1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] 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 of (I.R.S. employer
incorporation or organization) identification No.)
340 PIONEER WAY
MOUNTAIN VIEW, CALIFORNIA 94041
(Address of principal executive offices, including zip code)
(415) 962-8100
(Registrant's telephone number, including area code)
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.
(1) Yes [X] No [ ]; (2) Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, issued and outstanding as
of May 12, 1997 was 6,265,254.
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IRIDEX CORPORATION
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income for the three months
ended March 31, 1997 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
INDEX TO EXHIBITS 18
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
ASSETS (unaudited) *
Current assets:
Cash and cash equivalents $ 4,282 $ 4,963
Available-for-sale securities 5,922 4,951
Accounts receivables, net 4,953 5,390
Inventories 2,050 1,859
Prepaids and other current assets 293 122
Deferred income taxes 519 519
------- -------
Total current assets 18,019 17,804
Available-for-sale securities, long term 4,299 5,200
Property and equipment, net 639 655
Deferred income taxes 48 48
------- -------
Total assets $23,005 $23,707
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 441 $ 535
Accrued expenses 892 1,684
Current portion of capital lease obligations 8 8
------- -------
Total current liabilities 1,341 2,227
------- -------
Capital lease obligations, net of current portion -- 2
Total liabilities 1,341 2,229
------- -------
Stockholders' equity:
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,368,577 shares as of 3/31/97
and 6,350,180 shares as of 12/31/96 64 63
Additional paid-in capital 21,248 21,248
Retained earnings
352 167
------- -------
Total stockholders' equity 21,664 21,478
------- -------
Total liabilities and stockholders' equity $23,005 $23,707
======= =======
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* Derived from the 1996 audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
------ ------
Sales $3,320 $2,417
Cost of sales 1,437 932
------ ------
Gross profit 1,883 1,485
------ ------
Operating expenses:
Research and development 421 270
Selling, general and administrative 1,324 1,056
------ ------
Total operating expenses 1,745 1,326
------ ------
Income from operations 138 159
Other income, net 155 92
------ ------
Income before provision for income taxes 293 251
Provision for income taxes (108) (26)
------ ------
Net income $ 185 $ 225
====== ======
Net income per share $ 0.03 $ 0.04
====== ======
Shares used in per share calculation 6,640 5,697
------ ------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------- ----------
Cash flows from operating activities:
Net income $ 185 $ 225
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation 80 34
Provision for doubtful accounts 25 (2)
Changes in operating assets and liabilities:
Accounts receivable 412 181
Inventories (191) (174)
Prepaids and other current assets (171) (21)
Deferred income taxes - -
Accounts payable (94) 405
Accrued expenses (792) (586)
------ -------
Net cash (used in) provided by operating activities 546 62
------ -------
Cash flows from investing activities:
Purchases of available-for-sale securities (4,810) -
Proceeds from sale of available-for-sale securities 4,740 -
Acquisition of property and equipment (64) (45)
------ -------
Net cash used in investing activities (134) (45)
------ -------
Cash flows from financing activities:
Payment on capital lease obligations (2) (2)
Issuance of common stock, net 1 15,855
------ -------
Net cash provided by (used in) financing activities (1) 15,853
------ -------
Net (decrease) increase in cash and cash equivalents (681) 15,870
Cash and cash equivalents at beginning of period 4,963 1,227
------ -------
Cash and cash equivalents at end of period $4,282 $17,097
====== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at March 31, 1997 and for the
three month period then ended are unaudited (except for the balance sheet
information as of December 31, 1996, which is derived from the Company's
audited financial statements) and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report
on Form 10-K, which was filed with the Securities and Exchange Commission on
March 25, 1997. The results of operations for the three month period ended
March 31, 1997 is not necessarily indicative of the results for the year ending
December 31, 1997, or any future interim period.
2. INVENTORIES COMPRISE: (IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996
--------- ----------
(UNAUDITED)
Raw materials and work in progress $1,130 $ 924
Finished goods 920 935
------ ------
Total inventories $2,050 $1,859
====== ======
3. AVAILABLE-FOR-SALE SECURITIES
At March 31, 1997, available-for-sale securities consisted of five corporate
securities due through July 1997, one municipal security due December 1997 and
four long term available-for-sale municipal securities due through 2036.
4. RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," (SFAS 128) which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and will become effective
for the Company's 1997 fiscal year. SFAS 128 requires restatement of all
prior-period earnings per share data presented after the effective date. SFAS
128 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Actual results could differ materially from those set forth
in such forward-looking statements as a result of the factors set forth under
"Factors Affecting Operating Results" and other risks detailed in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 25, 1997 and detailed from time to time in the Company's reports filed
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain
items in the Company's income statement for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------ ------
Sales . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . 43.3 38.6
----- ----
Gross profit . . . . . . . . . . . . . . . . 56.7 61.4
Operating expenses:
Research and development . . . . . . . . . . . . 12.7 11.1
Sales, general and administrative . . . . . . . 39.9 43.7
----- ----
Total operating expenses . . . . . . . . . 52.6 54.8
Income from operations . . . . . . . . . . . . . . 4.1 6.6
Other income, net . . . . . . . . . . . . . . . . . 4.7 3.8
Income before provision for income taxes . . . . . 8.8 10.4
Provision for income taxes . . . . . . . . . . . . (3.3) (1.1)
Net income . . . . . . . . . . . . . . . . . . . . 5.6% 9.3%
==== ====
Sales. Sales increased 37% to $3.3 million for the three months ended
March 31, 1997 from $2.4 million for the three months ended March 31, 1996.
The growth in sales over these periods was primarily attributable to increased
unit volume as the Company expanded its product offerings and broadened its
customer base, offset somewhat by slight decreases in average selling prices.
International sales of $1.7 million accounted for 52% of sales in the three
months ended March 31, 1997 compared to $1.2 million or 51% of sales in the
comparable 1996 period. The Company expects revenues from international sales
to continue to account for a substantial portion of its sales. The increase in
revenue from international sales of approximately $.5 million for the three
months ended March 31, 1997 was primarily due to the international shipments of
the OcuLight GL. While the OcuLight GL was introduced in the third quarter of
1996, the Company's ability to ship the OcuLight GL in volume domestically
during the first quarter of 1997 continue to be negatively affected by delivery
problems with a sole source component. The Company has recently qualified a
second source for that component and expects that deliveries from the two
sources should meet its requirements for the second quarter. The Company
expects future growth in sales to be primarily derived from sales of the
OcuLight GL and the DioLite 532 Dermatology Laser (the "DioLite 532")
which the Company plans to begin shipping during the third quarter of 1997.
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Gross Profit. The Company's gross profit increased 27% to $1.9
million for the three months ended March 31, 1997 from $1.5 million for the
three months ended March 31, 1996. Gross profit as a percentage of net sales
for the three months ended March 31, 1997 decreased to 56.7%, as compared to
61.4% for the three months ended March 31, 1996, due primarily to increased
costs incurred to support expansion of the Company's business and the
introduction of the OcuLight GL. In addition, increasing competition and a
larger than expected percentage of international sales has resulted in a slight
downward trend in average selling prices of the Company's products. While the
Company expects continued competitive pressure on the prices of its products,
it expects the percentage of international sales to stabilize or decline
slightly in the next quarter. The Company intends to continue its efforts to
reduce the cost of components and the costs associated with new product
introductions and thereby mitigate the impact of price reductions on its gross
profits. The Company expects its gross profit to continue to fluctuate due to
changes in the relative proportions of domestic and international sales, costs
associated with additional new product introductions, pricing and a variety of
other factors.
Research and Development. Research and development expenses increased
by 56% to $.4 million for the three months ended March 31, 1997 from $.3
million for the three months ended March 31, 1996. The increase in research
and development expenses during this period was primarily attributable to an
increase in personnel as the Company strengthened its product development
efforts, particularly those directed at the introduction of the OcuLight GL and
the DioLite 532. The Company expects these expenses for research and
development to continue to increase in absolute dollars during 1997 in
connection with new product development activities.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 25% to $1.3 million for the three months ended March 31,
1997 from $1.1 million for the three months ended March 31, 1996. The
increases in sales, general and administrative expenses were primarily due to
the hiring of additional marketing and administrative employees to address new
opportunities, to support expanding unit volumes and the expenses associated
with the OcuLight GL and the DioLite 532. During 1995, the Company began
implementing a new management information system in manufacturing and expects
to continue to expand this system throughout the Company through 1997. The
Company expects these expenses to continue to increase during the first half of
1997 to support the increasing unit shipment volumes and additional employees.
Income Taxes. The Company's effective tax rate increased to 36.9% for
the three months ended March 31, 1997 from 10.4% for the three months ended
March 31, 1996. These rates differ from the federal statutory rate primarily
due to the utilization of tax credits and non- taxable available-for-security
investments.
Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," (SFAS 128) which specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and will become
effective for the Company's 1997 fiscal year. SFAS 128 requires restatement of
all prior-period earnings per share data presented after the effective date.
SFAS 128 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's primary sources of liquidity included
cash and cash equivalents and available-for-sale securities of $14.5 million.
During the three-month period ended March 31, 1997, the Company used
$.5 million in operating activities. Sources of cash included net income of
$.2 million and decreases in accounts receivable of $.4 million offset by
increases in inventories of $.2 million and increases in prepaids, accounts
payable expenses of $1.1 million. The increase
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in inventories is primarily due to the purchase of components for the Company's
new visible light laser photocoagulator, the OcuLight GL, shipments of which
continued to be delayed in the first quarter due to the unavailability of a sole
source component. The Company recently qualified a second source for that
component and expects that deliveries from the two sources should meet the
Company's requirements for such diode components for the second quarter. During
the first three quarters of 1996, while the Company waited for FDA approval of
the OcuLight GL, the Company built up its inventory of the OcuLight SL, the
Company's infrared product, in anticipation of allocating substantial
manufacturing resources to produce the OcuLight GL. When the introduction of
the OcuLight GL was delayed due to delays in FDA approval the Company
experienced increases in inventory levels and manufacturing labor
inefficiencies. The Company expects to continue to devote a significant portion
of its manufacturing capacity to the assembly of the OcuLight GL during the next
three months and to reduce inventory of the OcuLight SL over the next two
quarters.
The Company used $.1 million in investing activities during the three
months ended March 31, 1997. Investing activities consisted of the acquisition
of $.1 million of property and equipment used in the development and
production of the new OcuLight GL product and net acquisition of $.1 million of
available-for-sale securities.
In February 1996, the Company sold 1,982,500 shares of its Common
Stock in connection with its initial public offering ("IPO"). The net proceeds
of this offering were approximately $15.7 million after deducting underwriting
discounts and commissions and expenses of the offering. The Company has used a
portion of the net proceeds from the IPO for purchases of inventory, leasehold
improvements and payment of certain accrued liabilities. The Company believes
that, based on current estimates, its current cash balances and net cash
provided by operating activities will be sufficient to meet its working capital
and capital expenditure requirements through 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Dependence on Visible Photocoagulator. The Company introduced a new
semiconductor-based photocoagulator system, the OcuLight GL, in the second half
of 1996. The Company devoted significant resources to the development and
commercial introduction of the OcuLight GL. The Company believes that the
continued growth of its sales, if any, will be substantially dependent upon
sales of this visible light laser system. While the OcuLight GL has been
successfully introduced, the Company has continued to face risks associated
with developing and manufacturing a new product. For example, the Company
experienced delays in its manufacturing of the OcuLight GL due to the inability
of a supplier of a sole-source component to deliver components in volume and on
a timely basis. The Company has worked with this supplier to resolve these
difficulties and has qualified a second source for that component. The Company
expects to ship products incorporating components from this second source by
the second quarter of 1997. Other difficulties may occur, for example, despite
testing by the Company, quality and reliability problems may arise which may
result in reduced bookings, manufacturing rework costs, delays in collecting
accounts receivable, additional service and warranty costs and a decline in the
Company's competitive position. Moreover, the Company believes that
recommendations by ophthalmologists and clinicians for use of this laser will be
essential for its continued market acceptance. While the Company believes that
the OcuLight GL has been
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generally accepted by the market, ophthalmologists and clinicians may not
recommend this laser or related treatments unless they conclude, based upon
clinical data and other factors, that it is a beneficial alternative to other
technologies and treatments, including more established argon gas lasers.
There can be no assurance that the Company will be able to manufacture this
visible laser system has been on a cost-effective, timely basis or that it will
achieve widespread market acceptance. Additionally, the OcuLight GL competes
directly with established on-based and other photocoagulator systems currently
sold by the Company's competitors and new systems being introduced by
competitors and the Company expects to continue to experience significant
competitive pressures. Failure of the OcuLight GL system to achieve widespread
market acceptance for any reason would have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Continued Market Acceptance of Infrared Photocoagulators.
Prior to the third quarter of 1996, substantially all of the Company's revenues
had been derived from sales of its OcuLight Diode Laser Photocoagulator system
(the "OcuLight SL"), an infrared, invisible light, semiconductor-based laser
console and interchangeable delivery devices, into the ophthalmic medical device
market. The ophthalmic community historically has used argon-gas
photocoagulators which produce visible light and the substantial majority of
photocoagulators sold for ophthalmic purposes are argon-gas. Because sales of
the Company's OcuLight SL continues to represent a significant portion of the
infrared laser market, increased sales of the Company's infrared system will
depend on the rate at which users convert to infrared photocoagulators.
Equipment purchasing decisions may be based on a number of factors, in addition
to price and performance. For example, many ophthalmologists have been trained
in medical school to use visible lasers and may be reticent to change to
infrared lasers. There can be no assurance that the OcuLight SL will continue
to be accepted by the market or that other competitive treatments will not be
developed, and therefore that sales derived from the OcuLight SL will continue
to grow at historical rates or be sustainable at current sales levels. Any
decline in the demand for the OcuLight SL or any failure of sales derived from
such products to meet the Company's expectations would have a material adverse
effect on the business, results of operations and financial condition of the
Company.
Management of Growth. With the introduction of the OcuLight GL, the
Company has recently experienced, and may continue to experience growth in
production, the number of its employees, the scope of its operating and
financial systems and the geographic area of its operations. This growth has
resulted in new and increased responsibilities for management personnel and has
placed and continues to place a significant strain upon the Company's
management, operating, inventory and financial systems and resources. To
accommodate recent growth and to compete effectively and manage future growth,
if any, the Company has been required to continue to implement and improve
operational, financial and management information systems, procedures and
controls and to expand, train, motivate and manage its work force. The Company
has been implementing a new management information system in manufacturing and
expects to continue this implementation throughout the Company through 1997.
The Company's future success will depend on the successful installation of this
system as well as on the ability of its current and future executive officers
to operate effectively, both independently and as a group. There can be no
assurance that the Company's personnel, systems, procedures and controls will
be adequate to support the Company's existing and future operations. Any
failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees could have
a material adverse effect on the Company's business, results of operations and
financial condition. Additionally, the Company is in the process of relocating
to a larger facility. There can be no assurance that the Company's operations
will not be disrupted during such move, possibly causing a material adverse
effect on the Company's results of operations.
Dependence on Development of New Products and New Applications. The
Company's future success is dependent upon, among other factors, its ability to
develop, obtain regulatory approval, manufacture and introduce on a timely and
cost-effective basis as well as 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, including price,
safety, efficacy, reliability, marketing and sales efforts, the development of
new applications for these products and general economic conditions affecting
purchasing patterns. In 1996, the Company developed a
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new product which is intended to be used in the dermatology market to treat
vascular and pigmented skin lesions. The new product, the DioLite 532 will
deliver pulsed laser power through a variety of fiber optic delivery device
handpieces. While the Company has recently received 510(k) clearance for the
DioLite 532, there can be no assurance that such products will achieve clinical
acceptance or that the Company can successfully manage the introduction of such
product into the dermatology market, a market that the Company's products do not
currently address and in which the Company has no experience. The Company plans
to begin shipping the DioLite 532 in the third quarter of 1997. The failure of
the Company to successfully develop and introduce new products or enhanced
versions of existing products could have a material adverse effect on the
Company's business, operating results and financial condition. The Company is
seeking to expand the market for its existing and new products by working with
clinicians and third parties to identify new applications for its products,
validating new procedures which utilize its products and responding more
effectively to new procedures. There can be no assurance that the Company's
efforts to develop new applications for its products will be successful, that it
can obtain regulatory approvals to use its products in new clinical applications
in a timely manner, or at all, or gain satisfactory market acceptance for such
new applications. Failure to develop and achieve market acceptance of new
applications would have a material adverse effect on the Company's business,
results of operations and financial condition.
Dependence on Key Manufacturers and Suppliers. The Company relies on
third parties to manufacture substantially all of the components used in its
products, although the Company assembles critical subassemblies as well as the
final product at its facility in Mountain View, California. There are risks
associated with the use of independent manufacturers, including unavailability
of or delays in obtaining adequate supplies of components and potentially
reduced control of quality, production costs and the timing of delivery. The
Company has qualified two or more sources for most of the components used in
its products. Certain semiconductor laser components purchased from SDL, Inc.
("SDL") have not readily available from other suppliers. During the last half
1996 and first quarter 1997, the Company experienced delays in its
manufacturing of the OcuLight GL due to the inability of SDL to deliver
components in volume and on a timely basis. This component is also required
for the DioLite 532, which the Company expects to begin shipping in the third
quarter of 1997. The Company continues to work with this supplier to resolve
these difficulties. Additionally, during the first quarter of 1997, the
Company qualified Opto-Power as a second source in this diode component. The
Company expects that deliveries from SDL and Opto-Power should meet the
Company's requirements for such diode components at least for the second
quarter. The process of qualifying suppliers is ongoing, particularly as new
products are introduced and may be lengthy. The Company does not have
long-term or volume purchase agreements with any of its suppliers and currently
purchases components on a purchase order basis. No assurance can be given that
these components will be available in the quantities required by the Company,
on reasonable terms, or at all. Establishing its own capabilities to
manufacture these components would require significant scale-up expenses and
additions to facilities and personnel and could significantly decrease the
Company's profit margins. The Company's business, results of operations and
financial condition would be adversely affected if it is unable to continue to
obtain components as required at a reasonable cost.
Quarterly Fluctuations in Operating Results. Although the Company has
been profitable on an annual and quarterly basis for the last four years, the
Company's sales and operating results have varied substantially on a
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quarterly basis and such fluctuations are expected to continue in future
periods. The Company believes that its gross margins in 1997 will continue to
be lower than gross margins in 1996, primarily because of increases in costs
incurred to support expansion of the Company's business, costs associated with
the OcuLight GL, the introduction of the DioLite 532 and the downward trend in
average selling prices, primarily due to increased competition and a larger
than expected percentage of international sales. In addition, the Company
expects international sales of the OcuLight GL to exceed domestic sales of this
product during the second and third quarters of 1997. The gross margins on
international shipments of the OcuLight GL are significantly lower than the
gross margins on domestic shipments of the OcuLight GL, primarily due to
distributor discounts. Additionally, the Company expects to continue to incur
increased operating expenses in the second and third quarters of 1997
associated with the introduction of the OcuLight GL and DioLite 532. Such
increases may result in lower operating margins in the second and third
quarters of 1997. The ability of the Company to increase its operating margins
during the second and third quarters of 1997 and thereafter will depend
primarily on timely receipt of components from its two sources, successful and
timely manufacturing of the OcuLight GL and DioLite 532 and continued market
acceptance of the OcuLight GL as well as increased sales of the OcuLight SL
Systems. The Company's operating results are affected by a number of factors,
many of which are beyond the Company's control. Factors contributing to these
fluctuations include the timing of the introduction and market acceptance of
new products or product enhancements by the Company and its competitors, the
cost and availability of components and subassemblies, changes in pricing by
the Company and its competitors, the timing of the development and market
acceptance of new applications for the Company's products, the relatively long
and highly variable sales cycle for the Company's products to hospitals and
other health care institutions, fluctuations in economic and financial market
conditions and resulting changes in customers' or potential customers' budgets
and increased product development costs. Any inability to obtain adequate
quantities of a sole-source component for the OcuLight GL or the DioLite 532
would adversely impact the Company's ability to ship the OcuLight GL and the
DioLite 532. In addition to these factors, the Company's quarterly results have
been and are expected to continue to be affected by seasonal factors. The
Company manufactures its products to forecast rather than to outstanding
purchase orders, and products are typically shipped shortly after receipt of a
purchase order. While backlog increased in 1996 because of manufacturing
difficulties associated with the Company's new product, the Company does not
expect significant backlog in the future and the amount of backlog at any
particular date is generally not indicative of its future level of sales.
Although the Company's manufacturing procedures are designed to assure rapid
response to customer orders, they may in certain instances create a risk of
excess or inadequate inventory levels if orders do not match forecasts. The
Company increased its inventory of the OcuLight SL system during the first
three quarters of 1996 in anticipation of allocating substantial manufacturing
resources to produce the OcuLight GL in the fourth quarter of 1996 and the
first quarter of 1997. The Company expects to reduce inventory of the OcuLight
SL through the second half of 1997. The Company's expense levels are based, in
part, on expected future sales. If sales levels in a particular quarter do not
meet expectations, the Company may be unable to adjust operating expenses
quickly enough to compensate for the shortfall, and the Company's results of
operations may be adversely affected. In addition, the Company has
historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, even short delays in
shipment of products at the end of a quarter 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. There can be
no assurance that the Company will remain profitable in the future or that
operating results will not vary significantly.
Competition. Competition in the market for devices used for
ophthalmic treatments is intense and is expected to increase. This market is
also characterized by rapid technological innovation and change and the
Company's products could be rendered obsolete as a result of future
innovations. The Company's competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use,
scalability, durability and cost. In addition to photocoagulators, the Company
competes with pharmaceuticals, other technologies
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and other surgical techniques. Although many of the Company's current
competitors do not currently sell semiconductor lasers such as those used in
the Company's products, such competitors could incorporate these semiconductor
lasers into their products in the future and compete directly with the Company.
The Company's principal competitors are Coherent, Inc., Nidek, Zeiss, Keeler
and HGM Medical Laser Systems, Inc. Of these companies, only Nidek, Zeiss and
Keeler currently offer a semiconductor-based laser system. Other competitors
have substantially greater financial, engineering, product development,
manufacturing, marketing and technical resources than the Company. Such
companies also have greater name recognition than the Company and long-standing
customer relationships. In addition, there can be no assurance that other
medical companies, academic and research institutions or others will not
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
ophthalmic conditions targeted by the Company or are less expensive than the
Company's current or future products, and that the Company's technologies and
products would not be rendered obsolete by such developments. Any such
developments could have a material adverse effect on the business, financial
condition and results of operations of the Company.
Dependence on Collaborative Relationships. The Company has entered
into collaborative relationships with academic medical centers and physicians
in connection with the research and development and clinical testing of its
products. The Company plans to collaborate with third parties to develop and
commercialize existing and new products. In May 1996, the Company executed an
agreement with PDT, a maker of photodynamic drugs, under which the Company and
PDT will collaborate to develop a device which will emit a laser beam to
activate a photodynamic drug being developed by PDT to achieve a desired
therapeutic result. The development of this new photodynamic system will
require at least three years and significant financial and other resources.
There can be no assurance that this collaborative development effort will
continue or that it will result in the successful development and introduction
of a photodynamic system. The Company believes that these current and future
relationships are important because they would allow the Company greater access
to funds, to research, development and testing resources and to manufacturing,
sales and distribution resources. However, the amount and timing of resources
to be devoted to these activities are not within the Company's control. There
can be no assurance that such parties will perform their obligations as
expected or that the Company's reliance on others for clinical development,
manufacturing and distribution of its products will not result in unforeseen
problems. Further, there can be no assurance that the Company's collaborative
partners will not develop or pursue alternative technologies either on their
own or in collaboration with others, including the Company's competitors, as a
means of developing or marketing products for the diseases targeted by the
collaborative programs and by the Company's products. The failure of any
current or future collaboration efforts could have a material adverse effect on
the Company's ability to introduce new products or applications and therefore
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Dependence on International Sales. The Company derives, and expects
to continue to derive, a large portion of its revenue from international sales.
In 1995, 1996 and three months ended March 31, 1997, the Company's
international sales were $4.3 million, $6.1 million, and $1.7 million, or
48.7%, 49.6% and 51.6%, respectively, of total sales. Therefore, a large
portion of the Company's revenues will continue to be subject to the risks
associated with international sales, including fluctuations in foreign currency
exchange rates, shipping delays, generally longer receivables collection
periods, changes in applicable regulatory policies, international monetary
conditions, domestic and foreign tax policies, trade restrictions, duties and
tariffs, and economic and political instability. Each of these factors could
have a significant impact on the Company's ability to deliver products on a
competitive and timely basis.
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14
Patents and Proprietary Rights. The Company's success and ability to
compete is dependent in part upon its proprietary information. The Company
relies on a combination of patents, trade secrets, copyright and trademark
laws, nondisclosure and other contractual agreements and technical measures to
protect its intellectual property rights. The Company files patent
applications to protect technology, inventions and improvements that are
significant to the development of its business. The Company has been issued
six United States patents on the technologies related to its products and
processes. The Company has applied for two additional patents related to its
solid state laser products. There can be no assurance that any of the
Company's patent applications will issue as patents, that any patents now or
hereafter held by the Company will offer any degree of protection, or that the
Company's patents or patent applications will not be challenged, invalidated or
circumvented in the future. Moreover, there can be no assurance that the
Company's competitors, many of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
In addition to patents, the Company relies on trade secrets and
proprietary know-how which it seeks to protect, in part, through proprietary
information agreements with employees, consultants and other parties. The
Company's proprietary information agreements with its employees and consultants
contain industry standard provisions requiring such individuals to assign to
the Company without additional consideration any inventions conceived or
reduced to practice by them while employed or retained by the Company, subject
to customary exceptions. There can be no assurance that proprietary
information agreements with employees, consultant and others will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise 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 and
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 competitors of the Company.
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, the Company has not conducted any searches to
determine whether the Company's technology infringes any patents or patent
applications. The Company has from time to time been notified of, or has
otherwise been made aware of claims that it may be infringing upon patents or
other proprietary intellectual property owned by others. If it appears
necessary or desirable, the Company may seek licenses under such patents or
proprietary intellectual property. Although patent holders commonly offer such
licenses, no assurance can be given that licenses under such patents or
intellectual property will be offered or that the terms of any offered licenses
will be reasonable or will not adversely impact the Company's 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 the Company 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 the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, results of operations and financial condition. Conversely,
litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company 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.
Government Regulation. The medical devices marketed and manufactured
by the Company are subject to extensive regulation by the FDA and, in some
instances, by foreign and state governments. Pursuant to the Federal
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Food, Drug and Cosmetic Act of 1976, as amended, and the regulations
promulgated thereunder, the FDA regulates the 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 the Company's expectations due to the longer than
expected time period required to obtain FDA premarket clearance. Noncompliance
with applicable requirements, including good manufacturing practices ("GMP"),
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 manufactured or distributed by the Company. The failure of the Company
to obtain government approvals or any delays in receipt of such approvals would
have a material adverse effect on the Company's business, results of operations
and financial condition.
Product Liability and Insurance. The Company may be subject to
product liability claims in the future. The Company's products are highly
complex, used to treat extremely delicate eye tissue and are often used in
situations where there is a high risk of serious injury or adverse side
effects. In addition, although the Company recommends that its disposable
products only be used once and so prominently labels these disposables, the
Company believes that certain customers may reuse these disposables. Were such
a disposable not adequately sterilized by the customer between such uses, a
patient could suffer serious consequences, possibly resulting in a suit against
the Company for damages. Accordingly, the manufacture and sale of medical
products entails significant risk of product liability claims. Although the
Company maintains product liability insurance with coverage limits of $5.0
million per occurrence and an annual aggregate maximum of $6.0 million, there
can be no assurance that the coverage of the Company's insurance policies will
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
the Company in excess of its insurance coverage could have a material adverse
effect on the Company's business, results of operations and financial
condition. To date, the Company has not experienced any product liability
claims.
Volatility of Stock Price. The trading price of the Company's Common
Stock has been subject to wide fluctuations in response to a variety of factors
since the Company's initial public offering in February 1996, including
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, developments in
patents or other intellectual property rights, general conditions in the
ophthalmic laser industry, revised earning estimates, comments or
recommendations issued by analysts who follow the Company, its competitors or
the ophthalmic laser industry and general economic and market conditions.
Additionally, the stock market in general, and the market for technology stocks
in particular, have experienced extreme price volatility in recent years.
Volatility in price and volume has had a substantial effect on the market
prices of many technology companies for reasons unrelated or disproportionate
to the operating performance of such companies. These broad market fluctuations
could have a significant impact on the market price of the Common Stock.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On April 28, 1997, the Annual Meeting of Stockholders of the
Company was held in Santa Clara, California. An election of Directors was held
with a slate of six candidates, Theodore Bontacoff, James Donovan,
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Milton Chang, Donald Hammond, William Boeger and John Nehra being elected to the
Board of Directors of the Company. The slate of candidates received 5,229,829
affirmative votes of shares represented and voting and 1,200 shares voted
against the slate. Votes withheld from any nominee and broker non-votes were
counted for purposes of determining the presence or absence of a quorum.
The stockholders also approved an amendment of the 1989
Incentive Stock Option Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 500,000 shares from 1,000,000 to 1,500,000.
There were 3,891,089 shares voted for the amendment, 78,400 shares voted against
the amendment, 8,379 shares abstained and there were 1,253,161 broker non-votes.
The stockholders also approved an amendment and restatement of the Company's
1995 Employee Stock Purchase Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 50,000 shares from 50,000 shares to
100,000. There were 4,012,652 shares voted in favor of the amendment, 24,200
shares voted against the amendment, 8,479 shares abstained and there were
1,185,698 broker non-votes. Additionally, the stockholders ratified the
appointment of Coopers & Lybrand L.L.P. as independent accountants of the
Company for the fiscal year ending December 31, 1997. There were 5,222,550
shares voted in favor of the ratification, no shares voted against the
ratification and 8,479 shares abstained. The affirmative vote of the holders of
a majority of the Common Stock represented in person or by proxy and entitled to
vote at the Annual Meeting ("Votes Cast") was needed in order to approve the
foregoing proposals. Votes Cast against the proposals were counted for purposes
of determining (i) the presence or absence of a quorum for the transaction of
business and (ii) the number of Votes Cast with respect to each such proposal.
An abstention had the same effect as a vote against the proposal. Broker
non-votes were counted for purposes of determining the presence or absence of a
quorum, but were not counted as Votes Cast.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Net Income Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period for
which this report is filed.
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SIGNATURE
Pursuant to the requirements 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.
IRIDEX CORPORATION
(Registrant)
Date: May 15, 1997 By: /s/ JAMES DONOVAN
----------------------
James Donovan
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
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18
INDEX TO EXHIBITS
Exhibit Page
------- ----
11.1 Statement Regarding Computation of Net Income Per Share 19
27.1 Financial Data Schedule
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1
EXHIBIT 11.1
IRIDEX CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
--------- ----------
Weighted average shares outstanding
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 6,356 2,450
Conversion of preferred stock . . . . . . . . . . . . . . . . . -- 2,837
Common equivalent shares pursuant to Staff Accounting Bulletin
No. 83(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 273
Conversion of stock options under the treasury stock method . . 284 137
------ ------
Weighted average common shares and equivalents . . . . . . . . . . 6,640 5,697
====== ======
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 185 $ 225
====== ======
Net income per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.04
====== ======
(1) There is no difference between primary and fully diluted net income per
share.
(2) Pursuant to Securities & Exchange Commission's Staff Accounting Bulletin
No. 83, all securities issued during the period from January 17, 1995
through the filing date of the initial public offering (January 16,1996),
are included in the calculation of Common Stock equivalents as if
outstanding for all periods prior to the effective date of the initial
public offering (February 15, 1996), even if anti-dilutive. The Common
Stock warrants of stock options are computed using the Treasury Stock
Method, using the estimated initial public offering price and applicable
exercise prices.
-19-
5
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
4,282
5,922
4,953
0
2,050
18,019
4,299
0
23,005
1,341
0
0
0
64
0
23,005
3,320
3,320
1,437
1,745
0
0
0
293
(108)
0
0
0
0
185
.03
0
