UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Form 10-K
For the fiscal year ended January 2, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission file number: 0-11634
STAAR SURGICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-3797439
(I.R.S. Employer
Identification No.)
1911 Walker Avenue
Monrovia, California 91016
(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 July 4, 2014, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately $542,806,000 based on the closing price per share of $14.15 of the registrant’s Common
Stock on that date.
The number of shares outstanding of the registrant’s Common Stock as of March 11, 2015 was 38,797,569.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2015 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
ITEM 1.
BUSINESS .............................................................................................................................................................. 2
ITEM 1A. RISK FACTORS ..................................................................................................................................................... 15
ITEM 1B. UNRESOLVED STAFF COMMENTS ........................................................................................................................ 29
ITEM 2. PROPERTIES ........................................................................................................................................................ 29
ITEM 3. LEGAL PROCEEDINGS .......................................................................................................................................... 29
ITEM 4. MINE SAFETY DISCLOSURES ................................................................................................................................ 29
Page
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES ........................................................................................................................................ 31
ITEM 6. SELECTED FINANCIAL DATA ................................................................................................................................. 32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......... 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................................. 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................................................................................... 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ....... 48
ITEM 9A. CONTROLS AND PROCEDURES ............................................................................................................................ 48
ITEM 9B. OTHER INFORMATION ........................................................................................................................................ 49
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ................................................................... 51
ITEM 11. EXECUTIVE COMPENSATION ............................................................................................................................... 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS ............................................................................................................................................................ 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ................................ 51
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES .................................................................................................... 51
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ............................................................................................ 52
SIGNATURES
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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 the 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 85% of our total sales in fiscal
year 2014, 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. In June 2014
STAAR completed a project to consolidate substantially all of its manufacturing in 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 and distribution facility in Nidau, Switzerland under its
wholly owned subsidiary, STAAR Surgical AG. The Nidau facility also maintains manufacturing
capabilities for STAAR’s ICL products and the AquaFlow Device.
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.
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 also exposes us to the risk
of unexpected costs and possible supply interruptions. See “Item 1A. Risk Factors —Risks Related to Our Business —The
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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 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. The eye has an
anterior segment and a posterior segment that are separated by the natural crystalline lens.
The anterior segment consists of the cornea, the iris and ciliary body and the trabecular meshwork. It is filled with a
watery fluid called aqueous humor and is divided, by the iris, into an anterior chamber and a posterior chamber. 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 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 posterior segment of the eye that is behind the natural lens is filled with a jelly-like material called the vitreous
humor. 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 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 due to an irregular curvature of the cornea or defects in the natural lens. In an eye with
astigmatism, light fails to come to a single focus on the retina. Instead, two or more focus points occur that results in blurred
vision. 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.
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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, which also corrects for
astigmatism) 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 500,000 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 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,
China, 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 ship approximately 76% in less than one week from receipt of an order at our manufacturing facility.
Sales of ICLs (including TICLs) accounted for approximately 59% of our total sales in fiscal 2014, 61% of our total
sales in fiscal 2013, and 55% of our total sales in fiscal 2012.
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 offers 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.
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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 that 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 and Europe, 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. In China, we sell a “Preloaded Injector” with a silicone 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 us. Our 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 32% of our total sales in fiscal 2014, 33% of our total sales in fiscal 2013,
and 41% of our total sales in fiscal 2012.
Other Surgical Products
We also sell other related instruments and devices that we manufacture or that are manufactured by others, but these
products have relatively lower overall gross profit margins. Also, we sell injector parts to our lens supplier for their preloaded
acrylic IOL that they sell under their own brand. Sales of other surgical products accounted for approximately 9% of our total
sales in fiscal 2014, 5% of our total sales in fiscal 2013, and 4 % of our total sales in fiscal 2012.
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.
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 2, 2015, we owned approximately 67 United States and foreign patents and had approximately 21 patent
applications pending. In addition, as of January 2, 2015, our Japanese subsidiary owned approximately 50 Japanese and
foreign patents and had approximately 2 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. Some of these
patents expire by the end of 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 by the end of
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 patents with up to five
years of life remaining.
In addition to patents, we possess trade secrets and know-how regarding the design and production of the collamer
material and the manufacture of ICLs all of which we perform internally. We believe it would require extensive time and
effort for a competitor to duplicate these processes to develop a product with comparable capabilities to the ICL product line.
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, although the third quarter may be lower due to the summer vacation
effect in Europe.
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, social
media sites, 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, accounted for more than 10% of our
consolidated net sales during fiscal 2013 and 2012, although this decreased to approximately 9% during fiscal 2014. Net sales
to WooJeon during each of the last three fiscal years were as follows:
Net Sales to WooJeon
Fiscal Year
2014
2013
2012
Net Sales ($,
in thousands)
$6,563
$7,743
$6,713
Net Sales as
Percentage of
Consolidated
Net Sales
8.8%
10.7%
10.5%
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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. In the fourth quarter of 2014, we experienced a backlog for ICLs and TICLs primarily due to manufacturing
challenges in our Monrovia facility. Also, we implemented a voluntary hold on over 2,000 ICLs from shipment at the end of
the quarter. The impact of these manufacturing challenges to our revenue in the fourth quarter of 2014 was approximately $1.0
million. We continue to address the issues and expect to reduce the backlog to customary levels by the end of the first quarter
2015 or the end of the second quarter. If we cannot resolve our manufacturing challenges in the first quarter of 2015, our
financial results may be adversely impacted.
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. Start-up competitors
from a low cost manufacturing geography are beginning to appear in the market with a low cost alternative to the ICL, though
we do not believe they are having a material impact on our sales at this time.
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 2014 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.
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
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(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 country where we
propose to sell our medical devices or, if approved, whether such approvals will be granted in a timely or cost-effective
manner. We also cannot give any assurance that if our medical devices are approved for sale in a country action will not be
taken by the responsible regulatory authorities in the country with respect to our medical devices that might affect our ability to
maintain the required approvals in the country or to continue to sell our medical devices in the country. The regulatory
requirements in our most important current markets, the U.S., Europe and Japan, and in China and Korea 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.
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
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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.
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
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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. On February 3, 2010, we received a letter of
deficiency from the FDA outlining additional questions. After several communications with the FDA, on November 29, 2011,
we received a letter of deficiency from the FDA further questioning the clinical data. 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 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. On March 14, 2014 an FDA Ophthalmic
Devices Panel of the Medical Devices Advisory Committee that assessed our PMA Supplement submission seeking approval
of the TICL, voted favorably in response to the three questions posed to it by the FDA’s Division of Ophthalmic, Neurological
and Ear, Nose and Throat Devices regarding the TICL’s safety and effectiveness as well as whether the TICL’s benefits
outweigh its risks.
On May 27, 2014, we received a warning letter from the FDA (the “2014 Warning Letter”) citing alleged violations of
current good manufacturing practice (“cGMP”) regulations that were identified by the FDA during an inspection of the
Company’s manufacturing facility in Monrovia, California between February 10, 2014 and March 21, 2014. To summarize, the
2014 Warning Letter observations require remedial action in four general areas: design control documentation; validation of
software for an on-line calculator; data collection and trending of ICL vault complaints; and shelf life data on the ICL
product. The 2014 Warning Letter provides that, until the Company addresses the deficiencies to the FDA’s satisfaction, the
FDA will not approve premarket applications (“PMAs”) for the Company’s Class III devices where the applications are
reasonably related to the cGMP violations cited in the 2014 Warning Letter.
Beginning on November 14, 2014 and continuing through February 4, 2015, the FDA inspected our Monrovia facility.
On February 4, 2015, at the conclusion of the inspection, the FDA issued the 2015 FDA-483 with ten inspectional observations
(“2015 FDA-483”). The observations focus primarily on the need for adherence to and improved procedures, processes and
documentation relating to design change, design transfer into specifications and production, verification and validation
associated with device design and production, improvement in good documentation practices, and broader environmental
monitoring. STAAR responded to the FDA-483 and is concurrently continuing to develop and implement its corrective action
plans relating to the 2014 Warning Letter and the 2015 FDA-483.
While the PMA supplement remains pending, we cannot predict when, or if, the FDA will grant approval of the TICL
for use in the United States.
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:
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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;
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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;
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 relating to certain drugs, devices, biologics, and medical
supplies 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.
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We have affixed the CE Mark to all of our principal products including ICL and TICL products, IOLs, injector
systems and our AquaFlow Device.
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. If the PMDA 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, they
could take a variety of regulatory or legal actions, similar to the FDA, which could have a material and negative impact on the
Company.
Medical Device Regulation in China and Korea. Sales of our products in China and Korea, as in other countries, are
also subject to regulatory requirements. In China, medical devices such as our ICLs and IOLs require testing by a government
recognized laboratory qualified as a medical device testing center in accordance to Chinese standards. Results from the testing
center, together with registration documents are submitted to the Center for Medical Device Evaluation (CMDE) of the
Chinese FDA (CFDA) for technical evaluation and if accepted, then approval and registration by CFDA. In China, we obtain
registration of our products from CFDA ourselves. In Korea, medical devices such as our ICLs and IOLs require registration
and approval from the Korean Ministry of Food and Drug Safety (MFDS) prior to commercialization. Typically, the MFDA
requires similar documentation as required to obtain a CE Mark. Our distributor in Korea is contractually required to obtain,
with our assistance, the necessary health registrations, governmental approvals or clearances to import, market and sell our
products. We provide our distributor with information and data to obtain appropriate registrations and approvals, and the
distributor obtains such registrations. If the CFDA or MFDS 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, they could take a
variety of regulatory or legal actions in their respective countries, similar to the FDA, which could have a material and negative
impact on the Company.
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
12
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.
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 20 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 2015, we intend 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 $12.4 million, $6.7 million, and $6.4 million for our 2014,
2013, and 2012 fiscal years, respectively. We expect to invest approximately 12% of sales for research and development in
2015. During 2014, research and development expenses increased $5.7 million including $2.2 million for new product
development and increased headcount, $1.8 million for FDA remediation activities, and $1.5 million for the FDA Advisory
Panel meeting related to our PMA Supplement seeking U.S. approval for our Toric ICL. The Company expects to continue its
FDA remediation activities through 2016 and expects to spend approximately $4 million for these activities in 2015.
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
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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 February 10, 2015, we employed approximately 300 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.
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.
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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.
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.
spheric lenses – a spheric lens has surfaces that are shaped like sections of a sphere. The sphere is not an ideal shape
for an optically accurate lens, but spherical surfaces have historically been the simplest lens shape to make. Spheric lenses
have spherical aberrations – small errors in focus that become more pronounced at the edge of the lens When a spheric IOL is
placed in the human eye, these aberrations can reduce night vision and contrast sensitivity.
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.
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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 have a history of losses that could continue in the future.
During 2011, we achieved net income after reporting losses for more than ten years. However, in two of the past three
years we reported losses. 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 $140.4 million as of January 2, 2015. Our ability to fund our
capital requirements out of our available cash and cash generated from our operations depends on a number of factors,
including our ability to continue growing our existing operations. If we cannot continue to generate positive cash flow from
operations, we will have to reduce our costs and try to raise working capital from other sources. These measures could
materially and adversely affect our ability to execute our operations and expand 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 for certain adverse events and device malfunctions, 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, quality system
deficiencies observed at certain of our facilities during prior inspections have led to FDA Warning Letters and delays in
product approvals until we resolved 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
On May 27, 2014, we received the 2014 Warning Letter from the FDA citing alleged violations of current good
manufacturing practice (“cGMP”) regulations that were identified by the FDA during an inspection of the Company’s
manufacturing facility in Monrovia, California between February 10, 2014 and March 21, 2014. To summarize, the 2014
Warning Letter observations require remedial action in four general areas: design control documentation; validation of
software for an on-line calculator; data collection and trending of ICL vault complaints; and shelf life data on the ICL
product.” The 2014 Warning Letter provides that, until the Company addresses the deficiencies to the FDA’s satisfaction, the
FDA will not approve PMAs for the Company’s Class III devices where the applications are reasonably related to the cGMP
violations cited in the Warning Letter.
Beginning on November 14, 2014 and continuing through February 4, 2015, the FDA inspected our Monrovia facility.
On February 4, 2015, at the conclusion of the inspection, the FDA issued a Form FDA-483 with ten inspectional observations.
The observations focus primarily on the need for adherence to and improved procedures, processes and documentation relating
to design change, design transfer into specifications and production, verification and validation associated with device design
and production, improvement in good documentation practices, and broader environmental monitoring.
We timely responded to the 2014 Warning Letter and the 2015 FDA-483 and are continuing to develop and
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implement our corrective action plans related to both of these issuances.
While the PMA supplement remains pending, we cannot predict when, or if, the FDA will grant approval of the TICL
for use in the United States.
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 worldwide, which increases our costs and could
prevent us from selling our products” and “—We are subject to federal and state regulatory investigations.”
The 2014 Warning Letter and the 2015 FDA-483 may adversely impact our operations.
As noted above, we received the 2014 Warning Letter and the 2015 FDA-483, have responded, and continue to
develop and implement our corrective action plans relating to them. There can be no assurance that the FDA will be satisfied
with the Company's response to the 2014 Warning Letter or the 2015 FDA-483. Unless and until STAAR is able to correct
outstanding issues to the FDA's satisfaction, the FDA may withhold approval of new products such as the Toric ICL (TICL). In
addition, the Company may be subject to additional regulatory action by the FDA, including fines, injunctions, warning letters,
consent decrees, prosecution, civil money penalties, repairs, replacements, refunds, recalls or seizures of products, total or
partial suspension of production, the FDA’s refusal to grant future premarket approvals, withdrawals or suspensions of current
products. Any such further action could, ultimately, be significant to our ongoing business and operations.
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. On
March 14, 2014 a FDA Ophthalmic Devices Panel of the Medical Devices Advisory Committee voted favorably in response to
the three questions posed to it by the FDA’s Division of Ophthalmic, Neurological and Ear, Nose and Throat Devices
(regarding the TICL’s safety and effectiveness as well as whether the TICL’s benefits outweigh its risks).
Between February 10, 2014 and March 21, 2014, the FDA inspected our manufacturing facility in Monrovia,
California. On May 27, 2014, we received the 2014 Warning Letter from the FDA citing alleged violations of current good
manufacturing practice (“cGMP”) regulations that were identified by the FDA during the inspection. Between November 14,
2014 and February 4, 2015, the FDA again inspected our manufacturing facility in Monrovia, California. On February 4, 2015,
at the completion of this inspection, the FDA issued the FDA-483 with ten inspectional observations. 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,” “—We are subject to federal and state regulatory investigations,” and “FDA
compliance issues have delayed approvals and we expect to devote significant resources to maintaining compliance in the
future.”
While the PMA supplement remains pending, we cannot predict when, or if, the FDA will grant approval of the TICL
for use in the United States.
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 $1.6
million impact on Japanese yen translated sales for the fiscal year ended January 2, 2015. 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 more 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.
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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 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 2014, sales to our independent distributor in Korea, our second largest market,
declined by 15% compared to 2013, 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. We periodically provide anti-corruption training to relevant employees and distributors. 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 growth
declined globally in 2014, we believe that negative economic conditions have contributed to this decline. 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
highest gross margin product, restricted growth or a decline in its sales could materially harm our business.
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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 2013 and 2014. In
December 2013, the Consumer Affairs Agency of the Japanese government issued an official cautionary warning for
individuals interested in LASIK eyesight correction procedures. We believe this affected the volume of refractive surgery in
Japan in 2014. In Korea in June 2014, a regional television station reported that outcomes from LASIK surgery harmed
patients and significantly lowered their quality of life. A similar program was later broadcast on a national television station in
that country. 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 Korea 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. The results of this study were presented in October 2014 and can be found on the FDA
website. Some of the findings could amplify concerns about complications of laser refractive surgery. While these concerns
could encourage patients and physicians to select the ICL as an alternative, they could also decrease patient interest in all
refractive surgery, including ICL.
We may not realize the expected benefits of our manufacturing consolidation and tax strategies.
Since 2011 we have invested significant resources in manufacturing consolidation and a tax strategy initiative, and we
have invested approximately $6.3 million dollars to complete the consolidation. The goal 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. In June 2014, we completed
transferring ICL manufacturing from Nidau to our Monrovia, California facility, while maintaining manufacturing capabilities
in Nidau. Completion of remaining consolidation may result in disruption to our business and delays in our use of tax loss carry
forwards, which would adversely affect our results. For example, we experienced lower manufacturing yields in Monrovia
than typically experienced in Nidau in the fourth quarter of 2014.
Our manufacturing consolidation exposes us to risk.
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. 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, our manufacturing
consolidation results in our no longer having 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.
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,
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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 endeavor to 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 supplier is limited by their manufacturing capacity constraints, which
may 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 $130.8 million of U.S. federal tax net operating loss carryforwards as of January
2, 2015, 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 2033. 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 in the U.S. 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.
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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, which was the case during fiscal 2014 when we used $8.0 million of our cash for
operations. 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.
Because we manufacture most of our products from a single manufacturing site, if we suffer loss to our Monrovia
facility due to catastrophe, or if our manufacturing sites fail to be in compliance with its regulatory approvals, our
operations could be seriously harmed.
We depend on the continuing operation of our manufacturing facility in Monrovia, California, which is currently our
sole manufacturing facility for ICLs and IOLs. Our Monrovia facility could suffer catastrophic loss due to fire, flood,
earthquake, terrorism or other natural or man-made disasters (including manufacturing challenges) and we would need
resources (personnel and equipment) as well as 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. 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 2014, we contributed $241,000 to our Swiss Plan and made benefit payments of $1.1 million; although we
did not contribute to our Japan Plan, we made benefit payments of $55,000.
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 $3.1 million ($1.0 million for the Japan Plan
and $2.1 million for the Swiss Plan) as of January 2, 2015.
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
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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. We depend on our information technology infrastructure for electronic communications among our
locations around the world and between our personnel and our subsidiaries, customers, and suppliers. We collect and retain
large volumes of internal and customer, vendor and supplier data, including some personally identifiable information, for
business purposes. We also maintain personally identifiable information about our employees. The integrity and protection of
our customer, vendor, supplier, employee and other Company data is critical to our business. The regulatory environment
governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance
with applicable security and privacy regulations may increase our operating costs or adversely affect our business operations.
Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms
of deceiving our team members, contractors and temporary staff. Security breaches could disrupt our operations, and we could
suffer substantial financial damage or loss because of lost or misappropriated information. Despite the security measures we
have in place, our facilities and systems, and those of our suppliers, distributors and customers with which we do business, may
be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming
and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized
disclosure of confidential customer, employee, supplier or Company information, whether by us or by our suppliers,
distributors and customers with which we do business, could result in losses, damage our reputation, expose us to the risks of
litigation and liability, disrupt our operations and have a material adverse effect on our business, results of operations and
financial condition. 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.
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
22
• 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
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, relabeling or correction, 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, the underlying causal issues, 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 or prosecutions.
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
23
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 reportability 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.
Resources devoted to research and development may not yield new products that achieve commercial success.
We spent about 16.5% of our sales on research and development, including FDA-related panel, remediation, and
inspection costs, during the fiscal year ended January 2, 2015. 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.
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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 design, pre-clinical and clinical testing,
clearance or 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.
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.
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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, including any
significant change in design or manufacture, or that would constitute a major change in its intended use, 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.
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, obligated 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 and to wait at least a year following submission of this report to issue revised guidance
for industry on this topic. FDA submitted its report to Congress in January 2014and is expected to issue draft revised guidance
for public comment at some time in the future prior to issuing final guidance for implementation. Until the FDA issues final,
revised guidance to assist device manufacturers in determining when to submit a new 510(k) for a change or modification to a
previously cleared device, manufacturers may continue to adhere to the FDA’s 1997 Guidance on this topic when making this
determination, but the practical impact of the FDA’s continuing and evolving 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.
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 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.
26
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.
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.
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.
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.
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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. Also, several of our patents expire within the next couple
of years, which may expose our technologies to competitors. 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
re-design 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.
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.
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We are generally 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 $8.60 to $19.35 per share
during the year ended January 2, 2015. 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.
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 capabilities, 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 the Company may be 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. The most significant of these actions, proceedings and investigations are described
below. STAAR maintains insurance coverage for product liability and certain securities. Legal proceedings can extend for
several years, and the matters described below concerning the Company are at very early stages of the legal and administrative
29
process. As a result, these matters have not yet progressed sufficiently through discovery and/or development of important
factual information and legal issues to enable the Company to determine whether the proceedings are material to the Company
or to estimate a range of possible loss, if any. Unless otherwise disclosed, the Company is unable to estimate the possible loss
or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine outcomes
of these items, an adverse determination in one or more of these items currently pending could have a material adverse effect
on the Company’s consolidated results of operations, financial position or cash flows.
Securities and Exchange Commission Informal Inquiry
In a letter dated July 3, 2014, the United States Securities and Exchange Commission (“SEC”) advised STAAR that it is
conducting an informal inquiry into compliance with U.S. securities laws. The letter requested documents concerning any FDA
inspections, investigations, observations, noted violations, or warnings since January 1, 2014. The Company is cooperating
with this informal inquiry.
Todd v. STAAR
On July 8, 2014, a putative securities class action lawsuit was filed by Edward Todd against STAAR and three
officers in the federal court located in Los Angeles, California. The plaintiff claims that STAAR made misleading statements to
and omitted material information from our investors between February 27, 2013 and June 30, 2014 about alleged regulatory
violations at STAAR’s Monrovia manufacturing facility. On July 21, 2014, the Company was served with the Complaint.
Although the ultimate outcome of this action cannot be determined with certainty, the Company believes that the allegations in
the Complaint are without merit. The Company intends to vigorously defend against this lawsuit. The Company intends to file
a motion to dismiss the complaint, when appropriate, in the ongoing proceeding. On October 20, 2014, plaintiff amended its
complaint, dismissed two Company officers, added one other officer, and reduced the alleged Class Period to November 1,
2013 to June 30, 2014.
Item 4. Mine Safety Disclosures
None.
30
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 2, 2015
Year ended January 3, 2014
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$
$
11.50 $
13.77
19.35
19.05
16.23 $
13.23
10.51
6.25
8.60
10.03
13.85
14.14
12.41
10.41
5.31
5.20
Holders
As of February 10, 2015, there were approximately 406 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 1, 2010 through January 2, 2015 of the total performance of
the following:
• STAAR Surgical Company;
•
•
the Nasdaq Stock Market;
a peer group we have selected consisting of 10 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); 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 1, 2010 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.
31
Prepared by Zacks Investment Research, Inc. Used with Permission. All rights reserved.
Total Returns Index for Fiscal Years:
STAAR Surgical Company
The Nasdaq Stock Market (US and
Foreign Companies
Proxy Peer Group
2009
100.00
100.00
100.00
2010
196.77
118.02
117.75
2011
338.39
117.02
94.24
2012
187.74
134.80
104.33
2013
519.35
190.51
136.07
2014
291.29
220.35
147.93
Notes:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. This indexes are reweighted daily, using the market capitalization pm the previous trading day.
C.
D. The index level for all series was set to $100.00 on 1/1/2010.
If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
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 2, 2015, January 3, 2014, December 28, 2012, December 30, 2011, and December 31, 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 2, 2015 and January 3, 2014 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 each of the two fiscal years in the periods ended December 30, 2011 and December 31, 2010 and the consolidated balance
sheet data set forth below at December 28, 2012, December 30, 2011, and December 31, 2010, are derived from audited
consolidated financial statements of the Company not included in this Annual Report. The selected consolidated financial data
should be read in conjunction with the consolidated financial statements of the Company, and the Notes thereto, included in
this Annual Report, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
January 2,
2015
January 3,
2014
Fiscal Year Ended
December 28,
2012
(In thousands except per share data)
December 30,
2011
December 31,
2010
Statement of Operations
Net sales
Cost of sales
$
74,987
26,164
$
72,215 $
21,906
63,783 $
19,492
62,765 $
20,396
54,958
19,882
32
Gross profit
48,823
50,309
44,291
42,369
35,076
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 (benefit)
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
Weighted average shares outstanding-basic
Weighted average shares outstanding –diluted
Balance Sheet Data
Working capital
Total assets
Long-term obligations
Stockholders’ equity
$
$
$
$
$
$
$
18,160
25,879
12,363
127
321
(8,027 )
(618 )
(8,645 )
(253 )
(8,392 )
—
(8,392 ) $
16,568
23,888
6,708
203
2,242
700
414
1,114
716
398
15,150
21,281
6,444
—
2,636
(1,220 )
701
(519 )
1,244
(1,763 )
14,932
17,726
5,868
—
1,060
2,783
(79 )
2,704 )
1,356
1,348
—
398 $
—
(1,763 ) $
—
1,348 $
14,778
17,176
5,724
—
—
(2,602 )
(1,079 )
(3,681 )
432
(4,113 )
4,166
53
(0.22 ) $
0.01 $
(0.05 ) $
0.04 $
(0.12 )
(0.22 ) $
0.01 $
(0.05 ) $
0.04 $
(0.12 )
—
$
(0.22 ) $
(0.22 ) $
— $
0.01 $
0.01 $
— $
— $
(0.05 ) $
0.04 $
(0.05 ) $
0.04 $
0.12
(.00 )
(.00 )
38,091
38,091
36,706
38,607
36,253
36,253
35,434
36,878
34,825
34,825
$
28,451
58,911
5,366
37,099
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
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 about any of the following: any projections of earnings, revenue,
sales, profit margins, cash, effective tax rate or any other financial items; the plans, strategies, and objectives of management
for future operations or prospects for achieving such plans; statements regarding new, existing, or improved products,
including but not limited to, expectations for success of new, existing, and improved products in the U.S. or international
markets or government approval of a new or improved products (including the Toric ICL in the U.S.); or commercialization of
new or improved products; the nature, timing and likelihood of resolving issues cited in the FDA’s 2014 Warning Letter or
2015 FDA-483; future economic conditions or size of market opportunities; expected costs of quality system remediation
efforts; expected costs and savings from business consolidation plans and the timetable for those plans; statements of belief,
including as to achieving 2015 growth plans or metrics; expected regulatory activities and approvals, product launches, and
any statements of assumptions underlying any of the foregoing.
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
33
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 2014 Key Operational Metrics
Two principal strategic goals guided STAAR’s key operational metrics in 2014: to lay the groundwork for further
growth and to achieve and maintain profitability. In pursuit of these goals, STAAR aligned its business initiatives during 2014
along five key annual metrics that it used to gauge its performance for the year. These metrics are as follows:
•
•
•
Increase total revenue by 8% to 10%.
-
As discussed below in “—Results of Operations,” our total revenue increased by 3.8% for the full year of 2014.
Increase ICL Sales by 20% for the full year.
- As discussed below in “—Results of Operations,” ICL sales declined by 0.2% for the full year.
Increase gross profit margins by 300 basis points to 72.7% for the full year.
- As discussed below in “—Results of Operations,” gross profit margin decreased by 460 basis points to 65.1% for
the full year.
• Achieve profitability on a GAAP basis for the full year.
- As discussed below in “—Results of Operations,” we reported a net loss of $8.4 million for the full year.
• Manage the manufacturing consolidation with no material disruption to customer supply requirements or quality.
- We completed the planned transfer of manufacturing from our Nidau, Switzerland location, completing the
consolidation of our international manufacturing sites. We maintain manufacturing capability at that location.
We are currently experiencing manufacturing challenges in Monrovia that is causing product backlogs for ICLs
and we are addressing the matter.
Other Highlights
General
In 2014, total ICL sales declined 0.2% primarily due to backorders. Backorders were the result of manufacturing
challenges in the Monrovia facility that we are addressing. Also, we implemented a voluntary hold on over 2,000 ICLs from
shipment at the end of the quarter. The impact of these manufacturing challenges in the fourth quarter of 2014 was
approximately $1.0 million. We expect to reduce the backlog to customary levels by the end of the second quarter of 2015.
Increased ICL sales in 8 out of 12 of the Company’s focused markets were offset by decreases in Korea, the U.S., and Japan.
Negative media attention in Korea regarding refractive procedures – primarily LASIK – decreased the demand for refractive
procedures generally and the extent of that impact is currently uncertain. In 2014, total IOL sales increased 0.8% due to
increased sales of acrylic preloaded IOLs largely offset by lower silicone IOL sales (including preloaded silicone) in Japan, the
U.S., and China, and lower collamer IOL sales in the U.S. Total sales of our other product category increased, primarily due to
an increase in preloaded injector parts sold to a third party manufacturer. Changes in foreign currency negatively impacted
total sales by approximately $1.6 million. Gross profit decreased 3.0% due to decreased ICL sales, high manufacturing costs
due to the transition of manufacturing from Switzerland to the U.S., and higher inventory provisions.
The Company has generally been able to maintain the average selling prices for its products in the face of downward
pricing pressure in the healthcare industry. Global economic conditions may continue to negatively impact the number of
refractive procedures performed.
34
We expect revenue growth over the next 12 months and a related positive impact on gross margin and earnings. This
growth is expected to be driven primarily by increased sales of our ICL and preloaded acrylic IOL products. In addition, we
expect continued investment in our quality systems and research and development. We expect sales of lower margin injector
parts to continue to our lens supplier for their preloaded injector which they sell under their own brand. We will continue our
focus on prudently managing our business and delivering solid financial results, while at the same time striving to continue to
introduce new products to the market. Finally, we will continue to evaluate opportunities to acquire new product lines,
technologies and companies.
Product development activities are inherently uncertain, and there can be no assurance that we will be able to obtain
approval for any of our products, or if we obtain approval that we will successfully commercialize any of our products.
We completed the planned transfer of manufacturing from our Nidau, Switzerland location to Monrovia, California.
In December 2014, the FDA approved STAAR’s PMA Supplement regarding its calculator software for the ICL, which
enables physicians to calculate lens power and length as well as place lens orders with STAAR. In November 2014, the China
Food and Drug Administration (CFDA) issued an Approved Certification, which finalized the approval process for our Visian
ICL with CentraFLOW technology for marketing and sale in China. As a business in a highly regulated and competitive
industry, we face many risks and challenges. You should refer to the discussion in Item 1A, “Risk Factors” in Part I of this
Annual Report for further discussion of risks related to our business.
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 2014,
global sales of the ICL products represented approximately 59% 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 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 2014,
ICL with CentraFLOW technology received regulatory approval in Japan and China. 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
35
for the Toric ICL to the FDA on April 28, 2006. In March 2014, we received favorable votes by FDA Ophthalmic Devices
Panel of the Medical Devices Advisory Committee regarding the TICL’s safety and effectiveness. In May 2014, we received a
Warning Letter from the FDA citing alleged violations of current good manufacturing practice (“cGMP”) regulations that were
identified by the FDA during an inspection of the Company’s manufacturing facility in Monrovia, California. We continue to
devote considerable resources to addressing the issues raised in the still-outstanding 2014 Warning Letter and 2015 FDA-483.
During 2014, we spent approximately $1.8 million on our remediation efforts and expect this to increase to approximately $4
million in 2015 and that these efforts will continue into 2016. 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.
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. We continued development of our preloaded ICL product, which received CE
Mark in 2014, but requires additional design work prior to transferring to production.
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 2014.
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 expect demand to remain high. After several quarters where our third-party acrylic lens supplier could not
manufacture sufficient quantity of lenses to satisfy demand, over the last two quarters of 2014, they have met demand. We
expect them to meet demand in 2015. In the first quarter of 2015, our third party acrylic lens supplier identified higher than
expected reject rates with our injectors, manufactured for us by a third party injector manufacturer, used for the pre-loaded KS-
SP product line. We anticipate that this issue will impact our sales of injectors to our third party acrylic lens supplier during
the first quarter of 2014. We are still exploring the matter to determine the extent of exposure, if any. Base on the information
we have believe this matter is isolated and is not material to our 2014 financial statements.
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 expand sales of the preloaded acrylic IOL in Europe through increased sales and marketing activities
and entering new markets; 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 and Tax Strategy. Since 2011, STAAR devoted significant resources to two initiatives:
to consolidate global manufacturing, and to optimize our global organization for tax purposes. The goal of these strategies is to
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 $130.8 million in net operating loss carryforwards, and at the same time, reduce income taxes in foreign
jurisdictions where we pay tax.
In December 2012, the Company began manufacturing the first ICLs in the U.S., whereas they were previously
exclusively manufactured in Switzerland. In 2014, we ceased manufacturing ICLs in our Swiss facility, and all ICLs are
manufactured in the U.S. Our manufacturing consolidation, 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 $6.3 million on its manufacturing consolidation initiatives over a three and a half-
year period and spent approximately $0.3 million during 2014. Expenditures to date have largely consisted of severance,
employee costs, and professional fees to advisors and consultants.
36
In addition, as STAAR’s profitability grows outside the U.S., 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 $130.8 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.
Manufacturing the ICL is a complex process, and 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. Challenges in manufacturing the ICL, such as we are
currently experiencing, causes delays in filling orders, which 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. We continue to address our manufacturing challenges in our Monrovia facility and expect to reduce the backlog to
customary levels by the end of the second quarter of 2015. If we cannot resolve our manufacturing challenges during the first
two quarters of 2015, our financial results may be adversely impacted.
Status of U.S. TICL Submission.
Regarding our PMA Supplement submission to the FDA seeking approval of the TICL, on March 14, 2014, a FDA
Ophthalmic Devices Panel of the Medical Devices Advisory Committee voted favorably in response to the three questions
posed to it by the FDA’s Division of Ophthalmic, Neurological and Ear, Nose and Throat Devices (regarding the TICL’s safety
and effectiveness as well as whether the TICL’s benefits outweigh its risks). The FDA has not provided us with a timeline for
follow-up after the advisory panel meeting regarding a timeline for a decision on the PMA Supplement for the TICL, which
has remained pending for over eight years. While the PMA supplement remains pending, we cannot predict when, or if, the
FDA will grant approval of the TICL for use in the United States.
As discussed in Item IA, “Risk Factors” under the heading – “FDA compliance issues have delayed approvals and we
expect to devote significant resources to maintaining compliance in the future,” on May 27, 2014, we received the 2014
Warning Letter from the FDA citing alleged violations of current good manufacturing practice (“cGMP”) regulations that were
identified by the FDA during an inspection of the Company’s manufacturing facility in Monrovia, California between February
10, 2014 and March 21, 2014. To summarize, the 2014 Warning Letter observations require remedial action in four general
areas: design control documentation; validation of software for an on-line calculator; data collection and trending of ICL vault
complaints; and shelf life data on the ICL product. The 2014 Warning Letter provides that, until the Company addresses the
deficiencies to the FDA’s satisfaction, the FDA will not approve PMAs for the Company’s Class III devices where the
applications are reasonably related to the cGMP violations cited in the Warning Letter. On October 15, 2014 we responded to
questions from the FDA regarding the method used to select ICL power and length. Beginning on November 14, 2014 and
continuing through February 4, 2015, the FDA inspected our Monrovia facility. On February 4, 2015, at the conclusion of the
inspection, the FDA issued the 2015 FDA-483 with ten inspectional observations. The observations focus primarily on the
need for adherence to and improved procedures, processes and documentation relating to design change, design transfer into
specifications and production, verification and validation associated with device design and production, improvement in good
documentation practices, and broader environmental monitoring. It is unclear whether the 2014 Warning Letter or 2015 FDA-
483 will ultimately impact the timing of a potential TICL approval.
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.
37
Percentage of Net Sales
Net sales
Cost of sales
Gross profit
General and administrative
Marketing and selling
Research and development
Medical device tax
January 2,
2015
100.0 %
34.9 %
65.1 %
24.2 %
34.5 %
16.5 %
0.2 %
January 3,
2014
December 28,
2012
100.0 %
30.3 %
69.7 %
22.8 %
33.1 %
9.3 %
0.3 %
100.0 %
30.6 %
69.4 %
23.7 %
33.4 %
10.1 %
- %
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)
0.4 %
(10.7 ) %
(0.8 ) %
(11.5 ) %
(0.3 ) %
(11.2 ) %
3.1 %
1.1 %
0.7 %
1.8 %
1.0 %
0.8 %
4.1 %
(1.9 )%
1.1 %
(0.8 )%
2.0 %
(2.8 )%
* Denotes change is greater than 100%
Net Sales
Percentage Change
2014 vs.
2013
2013 vs.
2012
13.2 %
12.4 %
13.6 %
(9.4 ) %
(12.3 ) %
(4.1 ) %
*
14.9 %
*
(40.9 )%
*
42.4 %
*
3.8 %
19.4. %
(3.0 )%
9.6 %
8.3 %
84.8 %
(37.4 )%
(85.7 )%
*
*
*
*
*
The following table presents our net sales, by product, for the fiscal years presented (dollars in thousands):
ICL
IOL
Core Product Sales
Other
Total Sales
58.7%
32.5%
91.2%
8.8%
100.0%
2014
$ 44,047
24,336
68,383
6,604
$ 74,987
% of
Total
61.2%
33.4%
94.6%
5.4%
100.0%
2013
$ 44,128
24,153
68,281
3,934
$ 72,215
% of
Total
55.0%
40.7%
95.7%
4.3%
100.0%
2012
$ 35,080
25,971
61,051
2,732
$ 3,783
Net sales for 2014 were $75.0 million, a 3.8% increase over the $72.2 million reported in fiscal 2013. The increase in
net sales was due to an increase in other product sales. Changes in foreign currency negatively impacted net sales by $1.6
million.
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.
Total ICL sales for 2014 were $44.0 million, a 0.2% decrease from $44.1 million reported for fiscal 2013. ICL sales
increases in 8 out of 12 of the Company’s focused markets were offset by decreases in Korea, the US, and Japan. Changes in
foreign currency negatively impacted ICL sales by approximately $0.1 million. ICL sales represented 58.7% of our total sales
for fiscal year 2014.
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 61.2% of our total
sales for fiscal 2013. Toric ICL sales represented 47% of total ICL sales, where approved.
Total IOL sales were $24.3 million for fiscal 2014, an increase of 0.8% over the $24.2 million reported in fiscal 2013.
The increase is due to increased sales of acrylic preloaded IOLs largely offset by lower silicone IOL sales (including preloaded
38
silicone) in Japan, the US, and China, and lower collamer IOL sales in the US. Changes in foreign currency negatively
impacted IOL sales by approximately $1.1 million. IOL sales represented 32.5% of our total sales for fiscal year 2014.
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.
Other product sales for the year ended January 2, 2015 were $6.6 million, a 67.9% increase compared to the $3.9
million reported for the year ended January 3, 2014. 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. Changes in foreign currency negatively
impacted other product sales by approximately $0.4 million. Other product sales represented 8.8% of our total sales for fiscal
year 2014.
Other product sales 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% of the Company’s total sales in fiscal 2013.
Gross Profit
The following table presents our gross profit and gross profit margin for the fiscal years presented (dollars in
thousands):
Gross Profit
Gross Profit Margin
2014
$48,823
65.1%
2013
$50,309
69.7%
2012
$44,291
69.4%
Gross profit for the year ended January 2, 2015 was $48.8 million, a 3.0% decrease compared to the $50.3 million
reported for the year ended January 3, 2014. Gross profit margin decreased to 65.1% for the year, compared to 69.7% last
year. The decrease in gross profit and gross profit margin is due to an increase in inventory reserves primarily related to Toric
ICL inventory that was built in Switzerland in preparation for the U.S. launch. The reserves were recorded in accordance with
Company policies regarding the timing of reserves for expiring inventory and projections for the timing and amount of sales
during the same period. In addition, gross profit and gross profit margin decreased due to increased ICL manufacturing cost
and an increased mix of low margin injector part sales. 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.
General and Administrative Expense
The following table presents our general and administrative expense for the fiscal years presented (dollars in
thousands):
General and Administrative Expense
Percentage of Sales
2014
$18,160
24.2%
2013
$16,568
22.8 %
2012
$15,150
23.7%
General and administrative expense for the year ended January 2, 2015 was $18.2 million, a 9.6% increase compared
to the $16.6 million reported for the year ended January 3, 2014. The increase in expense is due to increased consulting
expense, legal fees, depreciation expense, and salaries and travel, partially offset by a decrease in stock based compensation.
General and administrative 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.
39
Marketing and Selling 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
2014
$25,879
34.5%
2013
$23,888
33.1 %
2012
$21,281
33.4%
Marketing and selling expense for the year ended January 2, 2015 was $25.9 million, an 8.3% increase compared to
the $23.9 million reported for the year ended January 3, 2014. The increase in expense is due to increased trade show expense,
online marketing expense, compensation and advertising and promotions.
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.
Research and Development Expense
The following table presents our research and development expense for the fiscal years presented (dollars in
thousands):
Research and Development Expense
Percentage of Sales
2014
$12,363
16.5%
2013
2012
$6,708
9.3%
$6,444
10.1%
Research and development expense for the year ended January 2, 2015 was $12.4 million, an 84.3% increase
compared to the $6.7 million reported for the year ended January 3, 2014. The increase is due to FDA panel and remediation
expenses of $3.3 million and increased headcount and new product development expenses. The Company expects its
remediation efforts to continue through 2016 and estimates it will incur costs of approximately $4 million in 2015 related to
these activities.
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 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.
Other General and Administrative Expenses
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
2014
2013
$321
0.4%
$2,242
3.1%
2012
$2,636
4.1%
Other general and administrative expenses in fiscal 2014 of $0.3 million compared with $2.2 million in fiscal 2013
represent costs associated with the Company’s consolidation of its manufacturing operations. During 2014, the Company
completed the consolidation of Nidau, Switzerland manufacturing to the U.S.
40
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.
Other Income (Expense), Net
The following table presents our other income (expense), net for the fiscal years presented (dollars in thousands):
Other Income (Expense), net
Percentage of Sales
2014
2013
$(618)
(0.8)%
$414
0.7%
2012
$701
1.1%
Other expense for the year ended January 2, 2015 was $0.6 million, compared to the $0.4 million of other income
reported for the year ended January 3, 2014, and $0.7 million of other income for the year ended December 28, 2012. The
change in other income and expense is due primarily to exchange losses recorded during the period compared to exchange
gains reported in the same period last year.
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)
Interest income
Interest expense
Exchange gains (losses)
Royalty income
Fair value adjustment of warrants(2)
Other
Net change in other income (expense), net
2014 v. 2013
$ (8)
2013 v. 2012
$ —
121
(72)
85
(308)
(113)
$ (287)
16 (1)
(935)
(67)
—
(38)
$ ( 1,032)
(1) Decrease in interest expense is due to the fulfillment of certain capital lease obligations.
(2) 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.
Provision (Benefit) for Income Taxes
The following table presents our provision (benefit) for income taxes for the fiscal years presented (in thousands):
Provision (Benefit) for Income Taxes
2014
$(253)
2013
$716
2012
$1,244
The provision for income taxes decreased from fiscal 2013 to fiscal 2014, primarily due to us recording tax benefits of
$1.4 million during the fourth quarter of 2014 principally generated from our Swiss operations. These benefits were recorded
after finalizing ongoing discussions with the Swiss tax authorities, or the STA, in connection with the completion of the
Company’s manufacturing consolidation project, which had been in progress since 2012 and completed in June 2014. These
discussions included, among other things, the approval of a special Swiss tax ruling available to certain qualified companies
doing business in Switzerland as a foreign operator, as defined by the STA. These discussions also included an agreement with
the STA to consolidate the financial results of a foreign entity solely for Swiss income tax purposes, previously not taxable by
the STA, to become subject to Swiss tax law. During the fourth quarter of 2014, we were advised by the STA that we had met
their qualifications for 2014. This ruling will reduce our Swiss effective income tax rate commencing in 2015.
The provision for income taxes decreased from fiscal 2012 to fiscal 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.
41
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 lines 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 $4 million approximate cost in 2015 associated with our
2014 FDA Warning Letter and 2015 FDA-483 remediation efforts. Although we do anticipate these costs will continue into
2016, we cannot currently estimate the amount but will update as more information is available. 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.”
Our financial condition for each of the years indicated included the following (in millions):
Cash and cash equivalents
Current assets
Current liabilities
Working capital
$
$
2014
13.0
44.9
16.4
$
28.5
2013
$ 22.9
$ 50.1
18.4
$ 31.7
2012
$ 21.7
$ 44.1
17.9
$ 26.2
2014 v. 2013
(9.9)
(5.2)
(2.0)
(3.2)
$
$
$
2013 v. 2012
$
$
$
1.2
6.0
0.5
5.5
Overview of changes in cash and cash equivalents and other working capital accounts.
Net cash used by operating activities was $8.0 million for fiscal year 2014 compared to cash provided by operating
activities of $3.4 million, and $3.2 million for fiscal years 2013 and 2012, respectively. For 2014, net cash used in operating
activities consisted of $8.4 million net loss, $6.2 million used for working capital and offset by non-cash operating activities of
$6.7 million. 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.
Net cash used in investing activities was $4.1 million, $3.4 million, and $2.1 million, for fiscal years 2014, 2013, and
2012, respectively, and relate primarily to the acquisition of property, plant and equipment. The increase in investment in
property, plant and equipment during 2014, relative to 2013 was due to the investments made in connection with the relocation
of all manufacturing to the Company’s Monrovia, CA facility. The increase in investment in property, plant and equipment
during 2013, relative to 2012, 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 $2.5 million, $2.4 million, and $4.3 million for fiscal years 2014, 2013,
and 2012, respectively. For 2014, net cash provided by financial activities consisted of $0.5 million in repayment of capital
lease obligations and $3.0 million of proceeds from exercise of stock options. 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.
Accounts receivable was $11.1 million as of January 2, 2015 and $10.7 million as of January 3, 2014 Days’ Sales
Outstanding (“DSO”) was 54 days in 2014 and 55 days in 2013.
42
Inventories at the end of fiscal 2014 and 2013 were $15.7 million and $12.5 million, respectively. Days’ inventory on
hand (“DOH”) was 155 days in 2014 and 159 days in 2013 for finished goods, including consignment inventory.
Shelf Registration
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.
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 $4.2 million based on the
rate of exchange on January 2, 2015), at an interest rate equal to the Tokyo short-term prime interest rate (approximately 1.10%
as of January 2, 2015) and may be renewed annually (the current line expires on March 30, 2015). 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 2015. The Company had 500,000,000 Yen outstanding on the line
of credit as of January 2, 2015 and January 3, 2014, (approximately $4.2 million and $4.8 million based on the foreign
exchange rates on January 2, 2015 and January 3, 2014, respectively) which approximates fair value due to the short-term
maturity and market interest rates of the line of credit. As of January 2, 2015, 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) ($1.0 million
at the rate of exchange on January 2, 2015), 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
2, 2015 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 lines of credit as of January 2, 2015.
Contractual Obligations
The following table represents the Company’s known contractual obligations as of January 2, 2015 (in thousands):
Payments Due by Period
43
Contractual Obligations
Line of credit
Capital lease obligations
Operating lease obligations
Pension benefit payments
Severance
Open purchase orders
Total
Critical Accounting Policies
Total
1 Year
$
$
4,150 $
934
3,849
1,607
180
472
11,192 $
4,150 $
442
1,368
135
40
472
6,607 $
2-3
Years
4-5
Years
More
Than
5 Years
— $
492
1,581
310
140
—
2,523 $
— $
—
656
228
—
—
884 $
—
—
244
934
—
—
1,178
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.
• 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 its routine
revenue recognition policies as disclosed above 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 Accounting Standards Codification (“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 goods 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 consolidated 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.
44
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 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
45
•
•
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.
• 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 benefits, 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
46
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 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 ASC 715 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. 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.
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 hedge transactions to offset changes in foreign currency.
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 2, 2015, STAAR had $4.2 million of foreign debt. Our $4.2 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 2, 2015).
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 $42,000.
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.
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,
47
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.
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 2, 2015, 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 2, 2015 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.
48
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of January 2,
2015, based on the criteria for effective internal control described in Internal Control — Integrated Framework (2013) 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 2, 2015.
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’ internal control over financial reporting as of January 2, 2015,
based on criteria established in Internal Control – Integrated Framework (2013) 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 the effectiveness 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 company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, 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 2, 2015, 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 2, 2015 and January 3, 2014, 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 2, 2015 and our report dated March 13, 2015 expressed an unqualified opinion
thereon.
/s/ BDO USA, LLP
Costa Mesa, California
March 13, 2015
Item 9B. Other Information
49
Compensatory Arrangements of Certain Officers:
The Compensation Committee engaged the Radford group as its compensation consultant to evaluate our
compensation structure. On March 6, 2015, as part of the annual executive performance review process, our Compensation
Committee recommended, and the Board of Directors awarded, the following 2015 salaries and bonus targets of certain
executives: Stephen Brown, Vice President and Chief Financial Officer, 2015 salary of $314,150, and bonus target of 45%,
Samuel Gesten, Vice President and General Counsel, 2015 salary of $332,690, and bonus target of 45%, Robin Hughes, Vice
President, Research & Development and Clinical, 2015 salary of $334,750, and bonus target of 40%, and James Francese, Vice
President, Marketing, 2015 salary of $276,040, and bonus target of 40%. The Board of Directors did not change Ms. Mason’s
compensation, which is set forth in the Employment Agreement attached as an exhibit to a Form 8-K filed with the
Commission on March 3, 2015.
50
PART III
Item 10. Directors, 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 for the 2015 annual meeting of stockholders (the “Proxy Statement”) to
be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended January 2, 2015.
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.
51
Item 15. Exhibits and Financial Statement Schedules
We have filed the following documents as part of this Annual Report on Form 10-K:
PART IV
(1) 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 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
(2)
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-36
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
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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)
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)
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)
Amendment No. 1 to Standard Industrial/Commercial Multi-Tenant Lease dated January 3, 2003, by and
between the Company and California Rosen LLC.(7)
10.9
10.10
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)
10.11
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)
†10.12
10.13
Form of Indemnification Agreement between the Company and certain officers and directors.(9)
Standard Industrial/Commercial Multi Tenant Lease — Gross dated October 6, 2005, entered into between
the Company and Z & M LLC.(11)
10.14
Warrant Agreement between STAAR Surgical Company and Broadwood Partners, L.P., dated December 14,
2007.(12)
†10.15
Amended and Restated Executive Employment Agreement by and between the Company and Barry G.
Caldwell, dated December 31, 2008.(13)
†10.16
Employment Agreement effective November 22, 2002 by and between the Company and Deborah
Andrews.(14)
†10.17
Letter of the Company dated April 11, 2007 to Deborah Andrews, Vice President and Chief Financial
Officer, regarding compensation.(14)
52
10.18
10.19
10.20
Credit Agreement between STAAR Japan Inc. and Mizuho Bank Inc., dated October 31, 2007.(15)
Amended Credit Agreement between STAAR Japan Inc. and Mizuho Bank Ltd., dated June 30, 2009.(15)
Basic Agreement on Unsterilized Intraocular Lens Sales Transactions between Canon Staar Co., Inc. and
Nidek Co., Ltd., dated May 23, 2005.(16)
10.21
Basic Agreement on Injector Product Sales Transactions between Canon Staar Co., Inc. and Nidek Co., Ltd.,
dated May 23, 2005.(16)
10.22
Memorandum of Understanding Concerning Basic Agreements for Purchase and Sale between STAAR Japan
Inc. and Nidek Co., Ltd., dated December 25, 2008.(16)
10.23
Acrylic Preset supply Warranty Agreement between STAAR Japan Inc. and Nidek Co., Ltd., dated
December 25, 2008.(16)
10.24
Framework Agreement for Loans between Credit Suisse and STAAR Surgical AG, dated August 12, 2010.
(17)
†10.25
†10.26
10.27
Form of Executive Severance Agreement.(18)
Form of Executive Change In Control Agreement.(18)
Standard Industrial/Commercial Single – Tenant Lease – Net dated August 17 , 2012, by and between the
Company and Pacific Equity Partners, LLC.(19)
†10.28
Letter of the Company dated March 27, 2012 to Samuel Gesten, Vice President and General Counsel,
regarding compensation.(21)
†10.29
Letter of the Company dated August 10, 2012 to James Francese, Vice President, Global Marketing,
regarding compensation. (21)
10.30
Amended Credit Agreement between STAAR Japan Inc. and Mizuho Bank Ltd., dated December 28, 2012.
(21)
†10.31
Amendment No. 2 to Amended and Restated Executive Employment Agreement by and between the
Company and Barry G. Caldwell, dated December 7, 2012. (21)
†10.32
Letter of the Company dated May 8, 2007 to Robin S. Hughes, Vice President of Marketing, regarding
compensation. (21)
†10.33
Letter of the Company dated August 7, 2013 to Stephen Brown, Vice President of Finance, and Chief
Financial Officer, regarding compensation.(20)
10.34
10.35
**Amendment Agreement between STAAR Surgical AG and Nidek Co., Ltd., dated April 11, 2014.(23)
Separation Agreement and General Release by and between the Company and Barry G. Caldwell, dated
October 1, 2014 (10)
†10.36
Employment Agreement effective March 1, 2015 by and between the Company and Caren Mason, dated
March 1, 2015. (22)
14.1
21.1
23.1
31.1
31.2
32.1
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.*
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
*
**
†
#
(1)
(2)
(3)
(4)
(5)
(6)
Filed herewith.
Portions of this exhibit were omitted pursuant to an order granting confidential treatment dated August 25, 2014.
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 Current Report on Form 8-K as filed on June 11, 2014.
Incorporated by reference from the Company’s Current Report on Form 8-K as filed on June 11, 2014.
Incorporated by reference to the Company’s Proxy Statement for its Annual Meeting of Stockholders held on May 29,
1998, as 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 Quarterly Report on Form 10-Q for the period ended July 4, 2014, as filed
on July 31, 2014.
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 29, 2000, as
53
(7)
(8)
(9)
(10)
(11)
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 8K as filed on October 7, 2014.
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 as filed on December 17, 2007.
(12)
(13) Incorporated by reference to the Company’s Current Report on Form 8-K as filed on January 8, 2009.
Incorporated by reference to the Company’s Current Report on Form 8-K as filed on October 1, 2009.
(14)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended October 2, 2009, as
(15)
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 as filed
on March 11, 2011.
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 as filed on August 23, 2012.
Incorporated by reference to the Company’s Current Report on Form 8-K as 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.
Incorporated by reference to the Company’s Current Report on Form 8-K as filed on March 3, 2015.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended April 4, 2014, as
filed on May 13, 2014.
(22)
(23)
(19)
(20)
(18)
(21)
(17)
(16)
54
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 13, 2015
STAAR SURGICAL COMPANY
By: /s/ Caren Mason
Caren Mason
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/ Caren Mason
Caren Mason
/s/ Stephen P. Brown
Stephen P. Brown
/s/ Mark B. Logan
Mark B. Logan
/s/ Richard A. Meier
Richard A. Meier
/s/ John C. Moore
John C. Moore
/s/ Louis E. Silverman
Louis E. Silverman
/s/ Charles Slacik
Charles Slacik
President, Chief Executive Officer and Director
March 13, 2015
(principal executive officer)
Vice President, Chief Financial Officer
(principal accounting and financial officer)
March 13, 2015
Chairman of the Board, Director
March 13, 2015
Director
Director
Director
Director
March 13, 2015
March 13, 2015
March 13, 2015
March 13, 2015
F-0
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 2, 2015, January 3, 2014, and December 28, 2012
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at January 2, 2015 and January 3, 2014
Consolidated Statements of Operations for the years ended January 2, 2015, January 3, 2014, and December 28,
2012
Consolidated Statements of Comprehensive Income (Loss) for the years ended January 2, 2015, January 3,
2014, and December 28, 2012
Consolidated Statements of Stockholders’ Equity for the years ended January 2, 2015, January 3, 2014, and
December 28, 2012
Consolidated Statements of Cash Flows for the years ended January 2, 2015, January 3, 2014, and December
28, 2012
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-36
F-1
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 2, 2015 and January 3, 2014 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 2, 2015. 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 2, 2015 and January 3, 2014, and the results of
their operations and their cash flows for each of the three years in the period ended January 2, 2015, 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 2, 2015, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated March 13, 2015 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Costa Mesa, California
March 13, 2015
F-2
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, 2015 and January 3, 2014
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:
2014
2013
(In thousands, except
par value amounts)
$ 13,013 $
11,054
15,717
4,517
596
44,897
10,066
870
1,786
695
597
58,911 $
$
$
4,150 $
6,620
301
399
4,976
16,446
468
1,704
115
3,079
21,812
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
Common stock, $0.01 par value; 60,000 shares authorized: 38,429 and 37,911 shares
issued and outstanding at January 2, 2015 and January 3, 2014, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
384
178,232
(1,070 )
(140,447 )
37,099
$ 58,911 $
379
170,246
282
(132,055 )
38,852
61,931
The accompanying notes are an integral part of these consolidated financial statements.
F-3
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 2, 2015, January 3, 2014, and December 28, 2012
2014
2013
(In thousands,
except per share amounts)
2012
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 (loss) on foreign currency transactions
Other income, net
Other income (expense), net
Income (loss) before provision (benefit ) for income taxes
Provision (benefit ) for income taxes
Net income (loss)
Net income (loss) per share – basic
Net income (loss) per share – diluted
Weighted average shares outstanding – basic
Weighted average shares outstanding – diluted
$
$
$
$
74,987 $
26,164
48,823
18,160
25,879
12,363
127
321
(8,027 )
51
(154 )
(896 )
381
(618 )
(8,645 )
(253 )
(8,392 ) $
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 $
(0.22 ) $
(0.22 ) $
0.01 $
0.01 $
38,091
38,091
36,706
38,607
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 )
36,253
36,253
The accompanying notes are an integral part of these consolidated financial statements.
F-4
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended January 2, 2015, January 3, 2014, and December 28, 2012
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 loss
Comprehensive loss
2014
2013
(In thousands)
2012
$
(8,392 ) $
398 $
(1,763 )
(955 )
(397 )
(1,352 )
(9,744 ) $
(1,327 )
29
(1,298 )
(900 ) $
(689 )
(136 )
(825 )
(2,588 )
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended January 2, 2015, January 3, 2014, and December 28, 2012
(In thousands)
Common
Stock
Shares
Common
Stock
Par
Value
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income
(AOCI)
Retained
Earnings
(Accumulated
Deficit)
Total
—
—
324
—
58
361 $
—
—
3
—
—
157,382 $
—
—
1,511
3,358
—
2,405 $
—
(825 )
(130,690 ) $
(1,763 )
—
—
—
—
—
—
—
36,423
—
364
—
162,251
—
1,580
—
(132,453 )
398
—
—
—
(1,298 )
645
7
3,279
—
Balance, at December 30,
2011
36,041 $
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
Net loss
Other comprehensive loss
Common stock issued upon
exercise of options
Common stock issued upon
cashless exercise of options
127
Stock-based compensation
Unvested restricted stock
Vested restricted stock
(341 )
275
485
—
341
17
5
—
3
—
37,911
—
—
379
—
—
457
4
1
(3 )
3
(5 )
4,721
—
—
170,246
—
—
3,018
(1 )
4,969
—
—
—
—
—
—
—
—
—
—
—
—
282
—
(1,352 )
(132,055)
(8,392 )
—
—
—
—
—
—
—
—
—
—
—
29,458
(1,763 )
(825 )
1,514
3,358
—
31,742
398
(1,298 )
3,286
—
4,721
3
—
38,852
(8,392 )
(1,352 )
3,022
—
4,969
(3 )
3
Balance, at January 2, 2015
38,429 $
384 $
178,232 $
(1,070 ) $
(140,447 ) $
37,099
The accompanying notes are an integral part of these consolidated financial statements
F-6
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 2, 2015, January 3, 2014, and December 28, 2012
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
$
2014
2013
2012
(In thousands)
398 $
(8,392 ) $
(1,763 )
operating activities:
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 returns and bad debts
Changes in working capital:
Accounts receivable trade, net
Inventories, net
Prepaids, deposits and other current assets
Accounts payable
Other current liabilities
Net cash provided by (used in) by operating activities
Cash flows from investing activities:
Acquisition 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 (decrease) in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
$
2,078
382
(841 )
—
194
—
4,663
3
182
(934 )
(3,943 )
(1,062 )
972
(1,253 )
(7,951 )
(4,054 )
—
—
(4,054 )
—
(490 )
3,022
2,532
(468 )
(9,941 )
22,954
13,013 $
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
The accompanying notes are an integral part of these consolidated financial statements
F-7
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2, 2015, the Company’s significant subsidiaries consisted of:
•
STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland that markets and distributes ICLs
and Preloaded IOLs.
STAAR Japan, a wholly owned subsidiary that markets and distributes Preloaded IOLs and ICLs.
•
• STAAR Surgical Cayman, Inc., a wholly owned subsidiary formed to develop, maintain, and own
intellectual property underlying the Company’s products marketed, distributed, and sold worldwide,
excluding the Americas.
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 2014 is based on a 52-week period, fiscal year 2013 is based on a 53-week
period, and fiscal year 2012 is based on a 52-week period.
Foreign Currency
The functional currency of the Company’s Japanese subsidiary is the Japanese yen. The functional currency of the
Company’s Swiss subsidiary, STAAR Surgical AG, is the U.S. Dollar.
Assets and liabilities of the Company’s Japanese subsidiary 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 2014, 2013, and 2012, the net foreign translation losses were $955,000, $1,327,000,
and $689,000, respectively, and net foreign currency transaction gains (losses), included in the consolidated statements of
operations under other income (expense) were, (896,000), $39,000, and $111,000, 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
F-8
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 2, 2015 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).
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 above 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 as contra-inventory, until the finished goods 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
consolidated 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.
F-9
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash
equivalents. The Company maintains cash deposits with major banks which from time to time may exceed federally insured
limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is
minimal.
Concentration of Credit Risk 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 2, 2015, there were two customers with trade receivables balances that represented 10% or more of consolidated
trade receivables. As of January 3, 2014 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% of the Company’s consolidated net sales in fiscal 2013 and 2012 and 9% in
2014.
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 (Accounting Standards
Codification 820-10-50):
• 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. Inventories also include
deferred margins for certain injector parts described under the revenue recognition policy. 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.
F-10
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated useful lives of assets are as follows:
Machinery and equipment
Furniture and equipment
Computer and peripherals
Leasehold improvements
5-10 years
3-7 years
2-5 years
(a)
(a) The estimated useful life of leasehold improvements are the shorter of the useful life of the asset or the term of
the associated leases.
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 2014
and 2013, the Company performed its annual impairment test and determined that its goodwill was not impaired. As of
January 2, 2015 and January 3, 2014, 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. The Company 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 2, 2015 and 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 economic benefits
realized 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 $2.8 million, $2.1 million and $1.8 million for 2014, 2013 and 2012, 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.
F-11
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 (loss). 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 Board, 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
F-12
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
after calculating the total financial performance for fiscal year 2014, 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.
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
accumulated other comprehensive income (loss) attributable to the Company for the years ended January 2, 2015, January 3,
2014, and December 28, 2012 (in thousands):
Defined
Benefit
Pension Plan
Japan
Foreign
Currency
Translation
2,795 $
$
Defined
Benefit
Pension Plan
Switzerland
Accumulated
Other
Comprehensive
Income (Loss)
2,405
(827 )
2
(813 ) $
(11 )
2
(822 )
280
(62 )
(604 )
(359 )
(52 )
(1,015 ) $
1,580
(707 )
(591 )
282
(1,863 )
511
(1,070 )
423 $
(127 )
-
296
(126 )
(63 )
107
23
(9 )
121 $
(689 )
-
2,106
(861 )
(466 )
779
(1,527 )
572
Balance, at December 30, 2011
Other comprehensive loss
Tax effect
Balance, at December 28, 2012
Other comprehensive income (loss)
Tax effect
Balance, at January 3, 2014
Other comprehensive income (loss)
Tax effect
Balance, at January 2, 2015
$
(176 ) $
Recent Accounting Pronouncements
F-13
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-15, “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about and
Entity’s Ability to Continue as a Going Concern”. Currently there is no guidance in GAAP about management’s responsibility
to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern. This ASU requires
management to assess the entity’s ability to continue as a going concern. This guidance is effective for fiscal years ending after
December 15, 2016. Early adoption is permitted. The Company expects to adopt this guidance when effective, and upon
adoption, will evaluate going concern based on this guidance.
In June 2014, the FASB issued ASU 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for
Shared Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the
Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. ASU 2014-12 is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2015. The Company is assessing the impact, if any, to
the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This guidance
includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. This guidance is effective for fiscal years and interim periods beginning after
December 15, 2016. Early adoption is not permitted. The Company expects to adopt this guidance when effective, and the
impact on its consolidated financial statements is not currently estimable.
Note 2 — Accounts Receivable Trade, Net
Accounts receivable trade, net consisted of the following at January 2, 2015 and January 3, 2014 (in thousands):
Domestic
Foreign
Less allowance for doubtful accounts and sales returns
Note 3 — Inventories, Net
2014
2013
$
$
1,818 $
10,825
12,643
1,589
11,054 $
2,135
10,045
12,180
1,449
10,731
Inventories, net consisted of the following at January 2, 2015 and January 3, 2014 (in thousands):
Raw materials and purchased parts
Work in process
Finished goods
Less inventory reserves
2014
2013
$
$
2,146 $
1,781
14,504
18,431
2,714
15,717 $
1,367
913
11,029
13,309
795
12,514
Note 4 — Prepaids, Deposits, and Other Current Assets
Prepaids, deposits, and other current assets consisted of the following at January 2, 2015 and January 3, 2014 (in
thousands):
2014
2013
F-14
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prepaids and deposits
Income tax receivable
Value added tax (VAT) receivable
Deferred charge for foreign profits
Other current assets
$
$
1,991 $
1,084
721
338
383
4,517 $
2,157
—
618
362
366
3,503
Note 5 — Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following at January 2, 2015 and January 3, 2014 (in thousands):
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation
2014
2013
$
$
15,674 $
6,535
8,400
30,609
20,543
10,066 $
16,225
4,837
6,552
27,614
20,209
7,405
Depreciation expense for the years ended January 2, 2015, January 3, 2014, and December 28, 2012, was
approximately $2.1 million, $1.7 million, and $1.3 million, respectively.
Note 6 – Intangible Assets, Net
Intangible assets, net, consisted of the following (in thousands):
January 2, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
January 3, 2014
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amortized intangible assets:
Patents and licenses
Customer relationships
Developed technology
Total
$
$
9,205 $
1,302
827
11,334 $
(8,859 ) $
(911 )
(694 )
(10,464 ) $
346 $
391
133
870 $
10,637 $
1,490
947
13,074 $
(10,057 ) $
(894 )
(743 )
(11,694 ) $
580
596
204
1,380
Aggregate amortization expense for amortized intangible assets was $382,000, $440,000, and $652,000, for the years
ended January 2, 2015, January 3, 2014, and December 28, 2012, 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
2015
2016
2017
2018
2019
Amount
$
233
233
233
171
—
F-15
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total
Note 7 — Other Current Liabilities
$
870
Other current liabilities consisted of the following at January 2, 2015 and January 3, 2014 (in thousands):
Accrued salaries and wages
Accrued income taxes
Accrued insurance
Accrued commissions
Accrued audit expense
Customer credit balances
Accrued severance
Accrued bonuses
Other(1)
2014
2013
1,647 $
867
550
309
352
186
180
75
810
4,976 $
1,630
485
551
528
328
153
731
935
1,031
6,372
$
$
(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 2, 2015) and may be renewed annually (the current line expires
on March 30, 2015). The credit facility is not collateralized. The Company had 500,000,000 Yen outstanding on the line of
credit as of January 2, 2015 and January 3, 2014, (approximately $4.2 million and $4.8 million based on the foreign exchange
rates on January 2, 2015 and January 3, 2014, 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
2, 2015, 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) ($1.0 million at the rate of exchange on January 2, 2015), 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 2, 2015 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 2, 2015.
Asset Retirement Obligation
The Company recorded certain Asset Retirement Obligations (“ARO”), in accordance with ASC 410-20 in connection
with the Company’s obligation to return its Japan facility to its “original condition”, as defined in the lease agreement. The
F-16
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company has recognized the fair value of the ARO liability obligation included in noncurrent liabilities. The obligation is
currently expected to be settled upon expiration of the lease in 2018.
The following table describes all changes to the Company’s asset retirement obligation liability (in thousands):
Asset retirement obligation at beginning of the year
Increase (decrease) in estimated liabilities
Liabilities settled
Accretion expense
Impact of changes in Japanese Yen
Asset retirement obligation at end of the year
Note 9 — Income Taxes
$
January 2, 2015
157
—
(25 )
3
(20 )
115
$
$
$
January 3, 2014
707
(221 )
(206 )
10
(133 )
157
The provision for (benefit from) for income taxes consists of the following (in thousands):
Current tax provision:
U.S. federal (benefit)
State
Foreign
Total current provision
Deferred tax provision (benefit):
U.S. federal and state
Foreign provision (benefit)
Total deferred provision (benefit)
Provision for (benefit from) for income taxes
2014
2013
2012
$
$
$
3
15
570
588
—
(841)
(841)
(253) $
(121) $
12
721
612
—
104
104
716 $
—
11
1,125
1,136
—
108
108
1,244
As of January 2, 2015, the Company had federal net operating loss carryforwards of $130.8 million available to
reduce future income taxes. The federal net operating loss carryforwards expire in varying amounts between 2017 and
2033. In California, the main state from which the Company conducts its domestic operations, the Company has state net
operating losses of $73.7 million available to reduce future California income taxes. The California net operating loss
carryforwards expire in varying amounts between 2015 and 2034 and, approximately $16.3 million of those net operating loss
carryforwards, will expire over the next three years.
The Company had accrued net income taxes receivable of $217,000 at January 2, 2015 and income taxes payable of
$655,000 at January 3, 2014, primarily due to taxes from foreign jurisdictions.
The provision for (benefit from) 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):
2014
2013
2012
Computed provision(benefit)
for taxes based on income at
statutory rate
Increase (decrease) in taxes
resulting from:
Permanent differences
Federal minimum taxes
34.0 %
$
(2,939)
34.0 %
$
379
34.0 %
$
(176)
(0.2)
(0.1)
20
3
3.2
—
35
—
(7.9)
—
41
—
F-17
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
(benefit) rate
(0.1)
—
4.6
3.3
—
0.1
(1.5)
(0.2)
—
1.0
(38.0)
10
—
(394)
0.7
—
6.4
(288)
43.7
—
—
(11)
132
18
—
(85)
3,281
(7.7)
12.5
0.2
(10.9)
6.4
(24.2)
8
—
71
487
—
(1.4)
(56.0)
9.2
(43.8)
3.1
(86)
140
(223.4)
(22.1)
2
(121)
71
(270)
(16.1)
—
1.1
83.2
8
290
(48)
227
(16)
1,158
114
83
—
(6)
(431)
2.9 %
$
(253)
64.3 %
$
716
(240.1) %
$
1,244
The Company recorded income tax benefits of $1.4 million during the fourth quarter of 2014 principally related to its
Swiss operations. These benefits were recorded after finalizing ongoing discussions with the Swiss tax authorities, or the STA,
in connection with the completion of the Company’s manufacturing consolidation project, which had been in progress since
2012 and completed in June 2014 (see Note 18). These discussions included, among other things, the approval of a special
Swiss tax ruling available to certain qualified companies doing business in Switzerland as a foreign operator, as defined by the
STA. These discussions also included an agreement with the STA to consolidate the financial results of a foreign entity solely
for Swiss income tax purposes, previously not taxable by the STA, to become subject to Swiss tax law. During the fourth
quarter of 2014, the Company was advised by the STA that it had met those special ruling qualifications for 2014.
Included in the state tax provision for 2014 is an increase to the state deferred tax asset and corresponding increase to
the valuation allowance of $394,000. For 2013 there was a decrease to the state deferred tax asset and corresponding decrease
to the valuation allowance of $71,000. For 2012 there was an increase to the state deferred tax asset and corresponding
increase to the valuation allowance of $48,000. This results in a total state tax provision of $15,000 for 2014, $12,000 for
2013, and $11,000 for 2012.
Included in the deferred foreign tax benefit for 2014 is a decrease in foreign deferred liabilities of $1,039,000. For
2013, there was a decrease to the foreign deferred tax assets of $630,000 and a corresponding decrease to the valuation
allowance of $1,008,000. For 2012 there was an increase to the foreign deferred tax assets of $16,000 and a corresponding
increase to the valuation allowance.
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 2014 and 2013 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 2, 2015 and January 3, 2014 are as follows (in thousands):
Current deferred tax assets (liabilities):
Allowance for doubtful accounts and sales returns
Inventories
2014
2013
$
127 $
511
21
11
F-18
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accrued vacation
State taxes
Accrued other expenses
Other
Valuation allowance
Total current deferred tax assets (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
397
—
119
80
(939 )
295 $
53,747 $
1,684
1,223
423
37
489
870
(1,326 )
(5,022 )
31
(53,165 )
(1,009 ) $
375
—
105
(137 )
(741 )
(366 )
50,409
2,212
921
525
57
731
360
(1,129 )
(4,992 )
(40 )
(50,082 )
(1,028 )
$
$
$
As of January 2, 2015, the Company had net deferred tax liabilities in Switzerland of $1,371,000 (which included
$1,326,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $658,000 in Japan included in
the Company’s components of deferred income tax assets and liabilities table. 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.
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.
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 2, 2015. 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
F-19
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $135,000 and $185,000 as of January 2,
2015 and January 3, 2014, respectively.
STAAR Japan, Inc.
Since 2012, STAAR Japan functions as a limited-risk distributor with a guaranteed return from STAAR AG and
accordingly, STAAR Japan’s deferred tax assets are considered fully realizable. In 2013, STAAR Japan fully released its
remaining valuation allowance and recorded an income tax benefit of approximately $433,000.
As of January 2, 2015, STAAR Japan’s net deferred tax assets were $658,000 (as translated using the Japanese Yen
exchange rate on January 2, 2015). As of January 3, 2014, STAAR Japan’s net deferred tax assets were $289,000, including
the remaining net operating loss carryover of $20,000 (as translated using the Japanese Yen exchange rate on January 3, 2014).
Other Income Tax Disclosures
The following tax years remain subject to examination:
Significant Jurisdictions
U.S. Federal
California
Switzerland
Japan
Open Years
2011 – 2013
2010 – 2013
2012 – 2013
2009 – 2013
Income (loss) from continuing operations before provision (benefit) for income taxes is as follows (in thousands):
Domestic
Foreign
Note 10 – Employee Benefit Plans
2014
2013
2012
$
$
(8,113 ) $
(532 )
(8,645 ) $
(2,131 ) $
3,245
1,114 $
(2,967 )
2,448
(519 )
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.
For the year ended, January 2, 2015, pursuant to the Manufacturing Consolidation Project, the Company terminated
certain employees in its Swiss subsidiary resulting in Swiss pension plan curtailments as defined by ASC 715-30-35, Defined
Benefit Plans – Pensions, Settlements, Curtailments, and Certain Termination Benefits. The curtailments resulted in a
decrease of $1.6 million in the Swiss pension plan’s projected benefit obligation, of which $0.9 million was used to distribute
cash payments to employees resulting in a decrease in plan assets. The remaining $0.8 million was recorded as a curtailment
gain measured in accordance with ASC 715-30-35-93.
F-20
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
However, since the Swiss pension plan’s accumulated other comprehensive loss, immediately preceding the
curtailments exceeded the curtailment gains, the curtailment gains were fully offset against the loss and no gain was recognized
in earnings.
At January 2, 2015, the discount rate, one of the key assumptions used to calculate the Swiss pension plan’s projected
benefit obligation, was reduced from 2.5% to 1.4%, resulting in an increase to the projected benefit obligation of $0.7 million
recorded through an increase in the accumulated other comprehensive loss account of the Swiss pension plan.
The following table shows the changes in the benefit obligation and plan assets and the Swiss Plan’s funded status as
of January 2, 2015 and January 3, 2014 (in thousands):
Change in Projected Benefit Obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Participant contributions
Benefits paid
Actuarial (gain) loss on obligation
Curtailments
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
Curtailment distributions
Plan assets at fair value, end of period
2014
2013
$
$
$
$
5,183 $
297
114
241
(116 )
737
(1,629 )
4,827 $
3,517 $
(230 )
241
241
(116 )
(948 )
2,705 $
4,853
320
101
239
(157 )
(173 )
—
5,183
3,053
144
239
239
(158 )
—
3,517
Funded status (pension liability), end of year
$
(2,122 ) $
(1,666 )
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
Effect of curtailments
Accumulated other comprehensive loss
$
$
(773 ) $
(902 )
266
528
(881 ) $
(521 )
(331 )
247
—
(605 )
Accumulated benefit obligation at end of year
(4,824 )
The underfunded balance of $2,122,000 and $1,666,000 was included in other long-term liabilities on the consolidated
(4,488 ) $
$
balance sheets as of January 2, 2015 and January 3, 2014, respectively.
Net periodic pension cost associated with the Swiss Plan during the years ended January 2, 2015, January 3, 2014 and
December 28, 2012 include the following components (in thousands):
F-21
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
2014
2013
2012
$
$
297 $
114
(97 )
24
—
—
—
338 $
320 $
101
(96 )
55
—
—
—
380 $
301
116
(100 )
54
—
—
—
371
Changes in other comprehensive income (loss), net of tax, associated with the Swiss Plan in the year ended January 2,
2015, January 3, 2014 and December 28, 2012 include the following components (in thousands):
Current year actuarial gain (loss) on plan assets, net of tax
Current year actuarial gain (loss) on benefit obligation, net of tax
Actuarial gain recorded in current year, net of tax
Prior service cost
Effect of curtailments
Change in other comprehensive income (loss)
2014
2013
2012
$
$
(375 ) $
(846 )
28
—
782
(411 ) $
37 $
135
46
—
—
218 $
50
(101 )
42
—
—
(9 )
The amount in accumulated other comprehensive income (loss) as of January 2, 2015 that is expected to be recognized
as a component of the net periodic pension costs during fiscal year 2015 is $64,000.
Net periodic pension cost and projected and accumulated pension obligation for the Company’s Swiss Plan were
calculated on January 2, 2015 and January 3, 2014 using the following assumptions:
Discount rate
Salary increases
Expected return on plan assets
Expected average remaining working lives in years
2014
2013
1.4 %
2.0 %
3.0 %
10.1
2.5 %
2.0 %
3.0 %
10.5
The discount rates 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. 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
Under Swiss law, pension funds are legally independent from the employer and all the contributions are invested with
regulated entities. The Company has a contract with Allianz Suisse Life Insurance Company’s BVG Collective Foundation
(the “Foundation”) to manage its Swiss pension fund. Multiple employers contract with the Foundation to manage the
employers’ respective pension plans. The Foundation manages the pension plans of its contracted employers as a collective
F-22
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
entity. The investment strategy is determined by the Foundation and applies to all members of the collective Foundation.
There are no separate financial statements for each employer contract. The pension plan assets of all the employers that
contract with the Foundation are comingled. They are considered multiple-employer plans under ASC 715-30-35-70 and
therefore accounted for as single-employer plans.
As there are no separate financial statements for each employer contract, there are no individual investments that can
be directly attributed to the Company’s pension plan assets. However, the funds contributed by an employer are specifically
earmarked for its employees and the total assets of the plan allocable to Company’s employees are separately tracked by the
Foundation. The lack of visibility into the specific investments of the plan assets and how they are valued is considered to be
a significant unobservable input, therefore, the Company considers the plan assets collectively to be Level 3 assets under the
fair value hierarchy (see Note 1).
Plan assets totaled $2.7 million and $3.5 million as of January 2, 2015 and January 3, 2014, respectively.
The table below sets forth the fair value of Plan assets for the fiscal year 2014 in accordance with ASC 715-20-50-
1(d) (in thousands):
Fair Value Measurement Using Significant Unobservable Inputs
( Level 3)
Liquid
Asset
Fund
Bond
Fund
Equity
Fund
Real
Estate
Fund
22 $
1
3,017 $
)
(200
115 $
(2 )
363 $
(29 )
2
(505
)
(6
)
(73
)
Total
3,517
(230 )
(582
)
25
$
2,312
$
107
$
261
$
2,705
Beginning balance at::
January 3, 2014
Actual return on plan assets
Purchases, sales and
settlement
Ending Balance at:
January 2, 2015
$
$
The table below sets forth the fair value of Plan assets for the fiscal year 2013 (in thousands):
Fair Value Measurement Using Significant Unobservable Inputs
( Level 3)
Liquid
Asset
Fund
Bond
Fund
Equity
Fund
Real
Estate
Fund
Beginning balance at::
December 28, 2012
Actual return on plan assets
Purchases, sales and
settlement
Ending Balance at:
January 3, 2014
$
$
35 $
(4 )
2,623 $
122
(9
)
272
73 $
13
29
322 $
13
28
22
$
3,017
$
115
$
363
$
Total
3,053
144
320
3,517
During fiscal 2015, the Company expects to make cash contributions totaling approximately $196,000 to the Swiss
Plan.
The estimated future benefit payments for the Swiss Plan are as follows (in thousands):
Fiscal Year
Amount
F-23
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2015
2016
2017
2018
2019
2020 – 2024
Total
Defined Benefit Plan-Japan
$
$
50
55
60
65
64
397
691
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 2, 2015 and January 3, 2014 is as follows (in thousands):
Change in Projected Benefit Obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Actuarial (gain) 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
2014
2013
$
$
$
$
1,049 $
157
9
(55 )
(66 )
(137 )
957 $
— $
—
—
—
—
—
— $
1,188
158
8
47
(123 )
(229 )
1,049
—
—
—
—
—
—
—
Funded status (pension liability), end of period
$
(957 ) $
(1,049 )
Amount Recognized in Accumulated Other Comprehensive Income, net of tax:
Transition obligation
Actuarial gain
Prior service cost
Net loss
$
(26 ) $
146
9
(8 )
81
191
17
(184 )
F-24
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated other comprehensive income
$
121 $
105
Accumulated benefit obligation at end of year
$
828 $
(857 )
The underfunded balance of $957,000 and $1,049,000, respectively, was included in other long-term liabilities
(pension liability) on the consolidated balance sheets as of January 2, 2015 and January 3, 2014.
Net periodic pension cost associated with the Japan Plan for the years ended January 2, 2015, January 3, 2014 and,
December 28, 2012 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
2014
2013
2012
$
$
157 $
9
12
(10 )
(1 )
167 $
158 $
8
12
(31 )
(1 )
146 $
185
13
16
(58 )
(1 )
1555
Changes in other comprehensive income (loss), net of tax, associated with the Japan Plan for the years ended January
2, 2015, January 3, 2014 and December 28, 2012 include the following components (in thousands):
Amortization of net transition obligation
Amortization of actuarial loss
Actuarial income (loss) recorded in current year
Amortization prior service cost
Change in other comprehensive income (loss)
2014
2013
2012
12
(9 )
13
(2 )
14 $
12
(47 )
(153 )
(1)
(189 ) $
16
(62 )
(117 )
(1 )
(127 )
$
The amount in accumulated other comprehensive income (loss) as of January 2, 2015 that is expected to be recognized
as a component of the net periodic pension cost in fiscal 2015 is approximately $5,500.
Net periodic pension cost and projected and accumulated pension obligation for the Company’s Japan Plan were
calculated on January 2, 2015 and January 3, 2014 using the following assumptions:
Discount rate
Salary increases
Expected return on plan assets
Expected average remaining working lives in years
2014
2013
0.6 %
4.5 %
N/A
8.12
0.9 %
4.7 %
N/A
7.48
The discount rate of 0.60% as of January 2, 2015 and the discount rate of 0.90% as of January 3, 2014 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.
The estimated future benefit payments for the Japan Plan are as follows (in thousands):
Fiscal Year
Amount
F-25
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2015
2016
2017
2018
2019
2020-2024
Total
Defined Contribution Plan
$
$
85
54
141
51
48
537
916
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 2, 2015, 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). In 2014, the
Company increased the contribution percentage to 80% from 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 2, 2015, January 3, 2014, and December 28, 2012, the Company made
contributions, net of forfeitures, of $518,000, $270,000, and $284,000, respectively, to the 401(k) Plan.
Note 11 — Stockholders’ Equity
The cost that has been charged against income for stock-based compensation is set forth below (in thousands):
Employee stock options
Restricted stock
Restricted stock units
Consultant compensation
Total
Fiscal Year Ended
January 2,
2015
January 3,
2014
December 28,
2012
$
$
2,842 $
935
795
91
4,663 $
2,683 $
999
589
218
4,489 $
2,595
590
—
23
3,208
The Company recorded stock-based compensation expense in the following categories on the accompanying
condensed consolidated statements of operations (in thousands):
General and administrative
Marketing and selling
Research and development
Total
Fiscal Year Ended
January 2,
2015
January 3,
2014
December 28,
2012
$
$
2,660 $
1,065
938
4,663 $
2,663 $
1,167
659
4,489 $
2,231
545
432
3,208
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 $306,000, $232,000, and $150,000 of stock-based compensation
to inventory during the year ended January 2, 2015, January 3, 2014, and December 28, 2012, 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 (Continued)
Stock Option Plans
The Amended and Restated 2003 Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-
based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options,
restricted stock, unrestricted share grants, and restricted stock units (RSUs). Options under the plan are granted at fair market
value on the date of grant, become exercisable over a three year period, or as determined by the Board of Directors, and expire
over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if
there is a change in control and pre-established financial metrics are met (as defined in the Plan). Grants of restricted stock
outstanding under the Plan generally vest over periods of one to three years. Grants of RSUs outstanding under the Plan
generally vest based on time, performance or a combination of both. As of January 2, 2015 there were 2,201,123 shares
authorized and available for grants under the Plan.
Assumptions
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model
applying the weighted-average assumptions noted in the following table. Expected volatilities are based on historical volatility
of the Company’s stock. The expected term of options granted is derived from the historical exercises and post-vesting
cancellations, and represents the period of time that options granted are expected to be outstanding. The Company has
calculated a 7% estimated forfeiture rate based on historical forfeiture experience. The risk-free rate is based on the U.S.
Treasury yield curve corresponding to the expected term at the time of the grant.
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (in years)
January 2,
2015
Fiscal Year Ended
January 3,
2014
December 28,
2012
0 %
55 %
1.29 %
4.12
0 %
%
71 %
0.73 %
4.12
0 %
79 %
0.82 %
5.21
A summary of option activity under the Plan for the year ended January 2, 2015 is presented below:
Options
Outstanding at January 3, 2014
Granted
Exercised
Forfeited or expired
Outstanding at January 2, 2015
Exercisable at January 2, 2015
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(000’s)
Shares
(000’s)
3,299 $ 6.17
15.43
617
6.09
(584 )
11.92
(157 )
3,175 $ 7.79
2,085 $ 5.71
6.19 $
4.91 $
8,692
7,583
Included in forfeited or expired options, are 48,000 share representing net shares withheld from an option holder for
the exercise price in lieu of cash.
A summary of unvested options activity under the Plan for the year ended January 2, 2015 is presented below:
F-27
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Options
Unvested at January 3, 2014
Granted during the year
Forfeited or expired during the year
Vested during the year
Unvested at January 2, 2015
Shares
(000’s)
Weighted-
Average
Grant-Date
Fair Value
$ 4.62
6.81
5.70
4.70
$ 5.92
1,131
617
(109 )
(549 )
1,090
The weighted-average grant-date fair value of options granted during the fiscal years ended January 2, 2015, January
3, 2014, and December 28, 2012, were $6.81, $3.51, and $6.65 per option respectively. The total intrinsic value of options
exercised during the fiscal years ended January 2, 2015, January 3, 2014, and December 28, 2012, were $5.5 million, $3.9
million, and $1.2 million, respectively.
As of January 2, 2015, there was $6.1 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 1.79 years.
Warrants
On June 1, 2009, the Company issued warrants to Broadwood Partners, L.P. (“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.
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 June 1, 2015, the term of
the remaining warrants. The Company considers the issuance of Penalty Warrants to be unlikely.
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)
A summary of the warrant activity for the year ended January 2, 2015 is provided below:
$
As of
June 1, 2009
1.01
700,000
0 %
74.4 %
3.28 %
6.0
F-28
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Weighted-
Average
Exercise
Price
Shares
(000’s)
Weighted-
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
(000’s)
700 $
—
—
—
700 $
700 $
4.00
—
—
—
4.00
4.00
0.41 $
0.41 $
3,521
3,521
Outstanding at January 3, 2014
Granted
Exercised
Forfeited or expired
Outstanding at January 2, 2015
Exercisable at January 2, 2015
Restricted stock
A summary of restricted stock activity for the year ended January 2, 2015 is presented below:
Outstanding at January 3, 2014
Granted
Vested
Forfeited or expired
Outstanding at January 2, 2015
Restricted Stock Units
Weighted
Average
Grant-Date
Fair Value
per Share
Shares
(000’s)
341 $
65
(140 )
(19 )
247 $
7.55
13.89
6.92
9.91
9.41
A summary of restricted stock unit’s activity for the year ended January 2, 2015 is presented below:
Outstanding at January 3, 2014
Granted
Vested
Forfeited or expired
Outstanding at January 2, 2015
Note 12 — Commitments and Contingencies
Lease Obligations and Firm Commitment
Weighted
Average
Grant-Date
Fair Value
per Share
Units
(000’s)
135 $
314
(135 )
(158 )
156 $
5.34
15.34
5.34
15.54
15.33
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.
F-29
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated future minimum lease payments under leases having initial or remaining non-cancelable lease terms in
excess of one year as of January 2, 2015 are as follows (in thousands):
Fiscal Year
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
Less amounts representing interest
Operating
Leases
Capital
Leases
$
$
$
1,368 $
796
785
328
328
244
3,849 $
—
3,849 $
442
348
144
—
—
—
934
67
867
Rent expense was approximately $1.4 million, $1.5 million, and $1.9 million, for the years ended January 2, 2015,
January 3, 2014, and December 28, 2012, respectively.
The Company had the following assets under capital lease at January 2, 2015 and January 3, 2014 (in thousands):
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation
2014
2013
1,141 $
334
21
1,496
511
985 $
3,922
611
155
4,688
3,984
704
$
$
Depreciation expense for assets under capital lease for each of the years ended January 2, 2015, January 3, 2014, and
December 28, 2012, was approximately $330,000, $566,000, and $522,000, respectively.
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
F-30
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s Chief Executive Officer and certain officers have as provisions of their 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.
On October 3, 2014, the Company’s Chief Executive Officer announced his retirement effective March 1,
2015. Effective with his retirement, he has become a consultant to the Company through March 1, 2016. In March 2015, the
Company will accrue an approximate $300,000 in benefits due to the former CEO, such benefits to be paid over a one year
period beginning on March 1, 2015 and ending on March 31, 2016.
Effective March 3, 2015, the Company entered into an Employment Agreement with its new Chief Executive Officer,
Caren Mason.
Litigation and Claims
From time to time the Company may be 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. The most significant of these actions, proceedings and investigations are described
below. STAAR maintains insurance coverage for product liability and certain securities. Legal proceedings can extend for
several years, and the matters described below concerning the Company are at very early stages of the legal and administrative
process. As a result, these matters have not yet progressed sufficiently through discovery and/or development of important
factual information and legal issues to enable the Company to determine whether the proceedings are material to the Company
or to estimate a range of possible loss, if any. Unless otherwise disclosed, the Company is unable to estimate the possible loss
or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine outcomes
of these items, an adverse determination in one or more of these items currently pending could have a material adverse effect
on the Company’s consolidated results of operations, financial position or cash flows.
Securities and Exchange Commission Informal Inquiry
In a letter dated July 3, 2014, the United States Securities and Exchange Commission (“SEC”) advised STAAR that it is
conducting an informal inquiry into compliance with U.S. securities laws. The letter requested documents concerning any FDA
inspections, investigations, observations, noted violations, or warnings since January 1, 2014. The Company is cooperating
with this informal inquiry.
Todd v. STAAR
On July 8, 2014, a putative securities class action lawsuit was filed by Edward Todd against STAAR and three
officers in the federal court located in Los Angeles, California. The plaintiff claims that STAAR made misleading statements to
and omitted material information from our investors between February 27, 2013 and June 30, 2014 about alleged regulatory
violations at STAAR’s Monrovia manufacturing facility. On July 21, 2014, the Company was served with the Complaint.
Although the ultimate outcome of this action cannot be determined with certainty, the Company believes that the allegations in
the Complaint are without merit. The Company intends to vigorously defend against this lawsuit. The Company intends to file
a motion to dismiss the complaint, when appropriate, in the ongoing proceeding. On October 20, 2014, plaintiff amended its
complaint, dismissed two Company officers, added one other officer, and reduced the alleged Class Period to November 1,
2013 to June 30, 2014.
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 2, 2015 and January 3, 2014 were $9,000 and $34,000, respectively.
Note 14 — Supplemental Disclosure of Cash Flow Information
Interest paid was $139,000, $153,000, and $270,000, for the years ended January 2, 2015, January 3, 2014, and
December 28, 2012, respectively. Income taxes paid amounted to approximately $1,089,000 $1,534,000, and $241,000, for the
years ended January 2, 2015, January 3, 2014, and December 28, 2012, respectively.
F-31
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s non-cash investing and financing activities were as follows (in thousands):
Non-cash investing and financing activities:
Assets obtained by capital lease
Purchase of property and equipment included in accounts payable
2014
2013
2012
$
$
802 $
682 $
— $
818 $
527
—
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:
2014
2013
2012
Net income (loss)
$
(8,392 )
$
398
$
(1,763
)
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
38,342
(251 )
38,091
—
—
—
—
38,091
37,017
(311 )
36,706
1,235
177
75
414
38,607
Net income (loss) per share – basic
Net income (loss) per share - diluted
$
$
(0.22 )
(0.22 )
$
$
0.01 $
0.01
$
36,433
(180 )
36,253
—
—
—
—
36,253
(0.05 )
(0.05 )
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
2014
2013
2012
1,988
492
227
2,707
1,109
—
—
1,109
1,632
746
180
2,558
Note 16 — Geographic and Product Data
The Company markets and sells its products in approximately 60 countries and has manufacturing in the United
States. Other than the United States, Japan, Korea, China, Spain and France, the Company does not conduct business in any
F-32
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
China
Korea
Spain
France
Others*
Total
2014
2013
2012
$
$
11,117 $
19,107
9,370
6,563
5,562
3,696
19,572
74,987 $
12,851 $
17,666
8,618
7,743
4,867
2,546
17,924
72,215 $
12,427
16,692
8,406
6,713
3,026
1,612
14,907
63,783
*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
2014
44,047 $
24,336
6,604
74,987 $
2013
44,128 $
24,153
3,934
72,215 $
$
$
2012
35,080
25,971
2,732
63,783
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
2014
2013
$
$
9,127 $
596
343
10,066 $
6,096
849
460
7,405
The Company sells its products internationally, which subjects the Company to several potential risks, including
fluctuating exchange rates (to the extent the Company’s transactions are not in U.S. dollars), regulation of fund transfers by
foreign governments, United States and foreign export and import duties and tariffs, and political instability.
Note 17 — Quarterly Financial Data (Unaudited)
Summary unaudited quarterly financial data from continuing operations for fiscal 2014 and 2013 is as follows (in
thousands except per share data):
January 2, 2015
Net sales
Gross profit
Net loss
Net (loss) per share – basic
Net (loss) per share – diluted
1st Qtr.
$
2nd Qtr. 3rd Qtr. 4th Qtr.
16,573
9,403
(2,538 )
(0.07 )
(0.07 )
20,048 $
13,667
(1,789 )
(0.05 )
(0.05 )
18,188 $
11,869
(2,706 )
(0.07 )
(0.07 )
20,178 $
13,884
(1,359 )
(0.04 )
(0.04 )
F-33
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 3, 2014
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 )
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 and Tax Strategy
From fiscal 2011 through June 2014, the Company 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 initiatives was to improve upon gross profit margin by streamlining operations, thereby reducing costs and increasing
profits in the U.S., to enable the Company to utilize its approximately $131 million in net operating loss carryforwards and at
the same time, reduce income taxes in foreign jurisdictions where it pays tax. STAAR had manufactured its products in four
facilities worldwide (Monrovia, California, Aliso Viejo, California, Nidau, Switzerland, and Ichikawa City, Japan). As of June
2014, all international production is consolidated into the Monrovia site.
The Company has invested approximately $6.3 million since inception of these initiatives, including $319,000 incurred
during 2014, and future expenses, if any, are not expected to be material. These expenses are included in the other general and
administrative expenses in the condensed consolidated statements of operations. Expenditures have largely consisted of
severance, employee costs, professional fees to advisors and consultants.
A summary of the activity for these initiatives is presented below for the year ended January 2, 2015 (in thousands):
Liability as of January 3, 2014
Costs incurred and charged to expense
Cash payments
Liability as of January 2, 2015
Termination Benefits
$
Other
Associated Costs
Total
28 $
109
(137 )
— $
759
321
(900 ) )
180
731 $
212
(763 )
180 $
$
F-34
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A
Description
02014
Column B Column C Column D Column E
Balance at
End of
Year
Balance at
Beginning
of Year
Deductions
Additions
(In thousands)
Allowance for doubtful accounts and sales returns deducted
from accounts receivable in balance sheet
Deferred tax asset valuation allowance
02013
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
$
$
$
$
$
$
1,449 $
50,823
52,272 $
384 $
3,330
3,714 $
244 $
49
293 $
1,316 $
51,093
52,409 $
263 $
744
1,007 $
130 $
1,014
1,144 $
1,128 $
51,571
52,699 $
255 $
—
255 $
67 $
478
545 $
1,589
54,104
55,693
1,449
50,823
52,272
1,316
51,093
52,409
F-35
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
STAAR Surgical AG, Sucursal en
España
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
None
China
Spain
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. 333-201232, No. 333-
167595 and No. 333-111154) of STAAR Surgical Company and Subsidiaries of our reports dated March13, 2015, 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
Costa Mesa, California
March 13, 2015
CERTIFICATIONS
Exhibit 31.1
I, Caren Mason 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 13, 2015
/s/ Caren Mason
Caren Mason
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 13, 2015
/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 2, 2015 (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 13, 2015
Dated: March 13, 2015
/s/ Caren Mason
Caren Mason
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.