,263
739
288
6,372
18,412
141
1,654
157
2,715
23,079
21,675
8,543
11,673
2,183
—
44,074
5,439
2,142
1,786
187
1,131
54,759
5,850
5,129
439
829
5,702
17,949
488
885
707
2,988
23,017
379
170,246
282
(132,055)
38,852
61,931 $
364
162,251
1,580
(132,453)
31,742
54,759
$
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-3
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 3, 2014, December 28, 2012, and December 30, 2011
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses:
General and administrative
Marketing and selling
Research and development
Medical device excise tax
Other general and administrative expenses
Operating income (loss)
Other income (expense):
Interest income
Interest expense
Gain on foreign currency transactions
Other income, net
Other income (expense), net
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per share – basic
Net income (loss) per share – diluted
2013
2012
2011
(In thousands,
except per share amounts)
$
$
$
$
72,215 $
21,906
50,309
16,568
23,888
6,708
203
2,242
700
59
(170)
39
486
414
1,114
716
398 $
0.01 $
0.01 $
63,783 $
19,492
44,291
15,150
21,281
6,444
—
2,636
(1,220)
59
(291)
111
822
701
(519)
1,244
(1,763) $
(0.05) $
(0.05) $
62,765
20,396
42,369
14,932
17,726
5,868
—
1,060
2,783
32
(523)
86
326
(79)
2,704
1,356
1,348
0.04
0.04
Weighted average shares outstanding – basic
Weighted average shares outstanding – diluted
36,706
38,607
36,253
36,253
35,434
36,878
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-4
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended January 3, 2014, December 28, 2012, and December 30, 2011
Net income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax
Pension liability adjustment, net of tax
Other comprehensive income (loss)
Comprehensive income (loss)
2013
2012
2011
(In thousands)
$
398 $
(1,763) $
1,348
(1,327)
29
(1,298)
(900) $
(689)
(136)
(825)
(2,588) $
211
94
305
1,653
$
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-5
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended January 3, 2014, December 28, 2012, and December 30, 2011
(In thousands)
Balance, at December 31, 2010
Net income
Other comprehensive income
Common stock issued upon exercise of options
Stock-based compensation
Vested restricted stock
Balance, at December 30, 2011
Net loss
Other comprehensive loss
Common stock issued upon exercise of options
Stock-based compensation
Vested restricted stock
Balance, at December 28, 2012
Net income
Other comprehensive loss
Common stock issued upon exercise of options
Common stock issued upon cashless exercise of warrants
Stock-based compensation
Unvested restricted stock
Vested restricted stock
Balance, at January 3, 2014
Common
Stock
Shares
Common
Stock
Par
Value
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income
(AOCI)
Retained
Earnings
(Accumulated
Deficit)
35,084 $
—
—
851
—
106
36,041
—
—
324
—
58
36,423
—
—
645
485
341
17
37,911 $
351 $
—
—
9
—
1
361
—
—
3
—
—
364
—
—
7
5
—
3
—
379 $
152,014 $
—
—
3,334
2,035
(1)
157,382
—
—
1,511
3,358
—
162,251
—
—
3,279
(5)
4,721
—
—
170,246 $
2,100 $
—
305
—
—
—
2,405
—
(825)
—
—
—
1,580
(1,298)
—
—
—
—
—
282 $
(132,038) $
1,348
—
—
—
—
(130,690)
(1,763)
—
—
—
—
(132,453)
398
—
—
—
—
—
—
(132,055) $
Total
22,427
1,348
305
3,343
2,035
—
29,458
(1,763)
(825)
1,514
3,358
—
31,742
398
(1,298)
3,286
—
4,721
3
—
38,852
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-6
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 3, 2014, December 28, 2012, and December 30, 2011
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
2013
2012
(In thousands)
2011
$
398 $
(1,763) $
1,348
Depreciation of property and equipment
Amortization of intangibles
Deferred income taxes
Fair value adjustment of warrant
Change in net pension liability
Loss on disposal of property and equipment
Stock-based compensation expense
Accretion of asset retirement obligation
Provision for sales return and bad debt
Changes in working capital:
Accounts receivable trade, net
Inventories
Prepaids, deposits and other current assets
Accounts payable
Other current liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of property and equipment
Proceeds from the sale of property and equipment
Net change in other noncurrent assets
Decrease in restricted cash, including reinvested interest
Net cash used in investing activities
Cash flows from financing activities:
Borrowings under lines of credit
Repayment of capital lease lines of credit
Proceeds from the exercise of stock options
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
$
1,711
440
104
(27)
162
200
4,489
10
263
(2,938)
(1,603)
(1,063)
367
842
3,355
(3,448)
—
—
—
(3,448)
—
(841)
3,286
2,445
(1,073)
1,279
21,675
22,954 $
1,309
652
143
(335)
205
131
3,208
16
77
224
(1,020)
(298)
1,014
(346)
3,217
(2,271)
—
(4)
129
(2,146)
3,510
(741)
1,514
4,283
(261)
5,093
16,582
21,675 $
1,469
797
367
117
257
13
1,914
—
(320)
(435)
(85)
(145)
480
(431)
5,346
(962)
26
47
—
(889)
—
(575)
3,343
2,768
(19)
7,206
9,376
16,582
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-7
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Note 1 — Organization and Description of Business and 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.
Principal products are IOLs and implantable Collamer lenses (“ICLs”). IOLs are prosthetic intraocular lenses used to restore vision that
has been adversely affected by cataracts, and include the Company’s lines of silicone and Collamer IOLs and the Preloaded Injector (a
silicone or acrylic IOL preloaded into a single-use disposable injector). ICLs, consisting of the Company’s ICL and Toric implantable
collamer lenses (“TICL”), are intraocular lenses used to correct refractive conditions such as myopia (near-sightedness), hyperopia
(far-sightedness) and astigmatism.
As of January 3, 2014, the Company’s significant subsidiaries consisted of:
⊕
⊕
STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland to develop, manufacture and distribute certain of
the Company’s products worldwide including ICLs.
STAAR Japan, a wholly owned subsidiary that markets and distributes Preloaded IOLs and ICLs.
The Company operates as one operating segment, the ophthalmic surgical market, for financial reporting purposes (see Note 16).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of STAAR Surgical and its wholly-owned subsidiaries
and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All
significant intercompany balances and transactions have been eliminated.
Fiscal Year and Interim Reporting Periods
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. Fiscal year 2013 is based on a 53-week period, while fiscal years 2012 and 2011 are based on a 52-week
period.
Foreign Currency
The functional currency of the Company and its Japanese subsidiary is the local currency. The functional currency of the
Company’s Swiss subsidiary, STAAR Surgical AG, is the U.S. dollar. 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 in the Consolidated
Statement of Comprehensive Income (Loss). During 2013 and 2012, the net foreign translation losses were $1,327,000
and $689,000, respectively, and in 2011 a net foreign translation gain of $211,000. Net foreign currency transaction gains, included in
the consolidated statements of operations under other income (expense) were, $39,000, $111,000, and $86,000, 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 or determinable; and collectability is
reasonably assured. The Company records revenue from non-consignment product sales when title and risk of ownership has been
transferred, which is typically at shipping point, except for the STAAR Japan subsidiary, which is typically recognized when the product
is received by the customer. STAAR Japan does not have significant deferred revenues as of January 3, 2014 as delivery to the customer
is generally made within the same or the next day of shipment. The Company presents sales tax it collects from its customers on a net
basis (excluded from revenues).
F-8
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
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. The Company maintains title and risk of loss of
consigned inventory and recognizes revenue for consignment inventory when the Company is notified that the IOL has been implanted.
ICLs are sold only to certified surgeons who have completed requisite training or for use in scheduled training surgeries. As a
result, STAAR partially mitigates the risk that the revenue it recognizes on shipment of ICLs would need to be reversed because of a
surgeon’s failure to qualify for its use.
The Company sells certain injector parts to an unrelated customer and supplier (collectively referred to as “supplier”) whereby
these injector part sales are either made as a final sale to the supplier or, are sold to be reprocessed by the supplier into finished goods
inventory (a preloaded acrylic IOL). These finished goods are then sold back to the Company at an agreed upon, contractual price. The
Company makes a profit margin on either type of sale with the supplier and each type of sale is made under separate purchase and sales
orders between the two parties resulting in cash settlement for the orders sold or repurchased. For parts that are sold as a final sale, the
Company recognizes a sale consistent with its routine revenue recognition policies as disclosed in Note 1 and those sales are included as
part of other sales in total net sales. For the injector parts that are sold to be reprocessed into finished goods, the Company does not
recognize revenue on these sales in accordance with ASC 845-10, Purchases and Sales of Inventory with the Same Counterparty.
Instead, the Company records the transaction at its carrying value, deferring any profit margin in inventory, until the finished good
inventory is sold to an end-customer (not the supplier) at which point the Company records the sale and the related cost of sale, including
the release of the deferred cost of sale in inventory, related to these finished goods.
For all sales, the Company is considered the principal in the transaction as the Company, among other factors, is the primary
obligor in the arrangement, bears general inventory risk, credit risk, has latitude in establishing the sales price, is responsible for
authorized and general sales returns risk and therefore, sales and cost of sales are reported separately in the statement of operations
instead of a single, net amount. Cost of sales includes cost of production, freight and distribution, royalties, and inventory provisions,
net of any purchase discounts.
The Company generally permits returns of product if the product is returned within the time allowed by its return policies and
records an allowance for estimated returns at the time revenue is recognized. The Company’s allowance for estimated returns considers
historical trends and experience, the impact of new product launches, the entry of a competitor, availability of timely and pertinent
information and the various terms and arrangements offered, including sales with extended credit terms. Sales are reported net of
estimated returns.
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment history
and credit worthiness, as determined by the Company’s review of its customers’ current credit information. The Company continuously
monitors collections and payments from customers and maintains a provision for estimated credit losses and uncollectible accounts
based upon its historical experience and any specific customer collection issues that have been identified. Amounts determined to be
uncollectible are written off against the allowance for doubtful accounts.
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 significant estimates and judgments of management with consideration
given to materiality. significant estimates used include determining valuation allowances for uncollectible trade receivables, sales
returns reserves, obsolete and excess inventory, deferred income taxes, and tax reserves, including valuation allowances for deferred tax
assets, pension liabilities, evaluation of asset impairment, in determining the useful life of depreciable and definite-lived intangible
assets, and in the variables and assumptions used to calculate and record stock-based compensation. Actual results could differ
materially from those estimates.
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.
F-9
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Concentration of Credit Risk and Revenues
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. As of January
3, 2014 and December 28, 2012, there were no customers with trade receivables balances that represented 10% or more of consolidated
trade receivables. 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.
A single customer has accounted for 11%, 11%, and 13% of the Company’s consolidated net sales in each of the last three fiscal
years, respectively.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy
prioritizes the inputs to valuation methodologies used to measure fair value:
•
•
•
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in
active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets,
and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of
the financial instruments.
Level 3 – Inputs to the valuation methodology are unobservable; that reflect management’s own assumptions about
the assumptions market participants would make and significant to the fair value.
The carrying values reflected in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable, prepaids
and other current assets, accounts payable, other current liabilities and line of credit approximate their fair values because of the short
maturity of these instruments.
Inventories, Net
Inventories, net 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, work in process and finished goods. The Company provides estimated inventory
allowances for excess, expiring, 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.
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 as noted below. 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.
Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets:
Machinery and equipment
Furniture and equipment
Computer and peripherals
Leasehold improvements
5-10 years
3-7 years
2-5 years
(a)
(a) Leasehold improvements are depreciated over the shorter of the useful life of the asset or the term of the associated leases.
F-10
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Goodwill
Goodwill, which has an indefinite life, is not amortized but instead 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 can be one level below the operating segment level, and can be combined
when reporting units within the same operating segment have similar economic characteristics. 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. During the fourth quarter of fiscal 2013 and 2012, the Company performed its annual impairment test and
determined that its goodwill was not impaired. As of January 3, 2014 and December 28, 2012, the carrying value of goodwill was $1.8
million.
Long-Lived Assets
The Company reviews property and equipment and intangible assets, excluding goodwill, for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by
comparing the carrying value of such assets to the estimated undiscounted future cash flows the assets are expected to generate. 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. A review of long lived assets was conducted as of January 3, 2014 and
no impairment was identified.
Amortization is computed on the straight-line basis, which is the Company’s best estimate of the pattern of economic benefits
over the estimated useful lives of the assets which range from 3 to 20 years for patents, certain acquired rights and licenses, 10 years for
customer relationships, and 3 to 10 years for developed technology.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Advertising Cost
Advertising costs, which are included in marketing and selling expenses, are expensed as incurred. Advertising costs were
$2,100,000, $1,810,000, and $1,306,000 for 2013, 2012 and 2011, respectively.
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, net operating loss and credit carryforwards, and uncertainty in income taxes, on a
jurisdiction-by-jurisdiction basis. Valuation allowances, or reductions to deferred tax assets, are 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 or realizable in the
jurisdiction in which they arise. 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.
The Company recognizes the income tax benefit from an uncertain tax position when it is more likely than not that, based on
technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes. The amount of tax benefit recorded, if any, is limited to the amount that is greater than 50 percent likely to be realized upon
settlement with the taxing authority (that has full knowledge of all relevant information). Accrued interest, if any, related to uncertain tax
positions is included as a component of income tax expense, and penalties, if incurred, are recognized as a component of operating
income or loss. The Company does not have any uncertain tax positions as of any of the periods presented. The Company did not incur
significant interest and penalties for any period presented.
F-11
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Basic and Diluted Net Income (Loss) Per Share
The Company has only one class of common stock and no participating securities which would require the two-class method of
calculating basic earnings per share. Basic per share information is calculated by dividing net income (loss) by the weighted average
number of shares outstanding, net of unvested restricted stock, during the period. Diluted per share information is calculated by
dividing net income (loss) by the weighted average number of shares outstanding, adjusted for the effects of potentially dilutive common
stock, which are comprised of outstanding warrants, stock options, unvested restricted stock and restricted stock units, during the period,
using the treasury-stock method.
Employee Defined Benefit Plans
The Company maintains a passive pension plan (the “Swiss Plan”) covering employees of its Swiss subsidiary. The Swiss Plan
conforms to the features of a defined benefit plan.
The Company also maintains a noncontributory defined benefit pension plan which covers substantially all of the employees of
STAAR Japan.
The Company recognizes the funded status, or difference between the fair value of plan assets and the projected benefit
obligations of the pension plan on the statement of financial position, with a corresponding adjustment to accumulated other
comprehensive income. If the projected benefit obligation exceeds the fair value of plan assets, then that difference or unfunded status
represents the pension liability. The Company records a net periodic pension cost in the consolidated statement of operations. The
liabilities and annual income or expense of both plans are determined using methodologies that involve several actuarial assumptions,
the most significant of which are the discount rate and the expected long-term rate of asset return (asset returns and fair-value of plan
assets are applicable for the Swiss Plan only). The fair values of plan assets are determined based on prevailing market prices (see Note
10).
Stock Based Compensation
Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value. 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 (see Note 11).
The Company also issues restricted stock to its executive officers and Board of Directors (the Board), which are restricted and
unvested common shares issued at fair market value on the date of grant. For the restricted shares issued to the Board, the restricted stock
vests over a one-year service period and are subject to forfeiture (or acceleration, depending upon the circumstances) until vested or the
service period is completed. The Company has also issued performance accelerated restricted stock (PARS) to its executive officers
which carry a three year service condition and a performance condition such that if the Company meets or exceeds certain predetermined
performance metrics set by the Directors, up to one third of the grant vesting may be accelerated annually. If the performance metrics
are not achieved, the restricted stock vests after three years. Restricted stock compensation expense is recognized on a straight-line
basis over the requisite service period of one to three years for the Board and PARS grants, respectively, based on the grant-date fair
value of the stock. Restricted stock is considered legally issued and outstanding on the grant date (see Notes 11 and 15).
The Company issues restricted stock units (“RSUs”) under the 2013 RSU Plan (see Note 11), which is a performance
contingent restricted stock award based upon the Company exceeding an internally established annual revenue target which is above the
established annual revenue plan. The RSUs contain both a performance and a service condition such that they vest after calculating the
total financial performance for fiscal year 2013, at which time, if the internally established revenue target is met or exceeded and the
grantee is still employed with the Company on the measurement date, which is one year after the grant date, the RSUs will become fully
vested. The Company recognizes compensation cost for the RSUs if and when the Company concludes that it is probable that the
performance condition will be achieved, net of an estimate of pre-vesting forfeitures, over the requisite service period based on the
grant-date fair value of the stock. The Company reassesses the probability of vesting at each reporting period and adjusts compensation
cost based on its probability assessment.
F-12
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Once the RSUs are vested, equivalent common shares will be issued or issuable to the grantee and therefore the RSUs are not
included in total common shares issued and outstanding until vested (see Notes 11 and 15).
The Company accounts for options granted to persons other than employees and directors under Equity –Based Payments to
Non-Employees. The fair value of such options is re-measured each reporting period using the Black-Scholes option-pricing model and
income or expense is recognized over the vesting period for changes to the fair value for the unvested options. As the options vest, no
such re-measurement is necessary or performed.
Accounting for Warrants
The Company has issued certain warrants under an agreement that expressly provides that if the Company fails to satisfy
continuous registration requirements the Company will be obligated only to issue additional common stock as the holder’s sole remedy,
with no possibility of settlement in cash. The Company accounts for these warrants as equity because additional shares are the only form
of settlement available to the holder. These warrants are only valued on the issuance date and not subsequently revalued. The Company
uses the Black-Scholes option pricing model as the valuation model to estimate the fair value of all warrants. See Note 11.
Comprehensive Income (Loss)
The Company presents comprehensive income (loss) in two separate but not consecutive consolidated financial statements, the
Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss). Total comprehensive
income (loss) includes, in addition to net income (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. The following
table summarizes the changes in the accumulated balances for each component of AOCI attributable to the Company for the years ended
January 3, 2014, December 28, 2012 and December 30, 2011 (in thousands):
Defined
Benefit
Pension Plan-
Japan
Accumulated
Other
Comprehensive
Income
Defined
Benefit
Pension Plan-
Switzerland
Foreign
Currency
Translation
Balance, December 31, 2010
Other comprehensive income (loss)
Tax effect
Balance, December 30, 2011
Other comprehensive loss
Tax effect
Balance, December 28, 2012
Other comprehensive income (loss)
Tax effect
Balance, January 3, 2014
$
$
2,584 $
211
-
2,795
(689)
-
2,106
(861)
(466)
779 $
642 $
(219)
-
423
(127)
-
296
(126)
(63)
107 $
(1,126) $
403
(90)
(813)
(11)
2
(822)
280
(62)
(604) $
2,100
395
(90)
2,405
(827)
2
1,580
(707)
(591)
282
Prior Year Reclassifications
Certain reclassifications have been made to the prior financial statement information to conform to current presentation.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740)” (ASU 2013-11), which states that an unrecognized
tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax
asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the
F-13
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the
applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the
unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax
assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that
exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU 2013-11 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company plans to adopt this
guidance during its quarter ending March 28, 2014 and is assessing the impact, if any, to the consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or an investment in a Foreign Entity (Topic 830)”
(ASU 2013-05), which provides guidance on releasing cumulative translation adjustments when a reporting entity (parent) ceases to
have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In
addition, these amendments provide guidance on the release of cumulative translation adjustments in partial sales of equity method
investments and in step acquisitions. This new guidance is effective on a prospective basis for fiscal years and interim reporting periods
beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the
effective date. Prior periods should not be adjusted and early adoption is permitted. The Company plans to adopt this guidance during
its quarter ending April 4, 2014 and does not expect the adoption to have any significant impact to its consolidated financial statements.
Note 2 — Accounts Receivable Trade, Net
Accounts receivable trade, net consisted of the following at January 3, 2014 and December 28, 2012 (in thousands):
Domestic
Foreign
Less allowance for doubtful accounts and sales returns
Note 3 — Inventories, Net
2013
2012
$
$
2,135 $
10,045
12,180
1,449
10,731 $
1,222
8,637
9,859
1,316
8,543
Inventories, net consisted of the following at January 3, 2014 and December 28, 2012 (in thousands):
Raw materials and purchased parts
Work in process
Finished goods
Less inventory reserves
2013
2012
$
$
1,367 $
913
11,029
13,309
795
12,514 $
1,946
1,318
8,945
12,209
536
11,673
Note 4 — Prepaids, Deposits, and Other Current Assets
Prepaids, deposits, and other current assets consisted of the following January 3, 2014 and December 28, 2012 (in thousands):
Prepaids and deposits
Value added tax (VAT) receivable
Deferred charge for foreign profits
Other current assets
2013
2012
$
$
2,157 $
618
362
366
3,503 $
1,672
307
—
204
2,183
F-14
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Note 5 — Property, Plant and Equipment
Property, plant and equipment consisted of the following at January 3, 2014 and December 28, 2012 (in thousands):
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation
2013
2012
$
$
16,225 $
4,837
6,552
27,614
20,209
7,405 $
14,734
3,483
5,281
23,498
18,059
5,439
Depreciation expense for the years ended January 3, 2014, December 28, 2012, and December 30, 2011, was approximately $1.7
million, $1.3 million, and $1.5 million, respectively.
Note 6 – Intangible Assets, Net
Intangible assets, net, consisted of the following (in thousands):
January 3, 2014
December 28, 2012
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amortized intangible assets:
Patents and licenses
Customer relationships
Developed technology
Total
$
$
10,637 $
1,490
947
13,074 $
(10,057) $
(894)
(743)
(11,694) $
580 $
596
204
1,380 $
10,786 $
1,835
1,166
13,787 $
(9,875) $
(917)
(853)
(11,645) $
911
918
313
2,142
Aggregate amortization expense for amortized intangible assets was $440,000, $652,000, and $797,000, for the years ended
January 3, 2014, December 28, 2012, and December 30, 2011, respectively.
The following table shows estimated amortization expense for intangible assets for each of the next five succeeding years and
thereafter (in thousands):
Fiscal Year
2014
2015
2016
2017
2018
Thereafter
Total
Amount
374
241
239
235
36
255
1,380
$
$
F-15
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Note 7 — Other Current Liabilities
Other current liabilities consisted of the following at January 3, 2014 and December 28, 2012 (in thousands):
Accrued salaries and wages
Accrued bonuses
Accrued severance
Accrued insurance
Accrued commissions
Accrued income taxes
Accrued audit expenses
Customer credit balances
Other(1)
2013
2012
1,630 $
935
731
551
528
485
328
153
1,031
6,372 $
1,950
500
499
515
107
451
396
324
960
5,702
$
$
(1)No item in “Other” above exceeds 5% of total other current liabilities.
Note 8 —Liabilities
Lines of Credit
The Company’s wholly owned Japanese subsidiary, STAAR Japan, has an agreement, as amended on December 28, 2012, with
Mizuho Bank which provides for borrowings of up to 500,000,000 Yen, at an interest rate equal to the Tokyo short-term prime interest
rate (approximately 1.475% as of January 3, 2014) and may be renewed annually (the current line expires on April 4, 2014). The credit
facility is not collateralized. The Company had 500,000,000 Yen outstanding on the line of credit as of January 3, 2014 and December
28, 2012, (approximately $4.8 million and $5.8 million based on the foreign exchange rates on January 3, 2014 and December 28, 2012,
respectively) which approximates fair value due to the short-term maturity and market interest rates of the line of credit. In case of
default, the interest rate will be increased to 14% per annum. As of January 3, 2014, there were no available borrowings under the line.
In August 2010, the Company’s wholly-owned Swiss subsidiary, STAAR Surgical AG, entered into a credit agreement with
Credit Suisse (the “Bank”). The credit agreement provides for borrowing of up to 1,000,000 CHF (Swiss Francs) ($1.1 million at the rate
of exchange on January 3, 2014), to be used for working capital purposes. Accrued interest and 0.25% commissions on average
outstanding borrowings is payable quarterly and the interest rate will be determined by the Bank based on the then prevailing market
conditions at the time of borrowing. The credit agreement is automatically renewed on an annual basis based on the same terms assuming
there is no default. The credit agreement may be terminated by either party at any time in accordance with its general terms and
conditions. The credit facility is not collateralized and contains certain conditions such as providing the Bank with audited financial
statements annually and notice of significant events or conditions, as defined in the credit agreement. The Bank may also declare all
amounts outstanding to be immediately due and payable upon a change of control or a material qualification, as defined in the
agreement, in STAAR Surgical independent auditors’ report. There were no borrowings outstanding as of January 3, 2014 and the full
amount of the line was available for borrowing.
Covenant Compliance
The Company is in compliance with covenants of its credit facilities and lines of credit as of January 3, 2014.
F-16
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Asset Retirement Obligation
The Company recorded certain Asset Retirement Obligations (“ARO”), in accordance with ASC 410-20 in connection with the
Company’s leased facilities in Japan that specifically relate to leasehold improvements made to the facility. This liability arises from
the Company’s obligation to return the facility to its “original condition”, as defined in the lease agreements. The Company has
recognized the fair value of the ARO liability obligation included in noncurrent liabilities. During 2012, in connection with the
Company’s decision to consolidate its manufacturing operations to the U.S. and close its Japanese manufacturing facility, which was
completed in 2013, the Company obtained more current estimates of the costs to return the facility to its original condition as shown in
the table below. The remaining ARO is for the existing offices under the current lease agreement expected to be settled upon expiration
of the lease agreement in 2018.
The following table describes all changes to the Company’s asset retirement obligation liability (in thousands):
January 3,
2014
December 28,
2012
Asset retirement obligation at beginning of the year
Increase (decrease) in estimated liabilities
Liabilities settled
Accretion expense
Impact of changes in the Japanese Yen
Asset retirement obligation at end of the year
$
$
707 $
(221)
(206)
10
(133)
157 $
577
169
—
15
(54)
707
Note 9 — Income Taxes
The provision for income taxes consists of the following (in thousands):
Current tax provision:
U.S. federal (benefit)
State
Foreign
Total current provision
Deferred tax provision:
U.S. federal and state
Foreign provision
Total deferred provision
Provision for income taxes
2013
2012
2011
$
$
(121) $
12
721
612
—
104
104
716 $
— $
11
1,125
1,136
—
108
108
1,244 $
—
13
1,012
1,025
—
331
331
1,356
As of January 3, 2014, the Company had federal net operating loss carryforwards of $121.7 million available to reduce future
income taxes. The federal net operating loss carryforwards expire in varying amounts between 2017 and 2032. In California, the main
state from which the Company conducts its domestic operations, the Company has state net operating losses of $70.5 million available to
reduce future California income taxes. The California net operating loss carryfowards expire in varying amounts between 2014 and 2033
and, approximately $14.6 million of those net operating loss carryforwards, will expire over the next three years
The Company had accrued income taxes payable of $655,000 and $1,034,000 at January 3, 2014 and December 28, 2012,
respectively, primarily due to taxes from foreign jurisdictions.
F-17
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
The provision for income before taxes differs from the amount computed by applying the statutory federal income tax rate to income
before taxes as follows (in thousands):
2013
2012
2011
Computed provision for taxes
based on income at statutory
rate
Increase (decrease) in taxes
resulting from:
Permanent differences
State minimum taxes, net of
federal income tax benefit
Stock options
State tax benefit
Tax rate difference due to
foreign statutory rate
Foreign tax detriment (benefit)
Foreign earnings not
permanently reinvested
Foreign dividend withholding
Expiration of charitable
contribution carryover
Reserve
Other
Valuation allowance
Effective tax provision rate
34.0 %
$
379
34.0 %
$
(176)
34.0 %
$
919
3.2
0.7
—
6.4
43.7
—
(7.7)
12.5
0.2
(10.9)
6.4
(24.2)
64.3 % $
35
8
—
71
487
—
(86)
140
2
(121)
71
(270)
716
(7.9)
(1.4)
(56.0)
9.2
(43.8)
3.1
(223.4)
(22.1)
(16.1)
—
1.1
83.2
(240.1)% $
41
1.4
8
290
(48)
227
(16)
1,158
114
83
—
(6)
(431)
1,244
0.3
—
(4.3)
(19.7)
11.6
29.1
5.5
—
—
1.4
(9.2)
50.1 % $
37
9
—
(116)
(529)
312
788
147
—
—
37
(248)
1,356
Included in the state tax provision for 2013 is a decrease to the state deferred tax asset and corresponding decrease to the
valuation allowance of $71,000. For 2012 and 2011, included in the state tax provision is an increase to the state deferred tax asset and
corresponding increase to the valuation allowance of $48,000 and $116,000, respectively.
Included in the deferred foreign tax provision for 2013 is decrease to the foreign deferred tax asset of $630,000 and
corresponding decrease to the valuation allowance of $1,008,000. For 2012, there was an increase to the foreign deferred tax asset of
$16,000 and corresponding increase to the valuation allowance. For 2011, there was an decrease to the foreign deferred tax asset and
corresponding decrease to the valuation allowance of $312,000, respectively.
All earnings from the Company’s subsidiaries are not considered to be permanently reinvested. Accordingly, the Company
provides withholding and U.S. taxes on all unremitted foreign earnings. During 2013 and 2012 there were no withholding taxes paid to
foreign jurisdictions and there were no earnings repatriated from foreign subsidiaries.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax
assets (liabilities) as of January 3, 2014 and December 28, 2012 are as follows (in thousands):
F-18
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
2013
2012
$
$
Current deferred tax assets (liabilities):
Allowance for doubtful accounts and sales returns
Inventories
Accrued vacation
State taxes
Accrued other expenses
Other
Valuation allowance
Total current deferred tax liabilities
Non-current deferred tax assets (liabilities):
Net operating loss carryforwards
Stock-based compensation
Business, foreign and AMT credit carryforwards
Capitalized R&D
Contributions
Pensions
Depreciation and amortization
Foreign tax withholding
Foreign earnings not permanently reinvested
Other
Valuation allowance
Total non-current deferred tax liabilities
$
21 $
11
375
—
105
(137)
(741)
(366) $
50,409
2,212
921
525
57
731
360
(1,129)
(4,992)
(40)
(50,082)
(1,028) $
89
190
534
3
187
(111)
(1,331)
(439)
51,533
1,602
844
605
58
877
202
(885)
(5,783)
11
(49,762)
(698)
As of January 3, 2014, the Company had net deferred tax liabilities in Switzerland of $1,683,000 (which included $1,129,000 of
withholding taxes on unremitted foreign earnings) and net deferred tax assets of $289,000 in Japan included in the Company’s
components of deferred income tax assets and liabilities table. As of December 28, 2012, the Company had net deferred tax liabilities in
Switzerland of $1,137,000 (which included $885,000 of withholding taxes on unremitted foreign earnings) included in the Company’s
components of deferred income tax assets and liabilities table.
Valuation allowance
ASC 740 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 realizable.
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. In evaluating the Company’s ability to
recover the deferred tax assets within a jurisdiction from which they arise, management considers all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of
recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions
including overall current and projected business and industry conditions, the amount of future federal, state, and foreign pretax operating
income, the reversal of temporary differences and the successful implementation of feasible and prudent tax-planning strategies. These
assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the
Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company
considers three years of cumulative operating results. Valuation allowances, or reductions to deferred tax assets, are recognized if, based
on the weight of all the available evidence, it is more likely than not that some portion or all of the deferred tax asset may not be realized.
F-19
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
U.S. Jurisdiction
Due to the Company’s history of losses in the U.S., the valuation allowance fully offsets the value of U.S. deferred tax assets on
the Company’s balance sheet as of January 3, 2014. 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.
Foreign Jurisdictions
STAAR Japan, Inc.
STAAR Surgical Company acquired its remaining ownership interest in STAAR Japan in 2008. Based on management's
assessment of all available evidence at the time, including STAAR Japan’s history of cumulative losses, the Company concluded it was
more likely than not that the net deferred tax assets would not be realized, and accordingly, a full valuation allowance was established.
As of December 28, 2012, STAAR Japan’s valuation allowance was approximately $1.0 million.
During 2011 and 2012, the Company was engaged in a global restructuring strategy to consolidate global manufacturing into the
U.S. to reduce costs, improve gross profit, enable use of significant net operating loss carryforwards in the U.S., and reduce income taxes
in foreign jurisdictions. At the time, the Company manufactured its products in four facilities, two located in the U.S., and one of each
located in Switzerland and Japan. Since that time, the Company has developed and begun implementing a plan to consolidate its
manufacturing into a single site at its Monrovia, California location, to be substantially completed by the middle of 2014. During 2013,
the Company completed the transfer of the manufacturing operations in Japan to the U.S.
An important change in connection with this global restructuring strategy was the conversion of STAAR Japan from a traditional
principal manufacturer with unlimited manufacturing and inventory risk to a limited-risk distributor, or LRD. As an LRD, STAAR Japan
does not bear manufacturing risk and has limited risk of maintaining inventory. This conversion was accomplished by contractually
shifting these risks from STAAR Japan to STAAR AG, another wholly owned subsidiary of STAAR, as part of this global restructuring
strategy.
STAAR Japan, although legally converted to an LRD at the end of 2012, continued to sell off its on-hand inventory from the end
of 2012 through the first six months of 2013; consequently, it retained that inventory risk and functioned substantively as a principal
entrepreneur during that period. Beginning in the third quarter of 2013, STAAR Japan began to operate as an LRD, both legally and
economically, for STAAR AG. STAAR AG contractually assumed full principal manufacturing responsibility for its LRD (STAAR
Japan), thereby allowing STAAR Japan to completely transfer the risks of being a principal manufacturer to STAAR AG. As a result of
this change to an LRD, in the normal course of business, STAAR Japan no longer bears the risks of manufacturing its inventory and
operates as a limited-risk distributor for STAAR AG. STAAR AG has engaged STAAR U.S. as its contract manufacturer for all of
STAAR AG’s territory, including for Japan and China. Also, beginning in the third quarter of 2013, STAAR AG began selling inventory
to STAAR Japan in order for STAAR Japan to market and distribute the products in its territory, principally in Japan and China, as an
LRD. As a limited-risk distributor, STAAR Japan is contractually guaranteed to earn a fixed return on its net sales. The rate of return is
consistent with what a limited-risk distributor would earn in a distribution agreement of similar risks and responsibilities with an
unrelated party as determined by formal transfer price studies conducted by the Company in connection with its global manufacturing
consolidation strategy.
As a result of this change from a principal manufacturer to a limited-risk distributor with a guaranteed return, STAAR Japan
achieved a three-year cumulative pretax income in the third quarter of 2013, as measured from the beginning of the fourth quarter of
2010 through the end of the third quarter of 2013. Based on these results and management’s consideration of all available positive and
negative evidence, including the projected pretax income that STAAR Japan is contractually guaranteed to earn as an LRD, management
concluded that, at September 27, 2013 and at January 3, 2014, it is more likely than not that STAAR Japan’s deferred tax assets would be
realized. Accordingly, STAAR Japan fully released its remaining valuation allowance against net deferred tax assets based on the weight
of positive evidence that existed at September 27, 2013. This release amounted to approximately $433,000 of income tax benefit
recorded in the consolidated financial statements for the three and nine months ended September 27, 2013 (as translated using the
Japanese Yen exchange rate on September 27, 2013). The valuation allowance as of December 28, 2012 of $1.0 million was reduced to
$433,000 primarily due to the utilization of STAAR Japan’s net operating loss carryover during the nine months ended September 27,
2013. As of January 3, 2014, STAAR Japan’s net deferred tax assets of $289,000, including the remaining net operating loss carryover
of $20,000 (as translated using the Japanese Yen exchange rate on January 3, 2014), are included above in the table of components of
deferred income tax assets and liabilities.
F-20
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
STAAR Surgical AG
Due to STAAR Surgical AG’s history of profits, the deferred tax assets are considered fully realizable. Included in deferred tax
assets and liabilities of STAAR AG is noncurrent deferred tax assets of $185,000 and $187,000 as of January 3, 2014 and December 28,
2012, respectively.
Other Income Tax Disclosures
The following tax years remain subject to examination:
Significant Jurisdictions
U.S. Federal
California
Switzerland
Japan
Open Years
2010 – 2012
2009 – 2012
2011 – 2012
2008 – 2012
Income (loss) from continuing operations before provision for income taxes is as follows (in thousands):
Domestic
Foreign
2013
2012
2011
$
$
(2,131) $
3,245
1,114 $
(2,967) $
2,448
(519) $
(2,145)
4,849
2,704
Note 10 – Employee Benefit Plans
The Company maintains a passive pension plan (the “Swiss Plan”) covering employees of its Swiss subsidiary, which is
accounted for as a defined benefit plan.
Defined Benefit Plan-Switzerland
In Switzerland employers are required to provide a minimum pension plan for their staff. The Swiss Plan is financed by
contributions of both the employees and employer. The amount of the contributions is defined by the plan regulations and cannot be
decreased without amending the plan regulations. It is required that the employer contribute an amount equal to or greater than the
employee contribution.
F-21
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
The following table shows the changes in the benefit obligation and plan assets and the Swiss Plan’s funded status as of January 3,
2014 and December 28, 2012:
Change in Projected Benefit Obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Participant contributions
Benefits paid
Actuarial (gain) loss on obligation
Projected benefit obligation, end of period
Change in Plan Assets:
Plan assets at fair value, beginning of period
Actual return on plan assets (including foreign currency
impact)
Employer contributions
Participant contributions
Benefits paid
Plan assets at fair value, end of period
Funded status (pension liability), end of year
Amount Recognized in Accumulated Other Comprehensive
Loss, net of tax:
Actuarial loss on plan assets
Actuarial loss on benefit obligation
Actuarial gain recognized in current year
Accumulated other comprehensive loss
Accumulated benefit obligation at end of year
$
$
$
$
$
$
$
$
2013
2012
4,853 $
320
101
239
(157)
(173)
5,183 $
3,053 $
144
239
239
(158)
3,517 $
4,710
301
116
234
(639)
131
4,853
3,058
166
234
234
(639)
3,053
(1,666) $
(1,800)
(521) $
(331)
247
(605) $
(558)
(466)
205
(819)
(4,824) $
(4,410)
The underfunded balance of $1,666,000 and $1,800,000 was included in other long-term liabilities on the consolidated balance
sheets as of January 3, 2014 and December 28, 2012, respectively.
Net periodic pension cost associated with the Swiss Plan during the years ended January 3, 2014, December 28, 2012, and
December 30, 2011 include the following components (in thousands):
Service cost
Interest cost
Expected return on plan assets
Actuarial loss recognized in current year
Prior service loss recognized in current year
Transition obligation recognized in current year
Amendments
Net periodic pension cost
$
$
2013
2012
2011
320 $
101
(96)
55
—
—
—
380 $
301 $
116
(100)
54
—
—
—
371 $
414
127
(101)
97
—
—
—
537
Changes in other comprehensive loss, net of tax, associated with the Swiss Plan in the year ended January 3, 2014 and December
28, 2012 include the following components (in thousands):
F-22
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Current year actuarial gain on plan assets, net of tax
Current year actuarial (loss) gain on benefit obligation, net of tax
Actuarial gain recorded in current year, net of tax
Prior service cost
Change in other comprehensive loss
$
$
2013
2012
37 $
135
46
—
218 $
50
(101)
42
—
(9)
The amount in accumulated other comprehensive income (loss) as of January 3, 2014 that is expected to be recognized as a
component of the net periodic pension costs during fiscal year 2014 is $24,000.
Net periodic pension cost and projected and accumulated pension obligation for the Company’s Swiss Plan were calculated on
January 3, 2014 and December 28, 2012 using the following assumptions:
Discount rate
Salary increases
Expected return on plan assets
Expected average remaining working lives in years
2013
2012
2.50 %
2.00 %
3.00 %
10.50
2.00 %
2.00 %
3.00 %
10.30
The discount rates of 2.50% and 2.00% as of January 3, 2014 and December 28, 2012, respectively are based on an assumed
pension benefit maturity of 10 to 15 years. The rate was estimated using the rate of return for high quality Swiss corporate bonds that
mature in eight years. This maturity was used as there are significant numbers of high quality Swiss bonds, but very few bonds issued
with maturities with longer lives. As of January 3, 2014 and December 28, 2012 the average rate for high quality Swiss corporate bonds
was 2.00%. In order to determine an appropriate discount rate, the eight year rate of return was then extrapolated along the yield curve of
Swiss government bonds.
The salary increase rate was based on the Company’s best estimate of future increases over time.
The expected long-term rate of return on plan assets is based on the expected asset allocation and assumptions concerning
long-term interest rates, inflation rates, and risk premiums for equities above the risk-free rates of return. These assumptions take into
consideration historical long-term rates of return for relevant asset categories.
The Company has contracted with the Allianz Suisse Life Insurance Company’s BVG Collective Foundation (“Foundation”) to
manage the Swiss Plan. The Swiss pension funds are legally independent from the employer and are regulated by Swiss federal law. The
investment strategy is determined by the Foundation and this applies to all its members. However, the funds contributed by an employer
are specifically earmarked only for its employees. The unfunded obligations of a plan are not borne by the remaining participating
employers. Vested benefits have to be paid to terminated employees and they are generally rolled over into the pension fund of their new
employer. Since the Swiss Plan assets are comingled with other plans’ assets within the Foundation, the individual allocation of the
assets cannot be determined. The Foundation typically invests in bonds, equities, mortgage and real estate.
In fiscal 2014, the Company expects to make cash contributions totaling approximately $286,000 to the Swiss Plan.
The estimated future benefit payments for the Swiss Plan are as follows (in thousands):
Fiscal Year
2014
2015
2016
2017
2018
2019 – 2023
Total
$
$
54
54
57
60
64
386
675
F-23
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Defined Benefit Plan-Japan
STAAR Japan maintains a noncontributory defined benefit pension plan (“Japan Plan”) substantially covering all of the
employees of STAAR Japan. Benefits under the Japan Plan are earned, vested and accumulated based on a point-system, primarily
based on the combination of years of service, actual and expected future grades (management or non-management) and actual and future
zone (performance) levels of the employees. Each point earned is worth a fixed monetary value, 1,000 Yen per point, regardless of the
level grade or zone of the employee. Gross benefits are calculated based on the cumulative number of points earned over the service
period multiplied by 1,000 Yen. The mandatory retirement age limit is 60 years old.
STAAR Japan administers the pension plan and funds the obligations of the Japan Plan from STAAR Japan’s operating cash
flows. STAAR Japan is not required, and does not intend to provide contributions to the Plan to meet benefit obligations and therefore
does not have any plan assets. Benefit payments are made to beneficiaries as they become due.
The funded status of the benefit plan at January 3, 2014 and December 28, 2012 is as follows:
Change in Projected Benefit Obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Actuarial loss
Benefits paid
Foreign exchange adjustment
Projected benefit obligation, end of period
Changes in Plan Assets:
Plan assets at fair value, beginning of period
Actual return on plan assets
Employer contributions
Benefits paid
Distribution of plan assets
Foreign exchange adjustment
Plan assets at fair value, end of period
Funded status (pension liability), end of period
Amount Recognized in Accumulated Other Comprehensive Income,
net of tax:
Transition obligation
Actuarial gain
Prior service cost
Net loss
Accumulated other comprehensive income
Accumulated benefit obligation at end of year
2013
2012
1,188 $
158
8
47
(123)
(229)
1,049 $
— $
—
—
—
—
—
— $
1,108
185
13
63
(65)
(116)
1,188
—
—
—
—
—
—
—
(1,049) $
(1,188)
81 $
191
17
(184)
105 $
(857) $
117
353
28
(204)
294
(972)
$
$
$
$
$
$
$
$
F-24
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
The underfunded balance of $1,049,000 and $1,188,000, respectively, was included in other long-term liabilities on the
consolidated balance sheets as of January 3, 2014 and December 28, 2012, respectively.
Net periodic pension cost associated with the Japan Plan for the years ended January 3, 2014, December 28, 2012 and, December
30, 2011 includes the following components (in thousands):
Service cost
Interest cost
Net amortization of transition obligation
Actuarial gain
Prior service cost (credit)
Net periodic pension cost
2013
2012
2011
$
$
158 $
8
12
(31)
(1)
146 $
185 $
13
16
(58)
(1)
155 $
174
6
16
(117)
(1)
78
Changes in other comprehensive income, net of tax, associated with the Japan Plan for the years ended January 3, 2014 and
December 28, 2012 include the following components (in thousands):
Amortization of net transition obligation
Amortization of actuarial loss
Actuarial loss recorded in current year
Amortization prior service cost
Change in other comprehensive income
2013
2012
12 $
(47)
(153)
(1)
(189) $
16
(62)
(80)
(1)
(127)
$
$
The amount in accumulated other comprehensive income as of January 3, 2014 that is expected to be recognized as a component
of the net periodic pension cost in fiscal 2014 is approximately $9,000.
Net periodic pension cost and projected and accumulated pension obligation for the Company’s Japan Plan were calculated on
January 3, 2014 and December 28, 2012 using the following assumptions:
Discount rate
Salary increases
Expected return on plan assets
Expected average remaining working lives in years
2013
2012
0.90 %
4.70 %
N/A
7.48
0.80 %
3.00 %
N/A
8.88
The discount rate of 0.90% as of January 3, 2014 and the discount rate of 0.80% as of December 28, 2012 are based on the
approximate Japanese government bond rate with a term of 10 to 20 years.
The salary increase average rate was based on the Company’s best estimate of future increases over time.
F-25
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
The estimated future benefit payments for the Japan Plan are as follows (in thousands):
Fiscal Year
2014
2015
2016
2017
2018
2019 – 2023
Total
Defined Contribution Plan
$
$
45
58
75
120
72
390
760
The Company maintains a 401(k) profit sharing plan (“401(k) Plan”) for the benefit of qualified employees in North America.
During the fiscal year ended January 3, 2014, employees who participate may elect to make salary deferral contributions to the 401(k)
Plan up to the $17,500 of the employees’ eligible payroll subject to annual Internal Revenue Code maximum limitations (with a $5,500
annual catch-up contribution permitted for those over 50 years old). The Company makes a contribution of 50% of the employee’s
contribution up to the first 6% of the employee’s compensation. In addition, STAAR may make a discretionary contribution to qualified
employees, in accordance with the 401(k) Plan. During the years ended January 3, 2014, December 28, 2012, and December 30, 2011,
the Company made contributions, net of forfeitures, of $270,000, $284,000, and $150,000, respectively, to the 401(k) Plan.
Note 11 — Stockholders’ Equity
Common Stock
During fiscal year 2013, the Company issued 153,600 shares of restricted stock to certain employees and the Board of Directors.
Restricted shares are issued at fair market value on the date of grant, vest over a period of one to three years, and are subject to forfeiture
until vested or the service period is achieved and the restriction is lapsed or terminated. As of January 3, 2014, none of the 2013 grants
had vested. Restricted stock is issued and outstanding for legal and voting purposes but are not considered to be participating securities
as defined by ASC 260, Earnings per Share, as restricted stock dividends, if any declared, are forfeitable if the service condition is not
met (see Note 15).
Stock-Based Compensation
Stock-based compensation expense is set forth below (in thousands):
January 3,
2014
Fiscal Year Ended
December 28,
2012
December 30,
2011
Employee stock options
Restricted stock
Restricted stock units
Consultant compensation
Total
$
$
2,683 $
999
589
218
4,489 $
2,595 $
590
—
23
3,208 $
1,361
466
—
87
1,914
There was no net income tax benefit recognized in the consolidated statements of operations for stock-based compensation
expense for non-qualified stock options, as the Company fully offsets net deferred tax assets with a valuation allowance (see Note 9). In
addition, the Company capitalized $232,000, $150,000, and $121,000, of stock-based compensation to inventory as of January 3, 2014,
December 28, 2012, and December 30, 2011, respectively, and recognizes these amounts as cost of sales as the inventory is sold. The
Company does not recognize deferred income taxes for incentive stock option compensation expense, and records a tax deduction only
when a disqualified disposition has occurred (see Note 9).
F-26
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
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. On May 13, 2013,
the stockholders of STAAR approved the Restated 2003 Omnibus Plan, which increased the number of shares available for grants under
the Plan by 1,250,000 shares. As of January 3, 2014, all outstanding options have been issued under a plan approved by our stockholders.
As of January 3, 2014, approximately 1,363,000 shares were authorized and available for grants under the 2003 Omnibus Plan.
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, restricted stock and restricted stock units. Options under the plan are granted at fair market
value on the date of grant, become exercisable generally over a three- or four-year service 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). The Company settles stock option exercises with newly issued shares
of common stock. Restricted stock grants under the 2003 Plan generally vest over a period of one, three or four years. Restricted stock
units generally vest over a period of one year if both performance and service conditions have been met, as further described below.
Assumptions
The Company uses the Black-Scholes option pricing model to estimate the fair value of new stock option grants and establish that
fair value on the date of grant using the assumptions noted in the following table. Additionally, all option valuation models require the
input of highly subjective assumptions including the expected life of the option and expected stock price volatility. Expected volatilities
are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and optionee
termination experience. The expected term of options granted is derived from the historical exercise and activity from the time of grant
to the time of exercise or post-vesting cancellation date, and represents the period of time that options granted are expected to be
outstanding. The Company has determined an estimated 9.92% forfeiture rate used in the model for fiscal year 2013 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. Following are the weighted-average assumptions used with the Black-Scholes option-pricing
model to determine the fair value estimates of options granted:
January 3,
2014
Fiscal Year Ended
December 28,
2012
December 30,
2011
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (in years)
0 %
71 %
0.73 %
4.12
A summary of option activity under the Plan as of January 3, 2014 is presented below:
Outstanding at December 28, 2012
Granted
Exercised
Forfeited or expired
Outstanding at January 3, 2014
Exercisable at January 3, 2014
Shares
(000’s)
3,376 $
603
(645)
(35)
3,299 $
2,168 $
Weighted-
Average
Exercise
Price
5.89
6.77
5.10
8.53
6.17
5.30
0 %
79 %
0.82 %
5.21
Weighted-
Average
Remaining
Contractual
Term
0 %
77 %
1.82 %
5.49
Aggregate
Intrinsic
Value
(000’s)
6.27 $
5.04
32,745
23,405
F-27
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
The weighted-average grant-date fair value of options granted during the fiscal years ended January 3, 2014, December 28, 2012,
and December 30, 2011, was $3.51, $6.65, and $3.85, per option, respectively. The total fair value of options vested during fiscal years
ended January 3, 2014, December 28, 2012, and December 30, 2011, was $3,084,000, $1,830,000, and $1,049,000, respectively. The
total intrinsic value of options exercised during the fiscal years ended January 3, 2014, December 28, 2012, and December 30, 2011, was
$3,894,000, $1,240,000, and $2,533,000, respectively.
As of January 3, 2014, there was $3.5 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
1.64 years.
The following table summarizes information about stock options outstanding and exercisable at January 3, 2014 (in thousands,
except per share data):
Number
Outstanding at
January 3,
2014
29
320
177
506
1,457
810
3,299
Options
Outstanding
Weighted-Average
Remaining
Contractual Life
5.24 Years
4.30 Years
5.48 Years
3.16 Years
6.96 Years
7.94 Years
6.27 Years
$
$
$
$
$
$
$
Weighted-
Average
Exercise
Price
Number
Exercisable at
January 3,
2014
Weighted-
Average
Exercise
Price
0.95
2.19
3.29
4.22
5.71
10.61
6.17
29 $
320 $
177 $
497 $
817 $
328 $
2,168 $
0.95
2.19
3.29
4.20
5.89
10.00
5.30
Range of Exercise Prices
$ 0.95
$ 1.56 to $2.30
$ 2.45 to $3.60
$ 3.75 to $5.29
$ 5.34 to $7.32
$ 7.50 to $13.34
Warrants
On December 14, 2007, the Company entered into a Warrant Agreement with Broadwood Partners, L.P. (“Broadwood”) granting
the right to purchase up to 700,000 shares of Common Stock at an exercise price of $4.00 per share, exercisable for a period of six
years. On December 12, 2013, Broadwood exercised these warrants with a “cashless” exercise (net share settlement) as allowed for
under the original Warrant Agreement (“cashless exercise”). Under the terms of the cashless exercise, the Company issued 485,456
shares of common stock to Broadwood and simultaneously withheld 214,544 shares of common stock as consideration for the $2.8
million aggregate ($4.00 per share) exercise price owed by Broadwood to the Company, the number of shares withheld determined using
the Company’s average 21-day per share closing stock price preceding the exercise date.
On June 1, 2009, the Company issued warrants to Broadwood, pursuant to a Warrant Agreement, granting the right to purchase up
to an additional 700,000 shares of Common Stock at an exercise price of $4.00 per share, exercisable for a period of six years, which
remain outstanding. The warrants are accounted for as an equity instrument.
F-28
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
The Warrant Agreement provides that the Company will register the shares issuable upon exercise of the warrants with the
Securities Exchange Commission. The Company filed and secured effectiveness of a registration statement covering resale of the
shares. If the Company fails to keep the registration statement effective and the lapse exceeds permitted suspensions, as the holder’s
sole remedy, the Company will be obligated to issue an additional 30,000 warrants (“Penalty Warrants”) for each month that the
Company does not meet this effectiveness requirement through the term of the remaining warrants, June 1, 2015. The Company does
not consider the issuance of Penalty Warrants likely.
The fair value of the warrants was estimated on the issuance date, June 1, 2009, using a Black-Scholes option valuation model
applying the assumptions noted in the following table:
$
Common stock price per share
Number of warrants
Expected dividends
Expected volatility
Risk-free rate
Life (in years)
As of
June 1, 2009
1.01
700,000
0 %
74.4 %
3.28 %
6.0
A summary of the warrants activity is provided below:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(000’s)
4.10
—
4.00
6.00
4.00
4.00
1.41 $
1.41 $
8,470
8,470
Shares
(000’s)
1,470 $
—
(700)
(70)
700 $
700 $
Outstanding at December 28, 2012
Granted
Exercised
Forfeited or expired
Outstanding at January 3, 2014
Exercisable at January 3, 2014
Restricted stock
A summary of restricted stock as of January 3, 2014 is presented below:
Outstanding at December 28, 2012
Granted
Forfeited
Vested
Outstanding at January 3, 2014
Shares
(000’s)
Weighted Average
Grant-Date Fair Value
per Share
205 $
154
—
(18)
341 $
8.48
6.58
—
9.90
7.55
F-29
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Restricted Stock Units
In March 2013, pursuant to the Company’s Amended and Restated 2003 Omnibus Equity Incentive Plan, the Compensation
Committee approved a 2013 Restricted Stock Unit Plan (“2013 RSU Plan”), which is a performance contingent restricted stock award.
On March 4, 2013, the Company granted 135,000 RSUs as presented in the table below with vesting subject to a performance and
service condition. As of January 3, 2014, although the Company had achieved the performance target, none of the RSUs were vested due
to not having met the service condition date, which is March 12, 2014.
A summary of restricted stock units as of January 3, 2014 is presented below:
Outstanding at December 28, 2012
Granted
Forfeited
Vested
Outstanding at January 3, 2014
Note 12 — Commitments and Contingencies
Lease Obligations and Firm Commitment
Units
(000’s)
Weighted Average
Grant-Date Fair Value
per Share
—
135
—
—
135
$
$
—
5.34
—
—
5.34
The Company leases certain property, plant and equipment under capital and operating lease agreements. These leases vary in
duration and contain renewal options and/or escalation clauses. Current and long-term obligations under capital leases are included 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 January 3, 2014 were as follows (in thousands):
Fiscal Year
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
Less amounts representing interest
Operating
Leases
Capital
Leases
$
$
$
2,058 $
1,817
1,715
1,731
257
429
8,007 $
—
8,007 $
303
142
6
—
—
—
451
22
429
Rent expense was approximately $1.5 million, $1.9 million, and $1.8 million, for the years ended January 3, 2014, December 28,
2012, and December 30, 2011, respectively.
F-30
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
The Company had the following assets under capital lease at January 3, 2014 and December 28, 2012 (in thousands):
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation
2013
2012
3,922 $
611
155
4,688
3,984
704 $
3,923
946
155
5,024
3,576
1,448
$
$
Depreciation expense for assets under capital lease for each of the years ended January 3, 2014, December 28, 2012, and
December 30, 2011, was approximately $566,000, $522,000, and $615,000, respectively.
As of January 3, 2014, the Company has a firm commitment of $800,000 which it is obligated to fulfill in the following
twenty-four month period solely to be used for the acquisition of property and equipment. Once fulfilled, the property and equipment
acquired under the firm commitment will be treated as assets acquired under a capital lease. The Company also has a minimum purchase
commitment of $1,064,000 with a supplier for purchase of certain finished goods inventory.
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 amounts that are likely to result from these audits;
however, final assessments, if any, could be significantly 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, or termination “without cause or for good reason” as defined in the employment agreements.
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 may relate to contractual rights and obligations, employment matters, and claims of
product liability. STAAR maintains insurance coverage for product liability claims but may not be insured against other potentially
material claims. Reserves are recorded for losses management determines are probable and reasonably estimable. While the Company is
not aware of any claims 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.
F-31
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Note 13 — Related Party Transactions
The Company has made various advances to certain employees. Amounts due from employees included in prepaids, deposits,
and other current assets at January 3, 2014 and December 28, 2012 were $34,000 and $11,000, respectively.
Note 14 — Supplemental Disclosure of Cash Flow Information
Interest paid was $153,000, $270,000, and $471,000, for the years ended January 3, 2014, December 28, 2012, and December 30,
2011, respectively. Income taxes paid amounted to approximately $1,534,000, $241,000, and $649,000, for the years ended January 3,
2014, December 28, 2012, and December 30, 2011, respectively.
The Company’s non-cash investing and financing activities were as follows (in thousands):
Non-cash investing and financing activities:
Assets obtained by capital lease
Purchase of property and equipment included in accounts payable
2013
2012
2011
$
$
— $
881 $
527 $
— $
331
—
Note 15 — Basic and Diluted Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands except per share
amounts):
Numerator:
Net income (loss)
Denominator:
Weighted average common shares and denominator for basic calculation:
Weighted average common shares outstanding
Less: Unvested restricted stock
Denominator for basic calculation
Weighted average effects of potentially dilutive common stock:
Stock options
Unvested restricted stock
Restricted stock units
Warrants
Denominator for diluted calculation
Net income (loss) per share – basic
Net income (loss) per share - diluted
2013
2012
2011
$
398 $
(1,763) $
1,348
37,017
(311)
36,706
36,433
(180)
36,253
1,235
177
75
414
38,607
—
—
—
—
36,253
35,578
(144)
35,434
859
—
—
585
36,878
$
$
0.01 $
0.01 $
(0.05) $
(0.05) $
0.04
0.04
The following table sets forth (in thousands) the weighted average number of options and warrants to purchase shares of common
stock and restricted stock which were not included in the calculation of diluted per share amounts because the effects would be
anti-dilutive.
Options
Warrants
Restricted stock
Total
2013
2012
2011
1,109
—
—
1,109
1,632
746
180
2,558
1,101
—
144
1,245
F-32
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Note 16 — Geographic and Product Data
The Company markets and sells its products in approximately 60 countries and has manufacturing sites in the United States
and Switzerland. Other than the United States, Japan, Korea, China, and Spain, the Company does not conduct business in any country in
which its sales in that country exceed 5% of consolidated sales. Sales are attributed to countries based on location of customers. The
composition of the Company’s sales to unaffiliated customers is set forth below (in thousands):
Net sales to unaffiliated customers
United States
Japan
Korea
China
Spain
Others*
Total
$
$
2013
2012
2011
12,851 $
17,666
7,743
8,618
4,867
20,470
72,215 $
12,427 $
16,692
6,713
8,406
—
19,545
63,783 $
13,852
15,690
8,142
6,354
—
18,727
62,765
*No other location individually exceeds 5% of total sales.
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 used in cataract surgery and ICLs
used in refractive surgery. The composition of the Company’s net sales by product line is as follows (in thousands):
Net sales by product line
ICLs
IOLs
Other surgical products
Total
2013
2012
2011
$
$
44,128 $
24,153
3,934
72,215 $
35,080 $
25,971
2,732
63,783 $
32,072
27,547
3,146
62,765
The composition of the Company’s long-lived assets, consisting of property and equipment, between those in the United States,
Switzerland, and Japan is set forth below (in thousands):
Long-lived assets
U.S.
Switzerland
Japan
Total
2013
2012
6,096 $
849
460
7,405 $
3,052
984
1,403
5,439
$
$
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.
F-33
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2014 and December 28, 2012
Note 17 — Quarterly Financial Data (Unaudited)
Summary unaudited quarterly financial data from continuing operations for fiscal 2013 and 2012 is as follows (in thousands
except per share data):
January 3, 2014
Net sales
Gross profit
Net income (loss)
Net income (loss) per share – basic
Net income (loss) per share – diluted
December 28, 2012
Net sales
Gross profit
Net income (loss)
Net income (loss) per share – basic
Net income (loss) per share – diluted
$
$
1st Qtr.
2nd Qtr.
3rd Qtr.
4th Qtr.
18,001
12,654
471
0.01
0.01
18,164
12,620
278
0.01
0.01
17,106
12,059
525
0.01
0.01
18,944
12,976
(876)
(0.02)
(0.02)
1st Qtr.
2nd Qtr.
3rd Qtr.
4th Qtr.
15,509 $
10,901
232
0.01
0.01
15,942 $
11,045
(491)
(0.01)
(0.01)
15,866 $
11,176
(90)
(0.00)
(0.00)
16,466
11,168
(1,414)
(0.04)
(0.04)
Quarterly and year-to-date computations of net income (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.
Note 18 — Manufacturing Consolidation Project and Tax Strategy
From fiscal 2011 through 2013, the Company has devoted significant resources to two initiatives: a project to consolidate global
manufacturing, and development of a strategy to optimize its global organization for tax purposes. The goal of these strategies is to
further improve upon gross profit margin by streamlining operations, thereby reducing costs and to increase profits in the U.S., to enable
the Company to utilize its $121.7 million in net operating loss carryforwards and at the same time, reduce income taxes in foreign
jurisdictions where it pays tax. STAAR currently manufactures its products in four facilities worldwide. It has developed a plan to
methodically consolidate its manufacturing in a single site at its Monrovia, California location which is expected to be substantially
completed during 2014.
The Company has invested approximately $5.9 million over a three-year period, of which it incurred approximately $2.2 million
during 2013. These expenses are included in the other general and administrative expenses in the consolidated statement of operations
for the year ended January 3, 2014. Expenditures to date have largely consisted of severance, employee costs, professional fees to
advisors and consultants.
A summary of the activity for these initiatives is presented below as of January 3, 2014 (in thousands):
Liability at December 28, 2012
Costs incurred and charged to expense
Cash payments
Liability at January 3, 2014
Total costs incurred to date
Total costs expected
Total costs remaining
Termination
Benefits
Other Associated
Costs
Total
$
$
$
$
$
504 $
481
(254)
731 $
1,381 $
1,592 $
211 $
293 $
1,761
(2,026)
28 $
4,558 $
4,608 $
50 $
797
2,242
(2,280)
759
5,939
6,200
261
F-34
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A
Description
2013
Allowance for doubtful accounts and sales
returns deducted from accounts receivable
in balance sheet
Deferred tax asset valuation allowance
2012
Allowance for doubtful accounts and sales
returns deducted from accounts receivable
in balance sheet
Deferred tax asset valuation allowance
2011
Allowance for doubtful accounts and sales
returns deducted from accounts receivable
in balance sheet
Deferred tax asset valuation allowance
$
$
$
$
$
$
Column B
Balance at
Beginning of
Year
Column C
Column D
Additions
Deductions
(In thousands)
Column E
Balance at
End of
Year
1,316
$
51,093
52,409 $
263
$
744
1,007 $
130
$
1,014
1,144 $
1,449
50,823
52,272
1,128
$
51,571
52,699 $
1,423
$
51,689
53,112 $
255
$
—
255 $
195
$
—
195 $
67
$
478
545 $
1,316
51,093
52,409
489
$
118
607 $
1,128
51,571
52,699
F-35
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RESTRICTED STOCK UNIT AWARD AGREEMENT
Pursuant to the Restricted Stock Unit Award Grant Notice (the “Grant Notice”) to which this Restricted Stock Unit Award
Agreement (this “ Agreement ”) is attached, STAAR Surgical Company, a Delaware corporation (the “ Company ”), has granted to the
Participant an award of restricted stock units (“ Restricted Stock Units ” or “ RSUs ”) under the Company’s Amended and Restated 2003
Omnibus Equity Incentive Plan, as amended from time to time (the “ Plan ”). Each vested Restricted Stock Unit represents the right to
receive one share of Common Stock (“ Share ”) to purchase the number of Shares indicated in the Grant Notice. Capitalized terms not
specifically defined herein shall have the meanings specified in the Plan and Grant Notice.
ARTICLE I.
GENERAL
1.1 Incorporation of Terms of Plan. The RSUs are subject to the terms and conditions of the Plan, which are
incorporated herein by reference. In the event of any inconsistency between the Plan and this Agreement, the terms of the Plan shall
control.
ARTICLE II.
GRANT OF RESTRICTED STOCK UNITS
2.1 Grant of RSUs. Pursuant to the Grant Notice and upon the terms and conditions set forth in the Plan and this
Agreement, effective as of the Grant Date set forth in the Grant Notice, the Company hereby grants to the Participant an award of
RSUs under the Plan in consideration of the Participant’s past and/or continued employment with or service to the Company or any
Affiliates and for other good and valuable consideration.
2.2 Unsecured Obligation to RSUs. Unless and until the RSUs have vested in the manner set forth in Article 2 hereof,
the Participant will have no right to receive Common Stock under any such RSUs. Prior to actual payment of any vested RSUs, such
RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
2.3 Vesting Schedule. Subject to Section 0 hereof, the RSUs shall vest and become nonforfeitable with respect to the
applicable portion thereof according to the vesting schedule set forth in the Grant Notice (rounding down to the nearest whole Share).
2.4 Consideration to the Company. In consideration of the grant of the award of RSUs pursuant hereto, the Participant
agrees to render faithful and efficient services to the Company or any Affiliate. .
2.5 Forfeiture, Termination and Cancellation upon Termination of Service. Notwithstanding any contrary provision
of this Agreement or the Plan, upon the Participant’s termination of Service for any or no reason, all Restricted Stock Units which
have not vested prior to or in connection with such termination of Service (after taking into consideration any accelerated
vesting which may occur in connection with such termination of Service (if any)) shall thereupon automatically be forfeited,
terminated and cancelled as of the applicable termination date without payment of any consideration by the Company, and the
Participant, or the Participant’s beneficiary or personal representative, as the case may be, shall have no further rights hereunder. No
portion of the RSUs which has not become vested as of the date on which the Participant incurs a termination of Service shall
thereafter become vested.
2.6 Issuance of Common Stock upon Vesting.
(a) Within 15 business days following the Committee’s certification of the Revenue Goal for the
Measurement Period in the fiscal year following the end of the Measurement Period, but in no event later than March 15th of such
fiscal year (the “ Settlement Date ”), the Company shall settle vested RSUs by delivering to the Participant (or any transferee
permitted under Section 3.2 hereof) a number of Shares (either by delivering one or more certificates for such Shares or by entering
such Shares in book entry form, as determined by the Company in its sole discretion) equal to the number of RSUs subject to this
Award that vested. Notwithstanding the foregoing, in the event Shares cannot be issued pursuant to Section 18(f) of the Plan, the
Shares shall be issued pursuant to the preceding sentence as soon as administratively practicable after the Committee determines that
Shares can again be issued in accordance with such Section.
(b) As set forth in Section 18(a) of the Plan, the Company shall have the authority and the right to deduct or
withhold, or to require the Participant to remit to the Company, an amount sufficient to satisfy all applicable federal, state and local
taxes required by law to be withheld with respect to any taxable event arising in connection with the Restricted Stock Units. The
Company shall not be obligated to deliver any new certificate representing Shares to the Participant or the Participant’s legal
representative or enter such Shares in book entry form unless and until the Participant or the Participant’s legal representative shall
have paid or otherwise satisfied in full the amount of all federal, state and local taxes applicable to the taxable income of the
Participant resulting from the grant or vesting of the Restricted Stock Units or the issuance of Shares.
2.7 Conditions to Delivery of Shares. The Shares deliverable hereunder may be either previously authorized but
unissued Shares, treasury Shares or issued Shares which have then been reacquired by the Company. Such Shares shall be fully paid
and nonassessable. The Company shall not be required to issue or deliver any certificates or make any book entries evidencing
Shares deliverable hereunder prior to fulfillment of the conditions set forth in Section 18(f) of the Plan.
2.8 Rights as Stockholder. The holder of the RSUs shall not be, nor have any of the rights or privileges of, a
stockholder of the Company, including, without limitation, voting rights and rights to dividends, in respect of the RSUs and any
Shares underlying the RSUs and deliverable hereunder unless and until such Shares shall have been issued by the Company and held
of record by such holder (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of
the Company). No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 15 of the Plan.
ARTICLE III.
OTHER PROVISIONS
3.1 Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such
rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke
any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and
binding upon the Participant, the Company and all other interested persons. No member of the Committee or the Board shall be
personally liable for any action, determination or interpretation made in good faith with respect to the Plan, this Agreement or the
RSUs.
3.2 Grant is Not Transferable. During the lifetime of the Participant, the RSUs may not be sold, pledged, assigned or
transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the Committee,
pursuant to a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended from time to time, or the rules thereunder. Neither the RSUs nor any interest or right therein shall be liable for the debts,
contracts or engagements of the Participant or his or her successors in interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by
operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and
any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the
preceding sentence.
3.3 Tax Consultation. The Participant understands that the Participant may suffer adverse tax consequences in
connection with the RSUs granted pursuant to this Agreement (and the Shares issuable with respect thereto). The Participant
represents that the Participant has consulted with any tax consultants the Participant deems advisable in connection with the RSUs
and the issuance of Shares with respect thereto and that the Participant is not relying on the Company for any tax advice.
3.4 Adjustments. The Participant acknowledges that the RSUs are subject to modification and termination in certain
events as provided in this Agreement and Article 17 of the Plan.
3.5 Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the
Company in care of the Secretary of the Company at the Company’s principal office, and any notice to be given to the Participant
shall be addressed to the Participant at the Participant’s last address reflected on the Company’s records. Any notice shall be deemed
duly given when sent via email or when sent by reputable overnight courier or by certified mail (return receipt requested) through the
United States Postal Service.
3.6 Participant’s Representations. If the Shares issuable hereunder have not been registered under the Securities Act
or any applicable state laws on an effective registration statement at the time of such issuance, the Participant shall, if required by the
Company, concurrently with such issuance, make such written representations as are deemed necessary or appropriate by the
Company and/or its counsel.
3.7 Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or
construction of this Agreement.
3.8 Governing Law. The laws of the State of Delaware shall govern the interpretation, validity, administration,
enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts
of laws.
3.9 Conformity to Securities Laws. The Participant acknowledges that the Plan and this Agreement are intended to
conform to the extent necessary with all provisions of the Securities Act of 1933, as amended, and the Exchange Act and any other
applicable law. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the RSUs are granted, only in
such a manner as to conform to such laws. To the extent permitted by such laws, the Plan and this Agreement shall be deemed
amended to the extent necessary to conform to such laws.
3.10 Amendment, Suspension and Termination. To the extent permitted by the Plan, this Agreement may be wholly or
partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Committee or the Board;
provided, however, that, except as may otherwise be provided by the Plan, no amendment, modification, suspension or termination
of this Agreement shall adversely affect the RSUs in any material way without the prior written consent of the Participant.
3.11 Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple
assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on
transfer herein set forth in Section 3.2 hereof, this Agreement shall be binding upon the Participant and his or her heirs, executors,
administrators, successors and assigns.
3.12 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan or this Agreement,
if the Participant is subject to Section 16 of the Exchange Act, then the Plan, the RSUs and this Agreement shall be subject to any
additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by
applicable laws, this Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
3.13 Entire Agreement. The Plan, the Grant Notice and this Agreement (including all Exhibits thereto, if any) constitute
the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and the
Participant with respect to the subject matter hereof.
3.14 Section 409A. Notwithstanding any other provision of the Plan, this Agreement or the Grant Notice, the Plan, this
Agreement and the Grant Notice shall be interpreted in accordance with the requirements of Section 409A of the Code. The
Committee may, in its discretion, adopt such amendments to the Plan, this Agreement or the Grant Notice or adopt other policies and
procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, as the Committee
determines are necessary or appropriate to comply with the requirements of Section 409A of the Code.
3.15 Limitation on Participant’s Rights. Participation in the Plan confers no rights or interests other than as herein
provided. This Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be
construed as creating a trust. The Plan, in and of itself, has no assets. Participant shall have only the rights of a general unsecured
creditor of the Company and its Affiliates with respect to amounts credited and benefits payable, if any, with respect to the RSUs, and
rights no greater than the right to receive the Common Stock as a general unsecured creditor with respect to RSUs, as and when
payable hereunder.
3.16 Not a Contract of Service Relationship. Nothing in this Agreement or in the Plan shall confer upon the Participant
any right to continue to serve as an Employee or other service provider of the Company or any of its affiliates or shall interfere with
or restrict in any way the rights of the Company and its affiliates, which rights are hereby expressly reserved, to discharge or
terminate the services of the Participant at any time for any reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in a written agreement between the Company or an affiliate and the Participant.
Subsidiaries of STAAR Surgical Company
Exhibit 21.1
Name of Subsidiary
STAAR Surgical AG
STAAR Japan Inc.
STAAR Surgical Cayman, Inc.
STAAR Surgical PTE. LTD
STAAR Optical Equipment Technology
(Shanghai) Co., LTD
Circuit Tree Medical, Inc.
Other Names Under
Which it Does Business
None
STAAR Japan Godo Kaisha
None
None
State or Other
Jurisdiction of Incorporation
Switzerland
Japan
Cayman Islands
Singapore
None
None
China
California
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
STAAR Surgical Company
Monrovia, CA
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-194147, No. 333-175980, No.
333-148902, No. 333-143131, No. 333-124022 and No. 333-116901) and Form S-8 (No. 333-189349, No. 333-167595 and No.
333-111154) of STAAR Surgical Company and Subsidiaries of our reports dated March 12, 2014, relating to the consolidated financial
statements and financial statement schedule, and the effectiveness of STAAR Surgical Company and Subsidiaries’ internal control over
financial reporting, which appear in this Form 10-K.
/s/ BDO USA, LLP
Los Angeles, California
March 12, 2014
CERTIFICATIONS
Exhibit 31.1
I, Barry G. Caldwell 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 12, 2014
/s/ Barry G. Caldwell
Barry G. Caldwell
President, Chief Executive Officer and
Director (principal executive officer)
Exhibit 31.2
CERTIFICATIONS
I, Stephen P. Brown 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 12, 2014
/s/ Stephen P. Brown
Stephen P. Brown
Chief Financial Officer
(principal accounting and financial officer)
Certification pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the filing of the Annual Report on Form 10-K for the year ended January 3, 2014 (the “Report”) by STAAR
Surgical Company (“the Company”), 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 the Company as of and for the periods presented in the Report.
Dated: March 12, 2014
Dated: March 12, 2014
/s/ Barry G. Caldwell
Barry G. Caldwell
President, Chief Executive Officer
and Director
(principal executive officer)
/s/ Stephen P. Brown
Stephen P. Brown
Chief Financial Officer
(principal financial officer)
A signed original of this statement has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.