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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
[ ] 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 0-27598
IRIDEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0210467
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1212 TERRA BELLA AVENUE, MOUNTAIN VIEW CA 94043-1824
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(650) 940-4700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
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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 [X] 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 20, 2002, was approximately $14,703,055 based on the
closing price reported for such date on the NASDAQ National Market System. For
purposes of this disclosure, shares of Common Stock held by each executive
officer and director and by each holder of 5% or more of the outstanding shares
of Common Stock have been excluded from this calculation, because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 20, 2002, Registrant had 6,862,862 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Proxy Statement for the Registrant's 2002 Annual
Meeting of Stockholders (the "Proxy Statement") are incorporated by reference
into Part III of this Annual Report on Form 10-K.
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Table of Contents
Page No.
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Part I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 17
Item 3. Legal Proceedings............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders........................... 17
Part II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters......... 18
Item 6. Selected Financial Data....................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 21
Item 7A. Quantitative and Qualitative Disclosure about Market Risk..................... 35
Item 8. Financial Statements and Supplementary Data................................... 36
Item 9. Disagreements on Accounting and Financial Disclosure.......................... 57
Part III
Item 10. Directors and Executive Officers of the Registrant............................ 58
Item 11. Executive Compensation........................................................ 58
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 58
Item 13. Certain Relationships and Related Transactions................................ 58
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 59
Signatures..................................................................................... 61
PART I
This Annual Report on Form 10-K (The "Form 10-K") contains certain
forward-looking statements within the meaning of section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), such as statements
relating to levels of future sales and operating results, including sales of our
OcuLight SLx and Apex 800 laser systems; actual order rate and market acceptance
of our products, opportunities in the adjunctive diagnostic market and our
efforts to provide total disease management solutions; expectations for future
sales growth, generally, and the potential for production cost decreases and
higher gross margins; our estimates of the size of our markets; levels of future
investment in research and development; the development of new, more
cost-effective technologies, therapeutic and adjunctive diagnostic systems,
strategic alliances and new delivery devices; favorable Center for Medicare and
Medicaid coverage decisions regarding AMD procedures that use our products;
results of clinical studies and risks associated with bringing new products to
market, general economic conditions and levels of international sales. In some
cases, forward-looking statements can be identified by terminology, such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "intends," "potential," "continue," or the negative of
such terms or other comparable terminology. These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to differ materially from those expressed
or implied by such forward-looking statements. Such factors include, among
others, the information contained under the captions "Part I, Item 1, Business,"
and "Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations-Factors That May Affect Future Results" in
this Annual Report. The reader is cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of this Form 10-K. We undertake no obligation to update the results of any
revision of these forward-looking statements. The reader is strongly urged to
read the information set forth under the caption "Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
That May Affect Future Results" for a more detailed description of these
significant risks and uncertainties.
ITEM 1. BUSINESS
GENERAL
IRIDEX Corporation is a leading worldwide provider of
semiconductor-based laser systems used to treat eye diseases in ophthalmology
and skin afflictions in dermatology (also referred to as aesthetics). Our
products are sold in the United States predominantly through a direct sales
force and internationally through 67 independent distributors into 91 countries.
Our ophthalmology products treat eye diseases, including the three
leading causes of irreversible blindness. Our current family of OcuLight laser
systems, used for ophthalmic applications, includes the IRIS Medical OcuLight
SL, OcuLight SLx, OcuLight GL and OcuLight GLx Laser Photocoagulation systems.
Our dermatology products treat skin diseases, primarily vascular and pigmented
lesions and remove unwanted hair. The dermatology laser systems that we offer
include the IRIDERM DioLite 532 and the Apex 800 systems. Our revenues arise
primarily from the sale of these OcuLight laser systems used in treatment of
various eye diseases and the DioLite 532 and Apex 800 used for dermatological
applications. Each ophthalmic and dermatologic system consists of a small,
portable laser console and interchangeable delivery devices, primarily for
hospital and office-based use by ophthalmologists and dermatologists. We believe
that our semiconductor-based systems are more portable, economical, reliable and
flexible than competing systems. Since our first shipment in 1990, more than
4,900 IRIDEX medical laser systems have been sold worldwide.
IRIDEX Corporation was incorporated in California in February 1989 as
IRIS Medical Instruments, Inc. In 1996, we changed our name to IRIDEX
Corporation and reincorporated in Delaware. Our executive offices are located at
1212 Terra Bella Avenue, Mountain View, California 94043-1824, and our telephone
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number is (650) 940-4700. As used in this Form 10-K, the terms "Company,"
"IRIDEX," "we," "us" and "our" refer to IRIDEX Corporation, a Delaware
corporation, and, when the context so requires, our wholly owned subsidiaries,
IRIS Medical Instruments, Inc. and Light Solutions Corporation, both California
corporations, and IRIDEX Foreign Sales Corporation, a Barbados corporation, and
our dermatology division, IRIDERM.
THE IRIDEX STRATEGY
We are one of the worldwide leaders in developing, manufacturing,
marketing and selling innovative and cost-effective medical laser systems. The
key elements of our strategy are:
Broaden Product Lines. One of our core strengths has been our regular
introduction of new laser systems, delivery devices and product upgrades to
enhance the benefits of our laser systems. We attempt to leverage our existing
products and technology when developing new products. In 1997, we introduced the
DioLite 532, based on the same visible light technology as the OcuLight GL, for
the dermatology market. In 1998, we introduced the OcuLight GLx, a new version
of the OcuLight GL, with increased power and delivery device capability. In
October 1999, we introduced the next generation of OcuLight SLx, which offers
added features, such as LongPulse and MicroPulse operating modes. These features
enable the OcuLight SLx to perform the latest in clinical infrared applications.
In October 2000, we introduced the Easy Fit family of portable slit lamp
adapters (SLAs). These new SLAs allow for improved viewing clarity of the retina
by the physician. In 2001, we introduced the Apex 800, a high powered infrared
laser for hair removal for the dermatology market. The characteristics of these
products are similar to those which have made our previous products successful,
such as low cost ownership, reliability and portability. We intend to continue
our investment in research and development to improve the performance of our
systems. We also intend to develop additional technologies which can more cost
effectively address the needs of the ophthalmic and dermatologic markets.
Develop and Validate New Applications. We seek to develop and validate
applications that are less costly, reduce side effects and achieve better
clinical results than existing treatments. Our products are currently being used
in multiple studies in the United States and internationally to demonstrate the
clinical benefits of our technology in treatment. Our OcuLight SLx laser is
being used in several studies to treat the various stages of age-related macular
degeneration (AMD). Additionally, two international studies are evaluating the
use of our G-Probe as a primary treatment for glaucoma. We announced in October
1999 that a study on occult wet AMD produced results demonstrating that
Transpupillary Thermotherapy (TTT) was effective in improving or stabilizing
vision in 75% of patients with a procedure using our OcuLight infrared laser
photocoagulator. In March 2000, enrollment commenced in a twenty center clinical
trial that we are sponsoring which could validate TTT as an effective therapy
for the majority of patients with wet AMD. In November 2001, we announced that
enrollment for a study on dry AMD was stopped as sufficient enrollment had been
achieved to detect a clinically relevant difference in the clinical outcomes of
the study. New applications increase laser usage and may ultimately increase the
size of the market for laser photocoagulators.
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Provide Total Disease Management. We intend to expand our product
offerings beyond therapeutic laser systems and develop adjunctive diagnostic
systems. An adjunctive diagnostic system is used either to screen and identify
more patients who require therapy or objectively assess the adequacy of therapy.
We believe that a significant opportunity exists to provide diagnostic equipment
to the ophthalmic and optometric communities. We intend to pursue our entrance
into this diagnostic market through both internal development and selected
acquisitions. By pursuing both therapeutic and diagnostic systems, we intend to
provide total disease management solutions to our customers.
Develop New Markets Through Strategic Alliances. We intend to establish
strategic alliances in order to expedite and lower the cost of developing and
bringing to market new products, both to the ophthalmology and dermatology
markets and to markets not currently addressed by our products. Through these
alliances, we will seek access to technologies that we do not currently possess.
We have been working with Miravant Medical Technologies, formerly known as PDT,
Inc. ("Miravant"), a company engaged in the development of photodynamic drugs
and applications, to provide lasers to activate certain photodynamic drugs
developed by Miravant. In January 2002, Miravant announced that the top line
results of Phase III clinical trials of the photodynamic drug developed (SnET2)
did not meet the primary efficacy endpoint in the study. As a result, the future
place for SnET2 in the treatment of wet AMD is unclear and we cannot assure you
that SnET2 will be timely or successfully pursued through clinical trials by
Miravant. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Results - We Depend on
Collaborative Relationships to Develop, Introduce and Market New Products,
Product Enhancements and New Applications."
PRODUCTS
We utilize a systems approach to product design. Each system includes a
console, which generates the laser energy, and a number of interchangeable
peripheral delivery devices, including disposable delivery devices, for use in
specific clinical applications. This approach allows our customers to purchase a
basic system and add additional delivery devices as their needs expand or as we
develop new applications. We believe that this systems approach also brings
economies-of-scale to our product development and manufacturing efforts since
each application does not require the design and manufacture of complete
stand-alone products. Our primary non-disposable products range in price from
$2,000 to $75,000, and consist of laser consoles and peripheral delivery
devices.
Consoles: Our laser consoles incorporate the economic and technical benefits of
semiconductor laser technology, which is the basis of our semiconductor-based
laser systems.
Infrared Photocoagulator Consoles. These OcuLight photocoagulator
consoles are available in two infrared output power ranges: the OcuLight
SL at 2 Watts and the OcuLight SLx at 3 Watts. Each console weighs 14
pounds, has dimensions of 4"H x 12"W x 12"D, draws a maximum of 60 Watts
of wall power, and requires no external air or water cooling. Our
dermatology infrared laser light product, the Apex 800, was introduced
into the hair removal market in July 2001. Each console weighs 27
pounds, has dimensions of 6"H x 12"W x 17"D, draws 700 Watts of wall
power and has a closed loop integrated water cooling system. We believe
that the smaller overall sizes, lower weights and low power requirements
to operate represent distinct advantages over competing products.
Visible Photocoagulator Consoles. Our semiconductor-based
photocoagulator, the OcuLight GL, delivers visible laser light. The
OcuLight GLx, has increased power and delivery device capability. Our
visible laser light dermatology product, the DioLite 532, is also based
on semiconductor-based technology. The OcuLight GLx consoles weigh 15
pounds, have dimensions of 6"H x 12"W x 12"D, draw a maximum of 300
Watts of wall power and require no external air or water cooling.
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Peripheral Delivery Devices:
Our versatile family of consoles and delivery devices has been designed
to allow the addition of new capabilities with a minimal incremental
investment. A user adds capabilities by simply purchasing a new
interchangeable delivery device. We have developed both disposable and
nondisposable delivery devices and expect to continue to develop
additional devices.
Ophthalmic Delivery Devices:
TruFocus Laser Indirect Ophthalmoscope. The indirect ophthalmoscope is
worn on the physician's head and is used to treat peripheral retinal
disorders, particularly in infants or adults requiring treatment in the
supine position. This product can be used both for diagnosis and
treatment at the point-of-care.
Slit Lamp Adapter. These adapters allow the physician to utilize a
standard slit lamp oriented vertically for both diagnosis and treatment.
A slit lamp adapter can be installed by the doctor in several minutes,
converting over 50 variations of a standard diagnostic slit lamp into a
therapeutic photocoagulator delivery system. Slit lamp adapters are used
for treatment of both retinal and glaucoma diseases.
Operating Microscope Adapter. These adapters allow the physician to
utilize a standard operating microscope for both diagnosis and laser
treatment. These devices are similar to slit lamp adapters, except they
are oriented horizontally and therefore can be used to deliver retinal
photocoagulation to a supine patient.
EndoProbe. The EndoProbe is used for endophotocoagulation, a retinal
treatment performed in the hospital operating room or surgery center.
These sterile disposable probes are available in tapered, angled,
fluted, active aspiration and illuminating styles.
G-Probe. The G-Probe is used to treat medically and surgically
uncontrolled glaucoma, in many instances replacing cyclocryotherapy, or
freezing of the eye. The G-Probe's non-invasive procedure takes about
ten minutes, is done to an anesthetized eye in the doctor's office and
results in less pain and fewer adverse side effects than
cyclocryotherapy. The G-Probe is a sterile disposable product.
DioPexy Probe. The DioPexy Probe is a hand-held instrument which is used
to treat retinal tears and breaks transsclerally, noninvasively through
the sclera as an alternative method of attaching the retina. Our DioPexy
Probe results in increased precision, less pain and less inflammation
than traditional cryotherapy.
Dermatology Delivery Devices:
DioLite Handpiece. The DioLite Handpiece is a hand held instrument that
is used to treat vascular and pigmented lesions. These devices are
available in 200, 500, 700, 1000 and 1400 micron sizes.
ScanLite Scanner. The ScanLite is a computer pattern generator with
integrated controls designed to enhance the capabilities of the DioLite
532 laser system. It allows rapid and uniform treatment of large-area
vascular and pigmented lesions including port wine stains, matted
telangiectasia, and cafe au lait stains.
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Apex 800 ColdTip Handpiece. The ColdTip Handpiece is a handheld
instrument used with the Apex 800 for hair removal. It offers subzero
contact cooling of the epidermis to allow the use of higher treatment
fluences for improved clinical efficacy and patient comfort.
Apex 800 Varispot Handpiece. The VariSpot Handpiece is a hand held
instrument used with the Apex 800 for hair removal. It offers an aiming
beam which aids visualization of the target area allowing rapid
treatment.
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The following chart lists the eye diseases that can be treated using our
photocoagulator systems, including the delivery devices that we offer to treat
these diseases. The selection of delivery device is often determined by the
severity and location of the disease. The chart also lists the skin diseases or
conditions that can be treated with our dermatology laser systems.
Condition Procedure Console Delivery Devices
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Ophthalmology Treatments:
Age-related Macular Retinal Infrared & Slit Lamp Adapter
Degeneration Photocoagulation Visible
Diabetic Retinopathy
Macular Edema Grid Retinal Infrared & Slit Lamp Adapter &
Photocoagulation Visible Operating Microscope Adapter
Focal Retinal Visible Slit Lamp Adapter
Photocoagulation
Proliferative Pan-Retinal Infrared & Slit Lamp Adapter,
Photocoagulation Visible Operating Microscope Adapter,
Laser Indirect Ophthalmoscope,
EndoProbe
Glaucoma
Primary Open-Angle Trabeculoplasty Infrared & Slit Lamp Adapter
Visible
Angle-closure Iridotomy(1) Infrared & Slit Lamp Adapter
Visible
Uncontrolled Transscleral Infrared G-Probe
Cyclophotocoagulation
Retinal Detachment Retinopexy Retinal Infrared & Slit Lamp Adapter,
Photocoagulation Visible Laser Indirect Ophthalmoscope,
Operating Microscope Adapter,
EndoProbe
Transscleral Retinal Infrared DioPexy Probe
Photocoagulation
Retinopathy of Prematurity Retinal Infrared Laser Indirect
Photocoagulation Ophthalmoscope
Ocular Tumors Retinal Infrared Slit Lamp Adapter,
Photocoagulation Operating Microscope Adapter,
Laser Indirect Ophthalmoscope
Dermatology Treatments:
Vascular Lesions Selective Visible DioLite Handpiece
Photothermolysis
Pigmented Lesions Selective Visible DioLite Handpiece
Photothermolysis
Hair Removal Selective Infrared ColdTip Handpieces,
Photothermolysis Varispot Handpiece
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(1) This application is currently not cleared by the U.S. FDA.
RESEARCH AND DEVELOPMENT
Our research and development activities are performed internally by our
research and development staff comprised of 26 individuals and is supplemented
by consultants with specialized expertise. Research
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and development efforts are directed toward both development of new products and
development of new applications using existing products, as well as the
identification of markets not currently addressed by our products. Our
expenditures for research and development totaled approximately $4,808,000,
$5,265,000 and $3,925,000 in 2001, 2000 and 1999, respectively. We have close
working relationships with ophthalmic researchers, clinicians and dermatologists
around the world who provide new ideas, test the feasibility of these new ideas,
and assist us in validating new products and new applications before they are
introduced.
We are supporting pre-clinical and clinical studies to develop new
photocoagulation treatments and applications. The objectives of developing new
applications are to expand the number of patients who can be treated, to more
effectively treat diseases, to treat patients earlier in the treatment regimen
and to reduce the side-effects of treatment. Examples of such studies include:
Age-Related Macular Degeneration (AMD) -- Dry Form. About 90% of AMD is
the dry form. We are pursuing two approaches to treat dry AMD:
Therapeutic Treatment and Prophylactic Treatment. The Therapeutic
Treatment approach uses the OcuLight infrared laser to restore vision by
causing resorption of dry AMD deposits which have accumulated in the
macula and have impacted vision. For Prophylactic Treatment, we are
supporting a multi-center clinical trial which is testing a prophylactic
treatment of age-related macular degeneration (PTAMD trial). In November
2001, we announced that enrollment for the PTAMD trial was stopped as
sufficient enrollment had been achieved to detect a clinically relevant
difference in the clinical outcomes of the study. This trial treats
patients with dry AMD using our OcuLight infrared laser systems with the
objective of determining whether patient vision is better as a result of
treatment compared to no treatment; and secondarily, to determine
whether treatment reduces the rate of progression of the disease from
the dry form of AMD to the wet form of AMD.
Age-related Macular Degeneration (AMD) -- Wet Form. The wet form of AMD
constitutes about 10% of all AMD but accounts for about 80% of all
severe vision loss associated with AMD. We are pursuing three approaches
to treat wet AMD at different stages: Photodynamic Therapy (PDT),
Transpupillary Thermotherapy (TTT) and Feeder Vessel Treatment. All of
these approaches close new vessels in the macula caused by wet AMD with
less damage than conventional laser treatments. In the PDT approach, an
infused photodynamic drug is stimulated by one of our lasers to close
the new vessels. We have been collaborating with Miravant in
commercializing this PDT approach to treat "classic" wet AMD. The Phase
III clinical trial was fully enrolled in December 1999. In January of
2002, Miravant announced that the top line results of the trial
indicated that SnET2, the photodynamic drug developed, did not meet the
primary efficacy endpoint in the study population. The future place for
SnET2 in the treatment of wet AMD is unclear. We cannot assure you that
SnET2 will be timely or successfully pursued through clinical trials by
Miravant. In the TTT approach a certain form of wet AMD called "occult"
is treated with the infrared laser alone. Favorable results of a pilot
study were published in October 1999 and a multi-center randomized trial
called the TTT4CNV Trial, which we are sponsoring, is currently
enrolling patients. The Data Safety Monitoring Committee (DSMC) for the
TTT clinical trial meets semiannually to evaluate the status of the
study. For Feeder Vessel Treatment, two centers, one in Europe and one
in the U.S., are using our infrared laser in clinical studies to treat
both "classic" and "occult" wet AMD. Preliminary results reported by
both centers have been favorable.
Glaucoma. Preliminary studies are underway to evaluate the use of the
G-Probe as a first-line treatment modality for various glaucomas.
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Diabetic Retinopathy. Studies are underway to investigate the treatment
of diabetic retinopathy using the MicroPulse (minimal impact sub-visible
threshold) infrared photocoagulation available in our OcuLight SLx
product with the objective of causing regression of the disease with
less loss of vision than conventional therapy.
Ocular Tumors. Clinical studies have reported successful treatment of
ocular tumors using OcuLight infrared lasers using the TTT approach.
CUSTOMERS AND CUSTOMER SUPPORT
Our products are currently sold to ophthalmologists, including glaucoma
specialists, retinal specialists, pediatric ophthalmologists, dermatologists and
plastic surgeons. Other customers include research and teaching hospitals,
government installations, surgi-centers and hospitals. No customer or
distributor accounted for 10% or more of total sales in 2001, 2000 or 1999. See
"Management's Discussion and Analysis of Financial Condition and our Results of
Operations."
We are continuing our efforts to broaden our customer base through the
development of new products and new applications including new diagnostic
products for use by ophthalmologists and dermatologists. We currently estimate
that there are approximately 20,000 ophthalmologists in the United States and
50,000 internationally who are each potential customers. We believe there are
approximately 10,000 dermatologists and approximately 9,000 plastic surgeons in
the U.S. who are potential customers. Additionally, we estimate that there are
approximately 4,900 and 18,000 hospitals in the United States and
internationally, respectively, as well as approximately 2,300 ambulatory
surgical centers in the United States which potentially represent multiple unit
sales. Because independent ophthalmologists and dermatologists frequently
practice at their own offices as well as through affiliation with hospitals or
other medical centers, each independent ophthalmologist, dermatologist, plastic
surgeon, hospital and medical center is a potential customer for our products.
We seek to provide superior customer support and service. We maintain
an "around-the-clock" telephone service line to service our customers. If a
problem with a product cannot be diagnosed and resolved by telephone, a
replacement unit is shipped overnight to any domestic customer and by the most
rapid delivery means available to any international customer, and the problem
unit is returned to us. The small size and rugged design of our products allows
for economical shipment and quick response to customers almost anywhere in the
world.
SALES AND MARKETING
We market our products in the United States predominantly through our
direct sales force. As of December 29, 2001, we had a total of 12 employees
engaged in direct sales efforts within the United States. Our sales and
marketing organization is based at our corporate headquarters in Mountain View,
California with area sales managers located throughout the United States.
To support our sales process, we conduct marketing programs which
include direct mail, trade shows, public relations, and advertising in trade and
academic journals and newsletters. We annually participate in approximately 87
trade shows or meetings in the United States and approximately 65 trade shows or
meetings internationally. These meetings allow us to present our products to
existing and prospective buyers.
International product sales represented 41.3%, 35.6% and 38.9% of our
sales in 2001, 2000 and 1999, respectively. Our international sales are made
principally to customers in Europe and the Asia/Pacific Rim region. Our products
are sold internationally through our 67 independent distributors into 91
countries. International sales are administered through our corporate
headquarters in Mountain View, California, along with four international
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area sales managers. Our distribution agreements with our international
distributors are generally exclusive and typically can be terminated by either
party without cause on 90 days notice. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors That May Affect Future
Results--We Depend on International Sales."
We believe that educating patients and physicians at an early stage
about the long-term health benefits and cost-effectiveness of diagnosis and
treatment of diseases that cause blindness is critical to market acceptance of
our ophthalmic products. We believe that the trend toward management of health
care costs in the United States will lead to increased awareness of and emphasis
on disease prevention and cost-effective treatments and, as a result, will
increase demand for our ophthalmic laser products as well as our prospective
diagnostic products.
We work with our customers to enhance our ability to identify new
applications for our products, validate new procedures using our products,
respond more effectively to new procedures and expedite regulatory approvals of
new products and applications. Customers include key opinion leaders who are
often the heads of the departments or professors at universities. We believe
that these luminaries in the field of ophthalmology and dermatology are key to
the successful introduction of new technologies and their subsequent acceptance
by the general market. Acceptance of our products by these early adopters is key
to our strategy in the validation of our technology.
OPERATIONS
The manufacture of our infrared and visible light photocoagulators and
the related delivery devices is a highly complex and precise process. Completed
systems must pass quality control and reliability tests before shipment. Our
products may also suffer from product defects or failures after being shipped to
the customer despite testing because of the complex nature of our products.
We rely on third parties to manufacture substantially all of the
components used in our products, although we assemble critical subassemblies and
the final product at our facility in Mountain View, California. Some of these
suppliers and manufacturers are sole source. We have some long-term or volume
purchase agreements with our suppliers and currently purchase most components on
a purchase order basis. These components may not be available in the quantities
required, on reasonable terms, or at all. Financial or other difficulties faced
by our suppliers or significant changes in demand for these components or
materials could limit their availability. Any failures by such third parties to
adequately perform may delay the submission of products for regulatory approval,
impair our ability to deliver products on a timely basis or otherwise impair our
competitive position. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results--We Face Risks of Manufacturing and We Depend on Key Manufacturers and
Suppliers."
In April 1998, we received certification for ISO 9001/EN 46001. ISO
9001/EN 46001 is a documented international quality system demonstrating
compliance to the European Medical Device Directive.
International regulatory bodies often establish varying product
standards, packaging requirements, labeling requirements, tariff regulations,
duties and tax requirements. As a result of our sales in Europe, we are required
to have all products "CE" registered, an international symbol affixed to all
products demonstrating compliance to the European Medical Device Directive and
all applicable standards. In July
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1998, we received CE registration under Annex II guidelines, the most stringent
path to CE registration. With Annex II CE registration, we have demonstrated our
ability to both understand and comply with all applicable European standards.
This allows us to register any product upon our internal verification of
compliance to all applicable European standards. Currently, all released
products are CE registered. Continued registration is based on successful review
of the process by our European Registrar during its annual audit. Any loss of
registration would have a material adverse effect on our business, results of
operations and financial condition. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That May
Affect Future Results-We Are Subject to Government Regulation."
COMPETITION
Competition in the market for devices used for ophthalmic and
dermatologic treatments is intense and is expected to increase. This market is
also characterized by rapid technological innovation and change, and our
products could become obsolete as a result of future innovations. Our
competitive position depends on a number of factors including product
performance, characteristics and functionality, ease of use, scalability,
durability and cost. In addition to other companies that manufacture
photocoagulators and dermatological devices, we compete with pharmaceutical
solutions, other technologies and other surgical techniques available in both
the dermatologic and ophthalmic markets. Our principal competitors in
ophthalmology are Lumenis Ltd., Nidek, Inc., Carl Zeiss, Inc., Alcon
International and Quantel. All of these companies currently offer a competitive,
semiconductor-based laser system in ophthalmology. Our principal competitors in
dermatology are Lumenis Ltd., Laserscope, Candela Corporation and Altus Medical
Inc. Some competitors have substantially greater financial, engineering, product
development, manufacturing, marketing and technical resources than we do. Some
companies also have greater name recognition than us and long-standing customer
relationships. In addition, other medical companies, academic and research
institutions, or others, may develop new technologies or therapies, including
medical devices, surgical procedures or pharmacological treatments and obtain
regulatory approval for products utilizing such techniques that are more
effective in treating the conditions targeted by us, or are less expensive than
our current or future products. Our technologies and products could be rendered
obsolete by such developments. Any such developments could have a material
adverse effect on our business, financial condition and results of operations.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Affect Future Results--Our Market is
Competitive."
PATENTS AND PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon our
proprietary information. We rely on a combination of patents, trade secrets,
copyright and trademark laws, nondisclosure and other contractual agreements and
technical measures to protect our intellectual property rights. We file patent
applications to protect technology, inventions and improvements that are
significant to the development of our business. We have been issued twelve
United States patents and one foreign patent on the technologies related to our
products and processes. We have approximately eight pending patent applications
in the United States and six foreign pending patent applications that have been
filed. There can be no assurance that any of our patent applications will issue
as patents, that any patents now or hereafter held by us will offer any degree
of protection, or that our patents or patent applications will not be
challenged, invalidated or circumvented in the future. Moreover, our
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, may seek to apply for and obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our
products either in the United States or in international markets.
In addition to patents, we rely on trade secrets and proprietary
know-how which we seek to protect, in part, through proprietary information
agreements with employees, consultants and other parties. Our proprietary
information agreements with our employees and consultants contain provisions
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requiring such individuals to assign to us, without additional consideration,
any inventions conceived or reduced to practice by them while employed or
retained by us, subject to customary exceptions. Proprietary information
agreements with employees, consultants and others may be breached, and we may
not have adequate remedies for any breach. Our trade secrets may become known to
or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights. Companies in
the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and our competitors. Because patent applications are
maintained in secrecy in the United States of America until patents are issued
and are maintained in secrecy for a period of time outside the United States of
America, we have not conducted any searches to determine whether our technology
infringes any patents or patent applications. We have, from time to time, been
notified of, or have otherwise been made aware of, claims that we may be
infringing upon patents or other proprietary intellectual property owned by
others.
Any claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
shipment delays, require us to develop noninfringing technology or require us to
enter into royalty or licensing agreements. Although patent and intellectual
property disputes in the medical device area have often been settled through
licensing or similar arrangements, the terms of any license may not be
reasonable and may result in substantial costs to us, including ongoing
royalties. An adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent us from manufacturing and
selling our products, which would have a material adverse effect on our
business, results of operations and financial condition. Conversely, litigation
may be necessary to enforce patents issued to us, to protect trade secrets or
know-how owned by us or to determine the enforceability, scope and validity of
the proprietary rights of others. Both the defense and prosecution of
intellectual property suits or interference proceedings are costly and time
consuming. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Affect Future Results--We Rely on
Patents and Proprietary Rights."
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by us are subject to
extensive regulation by numerous governmental authorities, including federal,
state, and foreign governmental agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, as amended, and the regulations promulgated thereunder (the
"FDA Act"), the Food and Drug Administration (the "FDA") serves as the principal
federal agency with authority over medical devices and regulates the research,
clinical testing, manufacture, labeling, distribution, sale, marketing and
promotion of such devices. Noncompliance with applicable requirements can result
in, among other things, fines, injunctions, civil penalties, recall or seizures
of products, total or partial suspension of production, failure of the
government to grant premarket clearance or approval for devices, withdrawal of
marketing approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device manufactured or
distributed by us.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to Quality System Regulations
("QSRs") requirements). Class II devices are subject to general and special
controls (for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval (or "PMA") by the FDA to ensure their safety and
effectiveness.
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Before a new Class III device can be introduced into the market, the
manufacturer must generally obtain marketing clearance through either a 510(k)
premarket notification or a PMA. A 510(k) clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or II medical device, or to a Class
III medical device for which the FDA has not called for a PMA. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional information or data are needed before a
substantial equivalence determination can be made. A request for additional data
may require that clinical studies of the device's safety and efficacy be
performed.
Commercial distribution of a device for which a 510(k) notification is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a previously approved device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past. Even in cases where the FDA grants a 510(k) clearance, it can take the
FDA from four to twelve months from the date of submission to grant a 510(k)
clearance, but it may take longer.
A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products that
fall into this category and could have a materially adverse effect on our
business, financial condition and results of operations. For any of our products
that are cleared through the 510(k) process, such as our Apex 800 system,
modifications or enhancements that could significantly affect the safety or
efficacy of the device or that constitute a major change to the intended use of
the device will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or if
it is a Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence which typically
includes extensive data, including human clinical trial data, to demonstrate the
safety and effectiveness of the device. The PMA application must also contain
the results of all relevant bench tests, laboratory and animal studies, a
complete description of the device and its components, and a detailed
description of the methods, facilities and controls used to manufacture the
device. In addition, the submission may require the applicant to detail the
proposed labeling, advertising literature and training methods.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for filing. Once the submission is accepted for filing, the FDA
begins an in-depth review of the PMA. An FDA review of a PMA application
generally takes one to two years from the date the PMA application is accepted
for filing, but may take significantly longer. The review time is often
significantly extended by the FDA asking for more information or clarification
of information already provided in the submission. During the review period, an
advisory committee, typically a panel of clinicians, will likely be convened to
review and evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. The FDA is not bound by the
recommendations of the advisory panel. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable QSR requirements,
which include good manufacturing practices.
If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an approvable letter, which may contain a number of conditions which
must be met in order to secure final approval of the PMA. When, and if, those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA approval letter, authorizing commercial marketing of the device for
certain indications. The FDA may also determine that additional
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clinical trials are necessary or other deficiencies exist in the PMA, in which
case PMA approval may be delayed. The PMA process can be expensive, uncertain
and lengthy, and a number of devices for which the FDA approval has been sought
by other companies have never been approved for marketing.
If human clinical trials of a device are required in connection with
either a 510(k) notification or a PMA, and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an investigational device exemption ("IDE")
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is reviewed and approved by the FDA and one or
more appropriate institutional review boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs.
All of our products have obtained either an independent 510(k) clearance
or are modifications of previously cleared 510(k) devices, which do not require
the submission of a new 510(k) notification. However, the FDA may not agree with
our determination that a 510(k) notification is not required for the modified
devices and require us to submit a new 510(k) notification for the modification.
If the FDA requires us to submit a new 510(k) notification for the modified
devices, we may be prohibited from marketing the modified device until the
510(k) notification is cleared by the FDA.
Any products manufactured or distributed by us pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and certain
state agencies. The FDA Act requires devices to be manufactured to comply with
applicable QSR regulations which impose certain procedural and documentation
requirements upon us with respect to manufacturing, design, development and
quality assurance activities.
Labeling and promotion activities are subject to scrutiny by the FDA
and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses. We
and our products are also subject to a variety of state laws and regulations in
those states or localities where our products are or will be marketed. Any
applicable state or local regulations may hinder our ability to market our
products in those states or localities. Manufacturers are also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. We may be
required to incur significant costs to comply with such laws and regulations now
or in the future. Such laws or regulations may have a material adverse effect
upon our ability to do business.
Exports of our products are regulated by the FDA and are covered by the
Export Amendment of 1996, which greatly expanded the export of approved and
unapproved United States medical devices. However, some foreign countries
require manufacturers to provide an FDA certificate for products for export
("CPE") which requires the device manufacturer to certify to the FDA that the
product has been granted premarket clearance in the United States and that the
manufacturing facilities appeared to be in compliance with QSR at the time of
the last QSR inspection. The FDA will refuse to issue a CPE if significant
outstanding QSR violations exist.
The introduction of our products in foreign markets will also subject us
to foreign regulatory clearances which may impose additional substantial costs
and burdens. International sales of medical devices are subject to the
regulatory requirements of each country. The regulatory review process varies
from
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country to country. Many countries also impose product standards, packaging,
requirements, labeling requirements and import restrictions on devices. In
addition, each country has its own tariff regulations, duties and tax
requirements. The approval by the FDA and foreign government authorities is
unpredictable and uncertain. The necessary approvals or clearances may not be
granted on a timely basis, if at all. Delays in receipt of, or a failure to
receive, such approvals or clearances, or the loss of any previously received
approvals or clearances, could have a material adverse effect on our business,
financial condition and results of operations.
Changes in existing requirements or adoption of new requirements or
policies by the FDA or other foreign and domestic regulatory authorities could
adversely affect our ability to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on our
business, financial condition and results of operations. We may be required to
incur significant costs to comply with laws and regulations in the future. These
laws or regulations may have a material adverse effect upon our business,
financial condition or results of operations.
REIMBURSEMENT
The cost of a significant portion of medical care in the United States
is funded by government programs, health maintenance organizations and private
insurance plans. Our products are typically purchased by doctors, clinics,
hospitals and other users, which bill various third-party payers, such as
government programs and private insurance plans, for the health care services
provided to their patients. Government imposed limits on reimbursement of
hospitals and other health care providers have significantly impacted the
spending budgets of doctors, clinics and hospitals to acquire new equipment,
including our products. Under certain government insurance programs, a health
care provider is reimbursed for a fixed sum for services rendered in treating a
patient, regardless of the actual charge for such treatment. The Center for
Medicare and Medicaid Services (CMS) reimburses hospitals on a
prospectively-determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis. CMS
reimburses physicians a prospectively-determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital or
physician in furnishing the care and regardless of the specific devices used in
that procedure. Reimbursement issues have affected sales of our ophthalmic
products to a greater extent than sales of our dermatologic products since
dermatology procedures, in general, are not covered procedures under most
insurance programs and the cost of these procedures are paid for by the patient.
Private third-party reimbursement plans are also developing increasingly
sophisticated methods of controlling health-care costs through limitation on
reimbursable procedures and the exploration of more cost-effective methods of
delivering health care. In general, these government and private measures have
caused health care providers, including our customers, to be more selective in
the purchase of medical products. In addition, changes in government regulation
or in private third-party payers' policies may limit or eliminate reimbursement
for procedures employing our products, which could have a material adverse
effect on our business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results - We Depend on Third Party
Coverage and Reimbursement Policies."
Doctors, clinics, hospitals and other users of our products may not
obtain adequate reimbursement for use of our products from third-party payors.
While we believe that the laser procedures using our products have generally
been reimbursed, payers may deny coverage and reimbursement for our products if
they determine that the device was not reasonable and necessary for the purpose
used, was investigational or was not cost-effective. For example, during July
2000, the CMS advised that claims for reimbursement for certain AMD procedures
that use our OcuLight SLx laser system would not be reimbursed by CMS. As a
result, since July 2000, sales of the OcuLight SLx laser system have dropped
significantly. In September 2000, CMS changed its position and advised that
claims for reimbursement for two of the AMD procedures can be submitted for
reimbursement with coverage and payment to be determined by the local medical
carriers in their discretion. Sales of the OcuLight SLx continue, albeit at a
lower level, because the OcuLight SLx can also be used for other retinal
procedures that are reimbursable by the CMS. Furthermore, since CMS advisories
are for domestic third party CMS payers, they are not likely to affect
international sales. We believe domestic sales of the OcuLight SLx laser system
will continue at these lower levels until more medical carriers reimburse for
performing such AMD procedures or until CMS advises that claims for these
procedures may be submitted directly to CMS at the national level. Two carriers,
Noridian Mutual Insurance, which is the CMS Part B carrier for Alaska, Arizona,
Colorado, Hawaii, Iowa, Nevada, North Dakota, Oregon, South Dakota, Washington
and Wyoming, as well as Cigna, which is the carrier for North Carolina,
Tennessee and Idaho, have made written coverage decisions approving the use of
the TTT protocol, using our OcuLight SLx laser system for the treatment of wet
AMD. We believe that more medical carriers will reimburse for these procedures
and CMS will allow direct reimbursement for them when they are further validated
by clinical studies. We are sponsoring a
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randomized clinical trial to further validate Transpupillary Thermal Therapy,
the most significant of the subject AMD procedures. See "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Sales."
PRODUCT LIABILITY AND INSURANCE
We may be subject to product liability claims in the future. Our
products are highly complex and are used to treat extremely delicate eye tissue
and skin conditions on and near a patient's face. Our products are often used in
situations where there is a high risk of serious injury or adverse side effects.
Accordingly, the manufacture and sale of medical products entails significant
risk of product liability claims. Although we maintain product liability
insurance with coverage limits of $11.0 million per occurrence and an annual
aggregate maximum of $12.0 million, the coverage of our insurance policies may
not be adequate. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful claim brought against us
in excess of our insurance coverage could have a material adverse effect on our
business, results of operations and financial condition. To date, we have not
experienced any product liability claims which would result in payments in
excess of our policy limits.
BACKLOG
We generally ship our products within a few days after acceptance of a
customer's purchase order. Accordingly, we do not believe that our backlog at
any particular time is indicative of future sales levels.
EMPLOYEES
At December 29, 2001, we had a total of 125 full-time employees,
including 52 in operations, 34 in sales and marketing, 26 in research and
development and 13 in finance and administration. We also employ, from time to
time, a number of temporary and part-time employees as well as consultants on a
contract basis. At December 29, 2001, we employed 3 such persons. We intend to
hire additional personnel during the next twelve months primarily in the direct
sales and production areas. Our future success will depend in part on our
ability to attract, train, retain and motivate highly qualified employees, who
are in great demand. We may not be successful in attracting and retaining such
personnel. Our employees are not represented by a collective bargaining
organization, and we have never experienced a work stoppage or strike. We
consider our employee relations to be good.
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and their ages as of December 29, 2001 were as
follows:
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Name Age Position
---- --- --------
Theodore A. Boutacoff 54 President, Chief Executive Officer and Director
Robert Kamenski 47 Chief Financial Officer and Vice President, Administration
Eduardo Arias 57 Senior Vice President, International Sales and Business Development
Timothy Powers 40 Vice President, Operations
James L. Donovan 64 Vice President, Corporate Business Development and Director
Mr. Boutacoff co-founded IRIDEX and since February 1989 has served as
its President, Chief Executive Officer and a member of its Board of Directors.
Prior to co-founding the Company, Mr. Boutacoff held various positions,
including Director of New Business and Clinical Development, Director of
Marketing and Director of Regulatory Affairs, with the Medical Division of
Coherent, Inc., a manufacturer of laser systems for science, medicine and
industry. Mr. Boutacoff holds a B.S. degree in civil engineering from Stanford
University.
Mr. Kamenski joined IRIDEX in March 1997 as Vice President, Finance and
Administration and was appointed Chief Financial Officer in October 1997. Prior
to joining us, from July 1992 to March 1997, Mr. Kamenski held various
positions, including Chief Financial Officer and Vice President of Finance and
Administration, with TeleSensory Corporation. Mr. Kamenski holds a B.B.A. degree
in accounting from the University of Wisconsin-Milwaukee.
Mr. Arias co-founded IRIDEX and, from April 1989 to September 1991, Mr.
Arias served as IRIDEX Vice President, Sales & Marketing and since September
1991 served as Senior Vice President, Worldwide Sales. Prior to co-founding the
Company, Mr. Arias held various positions, including Director of Marketing and
Sales, Medical Group and Director of International Operations, at Coherent, Inc.
Mr. Powers joined IRIDEX in July 1997 as Vice President, Operations.
Prior to joining us, from November 1988 to July 1997, Mr. Powers held various
positions, including Vice President of Operations, at Strato/Infusaid, Inc., a
Pfizer subsidiary. Mr. Powers holds a Masters of Management Science degree in
manufacturing engineering and a Bachelors of Science degree in industrial
technology, both from the University of Lowell in Massachusetts.
Mr. Donovan co-founded IRIDEX. He has served as a member of our Board of
Directors since February 1989. From February 1989 to October 1997, Mr. Donovan
served as our Chief Financial Officer, except during the period June to November
1996. He currently serves as our Vice President, Corporate Business Development.
Prior to co-founding the Company, Mr. Donovan served as General Manager of the
Medical Division and Chief Financial Officer of Coherent, Inc. Mr. Donovan holds
a B.S. degree in business administration from Southern Oregon State College.
-16-
ITEM 2. PROPERTIES
Our operating facilities are located in 37,000 square feet of space in
Mountain View, California. The building houses manufacturing, research and
development and serves as our headquarter offices. The lease term, which expired
in 2002, was renewed for two years through 2004.
Management believes that our facility will be adequate for our current
needs and that suitable additional space or alternative space will be available
as needed in the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
-17-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON EQUITY
Our Common Stock has been traded on the NASDAQ National Market System
under the symbol "IRIX" since our initial public offering on February 15, 1996.
The following table sets forth for the periods indicated the high and low
closing prices for our Common Stock.
HIGH LOW
------- -------
FISCAL 2002
First Quarter (through March 20, 2002) ................. $ 6.047 $ 4.170
FISCAL 2001
First Quarter .......................................... $ 6.313 $ 4.125
Second Quarter ......................................... 4.400 3.000
Third Quarter .......................................... 4.250 3.250
Fourth Quarter ......................................... 5.446 3.850
FISCAL 2000
First Quarter .......................................... $17.000 $ 8.000
Second Quarter ......................................... 13.000 8.375
Third Quarter .......................................... 12.000 7.625
Fourth Quarter ......................................... 11.375 4.875
FISCAL 2002
On March 20, 2002, the closing price on the NASDAQ National Market for
our Common Stock was $4.438 per share. As of March 20, 2002, there were
approximately 90 holders of record of our Common Stock.
DIVIDEND POLICY
We have never paid cash dividends on our Common Stock. We currently
intend to retain any earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future. In addition, the payment of
cash dividends to our stockholders is currently prohibited by our bank line of
credit. See Note 4 of Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of December 29,
2001 and December 30, 2000, and for the years ended December 29, 2001, December
30, 2000 and January 1, 2000, has been derived from, and are qualified by
reference to, our audited consolidated financial statements included herein. The
selected consolidated statement of operations data for the years ended January
2, 1999 and December 31, 1997 and the consolidated balance sheet data as of
January 1, 2000, January 2, 1999 and December 31, 1997 has been derived from our
audited financial statements not included herein. These historical results are
not necessarily indicative of the results of operations to be expected for any
future period.
The data set forth below (in thousands, except per share data) are
qualified by reference to, and should be read in conjunction with Item
7."Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements included in Item 8.
"Financial Statements and Supplementary Data."
Fiscal Fiscal Fiscal Fiscal Fiscal
Year Year Year Year Year
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales ........................................................ $ 27,275 $ 32,838 $ 26,391 $ 22,338 $ 16,995
Cost of sales ................................................ 14,205 14,506 11,669 9,915 7,321
-------- -------- -------- -------- --------
Gross profit .................................... 13,070 18,332 14,722 12,423 9,674
-------- -------- -------- -------- --------
Operating expenses:
Research and development ................................. 4,808 5,265 3,925 3,099 1,716
Selling, general and administrative ...................... 10,251 10,747 9,224 8,358 6,074
-------- -------- -------- -------- --------
Total operating expenses ........................ 15,059 16,012 13,149 11,457 7,790
-------- -------- -------- -------- --------
Income (loss) from operations ................................ (1,989) 2,320 1,573 966 1,884
Interest and other income..................................... 426 569 556 511 607
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes .............. (1,563) 2,889 2,129 1,477 2,491
Benefit from (provision) for income taxes .................... 962 (809) (682) (369) (897)
-------- -------- -------- -------- --------
Income (loss) from continuing operations ..................... (601) 2,080 1,447 1,108 1,594
Income (loss) from operations of discontinued Laser Research
segment (net of applicable income tax benefit (provision)
of $124, $(131), $(80), $213 and $(283) respectively) ..... (204) 336 171 640 504
Income (loss) on disposal of Laser Research segment (net of
applicable income tax benefit (provision) of $315,
$0, $0, $0 and $0 respectively) ............................ (468) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ............................................ $ (1,273) $ 2,416 $ 1,618 $ 1,748 $ 2,098
======== ======== ======== ======== ========
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Basic net income (loss) per share:
Continuing Operations ........................................ $ (0.09) $ 0.31 $ 0.22 $ 0.17 $ 0.25
Discontinued Operations ...................................... (0.10) 0.05 0.03 0.10 0.08
-------- -------- -------- -------- --------
Basic net income (loss) per common share ..................... $ (0.19) $ 0.36 $ 0.25 $ 0.27 $ 0.33
======== ======== ======== ======== ========
Diluted net income (loss) per share:
Continuing Operations ........................................ $ (0.09) $ 0.29 $ 0.21 $ 0.16 $ 0.24
Discontinued Operations ...................................... (0.10) 0.04 0.03 0.10 0.07
-------- -------- -------- -------- --------
Diluted net income (loss) per share .......................... $ (0.19) $ 0.33 $ 0.24 $ 0.26 $ 0.31
======== ======== ======== ======== ========
Shares used in net income (loss) per common share basic
calculations ............................................... 6,757 6,637 6,503 6,480 6,406
======== ======== ======== ======== ========
Shares used in net income (loss) per common share diluted
calculations ............................................... 6,757 7,285 6,849 6,765 6,755
======== ======== ======== ======== ========
December 29, December 30, January 1, January 2, December 31,
2001 2000 2000 1999 1997
------------ ------------ ---------- ---------- ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and ................. $ 9,102 $12,994 $13,148 $10,876 $13,488
available-for-sale securities
Working capital ............................ 26,374 27,005 23,842 23,450 21,716
Total assets ............................... 33,788 35,025 32,763 28,377 26,686
Total stockholders' equity ................. 29,833 30,500 27,504 25,885 23,880
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IRIDEX Corporation is the leading worldwide provider of
semiconductor-based laser systems used to treat eye diseases in ophthalmology
and skin afflictions in dermatology. Our products are sold in the United States
predominantly through a direct sales force and internationally through 67
independent distributors into 91 countries.
Our revenues arise primarily from the sale of our IRIS Medical OcuLight
Systems, IRIDERM DioLite 532 and Apex 800 systems, delivery devices, disposables
and, to a lesser extent, revenues from service and support activities. Our
current family of OcuLight systems includes the IRIS Medical OcuLight SL,
OcuLight SLx, OcuLight GL and OcuLight GLx Laser Photocoagulation systems.
Revenue from product sales is recognized upon receipt of a purchase order and
product shipment provided no significant obligations remain and collection of
the receivables is deemed probable. Revenue from services is recognized upon
performance of the applicable services. We believe that future growth in unit
sales will be derived from growth in the market for photocoagulator products,
replacement of installed photocoagulators which use vacuum tube-based technology
and from the adoption of new procedures.
Sales to international distributors are made on open credit terms or
letters of credit. Sales of our products internationally currently are
denominated in United States dollars and, accordingly, are subject to risks
associated with international monetary conditions and currency fluctuations. In
general, strengthening of the U.S. dollar relative to a foreign currency
increases the cost of our product to our customers. Other risks that
international sales are subject to include shipping delays, generally longer
receivable collection periods, changes in applicable regulatory policies,
domestic and foreign tax policies, trade restrictions, duties and tariffs and
economic and political instability. Future currency fluctuations or other factor
discussed above may have a material adverse effect on our business, financial
condition or results of operation. See "--Factors That May Affect Future
Results--We Depend on International Sales."
-21-
Cost of sales consists primarily of the cost of purchasing components
and sub-systems, assembling, packaging, shipping and testing components at our
facility, and the direct labor and associated overhead. Research and development
expenses consist primarily of personnel costs, materials and research support
provided to clinicians at medical institutions developing new applications which
utilize our products. Research and development costs have been expensed as
incurred. Sales, general and administrative expenses consist primarily of costs
of personnel, sales commissions, travel expenses, advertising and promotional
expenses, facilities, legal and accounting, insurance and other expenses which
are not allocated to other departments.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated:
Fiscal Year Fiscal Year Fiscal Year
Ended 2001 Ended 2000 Ended 1999
----------- ----------- -----------
Sales ................................................. 100.0% 100.0% 100.0%
Cost of sales ......................................... 52.1 44.2 44.2
------ ------ ------
Gross profit ..................................... 47.9 55.8 55.8
------ ------ ------
Operating expenses:
Research and development ......................... 17.6 16.0 14.9
Sales, general and administrative ................ 37.6 32.7 35.0
------ ------ ------
Total operating expenses ......................... 55.2 48.7 49.9
------ ------ ------
Operating income (loss) from continuing operations .... (7.3) 7.1 5.9
Other income, net ..................................... 1.6 1.7 2.1
------ ------ ------
Income (loss) from continuing operations before
provision for income taxes .......................... (5.7) 8.8 8.0
Benefit (provision) for income taxes .................. 3.5 (2.5) (2.6)
------ ------ ------
Income (loss) from continuing operations .............. (2.2) 6.3 5.4
Income (loss) from discontinued operations
(net of tax) ........................................ (2.5) 1.0 0.6
------ ------ ------
Net income (loss) ..................................... (4.7)% 7.3% 6.0%
====== ====== ======
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The following table sets forth for the periods indicated the amount of
sales for our operating segments and sales as a percentage of total sales.
Year Ending Year Ending Year Ending
December 29, 2001 December 30, 2000 January 1, 2000
----------------------- --------------------- -----------------------
Percentage of Percentage Percentage of
total of total total
Amount sales Amount sales Amount sales
------- ------------- ------- ---------- ------- -------------
Domestic $16,004 58.7% $21,133 64.4% $16,134 61.1%
International 11,271 41.3% 11,705 35.6% 10,257 38.9%
------- ------ ------- ------ ------- ------
Total $27,275 100.0% $32,838 100.0% $26,391 100.0%
Ophthalmology:
Domestic $10,976 40.2% $16,559 50.4% $11,088 42.0%
International 9,946 36.5% 10,506 32.0% 8,109 30.7%
------- ------ ------- ------ ------- ------
Total $20,922 76.7% $27,065 82.4% $19,197 72.7%
Aesthetics:
Domestic $ 5,028 18.4% $ 4,574 13.9% $ 5,046 19.1%
International 1,325 4.9% 1,199 3.6% 2,148 8.1%
------- ------ ------- ------ ------- ------
Total $ 6,353 23.3% $ 5,773 17.5% $ 7,194 27.2%
Combined Ophthalmology and Dermatology Sales
In 2001, sales decreased by 16.9% to $27.3 million from $32.8
million in 2000, primarily as a result of decreased unit sales for our
ophthalmology products. Domestic sales, which represented 58.7% of total sales,
decreased by $5.1 million or 24.3% primarily as a result of weakened economic
conditions in the United States of America. We expect future growth in domestic
sales to be primarily derived from sales of the OcuLight SLx and the Apex 800
hair removal laser for dermatology. International sales, which were 41.3% of
total sales, decreased by $0.4 million or 3.7% primarily as a result of the
strength of the U.S. dollar, which resulted in higher prices for our products in
foreign markets. We expect future growth in international sales to be primarily
derived from sales of the Apex 800 hair removal laser for dermatology. We face
challenges marketing and selling our products in the current difficult economic
environment, both domestically and internationally, and expect to continue to
face these challenges for the foreseeable future. See "-- Factors That May
Affect Future Results -- Our Business has been Adversely Impacted by the Current
Worldwide Economic Slowdown and Related Uncertainties."
In 2000, sales increased by 24.4% to $32.8 million from $26.4
million in 1999. The increase in our sales in 2000 was primarily due to
increased unit sales for our ophthalmology products, offset in part by overall
decreases in average selling prices. Domestic sales increased by $5.0 million or
31.0% to 64.4% of total net sales. International sales increased in absolute
dollars by 14.1% to $11.7 million, however as a percentage of total sales,
international sales decreased to 35.6% in 2000.
Ophthalmology Sales
Ophthalmology sales decreased in 2001 by $6.1 million or 22.7% to $20.9
million. Domestic ophthalmology sales decreased by $5.6 million or 33.7% to
$11.0 million. International ophthalmology sales decreased by $0.6 million or
5.3% to $9.9 million. The decrease in domestic sales was due primarily to
weakened economic conditions in the U.S. In addition, sales of our OcuLight SLx,
in particular, were impacted in the
-23-
United States as a result of uncertainties surrounding reimbursement by the
Center for Medicare and Medicaid (CMS) for certain procedures to treat
age-related macular degeneration (AMD) using our products.
In 2000, ophthalmology sales increased $7.9 million or 41.0% to $27.1
million. Domestic ophthalmology sales increased $5.5 million or 49.3% to $16.6
million. International ophthalmology sales increased $2.4 million or 29.6% to
$10.5 million. The overall increase in ophthalmology sales in 2000 related
primarily to increased unit sales of the OcuLight SLx to treat AMD and to sales
of the OcuLight 664 offset in part by decreased average selling prices. The
OcuLight 664 is a product co-developed with Miravant. See further discussion
under "Factors That May Affect Future Results--We Depend on Collaborative
Relationships to Develop, Introduce and Market New Products, Product
Enhancements and New Applications."
Dermatology Sales
Dermatology sales increased in 2001 by $0.6 million or 10.0% to $6.4
million. Domestic dermatology sales increased by $0.5 million or 9.9% to $5.0
million. International dermatology sales increased by $0.1 million or 10.5% to
$1.3 million. The overall increases in dermatology sales were primarily related
to sales of our Apex 800 hair removal laser system, which we introduced in July
2001. We expect that current economic slowdown may adversely affect sales of our
dermatology products, particularly the Apex 800 laser system, to a greater
extent than sales of ophthalmic products since aesthetic procedures are
typically elective and therefore can be deferred, while ophthalmology procedures
are typically not deferred.
Dermatology sales decreased in 2000 by $1.4 million or 19.8% to $5.8
million. Domestic aesthetics sales decreased by $0.5 million or 9.4% to $4.6
million. International dermatology sales decreased $1.0 million or 44.2% to $1.2
million. The overall decrease in dermatology sales in 2000 was due primarily to
concentration of our sales and marketing efforts on the introduction of our Apex
800 hair removal system, the first unit of which was not sold until the
following year and which impacted sales efforts for our existing DioLite 532
product.
Gross Profit. Gross profit was $13.1 million in 2001, $18.3 million in
2000 and $14.7 million in 1999. Gross profit represented 47.9% of sales in 2001,
55.8% in 2000 and 55.8% in 1999. Gross profit as a percentage of sales decreased
in 2001 as compared to 2000 due primarily to the decreased sales volume of the
OcuLight SLx, which has a relatively higher gross margin. In addition, fixed
manufacturing costs were spread over a lower sales volume and we experienced
higher initial production costs of our Apex 800 hair removal laser. We also
charged to expense $0.3 million of inventory related to the OcuLight 664 (see
further discussion under "Factors That May Affect Future Results -- We Depend on
Collaborative Relationships to Develop, Introduce and Market New Products,
Product Enhancements and New Applications.").
Gross profit as a percentage of sales did not change in 2000 as compared
to 1999 due primarily to increased sales of OcuLight SLx systems, a high gross
margin product, offset by decreased sales of the DioLight 532 and lower average
selling prices for the DioLight 532. In general, increasing competition has
continued to result in a downward trend in average selling prices for some
products. We intend to continue our efforts to reduce the cost of components and
thereby mitigate the impact of price reductions on our gross profit. We believe
gross profit in dollars will increase as volumes increase and unit production
costs will decrease as costs are engineered out of new products. However, gross
margins as a percentage of sales will continue to fluctuate due to changes in
the relative proportions of domestic and international sales, the mix of product
sales, costs associated with future product introductions and a variety of other
factors. See "Factors That May Affect Future Results--Our Operating Results May
Fluctuate From Quarter to Quarter."
Research and Development. Research and development expenses decreased by
8.7% in 2001 to $4.8 million and increased by 34.1% in 2000 to $5.3 million.
These expenses were 17.6% of sales in 2001, 16.0% of sales in 2000 and 14.9% of
sales in 1999. The decrease in 2001, in absolute dollars, was primarily due to
completion of the Apex 800 and cost containment measures. The increase in
research and development expenses in 2001, as a percentage of sales, was driven
by the decrease in sales which exceeded the decrease in research and development
expense. The increase in 2000, in absolute dollars and as a percentage of sales,
was primarily due to personnel and prototype expenses, related to the
development of the Apex 800 hair removal dermatology system, development costs
associated with unreleased ophthalmology products as well as increased clinical
study costs. We expect these expenses for research and development to increase
in absolute dollars during 2002 in connection with new product development
activities and clinical studies.
-24-
Sales, General and Administrative. Sales, general and administrative
expenses decreased by 4.6% in 2001 to $10.3 million and increased by 16.5% in
2000 to $10.7 million from $9.2 million in 1999. These expenses were 37.6% of
sales in 2001, 32.7% of sales in 2000 and 35.0% of sales in 1999. The decrease
in sales, general and administrative expenses, in absolute dollars, from 2000 to
2001 was primarily due to lower commissions, fewer sales personnel and other
cost containment actions. The increase, as a percentage of net sales, from 2000
to 2001 was due to the fact that the decrease in the level of sales exceeded the
decrease in sales, general and administrative expense. From 1999 to 2000, sales,
general and administrative expenses, in absolute dollars, increased due to
hiring of additional sales and marketing employees as well as expanded marketing
programs to address new sales opportunities and to support expanding unit
volumes, higher sales commissions and the growth in the infrastructure of our
finance and administrative group which was necessary to support our expanded
operations. The decrease in sales, general and administrative expense, as a
percentage of net sales, from 1999 to 2000 was due to the greater increase in
revenue relative to the increase in sales, general and administrative expense.
Other income, net. Other income, net consists primarily of interest
income. Interest income was $378,000, $552,000 and $469,000 in 2001, 2000 and
1999, respectively. This income was primarily from interest earned on
available-for-sale securities. Interest income decreased in 2001 compared with
2000 because of lower interest rates and overall lower average cash balances
during the year.
Income Taxes. In 2001, the Company's effective rate was a benefit of 62%
primarily as a result of the level of tax credits for research and development
activities relative to the loss for 2001. We had an effective tax rate of 28%
and 32% in 2000 and 1999, respectively. The tax rate for 2001, 2000 and 1999 was
lower than the Federal and State combined statutory rate of 40% because of
certain tax benefits associated with tax-exempt interest on tax preferred
securities and with tax credits for research and experimental activities.
Discontinued Operations. In April 2001, we discontinued our Laser
Research segment. In the first quarter of 2001, we recorded a loss of $893,000
(net of a $542,000 tax benefit). In the fourth quarter of 2001, we adjusted the
loss on discontinued operations to $672,000 (net of a $439,000 tax benefit).
Revenues for this segment were $599,000 for 2000 and $460,000 for 1999. Costs
and operating expenses of the Laser Research segment were $132,000 for 2000 and
$209,000 for 1999. Sales, general and administrative costs and indirect costs of
manufacturing historically were not allocated to the Laser Research segment.
LIQUIDITY AND CAPITAL RESOURCES
At December 29, 2001, our primary sources of liquidity included cash and
cash equivalents of $4.6 million and available-for-sale securities of $4.5
million, for a total of $9.1 million. In addition, we have available $4.0
million under our unsecured line of credit which bears interest at the bank's
prime rate and expires in October 2002. As of December 29, 2001, no borrowings
were outstanding under this credit facility. We expect to renew the line of
credit in October 2002 assuming that terms continue to be acceptable. We believe
that, based on current estimates, our current cash, available-for-sale
securities and the credit facility will be sufficient to meet our working
capital and capital expenditure requirements at least through the next twelve
months. However, we believe that the level of financial resources is a
significant competitive factor in our industry, and accordingly we may choose to
raise additional capital through debt or equity financing prior to the end of
2002.
We used $5,385,000 in cash and cash equivalents during 2001. In 2000, we
generated $353,000 in cash and cash equivalents. In 1999, we generated
$3,854,000.
-25-
Net cash used in operations totaled $3,635,000 in 2001 as compared with
$74,000 used in operations in 2000 and $2,862,000 generated from operations in
1999. In 2001, uses of cash included increases in net inventories of $2,841,000,
a net loss of $1,273,000, increases in deferred income taxes of $332,000,
decreases in accrued expenses of $338,000, decreases in accounts payable of
$232,000 and decreases in net accounts receivable of $56,000 offset by sources
of cash from operations which included depreciation of $859,000, tax benefit of
employee stock option plans of $372,000 and decreases in prepaids and other
current assets of $206,000. In 2000, sources of cash from operations included
net income of $2,416,000, depreciation of $893,000, increases in accounts
payable of $280,000 and decreases in net accounts receivable of $250,000,
partially offset by uses of cash from operations with increases in net
inventories of $2,465,000 and decreases in accrued expenses of $1,014,000. In
1999, sources of cash included net income of $1.6 million, depreciation of
$721,000, increases in accrued expenses of $2.4 million and increases in
accounts payable of $249,000, partially offset by uses of cash with increases of
deferred income taxes of $846,000, increases in net inventories of $752,000 and
increases in accounts receivable of $623,000.
We used $1,991,000 for investing activities in 2001. In 2000, we used
$133,000 and in 1999 we generated $982,000 from investing activities. The
generation or use of cash was primarily due to the sale or purchase and proceeds
of available-for-sale securities and the acquisition of fixed assets.
Net cash provided by financing activities during 2001, 2000 and 1999 was
$241,000, $560,000 and $10,000, respectively, which consisted primarily of
issuance of stock, in connection with our employee stock programs, offset in
part by purchase of treasury stock of $115,000 in 2001 and $315,000 in 1999.
In December 1998, we instituted a stock repurchase program whereby up to
150,000 shares of our Common Stock may be repurchased in the open market. We
plan to utilize all of the reacquired shares for reissuance in connection with
employee stock programs. In 1999 we purchased 76,000 shares of our Common Stock
from the open market. No shares were purchased during 2000. In 2001, we
purchased 27,000 shares of our Common Stock from the open market.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Revenue from product sales is recognized upon receipt of a purchase
order and product shipment provided no significant obligations remain and
collection of the receivables is deemed probable. Up-front fees received in
connection with product sales are deferred and recognized over the associated
product shipments. We accrue for estimated warranty costs upon shipment of
products in accordance with SFAS No. 5, "Accounting for Contingencies." Actual
warranty costs incurred have not materially differed from those accrued. Our
warranty policy is effective for shipped products which are considered defective
or fail to meet the product specifications.
Sales Returns Allowance and Allowance for Doubtful Accounts
In the process of preparing financial statements we must make estimates
and assumptions that affect the reported amount of assets and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, we must estimate future product returns related to current period
product revenue. We analyze historical returns, current economic trends and
changes in customer demand and acceptance of our products when evaluating the
adequacy of the sales returns allowance and other allowances. Significant
management judgements and
-26-
estimates must be made and used in connection with establishing the sales
returns and other allowances in any accounting period. Material differences may
result in the amount and timing of our revenue for any period if management made
different judgements or utilized different estimates. The provision for sales
returns amounted to $0.2 million in 2001. Similarly our management must make
estimates of the uncollectibility of our accounts receivable. Management
specifically analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Our accounts receivable balance was $8.1
million, net of allowance for doubtful accounts of $0.3 million as of December
29, 2001.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a standard cost basis which approximates actual cost on a
first-in, first-out (FIFO) method. Lower of cost or market is evaluated by
considering obsolescence, excessive levels of inventory, deterioration and other
factors.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
CONTRACTUAL OBLIGATIONS
The following table summarizes contractual obligations (in thousands):
Payments Due by Period
-------------------------------
Less than 1 - 3
Contractual Obligations Total 1 Year Years
---------------------- ------ ------ ------
Operating Leases $1,452 $ 650 $ 802
Unconditional Purchase
Obligations* $2,985 $2,598 $ 387
Total Contractual Cash
Obligations $4,437 $3,248 $1,189
* Contractual Purchase Obligations have varying cancellation terms
-27-
COMMERCIAL COMMITMENTS
We have available $4.0 million under our unsecured line of credit which
bears interest at the bank's prime rate and expires in October 2002. As of
December 29, 2001, no borrowings were outstanding under this credit facility.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141 "Business Combinations," which establishes financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. It requires that all business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later. We believe that adoption of the
standard will not have a material effect on our financial position or results of
operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
142 "Goodwill and Other Intangible Assets," which establishes financial
accounting and reporting for acquired goodwill and other intangible assets and
supercedes APB Opinion No. 17, Intangible Assets. It addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition, after they have been initially recognized in
the financial statements. The provisions of this Statement are effective
starting with fiscal years beginning after December 15, 2001. We believe that
SFAS No. 142 will not have a material effect on our financial position or
results of operation.
In October 2001, the Financial Accounting Standards Board issued SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" that
develops one accounting model for long lived assets that are to be disposed of
by sales and requires long-lived assets that are to be disposed of by sales be
measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144
supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets to
be Disposed Of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects
of Disposal of a segment of a business. Management does not expect the adoption
of SFAS 144 to have a material impact on our financial position and results of
operations.
-28-
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE RELY ON CONTINUED MARKET ACCEPTANCE OF OUR EXISTING PRODUCTS. We
currently market visible and infrared light semiconductor-based photocoagulator
medical laser systems to the ophthalmic market. We also market visible and
infrared light semiconductor-based photocoagulator medical laser systems to the
dermatology market. We believe that continued and increased sales, if any, of
these medical laser systems is dependent upon a number of factors including the
following:
- Product performance, procedures and price;
- Recommendations by ophthalmologists, dermatologists, clinicians,
and their associated opinion leaders;
- Performance of these laser systems and treatments which are a
beneficial alternative to competing technologies and treatments;
- The willingness of ophthalmologists and dermatologists to convert
to semiconductor-based or infrared laser systems from visible
argon gas or ion-based or other laser systems; and
- The level of reimbursement for treatments administered with our
products.
Any significant decline in market acceptance of our products would have a
material adverse effect on our business, results of operations and financial
condition.
WE FACE STRONG COMPETITION IN OUR MARKETS AND EXPECT THE LEVEL OF
COMPETITION TO GROW IN THE FORSEEABLE FUTURE. Competition in the market for
devices used for ophthalmic and dermatologic treatments is intense and is
expected to increase. This market is also characterized by rapid technological
innovation and change and our products could be rendered obsolete as a result of
future innovations. Our competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology are
Lumenis Ltd., Nidek, Inc., Carl Zeiss, Inc., Alcon International and Quantel.
All of these companies currently offer a competitive, semiconductor-based laser
system in ophthalmology. Our principal competitors in dermatology are Lumenis
Ltd., Laserscope, Candela Corporation and Altus Medical Inc. Some competitors
have substantially greater financial, engineering, product development,
manufacturing, marketing and technical resources than we do. Some companies also
have greater name recognition than us and long-standing customer relationships.
In addition to other companies that manufacture photocoagulators, we compete
with pharmaceutical solutions, other technologies and other surgical techniques.
Some medical companies, academic and research institutions or others may develop
new technologies or therapies that are more effective in treating conditions
targeted by us or are less expensive than our current or future products. Any
such developments could have a material adverse effect on our business,
financial condition and results of operations.
OUR FUTURE SUCCESS DEPENDS ON DEVELOPMENT OF NEW PRODUCTS AND NEW
APPLICATIONS. Our future success is dependent upon, among other factors, our
ability to develop, obtain regulatory approval, manufacture and market new
products. Introduction of new products and new applications will require that we
effectively transfer production processes from research and development to
manufacturing and effectively coordinate with our suppliers. In addition, we
must successfully sell and achieve market acceptance of new products and
applications and enhanced versions of existing products. The extent of, and rate
at which, market acceptance and penetration are achieved by future products, is
a function of many variables. These variables include price, safety, efficacy,
reliability, marketing and sales efforts, the development of new applications
for these products, the efficacy of competing products, treatments and
techniques and general economic conditions affecting purchasing patterns. Any
failure in our ability to successfully develop and introduce new products or
enhanced versions of existing products and achieve market acceptance of new
products and new applications could have a material adverse effect on our
operating results and would cause our net revenues to decline.
WE FACE RISKS OF MANUFACTURING. The manufacture of our infrared and
visible light photocoagulators and the related delivery devices is a highly
complex and precise process. We assemble critical subassemblies and the final
product at our facility in Mountain View, California. Although our OcuLight
Systems, DioLite 532 and Apex 800 have been successfully introduced, we
continue to face risks associated with manufacturing these products. Various
difficulties may occur despite testing. Furthermore, we may experience delays,
disruptions, capacity constraints or quality control problems in our
manufacturing operations and, as a result, product shipments to our customers
could be delayed, which would negatively impact our net revenues.
-29-
WE DEPEND ON SOLE SOURCE OR LIMITED SOURCE SUPPLIERS. We rely on third
parties to manufacture substantially all of the components used in our products.
Some of our suppliers and manufacturers are sole or limited source. In
addition, some of these suppliers are relatively small private companies that
may discontinue their operations at any time. There are risks associated with
the use of independent manufacturers, including unavailability of or delays in
obtaining adequate supplies of components, including optics, laser diodes and
crystals and potentially reduced control of quality, production costs and timing
of delivery. We may experience difficulty identifying alternative sources of
supply for certain components used in our products. For example, we experienced
delays in shipping our green laser systems (such as the DioLite 532 for
dermatology and the OcuLight GL and GLx for ophthalmology) during the first
fiscal quarter of 2001 due to a supply shortage of a key component. We qualified
additional sources for this component during the first fiscal quarter of 2001,
however, the process of qualifying suppliers is ongoing and may be lengthy,
particularly as new products are introduced. In addition, the use of alternate
components may require design alterations which may delay installation and
increase product costs. We have some long term or volume purchase agreements
with our suppliers and currently purchase components on a purchase order basis.
These components may not be available in the quantities required, on reasonable
terms, or at all. Financial or other difficulties faced by our suppliers or
significant changes in demand for these components or materials could limit
their availability. Any failures by such third parties to adequately perform may
impair our ability to offer our existing products, delay the submission of
products for regulatory approval, impair our ability to deliver products on a
timely basis or otherwise impair our competitive position. Establishing our own
capabilities to manufacture these components would be expensive and could
significantly decrease our profit margins. Our business and results of
operations would be adversely affected if we are unable to continue to obtain
components in the quantity and quality desired and at the prices we have
budgeted.
WE DEPEND ON INTERNATIONAL SALES FOR A SIGNIFICANT PORTION OF OUR
OPERATING RESULTS. We derive and expect to continue to derive a large portion of
our revenue from international sales. In 2001, 2000 and 1999, our international
sales were $11.3 million, $11.7 million and $10.3 million, or 41.3%, 35.6%, and
38.9%, respectively, of total sales. We anticipate that international sales will
continue to account for a significant portion of our revenues in the foreseeable
future. None of our international revenues and costs have been denominated in
foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies makes our products more expensive and thus less
competitive in foreign markets. For example, the current high U.S. dollar
relative value to the European currency (the Euro) is making our products less
competitive in Europe when compared to European competitors and could negatively
impact future sales levels from the region. Our international operations and
sales are subject to a number of risks, including:
- longer accounts receivable collection periods;
- multiple protectionist, adverse and changing foreign governmental laws
and regulations;
- foreign certification requirements, including continued ability to use
the "CE" mark in Europe;
- reduced or limited protections of intellectual property rights;
- potentially adverse tax consequences; and
- impact of recessions in economies outside of the United States.
The factors stated above could have a material adverse effect on our
business, financial condition or results of operations. For additional
discussion about our foreign currency risks, see Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk."
WE DEPEND ON THIRD PARTY COVERAGE AND REIMBURSEMENT POLICIES. Our
products are typically purchased by doctors, clinics, hospitals and other users,
which bill various third-party payors, such as governmental programs and private
insurance plans, for the health care services provided to their patients.
-30-
Third-party payers are increasingly scrutinizing and challenging the coverage of
new products and the level of reimbursement for covered products. Doctors,
clinics, hospitals and other users of our products may not obtain adequate
reimbursement for use of our products from third-party payers. While we believe
that the laser procedures using our products have generally been reimbursed,
payers may deny coverage and reimbursement for our products if they determine
that the device was not reasonable and necessary for the purpose used, was
investigational or was not cost-effective. For example, during July 2000, CMS
advised that claims for reimbursement for certain AMD procedures, which use our
OcuLight SLx laser system would not be reimbursed by CMS. As a result, since
July 2000, sales of the OcuLight SLx laser system have dropped significantly. In
September 2000, CMS changed its position and advised that claims for
reimbursement for two of the AMD procedures can be submitted for reimbursement,
with coverage and payment to be determined by the local medical carriers in
their discretion. Sales of the OcuLight SLx continue, albeit at a lower level,
because the OcuLight SLx can also be used for other retinal procedures with CMS
reimbursement. We believe domestic sales of the OcuLight SLx laser system will
continue at these lower levels until more medical carriers reimburse for
performing such AMD procedures or until CMS advises that claims for these
procedures may be submitted directly to CMS at the national level.
Changes in government legislation or regulation or in private
third-party payers' policies toward reimbursement for procedures employing our
products may prohibit adequate reimbursement. Denial of coverage and
reimbursement for our products could have a material adverse effect on our
business, results of operations and financial condition. We are unable to
predict what legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation may have on us.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER AND YEAR TO
YEAR. Our sales and operating results may vary significantly from quarter to
quarter and from year to year in the future. Our operating results are affected
by a number of factors, many of which are beyond our control. Factors
contributing to these fluctuations include the following:
- General economic uncertainties both preceding and following the
terrorist attacks on September 11, 2001;
- The timing of the introduction and market acceptance of new
products, product enhancements and new applications;
- Changes in demand for our existing line of dermatologic and
ophthalmic products;
- The cost and availability of components and subassemblies
including the ability of our sole or limited source suppliers to
deliver components at the times and prices that we have planned;
-31-
- Fluctuations in our product mix between dermatologic and
ophthalmic products and foreign and domestic sales;
- The effect of regulatory approvals and changes in domestic and
foreign regulatory requirements;
- Introduction of new products, product enhancements and new
applications by our competitors, entry of new competitors into
our markets, pricing pressures and other competitive factors;
- Our long and highly variable sales cycle;
- Decreases in the prices at which we can sell our products;
- Changes in customers' or potential customers' budgets, as a
result of, among other things, reimbursement policies of
government programs and private insurers for treatment that use
our products; and
- Increased product development costs.
In addition to these factors, our quarterly results have been and are expected
to continue to be affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If
sales levels in a particular quarter do not meet expectations, we may be unable
to adjust operating expenses quickly enough to compensate for the shortfall of
sales, and our results of operations may be adversely affected. In addition, we
have historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, any delays in shipment
of products could have a material adverse effect on results of operations for
such quarter. As a result of the above factors, sales for any future quarter are
not predictable with any significant degree of accuracy and operating results in
any period should not be considered indicative of the results to be expected for
any future period.
OUR BUSINESS HAS BEEN ADVERSELY IMPACTED BY THE WORLDWIDE ECONOMIC
SLOWDOWN AND RELATED UNCERTAINTIES. Weaker economic conditions worldwide,
particularly in the U.S., have contributed to the current slowdown in our
business in general. This has resulted in reduced demand for some of our
products, particularly in our dermatology products, such as the Apex 800,
increased rate of order cancellations or delays, excess manufacturing capacity
under current market conditions and higher overhead costs, as a percentage of
revenue. In addition, these economic conditions are making it very difficult for
us, our customers and our distributors to forecast and plan future business
activities. This level of uncertainty significantly challenges our ability to
operate profitably or grow our business. If the economic or market conditions
continue or further deteriorate, this may have a material adverse impact on our
financial position, results of operations and cash flows.
-32-
WE DEPEND ON COLLABORATIVE RELATIONSHIPS TO DEVELOP, INTRODUCE AND
MARKET NEW PRODUCTS, PRODUCT ENHANCEMENTS AND NEW APPLICATIONS. We have entered
into collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of our
products. We plan to collaborate with third parties to develop and commercialize
existing and new products. In May 1996, we executed an agreement with Miravant
Medical Technologies, a maker of photodynamic drugs, to collaborate on a device
that emits a laser beam to activate a photodynamic drug developed by Miravant
for the treatment of wet AMD. The Phase III clinical trial was fully enrolled in
December 1999. In January 2002, Miravant announced that the top line results of
the trial indicated that SnET2, the photodynamic drug developed, did not meet
the primary efficacy endpoint in the study population. As a result, the future
place for SnET2 in the treatment of wet AMD is unclear and we cannot assure you
that SnET2 will be timely or successfully pursued through clinical trials by
Miravant. In the fourth quarter of 2001, we charged to expense $0.3 million of
inventory related to the OcuLight 664, the laser used by Miravant in the Phase
III clinical trials. Additionally, our reliance on others for clinical
development, manufacturing and distribution of our products may result in
unforeseen problems. Further, our collaborative partners may develop or pursue
alternative technologies either on their own or in collaboration with others.
The failure of any current or future collaboration efforts could have a material
adverse effect on our ability to introduce new products or applications and
therefore could have a material adverse effect on our business, results of
operations and financial condition.
WE RELY ON PATENTS AND PROPRIETARY RIGHTS. Our success and ability to
compete is dependent in part upon our proprietary information. We rely on a
combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
our intellectual property rights. We file patent applications to protect
technology, inventions and improvements that are significant to the development
of our business. We have been issued twelve United States patents and one
foreign patent on the technologies related to our products and processes. We
have approximately eight pending patent applications in the United States and
six foreign pending patent applications that have been filed. Our patent
applications may not issue as patents, any patents now or in the future may not
offer any degree of protection, or our patents or patent applications may be
challenged, invalidated or circumvented in the future. Moreover, our
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, may seek to apply for and obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our
products either in the United States or in international markets.
In addition to patents, we rely on trade secrets and proprietary
know-how which we seek to protect, in part, through proprietary information
agreements with employees, consultants and other parties. Our proprietary
information agreements with our employees and consultants contain provisions
requiring such individuals to assign to us, without additional consideration,
any inventions conceived or reduced to practice by them while employed or
retained by us, subject to customary exceptions. Proprietary information
agreements with employees, consultants and others may be breached, and we may
not have adequate remedies for any breach. Also, our trade secrets may become
known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights. Companies in
the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and our competitors. Because patent applications are
maintained in secrecy in the United States until patents are issued and are
maintained in secrecy for a period of time outside the United States, we have
-33-
not conducted any searches to determine whether our technology infringes any
patents or patent applications. We have, from time to time, been notified of, or
have otherwise been made aware of claims that we may be infringing upon patents
or other proprietary intellectual property owned by others. If it appears
necessary or desirable, we may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses,
licenses under such patents or intellectual property may not be offered or the
terms of any offered licenses may not be reasonable. This may adversely impact
our operating results.
Any claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
shipment delays or require us to develop noninfringing technology or to enter
into royalty or licensing agreements. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. An adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us or to determine the
enforceability, scope and validity of the proprietary rights of others. Both the
defense and prosecution of intellectual property suits or interference
proceedings are costly and time consuming.
WE ARE SUBJECT TO GOVERNMENT REGULATION. The medical devices that we
market and manufacture are subject to extensive regulation by the FDA and by
foreign and state governments. Under the FDA Act and the related regulations,
the FDA regulates the design, development, clinical testing, manufacture,
labeling, sale, distribution and promotion of medical devices. Before a new
device can be introduced into the market, the manufacturer must obtain market
clearance through either the 510(k) premarket notification process or the
lengthier premarket approval ("PMA") application process. Obtaining these
approvals can take a long time and delay the introduction of a product. For
example, the introduction of the OcuLight GL in the United States was delayed
about three months from our expectations due to the longer than expected time
period required to obtain FDA premarket clearance. Noncompliance with applicable
requirements, including Quality System Regulations ("QSRs"), can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device we manufacture
or distribute. Our failure to obtain government approvals or any delays in
receipt of such approvals would have a material adverse effect on our business,
results of operations and financial condition.
In addition, we are also subject to varying product standards, packaging
requirements, labeling requirements, tariff regulations, duties and tax
requirements. For example, as a result of our sales in Europe, we are required
to have all products "CE" registered, an international symbol affixed to all
products demonstrating compliance to the European Medical Device Directive and
all applicable standards. While currently all of our released IRIS Medical and
IRIDERM products are CE registered, continued registration is based on
successful review of the process by our European Registrar during their annual
audit. Any loss of registration would have a material adverse effect on our
business, results of operations and financial condition.
WE MUST MANAGE GROWTH. We have experienced, and may continue to
experience growth in production, the number of employees, the scope of our
business, our operating and financial systems and the geographic area of our
operations. This growth has resulted in new and increased responsibilities for
management personnel and our operating, inventory and financial systems. To
effectively manage future growth, if any, we have been required to continue to
implement and improve operational, financial and management information
systems, procedures and controls. We implemented an enterprise-wide management
information system in 1998. We must also expand, train, motivate and manage our
work force. Our personnel, systems, procedures and controls may not be adequate
to support our existing and future operations. Any failure to implement and
improve our operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on our
business, results of operations and financial condition.
WE FACE PRODUCT LIABILITY RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS
OR RESULTS OF OPERATIONS. We may be subject to product liability claims in the
future. Our products are highly complex and are used to treat extremely delicate
eye tissue and skin conditions on and near a patient's face. Although we
maintain product liability insurance with coverage limits of $11.0
-34-
million per occurrence and an annual aggregate maximum of $12.0 million, our
coverage from our insurance policies may not be adequate. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful claim brought against us in excess of our insurance coverage could
have a material adverse effect on our business, results of operations and
financial condition.
IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE
HIGHER MARGIN PRODUCTS TO OFFSET ANY REDUCTIONS IN THE AVERAGE UNIT PRICE OF OUR
PRODUCTS, OUR OPERATING RESULTS MAY SUFFER. The average unit price of our
products may decrease in the future in response to changes in product mix,
competitive pricing pressures, new product introductions by us or our
competitors or other factors. If we are unable to offset the anticipated
decrease in our average selling prices by increasing our sales volumes, our net
revenues will decline. In addition, to maintain our gross margins, we must
continue to reduce the manufacturing cost of our products. Further, should
average unit prices of our current products decline, we must develop and
introduce new products and product enhancements with higher margins. If we
cannot maintain our gross margins, our business could be seriously harmed,
particularly if the average selling price of our products decreases
significantly without a corresponding increase in sales.
IF WE FAIL TO ACCURATELY FORECAST DEMAND FOR OUR PRODUCT AND COMPONENT
REQUIREMENTS FOR THE MANUFACTURE OF OUR PRODUCT, WE COULD INCUR ADDITIONAL COSTS
OR EXPERIENCE MANUFACTURING DELAYS AND MAY EXPERIENCE LOST SALES OR SIGNIFICANT
INVENTORY CARRYING COSTS. We use quarterly and annual forecasts based primarily
on our anticipated product orders to plan our manufacturing efforts and
determine our requirements for components and materials. It is very important
that we accurately predict both the demand for our product and the lead times
required to obtain the necessary components and materials. Lead times for
components vary significantly and depend on numerous factors, including the
specific supplier, the size of the order, contract terms and current market
demand for such components. If we overestimate the demand for our product, we
may have excess inventory, which would increase our costs. If we underestimate
demand for our products and, consequently, our component and material
requirements, we may have inadequate inventory, which could interrupt our
manufacturing, delay delivery of our product to our customers and result in the
loss of customer sales. Any of these occurrences would negatively impact our
business and operating results.
IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS
WOULD BE SERIOUSLY HARMED. Our facilities could be subject to a catastrophic
loss such as fire, flood or earthquake. All of our research and development
activities, manufacturing, our corporate headquarters and other critical
business operations are located near major earthquake faults in Mountain View,
California. Any such loss at any of our facilities could disrupt our operations,
delay production, shipments and revenue and result in large expense to repair
and replace our facilities.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE AND OUR
ABILITY TO GROW MAY BE LIMITED AS A RESULT. We believe that our existing cash
balances, available-for-sale securities, credit facilities and cash flow
expected to be generated from future operations, will be sufficient to meet our
capital requirements at least through the next 12 months. However, we may be
required, or could elect, to seek additional funding prior to that time. The
development and marketing of new products and associated support personnel
requires a significant commitment of resources. If cash from available sources
is insufficient, we may need additional capital, which may not be available on
favorable terms, if at all. If we cannot raise funds on acceptable terms we may
not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
Any inability to raise additional capital when we require it would seriously
harm our business.
OUR STOCK PRICE IS VOLATILE. The trading price of our Common Stock has
been subject to wide fluctuations in response to a variety of factors, some of
which are beyond our control, including:
- Quarterly variations in operating results;
- Changes in financial estimates by securities analysts;
- Announcements by us or our competitors of new products or of
significant clinical achievements
- Changes in market valuations of other similar companies; and
- Any deviations in our net sales or levels of profitability from
levels expected by securities analysts.
In addition, the stock market has recently experienced extreme
volatility that has often been unrelated to the performance of particular
companies. These broad market fluctuations could have a significant impact on
the market price of our common stock regardless of our performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
We are exposed to market risks inherent in our operations, primarily related to
interest rate risk and currency risk. These risks arise from transactions and
operations entered into in the normal course of business. We do not use
derivatives to alter the interest characteristics of our marketable securities
or our debt instruments. We have no holdings of derivative or commodity
instruments.
Interest Rate Risk. We are subject to interest rate risks on cash and cash
equivalents, available-for-sale marketable securities and any future financing
requirements. Interest rate risks related to marketable securities are managed
by managing maturities in our marketable securities portfolio. We have no
long-term debt as of December 29, 2001.
The fair value of our investment portfolio or related income would not be
significantly impacted by changes in interest rates since the marketable
securities maturities do not exceed fiscal year 2002 and the interest rates are
primarily fixed.
QUALITATIVE DISCLOSURES
Interest Rate Risk. Our primary interest rate risk exposures relate to:
- The available-for-sale securities will fall in value if market interest
rates increase.
- The impact of interest rate movements on our ability to obtain adequate
financing to fund future operations.
-35-
We have the ability to hold at least a portion of the fixed income investments
until maturity and therefore would not expect the operating results or cash
flows to be affected to any significant degree by a sudden change in market
interest rates on its short- and long-term marketable securities portfolio.
Management evaluates it's financial position on an ongoing basis.
Currency Rate Risk.
We do not hedge any balance sheet exposures against future movements in foreign
exchange rates. The exposure related to currency rate movements would not have a
material impact on future net income or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated balance sheets as of December 29, 2001 and December 30,
2000 and the consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 29, 2001, together with the related notes and the report of
PricewaterhouseCoopers LLP, independent accountants, are on the following pages.
Additional required financial information is described in Item 14.
-36-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IRIDEX Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity, of cash flows,
and of comprehensive income (loss) present fairly, in all material respects, the
financial position of IRIDEX Corporation and its Subsidiaries (the "Company") at
December 29, 2001 and December 30, 2000 and the results of their operations,
their cash flows, and of comprehensive income (loss) for each of the three years
in the period ended December 29, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index under 14(a)(2)
on page 59 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which 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, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 25, 2002
-37-
IRIDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 29, December 30,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 4,613 $ 9,998
Available-for-sale securities ........................................... 4,489 2,996
Accounts receivable, net of allowance for doubtful accounts of $318
in 2001 and $481 in 2000 ....................................... 8,066 8,010
Inventories, net ........................................................ 12,562 9,721
Prepaids and other current assets ....................................... 599 805
-------- --------
Total current assets ............................................. 30,329 31,530
Property and equipment, net ............................................. 1,535 1,903
Deferred income taxes ................................................... 1,924 1,592
-------- --------
Total assets ..................................................... $ 33,788 $ 35,025
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 1,176 $ 1,408
Accrued expenses ........................................................ 2,779 3,117
-------- --------
Total liabilities ................................................ 3,955 4,525
-------- --------
Commitments and contingencies (Note 5)
Stockholders' Equity
Convertible Preferred Stock, $.01 par value:
Authorized: 2,000,000 shares;
Issued and outstanding: none ..................................... -- --
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,815,672 shares in 2001 and
6,700,862 shares in 2000 ......................................... 69 67
Additional paid-in capital .............................................. 23,417 22,691
Accumulated other comprehensive income .................................. 3 10
Treasury Stock
Outstanding: 103,000 shares in 2001 and 76,000 shares in 2000 .... (430) (315)
Retained earnings ....................................................... 6,774 8,047
-------- --------
Total stockholders' equity ....................................... 29,833 30,500
-------- --------
Total liabilities and stockholders' equity ............. $ 33,788 $ 35,025
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-38-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Sales ..................................................................... $ 27,275 $ 32,838 $ 26,391
Cost of sales ............................................................. 14,205 14,506 11,669
-------- -------- --------
Gross profit ........................................................ 13,070 18,332 14,722
-------- -------- --------
Operating expenses:
Research and development .............................................. 4,808 5,265 3,925
Sales, general and administrative ..................................... 10,251 10,747 9,224
-------- -------- --------
Total operating expenses ............................................ 15,059 16,012 13,149
-------- -------- --------
Income (loss) from operations ....................................... (1,989) 2,320 1,573
Interest income ........................................................... 378 552 469
Other income, net ......................................................... 48 17 87
-------- -------- --------
Income (loss) before income taxes ................................... (1,563) 2,889 2,129
Benefit from (provision for) income taxes ................................. 962 (809) (682)
-------- -------- --------
Income (loss) from continuing operations ............................ (601) 2,080 1,447
Income (loss) from operations of discontinued Laser
Research segment (net of applicable income tax benefit (provision)
of $124, $(131) and $(80), respectively in 2001, 2000 and 1999) ... (204) 336 171
Income (loss) on disposal of Laser Research segment, including (net
of applicable income tax benefit of $315, $0 and
$0, respectively in 2001, 2000 and 1999) .......................... (468) -- --
-------- -------- --------
Net income (loss) ......................................................... $ (1,273) $ 2,416 $ 1,618
======== ======== ========
Basic net income (loss) per share:
Continuing operations ..................................................... $ (0.09) $ 0.31 $ 0.22
Discontinued operations ................................................... (0.10) 0.05 0.03
-------- -------- --------
Basic net income (loss) per common share .................................. $ (0.19) $ 0.36 $ 0.25
======== ======== ========
Diluted net income (loss) per share:
Continuing operations ..................................................... $ (0.09) $ 0.29 $ 0.21
Discontinued operations ................................................... (0.10) 0.04 0.03
-------- -------- --------
Diluted net income (loss) per common share ................................ $ (0.19) $ 0.33 $ 0.24
======== ======== ========
Shares used in net income (loss) per common share basic calculations ...... 6,757 6,637 6,503
======== ======== ========
Shares used in net income (loss) per common share diluted calculations .... 6,757 7,285 6,849
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-39-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Common Stock Additional Other
------------------ Paid-in Treasury Comprehensive Retained
Shares Amount Capital Stock Income (Loss) Earnings Total
--------- ------ ---------- -------- ------------- -------- -------
Balances, January 2, 1999.............. 6,506,010 $65 $21,800 $ 7 $4,013 $25,885
Issuance of Common Stock under Stock
Option Plan..................... 51,544 107 107
Issuance of Common Stock under Employee
Stock Purchase Plan............. 58,804 1 217 218
Purchase of Treasury Stock............. (76,000) (315) (315)
Change in unrealized gains on
available-for-sale securities... (9) (9)
Net income............................. 1,618 1,618
--------- --- ------- ------ --- ------- -------
Balances, January 1, 2000.............. 6,540,358 66 22,124 (315) (2) 5,631 27,504
Issuance of Common Stock under Stock
Option Plan..................... 120,173 1 317 318
Issuance of Common Stock
under Employee Stock
Purchase Plan................... 40,331 242 242
Stock compensation expense............. 8 8
Change in unrealized gains on
available-for-sale securities... 12 12
Net income............................. 2,416 2,416
--------- --- ------- ------ --- ------- -------
Balances, December 30, 2000............ 6,700,862 67 22,691 (315) 10 8,047 30,500
Issuance of Common Stock
under Stock Option Plan........ 74,942 1 99 100
Issuance of Common Stock under
Employee Stock Purchase Plan.... 66,868 1 255 256
Purchase of Treasury Stock............. (27,000) (115) (115)
Tax Benefit of Employee Stock
Option Plan..................... 372 372
Change in unrealized gains on
available-for-sale securities... (7) (7)
Net loss............................... (1,273) (1,273)
--------- --- ------- ------ --- ------- -------
Balances, December 29, 2001............ 6,815,672 $69 $23,417 $ (430) $ 3 $ 6,774 $29,833
========= === ======= ====== === ======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
-40-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Cash flows from operating activities:
Net income (loss) ....................................................... $(1,273) $ 2,416 $ 1,618
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................................... 859 893 721
Tax Benefit of Employee Stock Option Plan ........................... 372 -- --
Stock compensation expense .......................................... -- 8 --
Provision for doubtful accounts ..................................... (163) 131 128
Provision for inventories ........................................... 343 285 197
Deferred income taxes ............................................... (332) (74) (846)
Amortization of intangible asset .................................... 96
Changes in assets and liabilities:
Accounts receivable .............................................. 107 119 (682)
Inventories ...................................................... (3,184) (2,750) (949)
Prepaids and other current assets ................................ 206 (368) (90)
Accounts payable ................................................. (232) 280 249
Accrued expenses ................................................. (338) (1,014) 2,420
------- ------- -------
Net cash provided by (used in) operating activities .............. (3,635) (74) 2,862
------- ------- -------
Cash flows from investing activities:
Purchases of available-for-sale securities .............................. (4,489) (3,856) (3,511)
Proceeds from maturity of available-for-sale securities ................. 2,989 4,375 5,084
Acquisition of property and equipment ................................... (491) (652) (591)
------- ------- -------
Net cash provided by (used in) investing activities .............. (1,991) (133) 982
------- ------- -------
Cash flows from financing activities:
Purchase of Treasury Stock .............................................. (115) -- (315)
Issuance of Common Stock under stock purchase and
option plans .......................................................... 356 560 325
------- ------- -------
Net cash provided by financing activities ........................ 241 560 10
------- ------- -------
Net (decrease) increase in cash and cash equivalents ........... (5,385) 353 3,854
Cash and cash equivalents, beginning of year ................................ 9,998 9,645 5,791
------- ------- -------
Cash and cash equivalents, end of year ...................................... $ 4,613 $ 9,998 $ 9,645
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes ......................................................... $ 12 $ 2,244 $ 360
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gains (losses) on available-for-sale
securities ............................................................ $ (7) $ 12 $ (9)
The accompanying notes are an integral part of
these consolidated financial statements.
-41-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Net income (loss) ................................... $(1,273) $2,416 $ 1,618
Other comprehensive income:
Changes in unrealized gains (losses) on
available-for-sale securities ............. (7) 12 (9)
------- ------ -------
Comprehensive income (loss) ......................... $(1,280) $2,428 $ 1,609
======= ====== =======
The accompanying notes are an integral part of
these consolidated financial statements.
-42-
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Description of Business
IRIDEX Corporation is a leading worldwide provider of
semiconductor-based laser systems used to treat eye diseases in ophthalmology
and skin afflictions in dermatology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The consolidated financial statements include our accounts and our
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. The Company
invests primarily in money market funds and government paper; accordingly, these
investments are subject to minimal risks.
Available-for-Sale Securities
All marketable securities as of December 29, 2001 and December 30, 2000
are considered to be available-for-sale and therefore are carried at fair value.
Available-for-sale securities are classified as current assets when they have
scheduled maturities of less than one year. Available-for-sale securities are
classified as non current assets when they have scheduled maturities of more
than one year. Unrealized holding gains and losses on such securities are
reported net of related taxes as a separate component of stockholders' equity
until realized. Realized gains and losses on sales of all such securities are
reported in interest and other income and are computed using the specific
identification cost method.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a standard cost basis which approximates actual cost on a
first-in, first-out (FIFO) method. Lower of cost or market is evaluated by
considering obsolescence, excessive levels of inventory, deterioration and other
factors.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is generally three years.
Amortization of leasehold improvements and property and equipment is computed
using the straight-line method over the estimated useful life of the related
assets, typically three years.
-43-
Revenue Recognition
Revenue from product sales is recognized upon receipt of a purchase
order and product shipment provided no significant obligations remain and
collection of the receivables is deemed probable. Up-front fees received in
connection with product sales are deferred and recognized over the associated
product shipments. The Company accrues for estimated warranty costs upon
shipment of products in accordance with SFAS No. 5, "Accounting for
Contingencies." Actual warranty costs incurred have not materially differed from
those accrued. The Company's warranty policy is effective for shipped products
which are considered defective or fail to meet the product specifications. We
analyze historical returns, current economic trends and changes in customer
demand and acceptance of our products when evaluating the adequacy of the sales
returns allowance. Significant management judgements and estimates must be made
and used in connection with establishing the sales returns and other allowances
in any accounting period.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Advertising
We expense advertising costs as they are incurred. Advertising expenses
for 2001, 2000 and 1999 were $408,000, $478,000 and $359,000, respectively.
Fair Value of Financial Instruments
Carrying amounts of our financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to their short maturities. Estimated fair values for
available-for-sale securities, which are separately disclosed elsewhere, are
based on quoted market prices for the same or similar instruments.
-44-
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Accounting for Stock-based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees"("APB 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"("SFAS 123").
Under APB 25, compensation expense for grants to employees is based on
the difference, if any, on the date of the grant, between the fair value of the
Company's stock and the option's exercise price. SFAS 123 defines a "fair value"
based method of accounting for an employee stock option or similar equity
investment. The pro forma disclosure of the difference between compensation
expense included in net loss and the related cost measured by the fair value
method is presented in Note 6.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees, or in Conjunction with Selling Good and Services," and Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plan" ("FIN 28").
Concentration of Credit Risk and Other Risks and Uncertainties
Our cash and cash equivalents are deposited in demand and money market
accounts of three financial institutions. Deposits held with banks may exceed
the amount of insurance provided on such deposits. Generally these deposits may
be redeemed upon demand and therefore, bear minimal risk.
We market our products to distributors and end-users throughout the
world. Sales to international distributors are generally made on open credit
terms and letter of credit. Management performs ongoing credit evaluations of
our customers and maintains an allowance for potential credit losses.
Historically, we have not experienced any significant losses related to
individual customers or group of customers in any particular geographic area.
For the years ended December 29, 2001, December 30, 2000 and January 1, 2000 no
customer accounted for greater than 10% of revenue. As of December 29, 2001,
December 30, 2000 and January 1, 2000 no customer accounted for greater than 10%
of accounts receivable.
Our products require approvals from the Food and Drug Administration and
international regulatory agencies prior to commercialized sales. Our future
products may not receive required approvals. If we were denied such approvals,
or if such approvals were delayed, it would have a materially adverse impact on
our business, results of operations and financial condition.
-45-
Reliance on Certain Suppliers
Certain components and services used by the Company to manufacture and
develop its products are presently available from only one or a limited number
of suppliers or vendors. The loss of any of these suppliers or vendors would
potentially require a significant level of hardware and/or software development
to incorporate the products or services into the Company's products.
Use of Estimates
Management makes estimates and assumptions to prepare the consolidated
financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions 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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year's presentation. As a result of Iridex's disposal of it's Laser
Research segment in 2001, the Company's previously reported consolidated
financial statements for 2000 and 1999 have been reclassified to present the
discontinued Laser Research segment operations separate from continuing
operations. (See Note 11.)
Fiscal Year
Our fiscal year covers a 52 or 53 week period and ends on the Saturday
nearest December 31. Fiscal year 1999, 2000 and 2001 all included 52 weeks.
Net Income (loss) per Share
Basic and diluted net income per share are computed by dividing net
income (loss) for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net income
(loss) per share excludes potential common stock if their effect is
anti-dilutive. Potential common stock consists of incremental common shares
issuable upon the exercise of stock options.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141 "Business Combinations," which establishes financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. It requires that all business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later. The Company believes that adoption of
the standard will not have a material effect on the financial position or
results of operations of the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
142 "Goodwill and Other Intangible Assets," which establishes financial
accounting and reporting for acquired goodwill and other
-46-
intangible assets and supercedes APB Opinion No. 17, Intangible Assets. It
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition, after they have
been initially recognized in the financial statements. The provisions of this
Statement are effective starting with fiscal years beginning after December 15,
2001. The Company believes that SFAS No. 142 will not have a material effect on
the financial position or results of operation of the Company.
In October 2001, the Financial Accounting Standards Board issued SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" that
develops one accounting model for long lived assets that are to be disposed of
by sales and requires long-lived assets that are to be disposed of by sales be
measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144
supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets to
be Disposed Of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects
of Disposal of a segment of a business. Management does not expect the adoption
of SFAS 144 to have a material impact on the Company's financial position and
results of operations.
3. BALANCE SHEET DETAIL
Available-for-sale securities (in thousands):
UNREALIZED ESTIMATED MATURITY
COST GAINS FAIR VALUE DATES
---------- --------- ---------- -----------
As of December 29, 2001, available-for-sale
securities consisted of the following:
Government agencies........................... $ 4,486 $ 3 $ 4,489 1/02--7/02
As of December 30, 2000, available-for-sale
securities consisted of the following:
Government agencies........................... $ 2,986 $ 10 $ 2,996 2/01--7/01
There were no realized capital gains or losses recognized in 2001, 2000 and
1999.
-47-
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
(IN THOUSANDS)
Inventories:
Raw materials and work in process..................... $ 8,078 $ 6,168
Finished goods........................................ 4,484 3,553
------- -------
Total inventories.................................. $12,562 $ 9,721
======= =======
Property and Equipment:
Equipment............................................. $ 3,202 $ 3,229
Leasehold improvements................................ 1,872 1,829
Less: accumulated depreciation and amortization....... (3,539) (3,155)
------- -------
Property and equipment, net........................ $ 1,535 $ 1,903
======= =======
Accrued Expenses:
Accrued payroll, vacation and related expenses........ $ 870 $ 1,057
Accrued warranty...................................... 582 728
Income taxes payable.................................. -- 404
Sales and use tax payable............................. 266 195
Deferred revenue...................................... 329 146
Other accrued expenses................................ 732 587
------- -------
Total accrued expenses............................. $ 2,779 $ 3,117
======= =======
4. BANK BORROWINGS
We have a revolving line of credit agreement with a bank expiring on
October 5, 2002, which provides for borrowings of up to $4.0 million at the
bank's prime rate (4.75% at December 29, 2001). The agreement contains
restrictive covenants including prohibiting payment of dividends without the
bank's prior consent. There were no borrowings against the credit line at
December 29, 2001.
5. COMMITMENTS AND CONTINGENCIES
Lease Agreements
We lease our operating facilities under a noncancelable operating lease.
The lease, which expires in 2002, was renewed for two years. Rent expense, net
of sublease income, totaled $498,000, $289,000 and $282,000 for the years ended
December 29, 2001, December 30, 2000 and January 1, 2000 respectively. Rental
income related to a facility sublease was $11,000, $262,000 and $183,000 for the
years ended December 29, 2001, December 30, 2000 and January 1, 2000,
respectively.
Future minimum lease payments under current operating leases at December
29, 2001 are summarized as follows (in thousands):
Fiscal Year Operating Lease Payments
----------- ------------------------
2002 650
2003 687
2004 115
------
$1,452
======
-48-
License Agreements
The Company is obligated to pay royalties equivalent to 5% and 7.5% of
sales on certain products under certain license agreements. Royalty expense was
$85,000, $21,000 and $42,000 for the years ended December 29, 2001, December 30,
2000 and January 1, 2000, respectively.
Contingencies
From time to time, the Company may be engaged in certain administrative
proceedings, incidental to its normal business activities. Management believes
that liabilities resulting from such proceedings, or claims which are pending or
known to be threatened, are adequately covered by liability insurance and will
not have a material adverse effect on the Company's financial position or
results of operations.
6. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Our Articles of Incorporation authorize 2,000,000 shares of undesignated
preferred stock. Preferred Stock may be issued from time to time in one or more
series. As of December 29, 2001, we had no preferred stock issued and
outstanding.
TREASURY STOCK
In December 1998, we instituted a stock repurchase program whereby up to
150,000 shares of our Common Stock may be repurchased in the open market. We
plan to utilize all of the reacquired shares for reissuance in connection with
our employee stock programs. We repurchased 76,000 shares of Common Stock for
$315,000 in 1999. In 2000, no shares of Common Stock were repurchased. In 2001,
we repurchased 27,000 shares of Common Stock for $115,000.
STOCK OPTION PLANS
Amended and Restated 1989 Incentive Stock Plan
The Amended and Restated 1989 Plan (the "1989 Plan") provided for the
grant of options and stock purchase rights to purchase shares of our Common
Stock to employees and consultants. The terms of the 1989 Plan, which expired in
August 1999, are substantially the same as the 1998 Plan described below.
1998 Stock Plan
The 1998 Stock Plan (the "1998 Plan") provides for the granting to
employees (including officers and employee directors) of incentive stock options
and for the granting to employees (including officers and employee directors)
and consultants of nonstatutory stock options and stock purchase rights
("SPRs"). The exercise price of incentive stock options and SPRs granted under
the 1998 Plan must be at least equal to the fair market value of the shares at
the time of grant. With respect to any recipient who owns stock possessing more
than 10% of the voting power of our outstanding capital stock, the exercise
price of any option or SPR
-49-
granted must be at least equal to 110% of the fair market value at the time of
grant. Options granted under the 1998 Plan are exercisable at such times and
under such conditions as determined by the Administrator; generally over a four
year period. The maximum term of incentive stock options granted to any
recipient must not exceed ten years; provided, however, that the maximum term of
an incentive stock option granted to any recipient possessing more than 10% of
the voting power of our outstanding capital stock must not exceed five years. In
the case of SPRs, unless the Administrator determines otherwise, we have a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with us for any reason (including death or
disability). Such repurchase option lapses at a rate determined by the
Administrator. The purchase price for shares repurchased by us is the original
price paid by the purchaser. The form of consideration for exercising an option
or stock purchase right, including the method of payment, is determined by the
Administrator. The 1998 Plan expires in June 2008.
1995 Director Option Plan
In October 1995, we adopted the 1995 Director Option Plan (the "Director
Plan"), under which members of the Board of Directors are granted options to
purchase 11,250 shares upon the first to occur of their appointment or the
adoption of the Director Plan ("First Option") and an option to purchase 3,750
shares ("Subsequent Option") on July 1 of each year thereafter provided that he
or she has served on the Board for at least the preceding six months. The
options granted are at fair market value on the date of grant. The First Option
becomes exercisable as to one-twelfth (1/12) of the shares subject to the First
Option for each quarter over a three-year period. Each Subsequent Option becomes
exercisable as to one-fourth (1/4) of the shares subject to the Subsequent
Option for each quarter, commencing one quarter after the First Option and any
previously granted Subsequent Options have become fully exercisable. Options
granted under the Director Plan have a term of 10 years.
In the event of our merger with or into another corporation, resulting
in a change of control, or the sale of substantially all of our assets, each
Director Plan option becomes exercisable in full and shall be exercisable for 30
days after written notice to the holder of the event causing the change in
control.
Unless terminated sooner, the Director Plan will terminate in 2005. The
Board has authority to amend or terminate the Director Plan, provided no such
amendment may impair the rights of any optionee without the optionee's consent.
1995 Employee Stock Purchase Plan
Our 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in October 1995. On April 28, 1997, the shareholders
approved an amendment to increase the total number of shares of common stock for
issuance under the Purchase Plan from 50,000 to 100,000. The Purchase Plan
permits eligible employees (including officers and employee directors) to
purchase Common Stock through payroll deductions, which may not exceed 10% of an
employee's compensation. No employee may purchase more than $25,000 worth of
stock in any calendar year or more than 1,000 shares of Common Stock in any
twelve-month period. The price of shares purchased under the Purchase Plan is
85% of the lower of the fair market value of the Common Stock at the beginning
of the offering period or the end of the offering period. The Purchase Plan will
terminate in 2005, unless terminated sooner by the Board of Directors.
-50-
Information with respect to activity under these option plans are set
forth below (in thousands except share and per share data):
OUTSTANDING OPTIONS
-------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER AGGREGATE AVERAGE
FOR GRANT OF SHARES PRICE EXERCISE PRICE
--------- ---------- --------- --------------
Balances, January 2, 1999 ........ 188,744 1,317,501 $ 5,419 $4.11
Additional shares reserved ..... 150,000 -- -- --
Options granted ................ (218,394) 218,394 1,128 5.16
Options exercised .............. (47,568) (107) 1.89
Options expired ................ (11,819)
Options terminated ............. 81,134 (81,134) (364) 4.45
------- --------- ------
Balances, January 1, 2000 ........ 189,665 1,407,193 $ 6,076 $4.31
Additional shares reserved ..... 260,000 -- -- --
Options granted ................ (384,700) 384,700 3,570 9.28
Options exercised .............. (120,173) (318) 2.64
Options expired ................ (82,560)
Options terminated ............. 181,407 (181,407) (1,036) 5.71
------- --------- ------
Balances, December 30, 2000 ...... 163,812 1,490,313 $ 8,292 $5.56
Additional shares reserved ..... 290,000 -- -- --
Options granted ................ (368,050) 368,050 1,512 4.11
Options exercised .............. (74,942) (100) 1.61
Options expired ................ (29,068)
Options terminated ............. 126,604 (126,604) (873) 7.07
------- --------- ------
Balances, December 29, 2001 ...... 183,298 1,656,817 $ 8,831 $5.34
======= ========= ======
The following table summarizes information with respect to stock options
outstanding at December 29, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/29/01 (YEARS) PRICE AT 12/29/01 PRICE
--------------- ----------- ---------------- -------- ----------- --------
$0.16 - $2.00 136,549 2.90 $1.17 136,549 $1.17
$3.71 - $3.71 203,800 9.55 3.71 0 0.00
$3.90 - $3.94 23,000 8.63 3.91 6,132 3.94
$4.00 - $4.00 457,086 5.77 4.00 387,425 4.00
$4.03 - $4.88 199,357 8.08 4.35 78,321 4.42
$5.00 - $5.75 178,925 6.99 5.46 110,825 5.55
$6.25 - $8.88 203,500 6.47 8.27 150,603 8.23
$9.00 - $9.25 189,600 8.29 9.09 80,246 9.10
$9.50 - $12.75 57,500 8.66 11.18 14,828 10.92
$14.88 - $14.88 7,500 4.50 14.88 7,500 14.88
--------- -------
$0.16 - $14.88 1,656,817 6.92 5.34 972,249 5.08
========= =======
At December 30, 2000 and January 1, 2000 options to purchase 762,123 and 624,025
shares of Common Stock were exercisable at weighted average exercise prices of
$4.29 and $3.53, respectively.
-51-
The following information concerning our stock option and employee stock
purchase plans is provided in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation." We account for such plans in accordance with
Accounting Principles Board No. 25 and related Interpretations.
The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes multiple option pricing model with the following
weighted average assumptions:
2001 2000 1999
---------------- ----------------- ----------------
GROUP A GROUP B GROUP A GROUP B GROUP A GROUP B
------- ------- ------- ------- ------- -------
Risk-free Interest Rates.... 4.45% 4.40% 6.00% 6.19% 5.58% 5.34%
Expected Life from Date
of Vesting................ 3 yrs. 2 yrs. 3 yrs. 2 yrs. 3 yrs. 2 yrs.
Volatility.................. 0.90 0.90 0.78 0.78 0.78 0.78
Dividend Yield.............. -- -- -- -- -- --
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents officers and directors who are a
smaller group holding a greater average number of options than other option
holders and who tend to exercise later in the vesting period. Group B are all
other option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period.
The weighted average grant-date fair value per share of those options
granted in 2001, 2000 and 1999 was $2.82, $5.96 and $3.37, respectively.
We have also estimated the fair value for the purchase rights issued
under our 1995 Employee Stock Purchase Plan, under the Black-Scholes valuation
model using the following assumptions for 2001, 2000 and 1999:
2001 2000 1999
--------- --------- ----------
Risk-free Interest Rates.... 4.63% 5.67% 4.91%
Expected Life............... 0.5 year 0.5 year 0.5 year
Volatility.................. 0.90 0.78 0.78
Dividend Yield.............. -- -- --
The weighted average grant-date fair value per share of those purchase
rights granted in 2001, 2000 and 1999 was $2.11, $2.94 and $1.55, respectively.
The following pro forma income (loss) information has been prepared following
the provisions of SFAS No. 123:
2001 2000 1999
------- ------ ------
(amounts in thousands
except per share data)
Net income (loss) -- as reported ...................... $(1,273) $2,416 $1,618
Net income (loss) -- pro forma ........................ $(2,000) $1,640 $ 768
Net income (loss) per common share -- as reported ..... $ (0.19) $ 0.36 $ 0.25
Net income (loss) per common share -- pro forma ....... $ (0.30) $ 0.25 $ 0.12
Diluted net income (loss) per common share --
as reported ........................................ $ (0.19) $ 0.33 $ 0.24
Diluted net income (loss) per common share --
pro forma .......................................... $ (0.30) $ 0.23 $ 0.11
-52-
7. EMPLOYEE BENEFIT PLAN
We have a plan known as the IRIS Medical Instruments 401(k) trust to
provide retirement benefits through the deferred salary deductions for
substantially all employees. Employees may contribute up to 15% of their annual
compensation to the plan, limited to a maximum amount set by the Internal
Revenue Service. The plan also provides for Company contributions at the
discretion of the Board of Directors. On April 1, 2000 the Company commenced a
Company match for the 401(k) in the amount of 50% of employee contributions up
to an annual maximum of $1,000 per year. The Company contributions in fiscal
2001 totaled $99,000. The Company contributions in fiscal 2000 totaled $64,000.
No contributions were made in fiscal 1999.
8. INCOME TAXES
The provision for income taxes includes:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ -----------
(IN THOUSANDS)
Current:
Federal ....................... $(750) $855 $1,242
State ......................... -- 28 286
----- ---- ------
(750) 883 1,528
----- ---- ------
Deferred:
Federal ....................... (184) (96) (613)
State ......................... (28) 22 (233)
----- ---- ------
(212) (74) (846)
----- ---- ------
Income tax (benefit)
provision ................. $(962) $809 $ 682
===== ==== ======
The Company's effective tax rate differs from the statutory federal
income tax rate as shown in the following schedule:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Income tax provision (benefit) at statutory rate .... (34)% 34% 34%
State income taxes, net of federal benefit .......... (5)% 6% 6%
Tax exempt interest ................................. (3)% (3)% (3)%
Nondeductible permanent differences ................. 4% 0% 0%
Research and experimental credits ................... (28)% (10)% (10)%
Other ............................................... 4% 1% 5%
---- ---- ----
Effective tax rate .................................. (62)% 28% 32%
==== ==== ====
In 2001, the Company's effective rate was a benefit of 62% primarily as a
result of the level of tax credits for research and development activities
relative to the loss for 2001.
-53-
The tax effect of temporary differences and carry-forwards that give
rise to significant portions of the net deferred tax assets are presented below
(in thousands):
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
Fixed assets ........................................ $ 304 $ 487
Accrued liabilities ................................. 419 467
Allowance for excess and obsolete inventories ....... 287 151
Research credit ..................................... 437 329
State tax ........................................... 1 --
Allowance for doubtful accounts ..................... 127 186
Other ............................................... 349 (28)
------ -------
Net deferred tax asset .............................. $1,924 $ 1,592
====== =======
9. MAJOR CUSTOMERS AND BUSINESS SEGMENTS
We operate in two reportable segments: the ophthalmology medical device
segment and the dermatology medical device segment. In both segments, we
develop, manufacture and market medical devices. Our revenues arise from the
sale of consoles, delivery devices, disposables and service and support
activities.
In the years ended December 29, 2001, December 30, 2000 and January 1,
2000, no customer individually accounted for more than 10% of our revenue.
Revenue information shown in thousands by geographic region is as
follows:
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
United States .............. $16,004 $21,133 $16,134
Europe ..................... 5,530 5,475 4,611
Rest of Americas ........... 809 1,283 1,689
Asia/Pacific Rim ........... 4,932 4,947 3,957
------- ------- -------
$27,275 $32,838 $26,391
======= ======= =======
Revenues are attributed to countries based on location of customers.
In the years ended December 29, 2001, January 1, 2000 and January 1,
2000, no country individually accounted for more than 10% of our sales, except
for the United States, which accounted for 58.7 % of sales in 2001, 64.4% in
2000 and 61.1% in 1999.
-54-
Information on reportable segments for the three years ended December
29, 2001, December 30, 2000 and January 1, 2000 is as follows:
YEAR ENDED DECEMBER 29, 2001 YEAR ENDED DECEMBER 30, 2000 YEAR ENDED JANUARY 1, 2000
----------------------------------- ------------------------------------ -------------------------------------
Ophthalmology Dermatology Ophthalmology Dermatology Ophthalmology Dermatology
Medical Medical Medical Medical Medical Medical
Devices Devices Total Devices Devices Total Devices Devices Total
------------- ----------- -------- ------------- ----------- ------- ------------- ----------- -------
Sales $20,922 $6,353 $ 27,275 $27,065 $5,773 $32,838 $19,197 $7,194 $26,391
Direct Cost of
Goods Sold 6,772 2,595 9,367 7,796 2,051 9,847 5,907 2,054 7,961
------- ------ -------- ------- ------ ------- ------- ------ -------
Direct Gross
Margin 14,150 3,758 17,908 19,269 3,722 22,991 13,290 5,140 18,430
Total Unallocated
Costs -- -- 19,471 -- -- 20,102 -- -- 16,301
Pre-tax income
(loss) $ (1,563) $ 2,889 $ 2,129
Indirect costs of manufacturing, research and development and selling,
general and administrative costs are not allocated to the segments.
The Company's assets and liabilities are not evaluated on a segment
basis. Accordingly, no disclosure on segment assets and liabilities is provided.
-55-
10. COMPUTATION OF NET INCOME PER COMMON SHARE AND PER DILUTED COMMON SHARE
A reconciliation of the numerator and denominator of net income per
common share and diluted net income per common share is provided as follows (in
thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Numerator -- Net income (loss) per common share and
per diluted common share
Net income (loss) .............................................. $(1,273) $2,416 $1,618
======= ====== ======
Denominator -- Net income (loss) per common share
Weighted average common stock outstanding ................... 6,757 6,637 6,503
======= ====== ======
Net income (loss) per common share ............................. $ (0.19) $ 0.36 $ 0.25
======= ====== ======
Denominator -- Diluted net income (loss) per common share
Weighted average common stock outstanding ................... 6,757 6,637 6,503
Effect of dilutive securities
Weighted average common stock options ....................... -- 648 346
------- ------ ------
Total weighted average stock and options outstanding ........... 6,757 7,285 6,849
======= ====== ======
Diluted net income (loss) per common share .................. $ (0.19) $ 0.33 $ 0.24
======= ====== ======
During 2000 and 1999, there were 62,930, and 431,077 outstanding options to
purchase shares, respectively, at a weighted average exercise price of $9.82,
and $5.28 per share, respectively, were not included in the computations of
diluted net income per common share since, in each, case the exercise price of
the common shares exceeded the market price of the related options. During 2001,
options to purchase 1,656,817 shares at a weighted average exercise price of
$5.34 were outstanding but were not included in the computation of diluted net
loss per common share because their effect was antidilutive. These options could
dilute earnings per share in future periods.
11. SELECTED QUARTERLY FINANCIAL DATA, (UNAUDITED)
QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH
------- ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 29, 2001
Sales .............................................. $ 5,735 $7,088 $6,750 $7,702
Gross profit ....................................... $ 2,363 $3,697 $3,498 $3,512
Income (loss) from continuing operations ........... $ (924) $ 11 $ 171 $ 141
Income (loss) from discontinued operations ......... $ (893) $ -- $ -- $ 221
Net income (loss) .................................. $(1,817) $ 11 $ 171 $ 362
Net income (loss) per common share ................. $ (0.27) $ 0.00 $ 0.03 $ 0.05
Diluted income (loss) from continuing operations
per common share ................................. $ (0.14) $ 0.00 $ 0.02 $ 0.02
Diluted income (loss) from discontinued operations
per common share ................................. $ (0.13) $ 0.00 $ 0.00 $ 0.03
Diluted net income (loss) per common share ......... $ (0.27) $ 0.00 $ 0.02 $ 0.05
Year Ended December 30, 2000
Sales(1) ........................................... $ 7,996 $8,818 $8,213 $7,811
Gross profit(1) .................................... $ 4,659 $5,147 $4,441 $4,085
Income (loss) from continuing operations ........... $ 644 $ 790 $ 422 $ 224
Income (loss) from discontinued operations ......... $ 109 $ (32) $ 172 $ 87
Net income (loss) .................................. $ 711 $ 716 $ 561 $ 428
Net income (loss) per common share ................. $ 0.11 $ 0.11 $ 0.08 $ 0.06
Diluted income (loss) from continuing operations
per common share ................................. $ 0.09 $ 0.10 $ 0.06 $ 0.05
Diluted income (loss) from discontinued operations
per common share ................................. $ 0.00 $ 0.00 $ 0.02 $ 0.01
Diluted net income (loss) per common share ......... $ 0.09 $ 0.10 $ 0.08 $ 0.06
(1) Sales and Cost of Sales amounts for 2000 have been revised to reflect impact
of discontinued operations.
12. DISCONTINUED OPERATIONS
In April 2001, we discontinued our Laser Research segment. In the first
quarter of 2001, we recorded a loss of $893,000 (net of a $542,000 tax benefit).
In the fourth quarter of 2001, we adjusted the loss on discontinued operations
to $672,000 (net of a $439,000 tax benefit). Revenues for
-56-
this segment were $599,000 for 2000 and $460,000 for 1999. Costs and operating
expenses of the Laser Research segment were $132,000 for 2000 and $209,000 for
1999. Sales, general and administrative costs and indirect costs of
manufacturing historically were not allocated to the Laser Research segment.
12. SUBSEQUENT EVENTS
On January 13, 2002 a customer announced that the phase III clinical
trial of SnET2, a photodynamic drug activated by the OcuLight 664 laser system
for use in the treatment of wet AMD, did not meet the primary efficacy endpoint
of the study. As a result, the Company included a pretax charge in the fourth
quarter to cost of sales of $287,000 to reserve inventory associated with the
OcuLight 664 system.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-57-
PART III
Certain information required by Part III has been omitted from this Form
10-K. This information is instead incorporated by reference to our definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, which we will file
within 120 days after the end of our fiscal year pursuant to Regulation 14A in
time for our Annual Meeting of Stockholders to be held June 5, 2002.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is incorporated by reference to
"Election of Directors--Nominees" in our Proxy Statement for our 2002 Annual
Meeting of Stockholders. The information concerning our current executive
officers is found under the caption "Executive Officers of the Registrant" in
Part I hereof is also incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"Executive Compensation" in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
"Certain Relationships and Related Transactions" in our Proxy Statement.
-58-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE IN
FORM 10-K
REPORT
---------
(a) The following documents are filed in Part II of this Annual Report on Form 10-K:
1. FINANCIAL STATEMENTS
Report of Independent Accountants........................................................ 37
Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000................ 38
Consolidated Statements of Operations for the years ended December 29, 2001, December 30,
2000 and January 1, 2000............................................................ 39
Consolidated Statements of Stockholders' Equity for the years ended
December 29, 2001, December 30, 2000 and January 1, 2000............................ 40
Consolidated Statements of Cash Flows for the years ended
December 29, 2001, December 30, 2000 and January 1, 2000............................ 41
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 29, 2001, December 30, 2000 and January 1, 2000...................... 42
Notes to Consolidated Financial Statements............................................... 43
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts................................... 62
Other schedules have been omitted because they are either not required,
not applicable, or the required information is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS
Exhibits Exhibit Title
-------- -------------
3.1(1) Amended and Restated Certificate of Incorporation of Registrant
3.2(3) Amended and Restated Bylaws of Registrant.
10.1(1) Form of Indemnification Agreement with directors and officers.
10.2(1) Amended and Restated 1989 Incentive Stock Plan and form of agreement
thereunder.
10.3(1) 1995 Employee Stock Purchase Plan, as amended and form of agreement thereunder.
10.4(1) 1995 Director Option Plan and form of agreement thereunder.
10.5(1) 1995 Profit Sharing Plan
10.6(1) Third Restated Registration Rights Agreement dated as of October 27,
1995 by and among Registrant and certain individuals and entities named
therein.
10.7(1) Lease Agreement dated December 6, 1996 by and between Zappettini
Investment Co. and the Registrant.
-59-
Exhibits Exhibit Title
-------- -------------
10.8(1) Business Loan Agreement dated October 4, 1995 between Mid-Peninsula
Bank and the Registrant.
10.9(4) 1998 Stock Option Plan, as amended
10.10(2)* Development and Distribution Agreement dated as of May 28, 1996
between Miravant, Inc. (formerly PDT, Inc.) and the Company.
21.1(1) Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (See page 52).
----------------
* Confidential treatment has been granted with respect to certain portions
of this exhibit.
(1) Incorporated by reference to the like-numbered exhibits filed with the
Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared
effective on February 15, 1996.
(2) Incorporated by reference to the Exhibits in Registrant's Report on Form
10-Q for the quarter ended June 30, 1996.
(3) Incorporated by reference to the Exhibits in Registrant's Report on Form
10-Q for the quarter ended October 3, 1998.
(4) Incorporated by reference to the Exhibits in Registrant's Proxy Statement
for the Company's 1998 Annual Meeting of Stockholders which was filed
April 30, 1998.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 2001.
TRADEMARK ACKNOWLEDGMENTS
IRIDEX, the IRIDEX logo, IRIS Medical, OcuLight, SmartKey, EndoProbe and
Apex are our registered trademarks. IRIDERM, G-Probe, DioPexy, DioVet, TruFocus,
TrueCW, UltraView, DioLite 532, Long Pulse, Micro Pulse, ScanLite Scanner,
ColdTip Handpiece, Varispot Handpiece and Easy Fit product names are our
trademarks. All other trademarks or trade names appearing in the Form 10-K are
the property of their respective owners.
-60-
SIGNATURES
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, in the City of
Mountain View, State of California, on 29th day of March, 2002.
IRIDEX CORPORATION
By: /s/ Theodore A. Boutacoff
------------------------------------------
Theodore A. Boutacoff
President, Chief Executive Officer,
and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Theodore A. Boutacoff and Robert
Kamenski, jointly and severally, their attorney-in-fact, each with full power of
substitution, for him in any and all capacities, to sign on behalf of the
undersigned any amendments to this Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and each of the undersigned does hereby
ratifying and confirming all that each of said attorneys-in-fact, of his
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
/s/ Theodore A. Boutacoff President, Chief Executive Officer, and March 29, 2002
---------------------------------- Director (Principal Executive Officer)
(Theodore A. Boutacoff)
/s/ Robert Kamenski Chief Financial Officer and Vice March 29, 2002
---------------------------------- President, Administration (Principal
(Robert Kamenski) Financial and Accounting Officer)
/s/ James L. Donovan Vice President, Corporate Business March 29, 2002
---------------------------------- Development and Director
(James L. Donovan)
/s/ Robert K. Anderson Director March 29, 2002
----------------------------------
(Robert K. Anderson)
/s/ Donald L. Hammond Director March 29, 2002
----------------------------------
(Donald L. Hammond)
/s/ Joshua Makower Director March 29, 2002
----------------------------------
(Joshua Makower)
/s/ John M. Nehra Chairman of the Board March 29, 2002
----------------------------------
(John M. Nehra)
-61-
SCHEDULE II
IRIDEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END OF
DESCRIPTION THE PERIOD EXPENSES DEDUCTIONS THE PERIOD
----------- ------------ ---------- ---------- ----------
Balance for the year ended
January 1, 2000:
Allowance for doubtful accounts receivable $327 $ 128 $ (59) $396
Provision for inventory $182 $ 197 $ (5) $374
Balance for the year ended
December 30, 2000:
Allowance for doubtful accounts receivable $396 $ 131 $ (46) $481
Provision for inventory $374 $ 285 $ -- $659
Balance for the year ended
December 29, 2001:
Allowance for doubtful accounts receivable $481 $(163) $ -- $318
Provision for inventory $659 $ 65 $ -- $724
-62-
EXHIBIT INDEX
Exhibits Exhibit Title
-------- -------------
3.1(1) Amended and Restated Certificate of Incorporation of Registrant
3.2(3) Amended and Restated Bylaws of Registrant.
10.1(1) Form of Indemnification Agreement with directors and officers.
10.2(1) Amended and Restated 1989 Incentive Stock Plan and form of agreement
thereunder.
10.3(1) 1995 Employee Stock Purchase Plan, as amended and form of agreement thereunder.
10.4(1) 1995 Director Option Plan and form of agreement thereunder.
10.5(1) 1995 Profit Sharing Plan
10.6(1) Third Restated Registration Rights Agreement dated as of October 27,
1995 by and among Registrant and certain individuals and entities named
therein.
10.7(1) Lease Agreement dated December 6, 1996 by and between Zappettini
Investment Co. and the Registrant.
Exhibits Exhibit Title
-------- -------------
10.8(1) Business Loan Agreement dated October 4, 1995 between Mid-Peninsula
Bank and the Registrant.
10.9(4) 1998 Stock Option Plan, as amended
10.10(2)* Development and Distribution Agreement dated as of May 28, 1996
between Miravant, Inc. (formerly PDT, Inc.) and the Company.
21.1(1) Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See page 52).
----------------
* Confidential treatment has been granted with respect to certain portions
of this exhibit.
(1) Incorporated by reference to the like-numbered exhibits filed with the
Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared
effective on February 15, 1996.
(2) Incorporated by reference to the Exhibits in Registrant's Report on Form
10-Q for the quarter ended June 30, 1996.
(3) Incorporated by reference to the Exhibits in Registrant's Report on Form
10-Q for the quarter ended October 3, 1998.
(4) Incorporated by reference to the Exhibits in Registrant's Proxy Statement
for the Company's 1998 Annual Meeting of Stockholders which was filed
April 30, 1998.