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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
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 (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 19, 1998, was approximately $31,518,173 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 19, 1998, the Registrant had 6,465,558 shares of Common
Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrant's 1998 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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PART 1
ITEM 1. BUSINESS
GENERAL
IRIDEX Corporation ("IRIDEX" or the "Company") is the leading
worldwide provider of semiconductor-based laser systems used to treat eye
diseases in ophthalmology and skin lesions in dermatology. IRIDEX products are
sold in the United States predominantly through a direct sales force and
internationally through 53 independent distributors into 72 countries. The
Company markets its products using three brand names: IRIS Medical to the
ophthalmic market, IRIDERM to the dermatological market, and Light Solutions to
the research market.
The Company's ophthalmic products treat eye diseases, including the
three leading causes of irreversible blindness. The current family of
ophthalmic laser systems includes the IRIS Medical OcuLight SL, OcuLight SLx
and OcuLight GL Laser Photocoagulation systems (each an "OcuLight System").
Since its first shipment in 1990, more than 1,800 OcuLight Systems have been
sold worldwide, primarily for hospital and office-based use by ophthalmic
specialists. The Company's dermatological products treat skin diseases,
primarily vascular and pigmented lesions. In June 1997, the Company launched
the IRIDERM DioLite 532 Laser System to address the dermatological market. The
DioLite 532 Laser System is sold primarily for office-based use by
dermatologists. Each ophthalmic and dermatological system consists of a small,
portable laser console and interchangeable delivery devices. The Company
believes that its semiconductor-based systems are more portable and economical
and have a greater degree of reliability and flexibility than competing systems
which use traditional vacuum tube-based technology.
IRIDEX Corporation was incorporated in California in February 1989 as
IRIS Medical Instruments, Inc. In 1996, the Company changed its name to IRIDEX
Corporation and reincorporated in Delaware. IRIDEX conducts most of its
business through its wholly-owned operating subsidiary, IRIS Medical
Instruments, Inc. The Company's executive offices are located at 1212 Terra
Bella Avenue, Mountain View, California 94043-1824, and its telephone number is
(650) 940-4700. As used in this Form 10-K, the terms "Company" and "IRIDEX"
refer to IRIDEX Corporation, a Delaware corporation, and, when the context so
requires, its wholly-owned subsidiaries, IRIS Medical Instruments, Inc. and
Light Solutions Corporation, both California corporations and its
dermatological division IRIDERM.
This Annual Report on Form 10-K 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 a number of risks and
uncertainties, including the factors set forth under "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Factors That May
Affect Future Results" and other risks detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
Statements made herein are as of the date of the filing of this Form 10-K with
the Securities and Exchange Commission, and should not be relied upon as of any
subsequent date. The Company expressly disclaims any obligation to update
information presented herein, except as may otherwise be required by law.
THE IRIDEX STRATEGY
The Company's objective is to become a worldwide leader in developing,
manufacturing, marketing and selling innovative and cost-effective medical
laser systems. The key elements of the Company's strategy are:
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Broaden Product Lines by Leveraging Existing Technology. In 1996, the
Company introduced a new visible laser system, the OcuLight GL, for
ophthalmology, which significantly expanded the market opportunity for the
Company's products. In 1997, the Company introduced the DioLite 532, based on
the same visible light technology as the OcuLight GL, for the dermatological
market. The characteristics of both of these new products are similar to those
which have made the Company's previous products successful, such as low cost
ownership, reliability, and portability.
Develop and Validate New Applications. The Company is seeking to
develop and validate treatments that are less costly, reduce complications and
achieve better clinical results than existing treatments. The Company's
products are currently being used in multiple studies in the United States and
internationally to demonstrate the clinical benefits of its technology in
treatment. Examples of these studies include a multi-site study to
prophylactically treat age-related macular degeneration and international
studies which are evaluating the use of the Company's G-Probe as a primary
treatment for glaucoma.
Continue to Enhance Products. A core strength of the Company has been
its regular introduction of new delivery devices and product upgrades which
have enhanced the benefits of the Company's laser systems. The Company intends
to continue its investment in research and development to improve the
performance of its systems as well as to develop additional technologies which
can more cost effectively address the needs of the ophthalmic and
dermatological markets. To enhance the Company's research and development
efforts, the Company collaborates with an extensive network of academic leaders
who provide input and advice, as well as assist in validating the efficacy of
new products and applications.
Provide Total Disease Management. The Company intends to pursue both
therapeutic and 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. The Company believes that a
significant opportunity exists to provide diagnostic equipment to the
ophthalmic and optometric communities. The Company intends to pursue its
entrance into this diagnostic market through both internal development and
selected acquisitions. By pursuing therapeutic and diagnostic systems, the
Company intends to provide total disease management.
Develop New Markets through Strategic Alliances. The Company intends
to establish strategic alliances in order to expedite and lower the cost of
developing and bringing to market new products, both to the ophthalmic and
dermatological markets and to markets not currently addressed by the Company's
products. Through these alliances, the Company will seek access to
technologies that it does not currently possess. In May 1996, the Company
signed a Development and Distribution Agreement 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 which are currently being developed by
Miravant.
PRODUCTS
The Company utilizes 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
customers to purchase a basic system and add additional delivery devices as
their needs expand or as the Company develops new applications. This systems
approach also brings economies-of-scale to the Company's product development
and manufacturing efforts since each application does not require the design
and manufacture of complete stand-alone products.
Consoles. The Company's laser consoles incorporate the economic and
technical benefits of semiconductor technology, which is the basis of the
Company's semiconductor-based laser systems.
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Infrared Photocoagulator Console. 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. Consoles have United States list prices ranging from
$19,900 to $26,500.
Visible Photocoagulator Console: In September 1996, the Company
introduced a new semiconductor-based photocoagulator, the OcuLight GL,
which delivers visible laser light. In June 1997, the Company
launched a dermatological product, the DioLite 532, also based on
visible semiconductor-based technology. Both of these 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. The
OcuLight GL has a United States list price of $27,500. The DioLite
532 has a United States list price of $44,500.
Peripheral Delivery Devices. The Company's 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. The Company has
developed both disposable and nondisposable delivery devices and expects 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 and has a United States
list price of $8,800.
Slit Lamp Adapter. These adapters allow the physician to utilize a
standard slit lamp for both diagnosis and treatment. A slit lamp
adapter can be installed by the doctor in several minutes converting
any of 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 glaucomal diseases and have
United States list prices ranging from $6,000 to $6,500.
Operating Microscope Adapter. These adapters allow the physician to
utilize a standard operating microscope for both diagnosis and
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. The United States list
price of the adapter is $7,500.
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 and have United
States list prices ranging from $150 to $185.
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 and has
a United States list price of $200.
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.
Advantages include increased precision, less pain and less
inflammation than traditional cryotherapy. The DioPexy Probe has a
United States list price of $2,500.
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Dermatological 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 and have a
United States list price of $450 each.
The Company has developed a new laser system with Miravant. This
system emits a laser beam to activate a photodynamic drug being developed by
Miravant in order to achieve a therapeutic result in the treatment of
age-related macular degeneration. Clinical studies are currently underway to
test the efficacy of this procedure. Miravant has entered into a codevelopment
agreement with Pharmacia & Upjohn to more rapidly develop the photodynamic drug
and validate its use in clinical studies. The Company expects that, if clinical
studies are successful, receipt of the appropriate regulatory approval thereof
will take 3 to 5 years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future
Results--Dependence on Development of New Products and New Applications,"
"--Dependence on Collaborative Relationships and "--Government Regulation."
The following chart lists the eye diseases that can be treated using
the Company's photocoagulator systems, including the preferred delivery
devices. The selection of delivery device is often determined by the severity
and location of the disease. The chart also lists the skin diseases that can
be treated with the DioLite 532.
Condition Procedure Console Delivery Devices
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Ophthalmic Treatments:
Age-related Macular Degeneration Retinal Photocoagulation Infrared & Visible Slit Lamp Adapter
Diabetic Retinopathy
Macular Edema Grid Retinal Photocoagulation Infrared & Visible Slit Lamp Adapter and Operating
Microscope Adapter
Focal Retinal Visible Slit Lamp Adapter
Photocoagulation
Proliferative Pan-Retinal Photocoagulation Infrared & Visible Slit Lamp Adapter, Operating
Microscope Adapter, Laser
Indirect Ophthalmoscope,
EndoProbe
Glaucoma
Primary Open-Angle Trabeculoplasty Infrared & Visible Slit Lamp Adapter
Angle-closure Iridotomy(1) Infrared & Visible Slit Lamp Adapter
Uncontrolled Transscleral Infrared G-Probe
CycloPhotocoagulation
Retinal Detachment Retinopexy Retinal Infrared & Visible Slit Lamp Adapter, Laser
Photocoagulation Indirect Ophthalmoscope,
Operating Microscope Adapter,
EndoProbe
Transscleral Retinal Infrared DioPexy Probe
Photocoagulation
Retinopathy of Prematurity Retinal Photocoagulation Infrared Laser Indirect Ophthalmoscope
Ocular Tumors Retinal Photocoagulation Infrared Slit Lamp Adapter, Operating
Microscope Adapter, Laser
Indirect Ophthalmoscope
Dermatological Treatments:
Vascular Lesions Selective photothermolysis Visible DioLite Handpiece
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Condition Procedure Console Delivery Devices
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Pigmented Lesions Selective photothermolysis Visible DioLite Handpiece
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(1) This indication is under an Investigational Device Exemption in the
United States.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are performed
internally by its research and development staff comprised of 13 individuals
and is supplemented by consultants with specialized expertise. Research and
development efforts are directed toward both development of new products and
development of new applications using existing products. The Company's
expenditures for research and development totaled approximately $1,716,000,
$1,286,000 and $742,000 in 1997, 1996 and 1995, respectively. In addition, the
Company receives funds under grant from the United States government for
research. The Company has 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 the Company in
validating new products and new applications before they are introduced.
The Company is 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:
Ophthalmic Applications
Age-Related Macular Degeneration. The Company is supporting a
multi-center clinical trial which is testing a prophylactic treatment
of age-related macular degeneration. This treatment involves the use
of infrared light that passes through the sensory retina without
damaging it.
Glaucoma. Preliminary studies are underway to evaluate the use of the
G-Probe as a first-line treatment modality for various glaucomas.
Diabetic Retinopathy. Studies are underway to investigate the
treatment of diabetic retinopathy using minimal impact infrared
photocoagulation 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.
CUSTOMERS AND CUSTOMER SUPPORT
The Company's products are currently sold to ophthalmologists,
including glaucoma specialists, retinal specialists, and pediatric
ophthalmologists, and to dermatologists. 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 1997, 1996
or 1995.
The Company is continuing its efforts to broaden its customer base
through the development of new products and new applications. The Company
currently estimates that there are approximately 15,000 ophthalmologists in the
United States and 45,000 internationally who are each potential customers. The
Company believes there are approximately 10,000 dermatologists in the U.S.
Additionally, the Company estimates that there
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are approximately 4,800 and 18,000 hospitals in the United States and
internationally, respectively, as well as approximately 2,200 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 and
hospital and medical center is a potential customer for the Company's products.
The Company is seeking to broaden its customer base by developing new diagnostic
products directed at addressing the needs of optometrists and dermatologists.
The Company seeks to provide superior customer support and service. A
24-hour, seven day a week, telephone service line is maintained to service
customers with products under warranty or paid service contacts. If a problem
with a product cannot be diagnosed and resolved by telephone, a replacement
unit is shipped overnight to any domestic customer, and the problem unit is
returned to the Company. The small size and rugged design of the Company's
products allows for economical shipment and quick response to customers almost
anywhere in the world.
SALES AND MARKETING
To support its sales process, the Company conducts marketing programs
which include direct mail, trade shows, public relations, advertising in trade
and academic journals and newsletters. The Company annually participates in
approximately 50 trade shows or meetings in the United States and 65 trade
shows or meetings internationally. These meetings allow the Company to present
its products to existing as well as to prospective buyers. While the sales
cycle varies from customer to customer, it averages 12 months and typically
ranges from two to 24 months. The Company's sales and marketing organization
is based at the Company's corporate headquarters in Mountain View, with area
sales managers located in California, Georgia, Maryland, Massachusetts, Ohio
and Texas.
International product sales represented 51.8%, 49.6% and 48.7% of the
Company's sales in 1997, 1996 and 1995, respectively. The Company's products
are sold in the United States predominantly through a direct sales force and
internationally through 53 independent distributors into 72 countries.
International sales are administered through the Company's corporate
headquarters in Mountain View, California, along with two area sales managers.
The Company's distribution agreements with its 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
- --Dependence on International Sales."
The Company believes that educating patients and physicians about the
long-term health benefits and cost-effectiveness of diagnosis and treatment of
diseases that cause blindness at an early stage is critical to market
acceptance of the Company's ophthalmic products. The Company believes 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 its ophthalmic laser
products as well as its prospective diagnostic products.
The Company works with its customers to enhance its ability to
identify new applications for its products, validate new procedures using its
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. 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 the Company's products by
these early adopters is key to the Company's strategy in the validation of its
technology. In addition, the Company believes that widespread adoption of its
laser platforms will require education about the Company's products as compared
to competing systems.
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OPERATIONS
The manufacture of ophthalmic and dermatological laser systems is a
complex process involving precision components, intricate procedures, and
environmental controls. Completed systems must pass quality control and
reliability tests before shipment. The Company purchases substantially all of
its components that are either standard or built to proprietary specifications
and subassemblies from various independent suppliers and sub-contractors. The
Company assembles critical subassemblies as well as the final product at its
Mountain View, California facility. Most of the sub-contractors are located
within 10 miles of the Company's Mountain View, California facility. There are
risks associated with the use of independent suppliers and sub-contractors,
including unavailability of or delays in obtaining adequate supplies of
components and potentially reduced control of quality, production costs and the
timing of delivery. Any failures by such third parties to adequately perform
may delay the submission of products for regulatory approval, impair the
Company's ability to deliver products on a timely basis, or otherwise impair
the Company's competitive position. Establishing its own capabilities to
manufacture these components would require significant scale-up expenses and
additions to facilities and personnel and could adversely affect the Company's
earnings.
The Company has qualified two or more sources for most of the
components used in its products. However, certain of the Company's products
remain significantly dependent on sole source suppliers. Certain diodes
purchased from SDL, Inc. ("SDL") were not readily available from other suppliers
until the second quarter of 1997. During the last half of 1996 and the first
quarter of 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. The Company continues to work with SDL to ensure that such
difficulties do not reoccur. Additionally, during the first quarter of 1997,
the Company qualified Opto Power Corporation ("Opto Power"), a division of
Spectra Physics Lasers, Inc., as a second source of this diode component.
Although the Company believes that deliveries from SDL and Opto Power should
meet the Company's future requirements for such diode components, there can be
no assurance that the Company will not experience a shortfall in these diodes in
the future. The process of qualifying suppliers is ongoing and may be lengthy,
particularly as new products are introduced. 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. The Company's business,
financial condition and results of operations would be adversely affected if it
is unable to obtain components in the quantities required at a reasonable cost
and on a timely basis or if it could not expand manufacturing capacity to meet
demand or if operations at its single facility were disrupted. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results--Risks of Manufacturing and
Dependence on Key Manufacturers and Suppliers."
The Company implemented policies and procedures and quality systems
that are intended to allow the Company to receive ISO 9001 certification. ISO
9001 is an international series of quality standards designed to demonstrate a
company's capability and commitment to quality. An audit of the Company's
policies and procedures is in process, and the Company expects to be ISO 9001
certified by June 1998.
International regulatory bodies often establish varying regulations
governing product standards, packaging requirements, labeling requirements,
tariff regulations, duties and tax requirements. As a result of the Company's
sales in Europe, the Company was required to receive a "CE" mark certification,
an international symbol of quality and compliance with applicable European
medical device directives. Although the Company has received a CE mark
certification for the OcuLight SL platform, and has self-certified CE
compliance for the OcuLight GL and the DioLite 532, there can be no assurance
that the Company will be successful in meeting new certification requirements
in the future or in obtaining such certifications for its new products. Any
failure to obtain required certifications would have a material adverse effect
on the Company's business, results of operations and financial condition.
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COMPETITION
Competition in the market for devices used for ophthalmic and
dermatological treatments is intense and may 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 other companies that manufacture
photocoagulators, the Company's products compete with pharmaceutical treatments,
other technologies and other surgical techniques. The Company's principal
competitors in ophthalmology are Coherent, Inc., Nidek, Inc. ("Nidek"), Carl
Zeiss, Inc. ("Zeiss"), Alcon International ("Alcon"), Keeler Instruments, Inc.
("Keeler") and HGM Medical Laser Systems, Inc. ("HGM"). Of these companies,
Nidek, Zeiss, Alcon and Keeler currently offer a semiconductor-based laser
system in ophthalmology, and other companies may introduce a semiconductor-based
laser system. The Company's principal competitors in dermatology are Laserscope
and HGM, neither of which currently offers a semiconductor-based laser system in
dermatology. Other competitors have substantially greater financial,
engineering, product development, manufacturing, marketing and technical
resources than the Company. Such companies may 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 and dermatological conditions targeted by
the Company or are less expensive than the Company's current or future products.
Moreover, there can be no assurance 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results--Competition."
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 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, consultants and
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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. Recently, a company has challenged one of the
patents held by Light Solutions Corporation, a wholly owned subsidiary of
IRIDEX. The Company believes that this dispute will be settled without a
material adverse effect to the Company's business and financial condition.
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 the Company to develop noninfringing technology or
require the Company 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 to be marketed and manufactured by the Company 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 the Company.
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), and 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 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 predicate 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 the
Company's business, financial condition and results of operations. For any of
the Company's products that are cleared through the 510(k) process,
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 test, 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 includes 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 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,
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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.
The Company has obtained 510(k) clearance for its OcuLight SL,
OcuLight SLx and OcuLight GL consoles and a number of peripheral delivery
devices including the EndoProbe, the Laser Indirect Ophthalmoscope, the Slit
Lamp Adapter, the G-Probe and the DioPexy Probe, for photocoagulation of
tissues and structures in the eye in the treatment of various retinal and
glaucoma diseases. The Company has also made certain modifications to the Slit
Lamp Adapter that the Company has determined do not require the submission of a
new 510(k) notification. However, there can be no assurance that the FDA will
agree with the Company's determination that a 510(k) notification is not
required for the Slit Lamp Adapter modifications nor that FDA will not require
the Company to submit a new 510(k) notification for the modification. If the
FDA requires the Company to submit a new 510(k) notification for the modified
Slit Lamp Adapter, the Company may be prohibited from marketing the modified
device until the 510(k) notification is cleared by the FDA.
In July 1991, the Company submitted a 510(k) notification to obtain
clearance for use of its Slit Lamp Adapter for use in iridectomy and other
indications. After conducting an initial review of the submission, the FDA
indicated that clinical data would be required in order for the agency to make
a substantial equivalence determination regarding use of the device for
iridectomy. As a result, the Company obtained FDA approval of an
investigational device exemption ("IDE") to conduct clinical studies of the
Slit Lamp Adapter for iridectomy. Although the Company obtained IDE approval
in September 1992, to date, no patients have been recruited for the study.
There can be no assurance that once clinical data are collected and submitted
to the FDA, that they will be adequate to establish substantial equivalence,
that the FDA will not require additional clinical data, or that the FDA will
grant 510(k) clearance in a timely manner, if at all.
The Company has also established a strategic alliance with Miravant to
manufacture a device designed to photoactivate an ophthalmic drug currently
under development by Miravant. Miravant is responsible for obtaining the
required regulatory approvals. Under the FDA's combination products policy,
the ophthalmic drug and photoactivating device may be considered a drug-device
combination product and, therefore, be required to undergo the new drug
approval process. The steps required before a new drug can be commercially
distributed in the United States include (1) conducting appropriate
pre-clinical laboratory and animal tests, (2) submitting to the FDA an
application for an investigational new drug ("IND"), which must become
effective before clinical trials may commence, (3) conducting well-controlled
human clinical trials that establish the safety and effectiveness of the drug,
(4) filing with the FDA a new drug application ("NDA"), and (5) obtaining FDA
approval of the NDA prior to any commercial distribution of the drug. The new
drug approval process is expensive, lengthy and uncertain, and many new drug
products have never been approved for marketing. There can be no assurance
that an approved NDA would not be required for the ophthalmic drug and
photoactivating device as a combination product or, if required, that such
approval could be obtained. In addition, there can be no assurance that the
FDA would not require separate premarket clearance for the photoactivating
device through either a 510(k) notification or a PMA or, if required, that such
premarket clearance or approval could be obtained.
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The Company has received 510(k) clearance for the DioLite 532 console,
a new product for the dermatological market to treat vascular and pigmented
skin lesions, and the DioLite handpieces. The Company introduced the DioLite
532 in June 1997.
Any products manufactured or distributed by the Company 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 the Company 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.
The Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its 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. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations
now or in the future or that such laws or regulations will not have a material
adverse effect upon the Company's ability to do business.
Exports of the Company's 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 the Company's products in foreign markets will
also subject the Company 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 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, and no assurance can be
given that the necessary approvals or clearances will 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 the business, financial
condition and results of operations of the Company.
Changes in existing requirements or adoption of new requirements or
policies by the FDA or other foreign and domestic regulatory authorities could
adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future or that laws or regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations.
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REIMBURSEMENT
The Company's products are typically purchased by doctors, clinics,
hospitals and other users, which bill various third-party payers, such as
governmental programs and private insurance plans, for the health care services
provided to their patients. Third-party payers carefully review and are
increasingly challenging the prices charged for medical products and services.
Reimbursement rates from private companies vary depending on the procedure
performed, the third-party payor, the insurance plan and other factors.
Medicare reimburses hospitals on a prospectively-determined fixed amount for
the costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and 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 unrelated to
the specific devices used in that procedure. Third- party payers are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
While the Company believes that the laser procedures using its
products have generally been reimbursed, payers may deny coverage and
reimbursement for the Company's products if they determine that the device was
not reasonable and necessary for the purpose for which used, was
investigational or was not cost-effective. Additionally, there can be no
assurance that Miravant will be able to obtain coverage for its use of drugs
with the Company's OcuLight Systems, or that the reimbursement will be adequate
to cover the treatment procedure. The inability of doctors, clinics, hospitals
and other users of the Company's products to obtain adequate reimbursement for
use of the Company's products from third-party payers, and/or changes in
government legislation or regulation or in private third-party payers' policies
toward reimbursement for procedures employing the Company's products could have
a material adverse effect on the Company's business, results of operations and
financial condition. Moreover, the Company is 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 the Company. Most of the
treatment procedures for the Company's DioLite 532 dermatological systems are
billed to private-pay customers.
PRODUCT LIABILITY AND INSURANCE
The Company may be subject to product liability claims in the future.
The Company's products are highly complex and are used to treat extremely
delicate eye tissue as well as to treat skin conditions primarily on the face.
The Company's products 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 products, the Company believes that certain customers may
nevertheless reuse these disposable products. Were such a disposable product
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 $6.0 million per occurrence
and an annual aggregate maximum of $7.0 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.
BACKLOG
The Company generally ships its products within a few days after
acceptance of a customer's purchase order. Accordingly, the Company does not
believe that its backlog at any particular time is indicative of future sales
levels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Affect Future Results--Quarterly
Fluctuations in Operating Results."
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EMPLOYEES
At December 31, 1997, the Company had a total of 73 full-time
employees, including 31 in operations, 21 in sales and marketing, 13 in
research and development and 8 in finance and administration. The Company also
employs, from time to time, a number of temporary and part-time employees as
well as consultants on a contract basis. At December 31, 1997, the Company
employed 7 such persons. The Company intends to hire additional personnel
during the next twelve months in each of these areas. The Company's future
success will depend in part on its ability to attract, train, retain and
motivate highly qualified employees, who are in great demand. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The Company's employees are not represented by a collective
bargaining organization, and the Company has never experienced a work stoppage
or strike. The Company considers its employee relations to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of December
31, 1997 were as follows:
Name Age Position
---- --- --------
Theodore A. Boutacoff . . . . . 50 President, Chief Executive Officer and Director
Robert Kamenski . . . . . . . . 43 Chief Financial Officer and Vice President, Administration
Eduardo Arias . . . . . . . . . 53 Senior Vice President, Worldwide Sales
David M. Buzawa . . . . . . . . 45 Vice President, Product Development
James L. Donovan . . . . . . . 60 Vice President, Corporate Business Development
Timothy Powers . . . . . . . . 37 Vice President, Operations
Mr. Boutacoff co-founded the Company 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.
Robert Kamenski joined the Company in March 1997 as Vice President,
Finance and Administration and was appointed Chief Financial Officer in October
1997. Prior to joining the Company, 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 and is a
member of the American Institute of CPAs.
Mr. Arias co-founded the Company and served as Vice President, Sales &
Marketing from April 1989 until September 1991 when he was promoted to the
position of 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. Buzawa co-founded the Company and since February 1989 has managed
the Company's Product Development group, serving since February 1993 as the
Vice President, Product Development. Prior to co-founding the Company, Mr.
Buzawa held various positions, including Project Engineer, with Coherent, Inc.
Mr. Buzawa holds a B.A. degree in general science from the University of
Rochester. Mr. Buzawa served as executive officer of IRIDEX Corporation
through February 23, 1998. He presently serves as Vice President, Product
Development for IRIS Medical Instruments, Inc., a wholly-owned subsidiary of
IRIDEX Corporation, focusing on ophthalmology.
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Mr. Donovan co-founded the Company and, since February 1989, has served
as a member of its Board of Directors. From February 1989 to October 1997, Mr.
Donovan served as its Chief Financial Officer, except in the period June to
November 1996, and is currently serving as its 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.
Mr. Powers joined the Company in July 1997 as Vice President,
Operations. Prior to joining the Company, 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.
ITEM 2. PROPERTIES
The Company relocated its operating facilities in September 1997 to
37,000 square feet of space in Mountain View, California. The new building
houses manufacturing, research and development and serves as the Company's
headquarter offices. The lease term expires in 2002 and contains a renewal
option.
Management believes that its new facility will be adequate for its
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON EQUITY
The Company's Common Stock has been traded on the Nasdaq National
Market System under the symbol "IRIX" since the Company's initial public
offering on February 15, 1996. The following table sets forth for the periods
indicated the high and low closing prices for the Common Stock.
HIGH LOW
------- -------
FISCAL 1996
First Quarter (from February 15, 1996) ......... $10.875 $ 9.750
Second Quarter ................................. 16.750 10.250
Third Quarter .................................. 15.500 6.875
Fourth Quarter ................................. 9.500 6.250
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FISCAL 1997
First Quarter .................................. $ 8.750 $ 4.750
Second Quarter ................................. 9.625 5.375
Third Quarter .................................. 12.625 8.250
Fourth Quarter ................................. 12.375 7.500
FISCAL 1998
First Quarter (through March 19, 1998) ......... $ 9.125 $ 6.500
On March 19, 1998, the closing price on the Nasdaq National Market for
the Company's Common Stock was $8.38 per share. As of December 31, 1997, there
were approximately 78 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the payment of cash dividends by the Company to its stockholders is
currently prohibited by the Company's bank line of credit. See Note 4 of Notes
to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the
years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from
and are qualified by reference to, the consolidated financial statements of the
Company audited by Coopers & Lybrand L.L.P., independent accountants. The
selected consolidated statement of income data as of December 31, 1993 and 1994
and the consolidated balance sheet data as of December 31, 1993, 1994 and 1995
have been derived from the Company's 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 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."
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF INCOME DATA:
Sales .................................... $ 5,564 $ 7,182 $ 8,801 $ 12,364 $ 18,073
Cost of sales ............................ 2,280 2,423 2,798 4,899 7,612
------- ------- ------- -------- --------
Gross profit ..................... 3,284 4,759 6,003 7,465 10,461
------- ------- ------- -------- --------
Operating expenses:
Research and development ............. 528 629 742 1,286 1,716
Selling, general and administrative .. 2,601 3,383 3,787 5,197 6,074
Nonrecurring charge for acquisition of
technology(1) ........................ -- -- 80 -- --
------- ------- ------- -------- --------
Total operating expenses .......... 3,129 4,012 4,609 6,483 7,790
------- ------- ------- -------- --------
Income from operations ................... 155 747 1,394 982 2,671
Other income (expense), net .............. (24) (1) 58 699 607
------- ------- ------- -------- --------
Income before provision for income taxes . 131 746 1,452 1,681 3,278
Benefit (provision) for income taxes ..... -- 1,039 (452) (676) (1,180)
------- ------- ------- -------- --------
Net income ............................... $ 131 $ 1,785 $ 1,000 $ 1,005 $ 2,098
======= ======= ======= ======== ========
Net income per common share (2) .......... $ 0.11 $ 1.60 $ 0.78 $ 0.18 $ 0.33
======= ======= ======= ======== ========
Shares used in per common share
calculation(2) ........................... 1,142 1,118 1,276 5,725 6,406
======= ======= ======= ======== ========
Net income per common share-assuming
dilution(2) .............................. $ 0.03 $ 0.42 $ 0.23 $ 0.16 $ 0.31
======= ======= ======= ======== ========
Shares used in per common share-assuming
dilution calculation(2) .................. 4,248 4,242 4,354 6,410 6,755
======= ======= ======= ======== ========
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December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- -------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities ............ $ 269 $ 684 $1,227 $15,114 $13,488
Working capital ........................... $1,554 $2,973 $4,339 $20,777 $21,716
Total assets .............................. $2,603 $4,436 $6,395 $23,707 $26,686
Total stockholders' equity ................ $1,642 $3,436 $4,685 $21,478 $23,880
- ----------
(1) Reflects the write-off from the purchase of in-process research and
development. See Note 2 of Notes to Consolidated Financial Statements.
(2) See Note 10 of Notes to Consolidated Financial Statements for an
explanation of shares used in per share calculation.
ITEM 7. 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 That May Affect Future Results" and other risks detailed from time to
time in the Company's reports filed with the Securities and Exchange
Commission.
OVERVIEW
IRIDEX Corporation ("IRIDEX" or the "Company") is the leading
worldwide provider of semiconductor-based laser systems used to treat eye
diseases in ophthalmology and skin lesions in dermatology. IRIDEX products are
sold in the United States predominantly through a direct sales force and
internationally through 53 independent distributors into 72 countries. The
Company markets its products using three brand names: IRIS Medical to the
ophthalmic market, IRIDERM to the dermatological market, and Light Solutions to
the research market.
The Company's ophthalmic products treat eye diseases, including the
three leading causes of irreversible blindness. The current family of
ophthalmic laser systems includes the IRIS Medical OcuLight SL, OcuLight SLx
and OcuLight GL Laser Photocoagulation systems (each an "OcuLight System").
Since its first shipment in 1990, more than 1,800 OcuLight Systems have been
sold worldwide, primarily for hospital and office-based use by ophthalmic
specialists. The Company's dermatological products treat skin diseases,
primarily vascular and pigmented lesions. In June 1997, the Company launched
the IRIDERM DioLite 532 Laser System to address the dermatological market. The
DioLite 532 Laser System is sold primarily for office-based use by
dermatologists. Each ophthalmic and dermatological system consists of a small,
portable laser console and interchangeable delivery devices. The Company
believes that its semiconductor-based systems are more portable and economical
and have a greater degree of reliability and flexibility than competing systems
which use traditional vacuum tube-based technology.
The Company's sales consist of the purchase price of its IRIS Medical
OcuLight System and IRIDERM DioLite 532 consoles and delivery devices,
disposable products and, to a lesser extent, revenues from service and support
activities, the sale of Light Solutions products and research grants. Revenue
from product sales is generally recognized at the time of shipment (net of
allowances or discounts), while revenue from services is recognized upon
performance of the applicable services. The Company's sales have increased
primarily due to growth in unit sales (including additional unit sales resulting
from the introduction of the OcuLight GL during the second half of 1996 and the
DioLite 532 in June 1997), greater market penetration and an expanded product
offering. The Company believes that future growth in unit sales will be derived
both from a growth in the market for photocoagulator products and from the
replacement of installed photocoagulators which use vacuum tube-based
technology.
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Sales in the United States are derived from direct sales to end users
and internationally are derived from sales to 53 distributors who resell to
hospitals and physicians. Sales to international distributors are made on open
credit terms or letters of credit and generally are not subject to a right of
return unless the Company terminates a distributor. Although international
sales of the Company's products are currently denominated in United States
dollars, international sales are subject to a variety of risks 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.
The recent currency devaluation in many Asian countries has had the effect of
significantly increasing the purchase price of the Company's products to the
Company's distributors and their customers in that region. Conversely, because
certain of the Company's competitors are based in Asia, the currency
devaluations may put additional downward pressures on the average selling prices
of the Company's products. Product sales were lower for the affected Asian
region during the fourth quarter of 1997 primarily as a result of the currency
problem. The Company expects lower sales to the Asian region to continue into
1998. The Company also expects revenues from international sales to continue to
account for a substantial portion of its sales. Accordingly, if the Asian
economic difficulties are prolonged, worsen or otherwise negatively impact the
saleability of the Company's product, these difficulties could negatively impact
the Company's business, results of operations, and financial condition. While
these currency factors and other factors listed above have been mitigated by
product sales in other regions and in the United States, there can be no
assurance that future currency fluctuations or other factors discussed above
will not have a material adverse effect on the Company's business, financial
condition or results of operations. See "--Factors That May Affect Future
Results--Dependence on International Sales."
Cost of sales consists primarily of the cost of purchasing components
and sub-systems, assembling, packaging and testing components at the Company's
facility, and the direct labor and overhead associated therewith. Cost of
service and support consists of expenses related directly to service, support
and training activities. Product development expenses consist primarily of
personnel costs, materials and research support provided to clinicians at
medical institutions developing new applications which utilize the Company's
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.
Prior to 1995, the Company had not incurred any substantial income tax
liability because of its historical operating losses. However, during 1996,
the Company utilized its remaining net operating loss carryforwards and began
incurring income taxes at statutory tax rates.
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of sales for the periods indicated:
1995 1996 1997
---- ---- ----
Sales ................................................. 100.0% 100.0% 100.0%
Cost of sales ......................................... 31.8 39.6 42.1
----- ----- -----
Gross profit ..................................... 68.2 60.4 57.9
----- ----- -----
Operating expenses:
Research and development ......................... 8.4 10.4 9.5
Sales, general and administrative ................ 43.1 42.0 33.6
Nonrecurring charge for acquisition of technology 0.9 -- --
----- ----- -----
Total operating expenses ......................... 52.4 52.4 43.1
----- ----- -----
Income from operations ................................ 15.8 8.0 14.8
Other income, net ..................................... 0.7 5.6 3.3
----- ----- -----
Income before provision for income taxes .............. 16.5 13.6 18.1
Provision for income taxes ............................ (5.1) (5.5) (6.5)
----- ----- -----
Net income ............................................ 11.4% 8.1% 11.6%
===== ===== =====
Sales. Sales were $18.1 million, $12.4 million and $8.8 million in
1997, 1996 and 1995, respectively, representing increases of 46.2% from 1996 to
1997 and 40.5% from 1995 to 1996. The increase in the Company's sales in 1997
as compared to 1996 was primarily due to increased unit volumes, primarily as a
result of increased sales of the OcuLight GL and sales of the DioLite following
its introduction in June 1997, offset in part by decreased average selling
prices, particularly with respect to the Company's more mature products. The
increase in the Company's sales in 1996 as compared to 1995 was also primarily
attributable to increased unit volumes, primarily resulting from the
introduction of the OcuLight GL in the second half of 1996, offset in part by
decreased average selling prices. International sales accounted for 51.8%,
49.6% and 48.7% in 1997, 1996 and 1995, respectively. While international sales
as a percentage of revenues increased for 1997, international sales were lower
during the fourth quarter as compared to the first half of 1997, partially due
to the recent currency devaluation in many Asian countries. The impact on the
Company of lower sales in Asia was offset by strong sales in the U.S. during the
same fourth quarter. While these currency factors have been mitigated by
product sales in other regions and in the United States, there can be no
assurance that future currency fluctuations or other factors discussed above
will not have a material adverse effect on the Company's business, financial
condition or results of operations. While the OcuLight GL was introduced in the
third quarter of 1996, the Company's ability to ship the OcuLight GL in volume
during 1996 and the first half of 1997 was negatively affected by delivery
problems associated with a sole source component. The Company qualified a
second source for that component in the first quarter of 1997 and began to
receive shipments from the second source supplier in the second quarter of 1997.
The Company believes that deliveries from the two diode sources should meet its
requirements for 1998. The Company expects future growth in sales to be
primarily derived from sales of the OcuLight GL and the DioLite 532. See
"--Factors That May Affect Future Results--Risks of Manufacturing and Dependence
on Key Manufacturers and Suppliers."
Gross Profit. Gross profit was $10.5 million, $7.5 million and $6.0
million in 1997, 1996 and 1995 representing 57.9%, 60.4% and 68.2% of sales in
each of such periods, respectively. Gross profit as a percentage of sales
decreased in 1997 as compared to 1996 primarily due to increased sales of the
Company's OcuLight GL as well as an increase in international sales which, on
average, have lower gross profit margins. Gross profit as a percentage of
sales was lower in 1996 as compared to 1995 primarily due to the costs
associated with starting up manufacturing of the new OcuLight GL. Moreover,
increasing competition has continued to result in a downward trend in average
selling prices and has thereby lead to lower gross profit margins. The Company
intends to continue its efforts to reduce the cost of components and thereby
mitigate the impact of price reductions on its
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gross profit. Although the Company believes gross profit in dollars will
increase as volumes increase, critical components are received on schedule and
costs are engineered out of the new product, 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.
Research and Development. Research and development expenses increased
by 33.4% in 1997 to $1,716,000 and by 73.3% in 1996 to $1,286,000 from $742,000
in 1995, representing 9.5%, 10.4% and 8.4% of sales in these periods,
respectively. The increase in research and development expenses during 1997
was primarily attributable to an increase in personnel as the Company
strengthened its product development efforts, particularly those directed at
the introduction of the DioLite 532. The Company expects these expenses for
research and development to continue to increase in absolute dollars during
1998 in connection with new product development activities. The increase in
research and development expenses in 1996 as compared to 1995 was primarily
attributable to higher expenses incurred in connection with the development of
the OcuLight GL. The Company also conducts research and development pursuant
to grants from the U.S. Federal Government. Under the terms of many of these
grants, the Company typically retains the right to commercially market the
technology developed by the Company. The amounts received by the Company for
these research and development efforts are recognized as sales, and the related
labor and material costs are charged to cost of sales. As a result, the
Company's reported research and development expense does not completely reflect
the Company's research and development efforts.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 16.9% in 1997 to $6.1 million and by 37.2% in 1996 to $5.2
million from $3.8 million in 1995, representing 33.6%, 42.0% and 43.1% of sales
in these periods, respectively. The increases in sales, general and
administrative expenses in these periods were primarily due to the hiring of
additional sales and marketing employees to address new sales opportunities and
to support expanding unit volumes, higher sales commissions and the growth in
the infrastructure of the Company's finance, administrative and operations group
which were necessary to support the Company's expanded operations. Costs
associated with the launch of the DioLite 532 and sales of the OcuLight GL
during 1997 also increased sales and marketing expenses during this period. In
addition, general and administrative expenses increased due to the Company's
recent move to a new facility. The increase in sales, general and
administrative expenses for these periods were partially offset by decreases in
sales expenses associated with increasing international sales to independent,
non-employee, non-commissioned distributors.
Nonrecurring Charge for Acquisition of Technology. In the fourth
quarter of 1995, the Company wrote off $80,000, or 0.9% of sales in 1995, of
in-progress research and development costs in connection with an acquisition.
Other income, net. Other income, net consists primarily of interest
income. Interest income was $623,000, $691,000 and $64,000 in 1997, 1996 and
1995, respectively. This income was primarily from interest earned on
short-term investments. Interest income decreased in 1997 because of increased
investments in lower yield, tax preferred securities and investments in
leasehold improvements associated with the Company's new facility.
Income Taxes. The Company had an effective tax rate of 36%, 40% and
31% in 1997, 1996 and 1995, respectively. The rate for 1995 differs from the
statutory rate of 40% primarily due to the utilization of net operating losses.
In addition, in 1995, the Company reversed $280,000 of its valuation allowance
due to management's determination that it was more likely than not that the
related deferred tax assets would be utilized. The Company utilized its entire
remaining net operating loss carry forwards during 1996. The tax rate for 1997
was lower than the statutory rate because of certain tax benefits associated
with the Foreign Sales Corporation ("FSC") created in September 1996 and
increased investments in tax preferred securities.
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LIQUIDITY AND CAPITAL RESOURCES
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.
At December 31, 1997, the Company's primary sources of liquidity
included cash, cash equivalents and short term investments of $13.5 million. In
addition, the Company has available $1,000,000 under its unsecured line of
credit which bears interest at the bank's prime rate and expires in September
1998. At December 31, 1997, no borrowings were outstanding under this credit
facility. The Company believes that, based on current estimates, its current
cash balances, short term investments, net cash provided by operating activities
and its credit facility will be sufficient to meet its working capital and
capital expenditure requirements at least through the next twelve months.
However, the Company believes that the level of financial resources is a
significant competitive factor in its industry, and accordingly the Company may
choose prior to the end of 1998 to raise additional capital through debt or
equity financing.
Net cash used in operations totaled $88,000 and $1,256,000 in 1997 and
1996, respectively. Net cash provided from operations totaled $896,000 in 1995.
In 1997, sources of cash included net income of $2.1 million and increases in
accounts payable and accrued liabilities of $584,000, offset by increases in
inventories of $2.1 million and increases in accounts receivable of $732,000.
In 1996, sources of cash included net income of $1.1 million and increases in
accounts payable and accrued liabilities of $525,000, offset by increases in
accounts receivable of $2.8 million and increases in inventories of $603,000.
The increase in inventories is primarily due to an increase in supplies of key
components and dual sourcing. During 1996, while the Company waited for FDA
approval of the OcuLight GL, the Company built up its inventory of the OcuLight
SL in order to be able to allocate substantial manufacturing resources to
producing the OcuLight GL. When the introduction of the OcuLight GL was delayed
due to delays in FDA approval and the inability to obtain certain components,
the Company experienced increases in inventory levels and manufacturing labor
inefficiencies. To improve manufacturing efficiency in 1997, the Company
engineered dual sources for key components of the OcuLight GL and initiated a
purchasing program to increase the amount of safety stock of key components.
These measures resulted in increased levels of materials inventory which the
Company reduced in part in 1997 as the Company reduced the inventory level of
the OcuLight SL. The Company intends to continue to maintain an increased level
of inventory of certain key components.
The Company used approximately $4,418,000, $1,646,000 and $235,000 for
investing activities in 1997, 1996 and 1995, respectively, primarily for the
purchase of available-for-sale securities in 1997 and 1996, and the acquisition
of fixed assets in 1997, 1996 and 1995. Net cash provided by financing
activities during 1997 and 1996 were $299,000 and $15,782,000, respectively,
which consisted primarily of issuance of stock, including the Company's 1996
initial public offering. Net cash used in financing activities in 1995
consisted of approximately $118,000 for the repayment of funds previously
borrowed under the Company's bank line of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. The impact of adopting SFAS No. 130, which is effective
for the Company in 1998, has not been determined.
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In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported to the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998 and the impact of adoption has not been
determined.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Continued Market Acceptance of the Company's Products. The Company
currently markets visible and invisible light semiconductor-based
photocoagulator medical laser systems to the ophthalmic market and a visible
light semiconductor-based photocoagulator medical laser system to the
dermatological market. The Company believes that continued and increased sales,
if any, of these medical laser systems is dependent upon the continued market
acceptance of these products. Medical equipment purchasing decisions and
continued market acceptance of the Company's products may in turn depend on
opinions of medical professionals, performance and price,product and
treatment familiarity, procedure reimbursement economics and other
factors. The Company believes that recommendations by ophthalmologists and
dermatologists as to the use of semiconductor-based laser systems is essential
for the continued market acceptance of the Company's products. Such medical
professionals may not recommend these laser systems or related treatments
unless they conclude, based on clinical data and other factors, that the
performance of these laser systems and treatments are a beneficial alternative
to competing technologies and treatments. Favorable recommendations from such
medical professionals is particularly important to the Company because the
ophthalmic and dermatological communities historically have used more
established visible light, argon gas or other ion-based photocoagulation laser
systems. The Company's semiconductor-based laser systems are relatively new
to the marketplace. The Company's infrared laser systems deliver invisible
light to provide additional and, in some instances, improved treatments.
Because many ophthalmologists and dermatologists have been trained in medical
school using visible argon gas or other ion-based laser systems, they may be
reluctant or unwilling to convert to semiconductor-based or infrared laser
systems. In addition, ophthalmic procedures are typically reimbursed by third
party payers who are increasingly scrutinizing the level of reimbursement for
treatment procedures. Furthermore, changes in government legislation or
regulation could effect reimbursement levels. A reduction in the level of
reimbursement for treatments administered with the Company's ophthalmic
products would negatively impact the saleability of such products.
Dermatological procedures are typically paid for by the treated patient.
Any reduction in the perceived value of such treatments would reduce the price
level that dermatologists can charge and would negatively impact the
saleability of such products. There can be no assurance that the Company's
medical laser systems will continue to be accepted by the market. The failure
of medical professionals to recommend the Company's laser systems, the
introduction of improved alternative technologies or treatments, the reluctance
or unwillingness of ophthalmologists or dermatologists to convert to
semiconductor-based laser systems or to infrared laser systems, or reductions in
treatment reimbursements would negatively impact the market acceptance of the
Company's products. Any significant decline in market acceptance of the
Company's products would have a material adverse effect on the Company's
business, results of operations and financial condition.
Competition. Competition in the market for devices used for ophthalmic
and dermatological treatments is intense and may 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 other companies that manufacture
photocoagulators, the Company's products compete with pharmaceutical
treatments, other technologies and other surgical techniques.
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The Company's principal competitors in ophthalmology are Coherent, Inc., Nidek,
Inc. ("Nidek"), Carl Zeiss, Inc. ("Zeiss"), Alcon International ("Alcon"),
Keeler Instruments, Inc. ("Keeler") and HGM Medical Laser Systems, Inc. ("HGM").
Of these companies, Nidek, Zeiss, Alcon and Keeler currently offer a
semiconductor-based laser system in ophthalmology, and other companies may
introduce a semiconductor-based laser system. The Company's principal
competitors in dermatology are Laserscope and HGM, neither of which currently
offers a semiconductor-based laser system in dermatology. Other competitors have
substantially greater financial, engineering, product development,
manufacturing, marketing and technical resources than the Company. Such
companies may 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 and dermatological conditions targeted by the Company or are less
expensive than the Company's current or future products. Moreover, there can be
no assurance 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.
Risks of Manufacturing and Dependence on Key Manufacturers and
Suppliers. The manufacture of the Company's infrared and visible light
semiconductor-based photocoagulator medical laser systems and the related
delivery devices is a highly complex and precise process which requires the
integration of components with unique characteristics. Accordingly, problems
may occur in the manufacture of the Company's products which could prevent
shipping of some products or could 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. There can
be no assurance that the Company will be able to continue to manufacture its
existing products or future products on a cost-effective and timely basis.
Although the Company assembles critical subassemblies as well as the final
product at its facility in Mountain View, California, the Company relies on
third parties to manufacture substantially all of the components used in its
products. There are risks associated with the use of independent manufacturers,
unavailability of or delays in obtaining adequate supplies of components such
as optics and laser diodes 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. However, certain
of the Company's products remain significantly dependent on sole source
suppliers. Certain diodes purchased from SDL, Inc. ("SDL") were not readily
available from other suppliers until the second quarter of 1997. During 1996
and the first quarter of 1997, the Company experienced delays in its
manufacturing of the OcuLight GL because of the inability of SDL to deliver
components in volume and on a timely basis. The Company continues to work with
this supplier to ensure such difficulties do not recur. During the first
quarter of 1997, the Company qualified Opto Power as a second source of this
diode component. Because laser diode components are extremely complex and
difficult to manufacture, there can be no assurance that the Company's
suppliers of such components will be able to timely deliver components in
sufficient quantities to meet the Company's requirements. Similar manufacturing
issues or delays in the delivery of other key components of the Company's
products could also have a material adverse impact on the Company. 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 inability to obtain components as
required at a reasonable cost, or at all, would have a material adverse affect
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
1997, 1996 and 1995, the Company's international sales were $9.4 million, $6.1
million, and $4.3 million, representing 51.8%, 49.6% and 48.7%, respectively, of
total sales.
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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. The recent currency
devaluation in many Asian countries has had the effect of significantly
increasing the purchase price of the Company's products to the Company's
distributors and their customers in that region. Conversely, because certain
of the Company's competitors are based in Asia, the currency devaluations may
put additional downward pressures on the average selling prices of the
Company's products. Product sales were lower for the affected Asian region
during the fourth quarter of 1997 primarily as a result of the currency
problem. The Company expects lower sales to the Asian region to continue into
1998. The Company also expects revenues from international sales to continue
to account for a substantial portion of its sales. Accordingly, if the Asian
economic difficulties are prolonged, worsen or otherwise negatively impact the
saleability of the Company's product, these difficulties could negatively
impact the Company's business, results of operations, and financial condition.
While these currency factors and other factors listed above have been mitigated
by product sales in other regions and in the United States, there can be no
assurance that future currency fluctuations or other factors discussed above
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
Quarterly Fluctuations in Operating Results. Although the Company has
been profitable on an annual and quarterly basis for the last five years, the
Company's sales and operating results have varied substantially on a quarterly
basis, and such fluctuations are expected to continue in future periods. 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,
such as the recent currency devaluation in Asia, and resulting changes in
customers' or potential customers' budgets and increased product development
costs. For example, the Company's gross profits as a percentage of sales
have declined in part as a result of increased competition which have led to
decreases in average selling prices, particularly with respect to the Company's
older products. Any inability to obtain adequate quantities of the critical
components used in the system products would adversely impact the Company's
ability to ship the OcuLight SL, 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. For example, domestic sales often
decline slightly prior to the meeting of the American Academy of Ophthalmology
in the fourth quarter of the year. 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 and 1997, 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'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.
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26
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. Even if the Company's products achieve clinical acceptance,
there can be no assurance that the Company can successfully manage the
introduction of such products into the ophthalmic, dermatological or other
markets. 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 or new products would have a material adverse effect on the
Company's business, results of operations and financial condition.
Management of Growth. With the introduction of new products, the
Company has recently experienced, and may continue to experience growth in
production, the number of employees, the scope of its business, 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
is in the process of implementing a new enterprise resource planning ("ERP")
system to run the Company's business transaction processes. The Company expects
that the installation and implementation of this new system will continue
through the third quarter of 1998. The transition to the ERP system is a
highly complex and technical process, and it is not uncommon for companies
engaged in such a transition to experience unexpected delays and technical
problems. Because the Company's operations are currently dependent on its
existing system and will be dependent upon the new system once it comes on
line, the failure of the Company to successfully implement the ERP system or
difficulties encountered in the changeover to the new system may have a
material adverse effect on the Company's business and results of operations.
There can be no assurance that the Company will be
able to successfully install and implement the ERP system, and failure
to do so or difficulties encountered in the implementation process could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's future success will depend on the successful
installation of these systems 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.
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 Miravant Medical Technologies, formerly known as PDT, Inc.,
("Miravant"), a maker of photodynamic drugs, under which the Company and
Miravant have collaborated to develop a device that emits a laser beam to
activate a photodynamic drug developed by Miravant to achieve a desired
therapeutic result in the treatment of age-related macular degeneration. The
development, clinical testing and regulatory approval of this new photodynamic
system will require three to five years and significant financial and other
resources. There can be no assurance that this collaborative development
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27
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 may 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.
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. 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. Recently, a company has challenged one of the
patents held by Light Solutions Corporation, a wholly subsidiary of IRIDEX. The
Company believes that this dispute will be settled without a material adverse
effect to the Company's business and financial condition.
-26-
28
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 by foreign
and state governments. Pursuant to the FDA Act and the regulations promulgated
thereunder, 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 the Company's expectations due to the
longer than expected time period required to obtain FDA premarket clearance.
Noncompliance with applicable requirements, including QSR, 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 and
are used to treat extremely delicate eye tissue as well as to treat skin
conditions primarily on the face. The Company's products 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 products, the Company believes that
certain customers may nevertheless reuse these disposable products. Were such a
disposable product 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 $6.0
million per occurrence and an annual aggregate maximum of $7.0 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.
-27-
29
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.
Year 2000 Compliance. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications for various financial, business and administrative functions. In
addition, many of the Company's suppliers use similar applications. These
applications may contain source code that is unable to properly interpret
calendar years beginning with the upcoming year 2000. Systems that do not
properly recognize such date-sensitive information may fail or create erroneous
results. Because there are no internal calendars embedded in any of the
Company's products, the Company does not anticipate any problems with its
products related to the Year 2000 problem will develop. The Company is currently
installing a new enterprise resource planning ("ERP") system which it believes
will be fully Year 2000 compliant. Based on this and other information
currently available to the Company, the Company believes that its internal
systems currently are or, by such time as is necessary to avoid a material
adverse impact on the Company, will be Year 2000 compliant. Also based on
information thus far available to the Company, the Company does not believe that
it will incur expenditures in dealing with Year 2000 issues that will have a
material adverse effect on the financial condition of the Company. In
addition to the risks from failure of the Company's own internal systems, the
Company may also be exposed to risks from computer systems of parties with whom
the Company transacts business. For example, if the internal systems of one of
the Company's key suppliers developed problems such that the supplier could not
deliver parts to the Company on a timely basis, the Company's financial
condition could be materially adversely affected. The Company intends to work
with its suppliers to ascertain what actions, if any, are needed. There can be
no assurances, however, that unknown costs necessary to update the Company's
systems or address potential system interruptions of the Company's or its
suppliers' systems will not have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance sheets of the Company as of December 31, 1997 and 1996 and
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, together with the related notes
and the report of Coopers & Lybrand L.L.P., independent accountants, are set
forth on the following pages. Other required financial information is set
forth herein, as more fully described in Item 14 hereof.
-28-
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
IRIDEX Corporation
Mountain View, California:
We have audited the accompanying consolidated balance sheets of IRIDEX
Corporation and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of IRIDEX Corporation and subsidiaries as of December 31, 1997 and
1996, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
January 22, 1998
-29-
31
IRIDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1997 1996
-------- -------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 9,900 $14,107
Available-for-sale securities ...................................... 3,588 1,007
Accounts receivable, net of allowance for doubtful
accounts of $305 in 1997 and $265 in 1996 .......................... 6,057 5,390
Inventories ........................................................ 3,976 1,859
Prepaids and other current assets .................................. 451 122
Deferred income taxes .............................................. 550 519
-------- -------
Total current assets ......................................... 24,522 23,004
Property and equipment, net ........................................... 2,133 655
Deferred income taxes ................................................. 31 48
-------- -------
Total assets ................................................. $ 26,686 $23,707
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 752 $ 535
Accrued expenses ................................................... 2,051 1,684
Current portion of capital lease obligations ....................... 3 8
-------- -------
Total current liabilities .................................... 2,806 2,227
Capital lease obligations, net of current portion ..................... -- 2
-------- -------
Total liabilities ............................................ 2,806 2,229
-------- -------
Commitments (Note 5)
Stockholders' Equity:
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: 6,455,483 shares in 1997 and 6,350,180
shares in 1996 ............................................... 65 63
Additional paid-in capital ......................................... 21,552 21,248
Unrealized losses on available-for-sale securities ................. (2) --
Retained earnings .................................................. 2,265 167
-------- -------
Total stockholders' equity ................................... 23,880 21,478
-------- -------
Total liabilities and stockholders' equity ........... $ 26,686 $23,707
======== =======
The accompanying notes are an integral part of
these consolidated financial statements.
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IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- -------
Sales ................................................... $ 18,073 $ 12,364 $ 8,801
Cost of sales ........................................... 7,612 4,899 2,798
-------- -------- -------
Gross profit ......................................... 10,461 7,465 6,003
-------- -------- -------
Operating expenses:
Research and development ............................. 1,716 1,286 742
Sales, general and administrative .................... 6,074 5,197 3,787
Nonrecurring charge for acquisition of technology .... -- -- 80
-------- -------- -------
Total operating expenses ............................. 7,790 6,483 4,609
-------- -------- -------
Income from operations ............................... 2,671 982 1,394
Interest expense ........................................ -- -- (16)
Interest income ......................................... 623 691 64
Other income (expense) .................................. (16) 8 10
-------- -------- -------
Income before provision for income taxes.............. 3,278 1,681 1,452
Provision for income taxes .............................. (1,180) (676) (452)
-------- -------- -------
Net income .................... $ 2,098 $ 1,005 $ 1,000
======== ======== =======
Net income per common share ............................. $ 0.33 $ 0.18 $ 0.78
======== ======== =======
Shares used in per common share calculation ............. 6,406 5,725 1,276
======== ======== =======
Net income per common share-assuming dilution ........... $ 0.31 $ 0.16 $ 0.23
======== ======== =======
Shares used in per common share-assuming dilution
calculation ......................................... 6,755 6,410 4,354
======== ======== =======
The accompanying notes are an integral part of
these consolidated financial statements.
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IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
UNREALIZED
CONVERTIBLE LOSSES ON
PREFERRED STOCK COMMON STOCK ADDITIONAL AVAILABLE-
--------------------------- -------------------------- PAID-IN FOR-SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1994 ... 1,891,663 $ 19 1,164,817 $ 12 $ 5,243
Issuance of Common Stock .... 90,800 1 181
Issuance of Common Stock
under stock option plan. 249,807 2 65
Net income ..................
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1995 ... 1,891,663 19 1,505,424 15 5,489 --
Issuance of Common Stock,
net of issuance costs .. 1,982,500 20 15,639
Issuance of Common Stock
under Stock Option Plan. 9,096 9
Issuance of Common Stock
under Employee Stock
Purchase Plan .......... 15,665 120
Conversion of Preferred
Stock ..................... (1,891,663) (19) 2,837,495 28 (9)
Net Income
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1996 ... -- -- 6,350,180 63 21,248 --
Issuance of Common Stock
under Stock Option Plan. 65,896 1 59
Issuance of Common Stock
under Employee Stock
Purchase Plan .......... 43,503 1 245
Unrealized losses on
available-for-sale
securities................... $ (2)
Net income ..................
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1997 ... -- $ -- 6,455,483 $ 65 $ 21,552 $ (2)
========== ========== ========== ========== ========== ==========
RETAINED
EARNINGS
(DEFICIT) TOTAL
---------- ----------
Balances, December 31, 1994 ... (1,838) $ 3,436
Issuance of Common Stock .... 182
Issuance of Common Stock
under stock option plan. 67
Net income .................. 1,000 1,000
---------- ----------
Balances, December 31, 1995 ... (838) 4,685
Issuance of Common Stock,
net of issuance costs .. 15,659
Issuance of Common Stock
under Stock Option Plan. 9
Issuance of Common Stock
under Employee Stock
Purchase Plan .......... 120
Conversion of Preferred
Stock ..................... --
1,005 1,005
Net Income
---------- ----------
Balances, December 31, 1996 ... 167 21,478
Issuance of Common Stock
under Stock Option Plan. 60
Issuance of Common Stock
under Employee Stock
Purchase Plan .......... 246
Unrealized losses on
available-for-sale
securities................... (2)
Net income .................. 2,098 2,098
---------- ----------
Balances, December 31, 1997 ... $ 2,265 $ 23,880
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
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IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income .......................................................... $ 2,098 $ 1,005 $ 1,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 357 238 92
Provision for doubtful accounts ............................... 65 (118) 20
Nonrecurring charge for acquisition of technology ............. -- -- 80
Changes in operating assets and liabilities:
Accounts receivable ................................... (732) (2,794) (548)
Inventories ........................................... (2,117) (603) (350)
Prepaids and other current assets ..................... (329) 163 10
Deferred income taxes ................................. (14) 328 144
Accounts payable ...................................... 217 242 75
367 283 373
-------- -------- --------
Net cash provided by (used in) operating activities ... (88) (1,256) 896
-------- -------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities .......................... (61,684) (61,305) --
Proceeds from sale of available-for-sale securities ................. 59,103 60,298 --
Acquisition of property and equipment ............................... (1,837) (639) (235)
-------- -------- --------
Net cash used in investing activities ................. (4,418) (1,646) (235)
-------- -------- --------
Cash flows from financing activities:
Payment on bank borrowings .......................................... -- -- (175)
Payments of capital lease obligations ............................... (7) (6) (10)
Issuance of Common Stock, net ....................................... 306 15,788 67
-------- -------- --------
Net cash provided by (used in) financing activities ... 299 15,782 (118)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents .................................. (4,207) 12,880 543
Cash and cash equivalents, beginning of year ........................... 14,107 1,227 684
-------- -------- --------
Cash and cash equivalents, end of year ................................. $ 9,900 $ 14,107 $ 1,227
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ...................................................... $ -- $ -- $ 16
Income taxes .................................................. $ 671 $ 24 $ 27
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock in connection with acquisition ............. $ -- $ -- $ 182
Assets acquired in connection with acquisition ...................... $ -- $ -- $ 549
Liabilities assumed in connection with acquisition .................. -- -- 447
Unrealized loss on available-for-sale securities .................. $ (2) $ -- $ --
The accompanying notes are an integral part of
these consolidated financial statements.
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IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
IRIDEX Corporation ("IRIDEX" or the "Company") is the leading
worldwide provider of semiconductor-based laser systems used to treat eye
diseases in ophthalmology and skin lesions in dermatology. IRIDEX products are
sold in the United States predominantly through a direct sales force and
internationally through 53 independent distributors into 72 countries. The
Company markets its products using three brand names: IRIS Medical to the
ophthalmic market, IRIDERM to the dermatological market, and Light Solutions to
the research market.
Financial Statement Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of 90 days or less at the time of purchase to be cash equivalents.
Available-for-Sale Securities
All marketable securities as of December 31, 1997 are considered to be
available-for-sale and therefore are carried at fair value. Available-for-sale
securities classified as current assets have scheduled maturities of less than
one year, while available-for-sale securities classified as non current assets
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 the first-in, first-out
(FIFO) method. Appropriate consideration is given to obsolescence, excessive
levels, deterioration and other factors in evaluating lower of cost or market.
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 property and equipment under capital lease obligations
is computed using the straight-line method over the shorter of the remaining
lease term or the estimated useful life of the related assets, typically three
years.
Revenue Recognition
The Company recognizes product sales upon shipment of product to the
customer, upon fulfillment of acceptance terms, if any, and when no significant
contractual obligations remain outstanding.
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IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Research and Development
Research and development expenditures are charged to operations as
incurred.
Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for 1997, 1996 and 1995 were $170,000, $175,000 and
$49,000, respectively.
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.
Computation of Net Income Per Common Share and Per Common Share-Assuming
Dilution
See Note 10.
Concentration of Credit Risk
The Company's cash and cash equivalents are deposited in three
financial institutions and comprise demand and money market accounts.
The Company markets it products to distributors and end-users
throughout the world. Sales to international distributors are generally made on
open credit terms. The Company also offers extended payment terms on selected
sales transactions. Management performs ongoing credit evaluations of the
Company's customers and maintains an allowance for potential credit losses, but
historically has not experienced any significant losses related to individual
customers or group of customers in any particular geographic area.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. The impact of adopting SFAS No. 130, which is effective
for the Company in 1998, has not been determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported to the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998 and the impact of adoption has not been
determined.
Reclassifications
Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation. The reclassification had no
impact on previously reported income from operations or net income.
2. ACQUISITION
Effective October 27, 1995, the Company acquired the assets of Light
Solutions Corporation. Consideration paid consisted of the assumption of
certain liabilities and the issuance of 90,800 shares of the Company's Common
Stock.
The acquisition has been accounted for as a purchase. The fair market
value of assets acquired, research and development acquired and liabilities
assumed is as follows (in thousands):
Liabilities assumed .......................................... $ 447
Common Stock issued .......................................... 182
Tangible assets acquired ..................................... (318)
Contracts .................................................... (231)
Purchased in-process research and development ................ (80)
-----
$ --
=====
The amount allocated to purchase in-process technology was expensed on
the acquisition date.
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IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET DETAIL
Available-for-sale securities (in thousands):
Amortized Unrealized Estimated Maturity
Cost Losses Fair Value Dates
--------- ---------- ---------- --------
As of December 31, 1997, available-for-sale
securities consisted of the following:
Obligations of state and
local government agencies ................... $ 3,590 $ (2) $ 3,588 1/98 - 6/98
As of December 31, 1996, available-for-sale
securities consisted of the following:
Corporate notes.............................. 1,007 -- 1,007 7/97
There were no realized gains or losses recognized in 1997 and 1996.
December 31,
---------------------
1997 1996
------ ------
(in thousands)
Inventories:
Raw materials and work in process .................................... $ 3,378 $ 924
Finished goods ....................................................... 598 935
------- -------
Total inventories ................................................ $ 3,976 $ 1,859
======= =======
Property and Equipment:
Equipment ............................................................ $ 1,466 $ 1,226
Leasehold improvements ............................................... 1,597 --
Less accumulated depreciation and amortization ....................... (930) (571)
------- -------
Total property and equipment ..................................... $ 2,133 $ 655
======= =======
Accrued Expenses:
Accrued payroll and related expenses ................................. $ 593 $ 562
Accrued vacation ..................................................... 194 169
Distributor commissions .............................................. 141 129
Accrued warranty ..................................................... 114 114
Income taxes payable ................................................. 567 505
Other accrued expenses ............................................... 442 205
------- -------
Total accrued expenses ................................. $ 2,051 $ 1,684
======= =======
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IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BANK BORROWINGS
The Company has a revolving line of credit agreement with a bank
expiring on September 30, 1998, which provides for borrowings of up to
$1,000,000 at the bank's prime rate (8.50% at December 31, 1997). The
agreement contains restrictive covenants including prohibiting payment of
dividends without the bank's prior consent. The Company was in compliance with
these requirements at December 31, 1997. There were no borrowings against the
credit line at December 31, 1997.
5. COMMITMENTS
Lease Agreements
The Company leases its operating facilities under a noncancelable
operating lease. The lease expires in 2002 and contains a renewal option.
Rent expense totaled $224,000, $108,000 and $105,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Rental income related to a
facility sublease was $48,000, $7,000 and $29,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
Future minimum lease payments under current operating leases at
December 31, 1997 are summarized as follows (in thousands):
Fiscal Year Amount
----------- ------
1998 $ 491
1999 509
2000 531
2001 554
2002 93
------
$2,178
======
License Agreements
The Company is obligated to pay royalties equivalent to 5% of sales
from certain products under certain license agreements. Royalty expense was
$58,900, $37,000 and $28,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING AND REINCORPORATION
In February 1996, the Company was reincorporated from California into
Delaware, at which time each share of the Company's outstanding California
Common Stock was exchanged for one share of the Delaware Common Stock. Prior
to this, on January 10, 1996, the Company effected a 1-for-2 reverse stock
split of the Company's Common Stock. All Common and Common equivalent shares
and per share amounts in these financial statements have been adjusted
retroactively to give effect to the split.
-38-
40
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In February 1996, the Company issued 1,600,000 shares of its Common
Stock in an initial public offering in which an additional 950,000 shares of
Common Stock were sold by existing stockholders. In March 1996, the Company
issued an additional 382,500 shares of its Common Stock pursuant to exercise of
an over allotment option granted to the underwriters in connection with the
initial-public offering. In connection with the initial public offering and the
underwriters over-allotment option, the Company received proceeds of
$15,659,000, net of offering expenses of $2,184,000. In connection with the
offering, all shares of Convertible Preferred Stock totaling 1,891,663 shares
were converted into 2,837,495 shares of Common Stock.
CONVERTIBLE PREFERRED STOCK
During 1996, the Company amended its Articles of Incorporation to
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 31,
1997, the Company had no preferred stock issued and outstanding.
STOCK OPTION PLANS
Amended and Restated 1989 Incentive Stock Plan
The Amended and Restated 1989 Plan (the "1989 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 1989 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 the Company's
outstanding capital stock, the exercise price of any option or SPR granted must
be at least equal to 110% of the fair market value at the time of grant.
Options granted under the 1989 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 the Company's outstanding capital stock must not exceed five
years. In the case of SPRs, unless the Administrator determines otherwise, the
Company has a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company 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
the Company is the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company.
1995 Director Option Plan
In October 1995, the Company 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
-39-
41
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fully exercisable. An option is exercised by giving written notice of exercise
to the Company, specifying the number of full shares of Common Stock to be
purchased and tendering payment to the Company of the purchase price. Payment
for shares issued upon exercise of an option may consist of cash, check,
exchange of the Company's Common Stock or a combination thereof. Options granted
under the Director Plan have a term of ten years.
In the event of the merger of the Company with or into another
corporation, resulting in a change of control, or the sale of substantially all
of the assets of the Company, each 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 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.
Information with respect to activity under these option plans are set
forth below:
SHARES OUTSTANDING OPTIONS
AVAILABLE -------------------------------------------------------------------
FOR NUMBER PRICE PER AGGREGATE WEIGHTED AVG
GRANT OF SHARES SHARE PRICE EXERCISE PRICE
--------- --------- --------- ----------- --------------
(in thousands)
Balance, December 31, 1994 . . . . 98,585 481,560 $0.166-$1.00 $229 $ .48
Additional shares reserved 450,000 -- -- -- --
Options granted . . . . . (242,000) 242,000 $1.00-$5.00 352 $ 1.45
Options exercised . . . . (249,807) $0.166 - $1.00 (67) $ .27
Options terminated . . . . 6,755 (6,755) $0.166-$1.00 (5) $ .74
-------- -------- ------ ------
Balance, December 31, 1995 . . . . 313,340 466,998 $0.166-$5.00 $509 $ 1.09
Options granted . . . . . (275,850) 275,850 $6.00 - $14.88 2,127 $ 7.71
Options exercised . . . . (9,096) $0.166 - $1.00 (9) $ .99
Options terminated . . . . 100,508 (100,508) $0.166 - $14.75 (421) $ 4.19
-------- -------- ------ ------
Balance, December 31, 1996 . . . . 137,998 633,244 $0.166 - $14.88 $2,206 $ 3.48
Additional shares reserved 500,000 -- -- -- --
Options granted . . . . . (437,775) 437,775 $5.50-$11.125 2,922 $ 6.68
Options exercised . . . . (65,896) $0.166-$7.75 (60) $ .91
Options terminated . . . . 43,336 (43,336) $1.00-$14.75 (208) $ 4.80
-------- -------- ------ ------
Balance, December 31, 1997 . . . . 243,559 961,787 $0.166-$14.88 $4,860 $ 5.05
======== ======== ====== ======
At December 31, 1996, options to purchase 245,284 shares of the
Company's Common Stock were exercisable.
-40-
42
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with respect to
stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- --------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE (YEARS) PRICE AT 12/31/97 PRICE
--------------- ----------- ------------------------ ---------------- ----------- ----------------
$0.166 - $0.166 52,547 2.94 $ 0.166 52,547 $ 0.166
$1.000 - $1.000 178,580 6.69 $ 1.000 147,393 $ 1.000
$2.000 - $2.000 99,375 7.79 $ 2.000 50,644 $ 2.000
$5.000 - $7.750 503,785 9.17 $ 6.347 71,405 $ 6.880
$8.750 - $14.880 127,500 9.43 $ 10.022 7,167 $ 9.765
------- -------
$0.166 - $14.880 961,787 8.26 $ 5.054 329,156 $ 2.487
======= =======
The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts 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 option pricing model with the following weighted
average assumptions used grants in 1997, 1996 and 1995:
1997 1996 1995
----------------------------- ---------------------------- -----------------------------
Group A Group B Group A Group B Group A Group B
------------ ------------ ----------- ---------- ----------- ------------
Risk-free
interest rates 5.841%-6.722% 5.699%-6.722% 5.76%-6.70% 5.06%-6.64% 5.79%-6.81% 5.69%-7.62%
Expected Life
from Date of
Vesting 3 yrs. 2 yrs. 3 yrs. 2 yrs. 3 yrs. 2 yrs.
Volatility 0.62 0.62 0.00 - 0.62 0.00-0.62 -- --
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 fair value per share of those options granted in
1997, 1996 and 1995 was $3.85, $4.42 and $0.37, respectively.
The Company has also estimated the fair value for the purchase rights
issued under the Company's 1995 Employee Stock Purchase Plan, under the
Black-Scholes valuation model using the following assumptions for 1997, 1996
and 1995:
1997 1996 1995
---- ---- ----
Risk-free Interest Rates 5.09% 5.37% N/A
Expected Life 0.5 year 0.5 year N/A
Volatility 0.62 0.62 N/A
Dividend Yield -- -- N/A
The weighted average fair value per share of those purchase rights
granted in 1997 and 1996 was $2.27 and $3.08, respectively.
-41-
43
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following proforma income information has been prepared following
the provisions of SFAS No. 123:
(amounts in thousands except per share data)
1997 1996 1995
--------- --------- ---------
Net income -- as reported ....... $ 2,098 $ 1,005 $ 1,000
Net income -- proforma .......... $ 1,564 $ 886 $ 988
Net income per common share -- as
reported ..................... $ 0.33 $ 0.18 $ 0.78
Net income per common share --
proforma ..................... $ 0.24 $ 0.17 $ 77
Net income per common share --
assuming dilution-as reported $ 0.31 $ 0.16 $ 0.23
Net income per common share --
assuming dilution-proforma ... $ 0.23 $ 0.14 $ 0.23
The above proforma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors in October 1995. On April 28, 1997, the
stockholders 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 sooner terminated by the Board of
Directors.
7. EMPLOYEE BENEFIT PLAN
The Company has 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. No Company contributions have been made
to the plan since inception.
-42-
44
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provision for income taxes includes:
Year Ended December 31,
1997 1996 1995
------- ------- -------
(In thousands)
Current:
Federal ..................................... $ 1,010 $ 247 $ 39
State ....................................... 234 101 269
Deferred:
Federal ..................................... (95) 258 148
State ....................................... 31 70 (4)
------- ------- -------
Income tax provision ................... $ 1,180 676 452
======= ======= =======
The Company's effective tax rate differs from the statutory federal
income tax rate as shown in the following schedule:
December 31,
1997 1996 1995
---- ---- ----
Income tax provision at statutory rate .......... 34% 34% 34%
Utilization of net operating loss ............... -- -- (20)%
State income taxes, net of federal benefit ...... 6% 6% 8%
Change in valuation allowances .................. -- -- --
Other ........................................... 4% -- 9%
--- --- ---
Effective tax rate .............................. 36% 40% 31%
The effective income tax rate in each year was impacted by a reduction
in the Company's valuation allowance against deferred tax assets of $0, $0 and
$280,000 for the year ended 1997, 1996 and 1995, respectively.
The tax effect of temporary differences and carry-forwards that give
rise to significant portions of the deferred tax assets are presented below (in
thousands):
December 31,
1997 1996
Depreciation ................................................ $ 7 $ 48
Accrued liabilities ......................................... 131 226
Allowance for excess and obsolete inventories ............... 164 251
State tax ................................................... 68 42
Allowance for doubtful accounts ............................. 121 --
Other ....................................................... 90 --
---- ----
Net deferred tax asset ...................................... $581 $567
==== ====
9. MAJOR CUSTOMERS AND BUSINESS SEGMENTS
-43-
45
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company operates in a single industry segment encompassing the
development, manufacture, sales and support of medical devices for the treatment
of eye diseases in ophthalmology and skin lesions in dermatology.
In the years ended December 31, 1997, 1996 and 1995, respectively, no
customer individually accounted for more than 10% of the Company's revenue.
Revenue information by geographic region is as follows:
Year Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
North America ......................................... $ 8,865 $ 6,351 $ 4,606
Europe ................................................ 3,690 3,073 2,257
Central/South America ................................. 1,550 697 446
Asia/Pacific Rim ...................................... 3,968 2,243 1,492
------- ------- -------
$18,073 $12,364 $ 8,801
======= ======= =======
10 COMPUTATION OF NET INCOME PER COMMON SHARE AND PER COMMON SHARE -
ASSUMING DILUTION
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" and the
provisions of the Securities and Exchange Commission Staff Accounting Bulletin
No. 98, and accordingly all prior periods have been restated. Net income per
common share is computed using the weighted average number of shares of common
stock outstanding. Net income per common share - assuming dilution is computed
using the weighted average number of shares of common stock and dilutive common
equivalent shares from stock options and preferred stock outstanding. The
Company has determined that no incremental shares should be included in the
computations of earnings per share and in accordance with Staff Accounting
Bulletin No. 98.
-44-
46
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of net income per common share
and net income per common share - assuming dilution is provided as follows (in
thousands, except per share amounts):
Year Ended December 31,
1997 1996 1995
------ ------ ------
Numerator -- Net income per common share and per common share-assuming
dilution
Net income ............................................................ $2,098 $1,005 $1,000
====== ====== ======
Denominator -- Net income per common share
Weighted average common stock outstanding ........................ 6,406 5,725 1,276
====== ====== ======
Net income per common share ........................................... $ 0.33 $ 0.19 $ 0.78
====== ====== ======
Denominator -- Net income per common share-assuming dilution
Weighted average common stock outstanding ........................ 6,406 5,725 1,276
Effect of dilution securities
Weighted average common stock options ............................ 349 331 241
Weighted average convertible preferred stock ..................... -- 354 2,837
------ ------ ------
Total weighted average stock and options outstanding .................. 6,735 6,410 4,354
====== ====== ======
Net income per common share-assuming dilution ......................... $ 0.31 $ 0.16 $ 0.23
====== ====== ======
During 1997 and 1996, options to purchase 64,037 and 10,178 shares,
respectively, at weighted average exercise prices of $ 9.49 and
$ 9.80 per share, respectively were outstanding, but were not included
in the computations of net income per common share--assuming dilution because
the market price of the common shares exceeded the exercise price of the
related options.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
-45-
47
PART III
Certain information required by Part III has been omitted from this Form
10-K. This information is instead incorporated by reference to the Company's
definitive proxy statement (the "Proxy Statement"), which the Company will file
within 120 days after the end of its fiscal year pursuant to Regulation 14A in
time for the Company's Annual Meeting of Stockholders to be held June 8, 1998.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by
reference to "ELECTION OF DIRECTORS -- Nominees" in the Company's Proxy
Statement for the Company's 1998 Annual Meeting of Stockholders. The
information concerning current executive officers of the Registrant 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 the Company's 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 the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-46-
48
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............................................. 29
Consolidated Balance Sheets of the Company as of December 31, 1997 and
1996.......................................................................... 30
Consolidated Statements of Income of the Company for the years ended
December 31, 1997, 1996, and 1995............................................. 31
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.............................................. 32
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995................................................................. 33
Notes to Consolidated Financial Statements.................................... 34
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts............................... 51
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
Refer to 14(c) below
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of
1997.
-47-
49
(c) EXHIBITS
Exhibits Exhibit Title
-------- -------------
3.1(1) Amended and Restated Certificate of Incorporation of
Registrant
3.2(1) 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 and form of agreement
thereunder.
10.4(1) 1995 Director Option Plan and form of agreement
thereunder.
10.5(1) Third Restated Registration Rights Agreement dated as of
October 27, 1995 by and among Registrant and certain
individuals and entities named therein.
10.6 Lease Agreement dated December 6, 1996 by and between
Zappettini Investment Co. and the Registrant.
10.7 Business Loan Agreement dated October 1, 1997 between
Mid-Peninsula Bank and the Registrant.
10.10(2)* Development and Distribution Agreement dated as of May
28, 1996 between Miravant, Inc. (formerly PDT, Inc.) and
the Company.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See page 49).
27.1 Financial Data Schedule.
- ----------
* Confidential treatment has been granted with respect to certain portions
of this exhibit.
(1) Incorporated by reference to the exhibits filed with the Company's
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.
TRADEMARK ACKNOWLEDGMENTS
The IRIDEX logo, IRIS Medical, OcuLight and EndoProbe are registered
trademarks of the Company. IRIDEX, IRIDERM, G-Probe, DioPexy, TruFocus and
DioLite are trademarks of the Company. All other trademarks or trade names
appearing in the Form 10-K are the property of their respective owners.
-48-
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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 the 31st day of March, 1998.
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 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 31, 1998
- -------------------------------- Director (Principal Executive Officer)
(Theodore A. Boutacoff)
/s/ Robert Kamenski Chief Financial Officer and Vice March 31, 1998
- -------------------------------- President, Administration (Principal
(Robert Kamenski) Financial and Accounting Officer)
/s/ James L. Donovan Director March 31, 1998
- --------------------------------
(James L. Donovan)
/s/ William Boeger, III Director March 31, 1998
- --------------------------------
(William Boeger, III)
/s/ Milton Chang Director March 31, 1998
- --------------------------------
(Milton Chang)
/s/ Donald L. Hammond Director March 31, 1998
- --------------------------------
(Donald L. Hammond)
/s/ Joshua Makower Director March 31, 1998
- --------------------------------
(Joshua Makower)
/s/ John M. Nehra Chairman of the Board March 31, 1998
- --------------------------------
(John M. Nehra)
-49-
51
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
Our report on the consolidated financial statements of IRIDEX
Corporation is included on page 29 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 47 of this Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
January 22, 1998
-50-
52
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 December 31,
1995:
Allowance for doubtful accounts
receivable ................................ $ 365 $ 20 $ (2) $ 383
Balance for the year ended December 31,
1996:
Allowance for doubtful accounts
receivable ................................ $ 383 $(118) $ 265
Balance for the year ended December 31,
1997:
Allowance for doubtful accounts
receivable ................................ $ 265 $ 55 $ (15) $ 305
-51-
53
EXHIBIT INDEX
3.1(1) Amended and Restated Certificate of Incorporation of
Registrant
3.2(1) 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 and form of agreement
thereunder.
10.4(1) 1995 Director Option Plan and form of agreement
thereunder.
10.5(1) Third Restated Registration Rights Agreement dated as of
October 27, 1995 by and among Registrant and certain
individuals and entities named therein.
10.6 Lease Agreement dated December 6, 1996 by and between
Zappettini Investment Co. and the Registrant.
10.7 Business Loan Agreement dated October 1, 1997 between
Mid-Peninsula Bank and the Registrant.
10.10(2)* Development and Distribution Agreement dated as of May
28, 1996 between Miravant, Inc. (formerly PDT, Inc.) and
the Company.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See page 49).
27.1 Financial Data Schedule.
- ----------
* Confidential treatment has been granted with respect to certain portions
of this exhibit.
(1) Incorporated by reference to the exhibits filed with the Company's
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.
1
Exhibit 10.6
This Lease, executed in duplicate at Palo Alto, California, this 6th
PARTIES day of December, by and between
Zappettini Investment Co.
and
IRIDEX Corporation
hereinafter called respectively Lessor and Lessee, without regard to
number or gender,
PREMISES 1. WITNESSETH: That Lessor hereby leases to Lessee, and
Lessee hires from Lessor, those certain premises,
hereinafter in this lease designated as "the Premises",
with the appurtenances, situated in the City of Mountain
View, County of Santa Clara, State of California, and
more particularly described as follows, to wit:
An approximate 37,166 square foot industrial building
located on 2.69 acre lot and commonly referred to as 1212
Terra Bella, Mountain View, California.
USE 2. The Premises shall be used and occupied by Lessee for
design, testing, manufacturing, assembly, sales, office,
administration, research and development and other legal
uses ancillary thereto and for no other purpose without
the prior written consent of Lessor.
TERM 3. The term shall be for five (5) years, commencing on
the 1st day of March, 1997 (the "Commencement Date") and
ending on the 28th day of February, 2002.
RENTAL 4. Rent shall be payable to the Lessor without deduction
or offset at such place or places as may be designated
from time to time by the Lessor as follows:
Thirty Three Thousand One Hundred Eighty Two and
60/100ths Dollars ($33,182.60) upon execution of this
Lease representing rental due March 1, 1997. $33,182.60
shall be due on April 1, 1997 and on the 1st day of each
and every succeeding month through August 1st 1997. Forty
Thousand Eight Hundred Eighty Two and 60/100ths
($40,882.60) shall be due on September 1, 1997 and on the
1st day of each and every succeeding month through
February 1, 1999. Forty Two Thousand Seven Hundred Forty
and 90/100ths Dollars ($42,740.90) shall be due on March
1, 1999 and on the 1st day of each and every succeeding
month through February 1, 2000. Forty Four Thousand Five
Hundred Ninety Nine and 20/100ths Dollars ($44,599.20)
shall be due on March 1, 2000 and on the 1st day of each
and every succeeding month through February 1, 2001.
Forty Six Thousand Four Hundred Fifty Seven and 50/100ths
Dollars ($46,457.50) shall be due on March 1, 2001 and on
the 1st day of each and every succeeding month through
February 1, 2002.
SECURITY 5. Lessee has deposited with Lessor, $46,457.50 as
DEPOSIT security for the full and faithful performance of each
and every term, provision, covenant and condition of this
Lease. In the event Lessee defaults in respect of any of
the terms, provisions, covenants or conditions of this
Lease, including, but not limited to the payment of rent,
Lessor may use, apply or retain the whole or any part of
such security for the payment of any rent in default or
for any other sum which Lessor may spend or be required
to spend by reason of Lessee's default. Should Lessee
faithfully and fully comply with all of the terms,
provisions, covenants and conditions of this Lease, the
security of any balance thereof shall be returned to
Lessee or, at the option of Lessor, to the last assignee
of Lessee's interest in this Lease at the expiration of
the term hereof. Lessee shall not be entitled to any
interest on said security deposit.
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POSSESSION 6. If Lessor, for any reason whatsoever, cannot deliver
possession of the Premises to Lessee at the commencement
of the said term, as hereinbefore specified, this Lease
shall not be void or voidable, nor shall Lessor, or
Lessor's agents, be liable to Lessee for any loss or
damage resulting therefrom; but in that event the
commencement and termination dates of the Lease and all
other dates affected thereby shall be revised to conform
to the date of Lessor's delivery of possession.* * SEE
ADDENDUM ATTACHED
ACCEPTANCE 7. By entry hereunder, the Lessee accepts the Premises as
OF being in good and satisfactory condition, unless within
PREMISES forty-five (45) days after such entry Lessee shall give
AND Lessor written notice specifying in reasonable detail the
CONSENT TO respects in which the Premises were not in satisfactory
SURRENDER condition.* The Lessee agrees on the last day of the term
hereof, or on sooner termination of this Lease, to
surrender the premises, together with all alterations,
additions, and improvements which may have been made in,
to, or on the Premises by Lessor or Lessee, unto Lessor
in the same good condition as at Lessee's entry into the
Premises excepting for such wear and tear as would be
normal for the period of the Lessee's occupancy. The
Lessee, on or before the end of the term or sooner
termination of this Lease, shall remove all Lessee's
personal property and trade fixtures from the premises
and all property not so removed shall be deemed to be
abandoned by the Lessee. If the Premises be not
surrendered at the end of the term or sooner termination
of this Lease, the Lessee shall indemnify the Lessor
against loss or liability resulting from delay by the
Lessee in so surrendering the Premises including, without
limitation, any claims made by any succeeding tenant
founded on such delay. * SEE ADDENDUM ATTACHED
USES 8. Lessee shall not commit, or suffer to be committed,
PROHIBITED any waste upon the Premises, or any nuisance,
or other act or thing which may disturb the quiet
enjoyment of any other tenant in or around the buildings
in which the Premises may be located, or allow any sale
by auction upon the Premises, or allow the Premises to be
used for any improper, immoral, unlawful or objectionable
purpose, or place any loads upon the floor, walls, or
roof which endanger the structure, or place any harmful
liquids in the drainage system of the building. No waste
materials or refuse shall be dumped upon or permitted to
remain upon any part of the Premises outside of the
building proper. No materials, supplies, equipment,
finished products or semi-finished products, raw
materials or articles of any nature shall be stored upon
or permitted to remain on any portion of the Premises
outside of the buildings proper.
ALTERATIONS 9. The Lessee shall make no alterations, additions or
AND improvements to the Premises or any part thereof without
ADDITIONS first obtaining the prior written consent of the Lessor,
which consent shall not be unreasonably withheld or
delayed. The Lessor may impose as a condition to the
aforesaid consent such requirements as Lessor may deem
necessary in Lessor's sole discretion including without
limitation thereto a right of approval of the contractor
by whom the work is to be performed (which approval shall
not be unreasonably withheld or delayed), the times
during which it is to be accomplished, and the
requirement that upon written request of Lessor prior to
the expiration or earlier termination of the Lease,
Lessee will remove any or all improvements or additions
to the Premises installed at Lessee's expense.* All such
alterations, additions or improvements not specified to
be removed shall at the expiration of earlier termination
of the lease become the property of the Lessor and remain
upon and be surrendered with the Premises. All movable
furniture, business and trade fixtures, and machinery and
equipment shall remain the property of the Lessee and may
be removed by the Lessee at any time during the Lease
term when Lessee is not in default hereunder. Items which
are not to be deemed as movable furniture, business and
trade fixtures, or machinery and equipment shall include
heating, lighting, electrical systems, air conditioning,
permanent partitioning, carpeting, or any other
installation which has become an integral part of the
Premises.** The Lessee will at all times permit notices
of non-responsibility to be posted and to remain posted
until the completion of alterations or additions which
have been approved by the Lessor. * & ** SEE ADDENDUM
ATTACHED
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MAINTE- 10. Lessee shall, at Lessee's sole cost, keep and
NANCE OF maintain the Premises and appurtenances and every part
PREMISES thereof, including but not limited to, glazing,
sidewalks, parking areas, including resealing the parking
lot approximately every three (3) years, plumbing,
electrical systems, heating and air conditioning
installations, any store front, roof covering-unless it
is not feasible to repair the existing roof covering and
a new roof covering is required, and the interior of the
Premises in good order, condition, and repair. Lessor at
Lessor's sole cost and expense shall maintain the
exterior of the walls, and structural portions of the
roof, foundations, walls and floors except for any
repairs caused by the wrongful act of the Lessee and
Lessee's agents. The Lessor will replace the roof
covering if repairs to said covering are no longer
economically feasible in the judgment of roofing experts,
and provided that said replacement is not made necessary
by acts of the Lessee and Lessee's agents. The Lessee
shall water, maintain and replace, when necessary, any
shrubbery and landscaping provided by the Lessor on the
Premises. The Lessee expressly waives the benefits of any
statute now or hereafter in effect which would otherwise
afford the Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, conditions or
repair. *** SEE ADDENDUM ATTACHED
FIRE AND 11. Lessee shall not use, or permit the Premises, or any
EXTENDED part thereof, to be used, for any purposes other than
COVERAGE that for which the Premises are hereby leased, and no use
INSURANCE shall be made or permitted to be made on the Premises,
AND nor acts done, which will cause a cancellation of any
SUBROGATION insurance policy covering said building, or any part
thereof, nor shall Lessee sell or permit to be kept, used
or sold, in or about the Premises, any article which may
be prohibited by the standard form of fire insurance
policies. Lessee shall, at his sole cost and expense,
comply with any and all requirements, pertaining to the
Premises, of any insurance organization or company,
necessary for the maintenance of reasonable fire and
public liability insurance, covering said building and
appurtenances.
11.1 Lessee shall, at its expense, obtain and keep in
force during the term of this Lease a policy of
comprehensive public liability insurance insuring Lessee,
Lessor, and any third parties named by Lessor which may
include Lessor's lender, against liability of personal
injury, bodily injury, death and damage to property
arising out of the condition, use, occupancy or
maintenance of the Premises. Such insurance policy shall
have a combined single limit for both bodily injury and
property damage in an amount not less than One Million
Dollars ($1,000,000.00). The limits of said insurance
shall not limit the liability of Lessee hereunder.
11.2 Lessee shall, at its expense, keep in force during
the term of this Lease, a policy of fire and property
damage insurance in an "all risk" form with a sprinkler
leakage endorsement, insuring Lessee's inventory,
fixtures, equipment and personal property within the
Premises for the full replacement value thereof.
11.3 Lessor shall maintain a policy or policies of fire
and property damage insurance in an "all risk" form, with
sprinkler and, at the option of the Lessor, earthquake
endorsements, covering loss or damage to the building,
including Lessee's leasehold improvements installed with
the written consent of the Lessor for the full
replacement cost thereof.
11.4 Lessee shall pay to Lessor as additional rent,
during the term hereof, upon receipt of an invoice
therefore, 100 percent of the premiums for any insurance
obtained by Lessor pursuant to 11.3 above. Lessor may
obtain such insurance for the Building separately, or
together with other buildings and improvements which
Lessor elects to insure together under blanket policies
of insurance. In such case Lessee shall be liable for
only such portion of the premiums for such blanket
policies as are allocable to the Premises. It is
understood and agreed that Lessee's obligation under this
paragraph shall be prorated to reflect the Commencement
Date and Expiration Date of the Lease. If Lessor carries
earthquake insurance, Lessee's obligation to reimburse
Lessor for premiums shall not exceed $20,000.00 annually.
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11.5 Notwithstanding anything to the contrary in this
Lease, Lessee and Lessor each hereby waives any and all
rights of recovery against the other, or against the
officers, directors, employees, partners, agents and
representatives of the other, for loss of or damage to
the property of the waiving party or the property of
others under its control, to the extent such loss or
damage is insured against under any insurance policy
carried by Lessor or Lessee hereunder. Each party shall
notify their respective insurance carriers of this
waiver.
ABANDONMENT 12. Lessee shall not abandon the Premises at any time
during the term; and if Lessee shall abandon, or
surrender the Premises, or be dispossessed by process of
law, or otherwise, any personal property belonging to
Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor.
FREE FROM 13. Lessee shall keep the Premises and the property in
LIENS which the Premises are situated, free from any liens
arising out of any work performed, materials furnished,
or obligations incurred by Lessee.
COMPLIANCE 14. Lessee shall, at his sole cost and expense, comply
WITH with all of the requirements of all Municipal, State and
GOVERN- Federal authorities now in force, or which may hereafter
MENTAL be in force, pertaining to the Premises, and shall
REGULATIONS faithfully observe in the use of the Premises all
Municipal ordinances and State and Federal statutes now
in force or which may hereafter be in force. The judgment
of any court of competent jurisdiction, or the admission
of Lessee in any action or proceeding against Lessee,
whether Lessor be a party thereto or not, that Lessee has
violated any such ordinance or statute in the use of the
Premises, shall be conclusive of that fact as between
Lessor and Lessee. * SEE ADDENDUM ATTACHED
INDEMNI- 15. The Lessee, as a material part of the consideration
FICATION OF to be rendered to the Lessor, hereby waives all claims
LESSOR AND against the Lessor for damages to goods, wares and
LESSEE'S merchandise, and all other personal property in, upon, or
LIABILITY about the Premises and for injuries to persons in or
INSURANCE about the Premises, from any cause arising at any time,
excepting claims arising from the Lessor's negligence and
willful misconduct or breach of this Lease and the Lessee
will hold the Lessor exempt and harmless from any damage
or injury to any person, or to the goods, wares and
merchandise and all other personal property of any
person, arising from the use of the Premises by the
Lessee, or from the failure of the Lessee to keep the
Premises in good condition and repair, as herein
provided.
ADVERTISE- 16. Lessee will not place or permit to be placed in, upon
MENTS AND or about the Premises any unusual or extraordinary signs,
SIGNS or any signs not approved by the city or other governing
authority. The Lessee will not place, or permit to be
placed, upon the Premises, any signs, advertisements or
notices without the written consent of the Lessor first
had and obtained.* Any sign so placed on the Premises
shall be so placed upon the understanding and agreement
that Lessee will remove same at the termination of the
tenancy herein created and repair any damage or injury to
the Premises caused thereby, and if not so removed by
Lessee then Lessor may have same so removed at Lessee's
expense. * SEE ADDENDUM ATTACHED
UTILITIES 17. Lessee shall pay for all water, gas, heat, light,
power, telephone service and all other service supplied
to the Premises.
ATTORNEY'S 18. In case suit should be brought for the possession of
FEES the Premises, for the recovery of any sum due hereunder,
or because of the breach of any other covenant herein,
the losing party shall pay to the prevailing party a
reasonable attorney's fee, which shall be deemed to have
accrued on the commencement of such action and shall be
enforceable whether or not such action is prosecuted to
judgment.
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DEFAULT 19. In the event of any breach of this Lease by the
Lessee, or an abandonment of the Premises by the Lessee,
the Lessor has the option of 1) removing all persons and
property from the Premises and repossessing the Premises
in which case any of the Lessee's property which the
Lessor removes from the Premises may be stored in a
public warehouse or elsewhere at the cost of, and for the
account of Lessee, or 2) allowing the Lessee to remain in
full possession and control of the Premises. If the
Lessor chooses to repossess the Premises, the Lease will
automatically terminate in accordance with provisions of
the California Civil Code, Section 1951.2. In the event
of such termination of the Lease, the Lessor may recover
from the Lessee: 1) the worth at the time of award of the
unpaid rent which had been earned at the time of
termination including interest at 7% per annum; 2) the
worth at the time of award of the amount by which the
unpaid rent which would have been earned after
termination until the time of award exceeds the amount of
such rental loss that the Lessee proves could have been
reasonably avoided including interest at 7% per annum; 3)
the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and 4) any
other amount necessary to compensate the Lessor for all
the detriment proximately caused by the Lessee's failure
to perform his obligations under the Lease or which in
the ordinary course of things would be likely to result
therefrom. If the Lessor chooses not to repossess the
Premises, but allows the Lessee to remain in full
possession and control of the Premises, then in
accordance with provisions of the California Civil Code,
Section 1951.4, the Lessor may treat the Lease as being
in full force and effect, and may collect from the Lessee
all rents as they become due through the termination date
of the lease as specified in the lease. For the purposes
of this paragraph, the following do not constitute a
termination of Lessee's right to possession: a) Acts of
maintenance or preservation or efforts to relet the
property. b) The appointment of a receiver on the
initiative of the Lessor to protect his interest under
this Lease. * SEE ADDENDUM ATTACHED
LATE 20. Lessee hereby acknowledges that late payment by
CHARGES Lessee to Lessor of rent and other sums due hereunder
will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not
limited to, processing and accounting charges, and late
charges which may be imposed on Lessor by the terms of
any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum
due from Lessee shall not be received by Lessor or
Lessor's designee within ten (10) days after such amount
shall be due, Lessee shall pay to Lessor a late charge
equal to seven and one-half percent (7.5%) of such
overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the
costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in
no event constitute a waiver of Lessee's default with
respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted
hereunder.
SURRENDER 21. The voluntary or other surrender of this Lease by
OF LEASE Lessee, or a mutual cancellation thereof, shall not work
a merger, and shall, at the option of Lessor, terminate
all or any existing subleases or subtenancies, or may, at
the option of Lessor, operate as an assignment to him of
any or all such subleases or subtenancies.
TAXES 22. The Lessee shall be liable for all taxes levied
against personal property and trade or business fixtures.
The Lessee also agrees to pay, as additional rental,
during the term of this Lease and any extensions thereof,
all real estate taxes plus the yearly installments of any
special assessments which are of record or which may
become of record during the term of this lease. If said
taxes and assessments are assessed against the entire
building and building site, and this Lease does not cover
the entire building or building site, the taxes and
assessment installments allocated to the Premises shall
be prorated on a square footage or other equitable basis,
as calculated by the Lessor. It is understood and agreed
that the Lessee's obligation under this paragraph will be
prorated to reflect the commencement and termination
dates of this Lease.
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Real estate taxes shall not include taxes assessed on the
net income of Lessor or any gift, franchise or
inheritance taxes.
NOTICES 23. All notices to be given to Lessee may be given in
writing personally or by depositing the same in the
United States mail, postage prepaid, and addressed to
Lessee at the said Premises, whether or not Lessee has
departed from, abandoned or vacated the Premises.
ENTRY BY 24. Lessee shall permit Lessor and his agents to enter
LESSOR into and upon the Premises at all reasonable times for
the purpose of inspecting the same or for the purpose of
maintaining the building in which the Premises are
situated, or for the purpose of making repairs,
alterations or additions to any other portion of said
building, including the erection and maintenance of such
scaffolding, canopies, fences and props as may be
required without any rebate of rent and without any
liability to Lessee for any loss of occupation or quiet
enjoyment of the Premises thereby occasioned; and shall
permit Lessor and his agents, at any time within ninety
days prior to the expiration of this Lease, to place upon
the Premises any usual or ordinary "For Sale" or "To
Lease" signs and exhibit the Premises to prospective
tenants at reasonable hours.
DESTRUCTION 25. In the event of a partial destruction of the Premises
OF during the said term from any cause, Lessor shall
PREMISES forthwith repair the same, provided such repairs can be
made within one hundred twenty (120) days under the laws
and regulations of State, Federal, County or Municipal
authorities, but such partial destruction shall in no way
annul or void this Lease, except that Lessee shall be
entitled to a proportionate reduction of rent while such
repairs are being made, such proportionate reduction to
be based upon the extent to which the making of such
repairs shall interface with the business carried on by
Lessee in the Premises. If such repairs cannot be made in
one hundred twenty (120) days, Lessor may, at his option,
make same within a reasonable time, this Lease continuing
in full force and effect and the rent to be
proportionately reduced as aforesaid in this paragraph
provided. In the event that Lessor does not so elect to
make such repairs which cannot be made in one hundred
twenty (120) days or such repairs cannot be made under
such laws and regulations, this Lease may be terminated
at the option of either party. In respect to any partial
destruction which Lessor is obligated to repair or may
elect to repair under the terms of this paragraph, the
provision of Section 1932, Subdivision 2, and of Section
1933, Subdivision 4, of the Civil Code of the State of
California are waived by Lessee. In the event that the
building in which the Premises may be situated be
destroyed to the extent of not less than fifty percent
(50%) of the replacement cost thereof, Lessor may elect
to terminate this Lease, whether the Premises be injured
or not. A total destruction of the building in which the
Premises may be situated shall terminate this Lease. In
the event of any dispute between Lessor and Lessee
relative to the provisions of this paragraph, they shall
each select an arbitrator, the two arbitrators so
selected shall select a third arbitrator and the three
arbitrators so selected shall hear and determine the
controversy and their decision thereon shall be final and
binding upon both Lessor and Lessee, who shall bear the
cost of such arbitration equally between them.
ASSIGNMENT 26. The Lessee shall not assign, transfer, or hypothecate
AND SUBLET- the leasehold estate under this Lease, or any interest
TING therein, and shall not sublet the Premises, or any part
thereof, or any right or privilege appurtenant thereto,
or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without in each case,
the prior written consent of the Lessor. Lessor agrees
not to unreasonably withhold consent to sublet or assign.
As a condition for granting its consent to any subletting
the Lessor may require the Lessee to agree to pay to the
Lessor, as additional rental 50% of all rents received by
the Lessee from its Sublessee after deductions for
brokerage commissions which are in excess of the amount
payable by the Lessee to the Lessor hereunder.** The
Lessee shall, by thirty (30) days written notice, advise
the Lessor of its intent to sublet the Premises or any
portion thereof for any part of the term hereof. Within
thirty (30) days after receipt of Lessee's notice, Lessor
shall either give approval or disapproval to Lessee to
sublease the portion of the Premises described in
Lessee's notice. If the Lessor approves a subletting, the
Lessee may sublet immediately after receipt of the
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Lessor's written approval. In the event Lessee is allowed
to assign, transfer or sublet the whole or any part of
the Premises, with the prior written consent of Lessor,
no assignee, transferee or sublessee shall assign or
transfer this Lease, either in whole or in part, or
sublet the whole or any part of the Premises, without
also having obtained the prior written consent of the
Lessor. A consent of Lessor to one assignment, transfer,
hypothecation, subletting, occupation or use by any other
person shall not release Lessee from any of Lessee's
obligations hereunder or be deemed to be a consent to any
subsequent similar or dissimilar assignment, transfer,
hypothecation, subletting, occupation or use by any other
person. Any such assignment, transfer, hypothecation,
subletting, occupation or use without such consent shall
be void and shall constitute a breach of this Lease by
Lessee and shall, at the option of Lessor exercised by
written notice to Lessee, terminate this Lease. The
leasehold estate under this Lease shall not, nor shall
any interest therein, be assignable for any purpose by
operation of law without the written consent of Lessor.
As a condition to its consent, Lessor may require Lessee
to pay all expense in connection with the assignment, and
Lessor may require Lessee's assignee or transferee (or
other assignees or transferees) to assume in writing all
of the obligations under this Lease.*** ** AND *** SEE
ADDENDUM ATTACHED
CONDEM- 27. If any part of the Premises shall be taken for any
NATION public or quasi-public use, under any statute or by right
of eminent domain or private purchase in lieu thereof,
and a part thereof remains which is susceptible of
occupation hereunder, this Lease shall, as to the part so
taken, terminate as of the date title shall vest in the
condemnor or purchaser, and the rent payable hereunder
shall be adjusted so that the Lessee shall be required to
pay for the remainder of the term only such portion of
such rent as the value of the part remaining after such
taking bears to the value of the entire Premises prior to
such taking; but in such event Lessor shall have the
option to terminate this Lease as of the date when title
to the part so taken vests in the condemnor or purchaser.
If all of the Premises, or such part thereof be taken so
that there does not remain a portion susceptible for
occupation hereunder, this Lease shall thereupon
terminate. If a part or all of the Premises be taken, all
compensation awarded upon such taking shall go to the
Lessor and the Lessee shall have no claim thereto, except
that Lessee shall have the right to receive that portion
of the condemnation proceeds based upon the value of all
personal property that Lessee shall have the right to
remove from the Premises.
EFFECT OF 28. The term "Lessor" as used in this Lease, means only
CONVEYANCE the owner for the time being of the land and building
containing the Premises, so that, in the event of any
sale of said land or building, or in the event of a lease
of said building, the Lessor shall be and hereby is
entirely freed and relieved of all covenants and
obligations of the Lessor hereunder, provided that Lessor
transfers the security deposit to the transferee and the
transferee assumes in writing Lessor's obligations
hereunder, and it shall be deemed and construed, without
further agreement between the parties and the purchaser
at any such sale, or the Lessee of the building, that the
purchaser or lessee of the building has assumed and
agreed to carry out any and all covenants and obligations
of the Lessor hereunder. If any security be given by the
Lessee to secure the faithful performance of all or any
of the covenants of this Lease on the part of the Lessee,
the Lessor may transfer and deliver the security, as
such, to the purchaser at any such sale or the lessee of
the building, and thereupon the Lessor shall be
discharged from any further liability in reference
thereto.
SUBORDI- 29. Lessee agrees that this Lease may, at the option of
NATION Lessor, be subject and subordinate to any mortgage, deed
of trust or other instrument of security which has been
or shall be placed on the land and building or land or
building of which the Premises form a part, and this
subordination is hereby made effective without any
further act of Lessee. The Lessee shall, at any time
hereinafter, on demand, execute any instruments,
releases, or other documents that may be required by any
mortgage, mortgagor, or trustor or beneficiary under any
deed of trust for the purpose of subjecting and
subordinating this Lease to the lien of any such
mortgage, deed of trust or other instrument of security,
and the failure of the Lessee to execute any such
instruments, releases or documents, shall constitute a
default hereunder. Lessee shall not be
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required to execute any documents subordinating this
Lease unless the holder of any such lien executes a
Non-Disturbance Agreement in favor of Lessee.
WAIVER 30. The waiver by Lessor of any breach of any term,
covenant or condition, herein contained shall not be
deemed to be a waiver of such term, covenant or condition
or any subsequent breach of the same or any other term,
covenant or condition therein contained. The subsequent
acceptance of rent hereunder by Lessor shall not be
deemed to be a waiver of any preceding breach by Lessee
of any term, covenant or condition of this Lease, other
than the failure of Lessee to pay the particular rental
so accepted, regardless of Lessor's knowledge of such
preceding breach at the time of acceptance of such rent.
HOLDING 31. Any holding over after the expiration of the said
OVER term, with the consent of Lessor, shall be construed to
be a tenancy from month to month, at a rental to be
negotiated by Lessor and Lessee prior to the expiration
of said term, and shall otherwise be on the terms and
conditions herein specified, so far as applicable.
SUCCESSORS 32. The covenants and conditions herein contained shall,
AND subject to the provisions as to assignment, apply to and
ASSIGNS bind the heirs, successors, executors, administrators and
assigns of all of the parties hereto; and all of the
parties hereto shall be jointly and severally liable
hereunder.
TIME 33. Time is of the essence of this Lease.
MARGINAL 34. The marginal headings or titles to the paragraphs of
CAPTIONS this Lease are not a part of this Lease and shall have no
effect upon the construction or interpretation of any
part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto
and may not be modified orally or in any other manner
than by an agreement in writing signed by all of the
parties hereto or their respective successors in
interest.
PARAGRAPHS #35 AND #36 AND ADDENDUM ATTACHED HERETO ARE
HEREBY MADE A PART OF THIS LEASE.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY WHO WILL REVIEW THE DOCUMENT AND ASSIST YOU TO
DETERMINE WHETHER YOUR LEGAL RIGHTS ARE ADEQUATELY
PROTECTED. RENAULT & HANDLEY IS NOT AUTHORIZED TO GIVE
LEGAL AND TAX ADVICE. NO REPRESENTATION OR RECOMMENDATION
IS MADE BY RENAULT & HANDLEY OR ITS AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING
THERETO. THESE ARE QUESTIONS FOR YOUR ATTORNEY WITH WHOM
YOU SHOULD CONSULT BEFORE SIGNING THIS DOCUMENT.
IN WITNESS WHEREOF, Lessor and Lessee have executed these
presents, the day and year first above written.
LESSOR LESSEE
ZAPPETTINI INVESTMENT CO. IRIDEX CORPORATION
------------------------- -------------------------
/s/ George O. McKee /s/ Theodore A. Boutacoff
------------------------- -------------------------
------------------------- -------------------------
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ADDITIONAL PARAGRAPHS
These additional paragraphs are hereby made a part of that certain Lease dated
December 6, 1996 by and between Zappettini Investment Co., Lessor, and lRIDEX
Corporation, Lessee, covering premises at 1212 Terra Bella, Mountain View,
California.
35. Options to Renew. Lessor grants to Lessee two successive two year
options to renew this Lease. The first two year option shall commence, if at
all, on the termination date of this Lease and will terminate on February 29,
2004. The second option period shall commence, if at all, on March 1, 2004
providing that the first option has been exercised and shall terminate on
February 28, 2006. In no event can the 2nd option to renew be exercised unless
the lst option to renew has been exercised. The option terms shall be governed
by all the terms and conditions as are contained in the Lease excepting that
there shall be no additional options and also excepting the basic monthly
rental. The basic monthly rent for each of the option terms shall be negotiated
by Lessor and Lessee at the time each option is exercised and shall be based on
98 percent of the then market rent for the Premises based on similar space
within a 1 mile radius of the subject property. In no event however, shall the
monthly rental for the first option term be less than $46,457.50 nor shall the
rental amount for the 2nd option term be less than that amount being paid for
the lst option term. In order to exercise each option, the Lessee must give the
Lessor written notice a minimum of 90 days and a maximum of 120 days prior to
the termination of the immediately preceding term. At the option of the Lessor,
any of the above options to renew may be declared null and void if the Lessee is
in default under any of the terms or conditions of the Lease when said option is
exercised.
36. Lessor will indemnify, defend and hold Lessee harmless from and
against all costs of response, corrective action, remedial action, claims,
demands, losses and liabilities arising from any pre-existing environmental
contamination which may have occurred prior to the Lessee taking possession of
the Premises.
Lessee will only be responsible for contamination of the Premises or the soils
or ground water thereon or thereunder in violation of Hazardous Materials Laws,
that is caused by Lessee or Lessee's agents, contractors or invitees during the
term as may be extended. All hazardous materials and toxic wastes that Lessee
brings on the Premises shall be stored according to Hazardous Materials' Law.
All hazardous materials and toxic wastes that Lessee brings on the site shall be
stored according to all local, state and national government regulations.
Hazardous Materials shall be defined as those substances that are recognized as
posing a risk of injury to health or safety by the Santa Clara Fire Department,
the Santa Clara County Health Department, the Regional Water Quality Control
Board, the State of California or the Federal Government.
For purposes of this Lease, "Hazardous Materials Law" shall mean all local,
state and federal laws, statutes, ordinances, rules, regulations, judgments,
injunctions, stipulations, decrees, orders, permits, approvals, treaties or
protocols now or hereafter enacted, issued or promulgated by any governmental
authority which relate to any Hazardous Material or the use, handling,
transportation, production, disposal, discharge, release, emission, sale or
storage of, or the exposure of any person to, a Hazardous Material.
9
10
Lessor hereby releases Lessee from and waives all claims, costs, losses, damages
and liabilities ("Claims") against Lessee, arising out of or in connection with
any Hazardous Material present at any time on, in, under or about the Premises
except to the extent that any such Claims results from the release, disposal,
emission or discharge of Hazardous Materials on or about the Premises by Lessee
by its agent, contractors or employees. In this regard, Lessor hereby waives the
benefits of California Civil Code Section 1542 which provides as follows: "A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release which if
known by him must have materially have affected his settlement with debtor."
10
11
ADDENDUM
Added to the end of paragraph 6: *Notwithstanding anything to the contrary in
this Lease, (i) if possession of the Premises has not been delivered to Lessee
for any reason whatsoever on or before March 1, 1997, Lessee shall not be
obligated to pay rent for that period of time after the Rent Commencement Date
equal to the number of days that possession of the Premises is delayed beyond
March 1, 1997, and (ii) if possession of the Premises is not delivered to Lessee
for any reason whatsoever on or before April 30, 1997 then Lessee may terminate
this Lease by written notice to Lessor, whereupon any monies previously paid to
Lessor by Lessee shall be reimbursed to Lessee and neither party shall have any
further obligation to each other.
Addition to paragraph 7:
*If Lessee notifies Lessor within such 45 day period that there are structural
defects in the Premises, Lessor shall, at its cost, repair such structural
defects.
Additions to paragraph 9:
* Upon request, Lessor shall advise Lessee in writing whether it reserves the
right to require Lessee to remove any such alterations, additions or
improvements from the Premises upon expiration or sooner termination of this
Lease. If Lessor elects not to reserve such right, then Lessee shall not be
required to remove the initial tenant improvements which Lessee intends to
construct in the Premises., ** ; provided however, that Lessee shall have the
right to remove at any time any special purpose improvements installed in the
Premises by Lessee at Lessee's cost including, without limitation, supplementary
heating, ventilation and air conditioning systems and chillers for laboratory
bench heat exchange. Lessee shall, upon removal of such special purpose
improvements, return the Premises to its condition prior to their installation
including all patching, cleaning and repainting if necessary.
Addition to paragraph 10:
***In the event of fire or other casualty, paragraph 25, rather than this
paragraph 10, shall govern the obligations of the parties with respect to the
repair, maintenance and replacement of the Premises. Notwithstanding anything to
the contrary in this Lease, Lessor, at its cost and expense, shall make any
repair, maintenance or improvement (i) required as a result of a construction
defect in the Premises as of the Commencement Date, and (ii) for which Lessor
has a right of reimbursement from others (including, without limitation,
insurers). Lessee shall have the benefit of any construction and/or equipment
warranties existing in favor of Lessor that would assist Lessee in discharging
its obligations under this Lease.
1. If Lessee is required to replace an HVAC unit, plumbing line, main electrical
panel or generator, it may instead elect to require Lessor to perform such
Capital Repair.
2. The cost of any of the above replacements performed by Landlord, which is
reimbursable by Lessee, shall be amortized over the useful life of the Capital
Repair determined in accordance with generally accepted accounting principles
with interest on the unamortized balance at the then prevailing market rate
Lessor would pay if it borrowed funds to replace these units from an
institutional lender. Lessor shall inform Lessee of the monthly amortization
payment required to so amortize such costs, and shall also provide Lessee with
the information upon which such determination is made. Tenant shall pay such
amortized payment for each month during the term of the Lease after such
improvement is completed until the first to occur of (i) the resetting of rent
or the
11
12
end of the term over which such costs were amortized. Such amortized amount
shall be due at the same time that rent is due.
3. The cost of any Capital Repair performed by Lessor shall be shared by Lessee
and Lessor as follows. Upon completion of the Capital Repair, Lessor shall
notify Lessee of the total cost incurred by Lessor to complete the work and
shall deliver to Lessee documentary support for such costs and lien waivers (or
lien release bonds) for such work. Lessee shall be responsible for that portion
of the cost incurred by Lessor for the Capital Repair times a fraction, the
numerator of which shall be equal to the lesser of the months in the Lease term
(a) until the resetting of monthly rent for the Premises based upon the fair
market value of the Premises as so repaired or improved, or (b) the useful life
of the capital repairs and the denominator shall be the months on the useful
life of the capital repair.
4. For the purposes of this paragraph, a Capital Repair shall not include the
resealing of the parking lot.
Addition to paragraph 16
*which consent shall not be unreasonably withheld or delayed. Lessee shall have
the right to place signs displaying the name and logo of Lessee in the present
sign locations and on the entry doorways.
Addition to paragraph 19
*Notwithstanding anything to the contrary in this Lease, (i) Lessee shall not be
deemed to be in default or breach of this Lease on account of Lessee's failure
to pay money to Lessor unless Lessee's failure to pay continues for ten (10)
days after the first day of each month, and (ii) Lessee shall not be in default
or breach of this Lease for failing to perform any covenant of this Lease (other
than a covenant to pay money to Lessor) unless Lessee's failure to perform such
covenant continues for a period of thirty (30) days after Lessee's receipt of
written notice of such failure, or such longer time as may be reasonably
required to cure the default so long as Lessee commences to cure such failure
within thirty (30) day period and diligently prosecutes such cure to completion.
Addition to paragraph 24
Lessor shall provide to Lessee twenty-four (24) hours' notice prior to its entry
onto the Premises (except in the event of an emergency) and such entry shall be
subject to Lessee's right to accompany Lessor at all times and Lessee's
reasonable security precautions. Lessor shall ensure that reasonable access to
the Premises is available to Lessee at all times and shall use reasonable
efforts to mitigate any interference with Lessee's business caused by Lessor's
entry and work.
Addition to paragraph 25
Landlord shall have the additional right to terminate the Lease in the event of
a casualty which is not required hereunder to be covered by insurance or where
insurance proceeds are not available to pay at least eighty percent (80%) of the
replacement cost of the Building. Tenant shall have the additional right to
terminate the Lease if restoration or repair of the Building would take longer
than one hundred twenty (120) days.
Addition to paragraph 26
*arising after the effective date of the transfer in question. Notwithstanding
anything to the contrary in this Lease, Lessee may, without Lessor's prior
written consent and without being subject to the terms of this paragraph 26
including, without limitation, Lessor's right to recapture the Premises and
participate in assignment
12
13
and subletting proceeds, sublease the Premises or assign the Lease to: (i) a
corporation controlling, controlled by or under common control with Lessee; (ii)
a successor corporation related to Tenant by merger, consolidation or
nonbankruptcy reorganization; or (iii) a purchaser of substantially all of the
assets of Lessee.
Addition to paragraph 14
If Lessee is required to make any capital repairs to this paragraph 14 then the
provisions of paragraph 10 with regard to capital repairs shall apply. The
paragraph 14 shall not apply to any requirement regarding any Hazardous
Material.
13
1
Exhibit 10.7
BUSINESS LOAN AGREEMENT
- --------------------------------------------------- --------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$1,000,000.00 10-01-1997 09-03-1998 0108213255 512 Unsec JS
- --------------------------------------------------- --------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: IRIDEX CORPORATION Lender: Mid-Peninsula Bank
1212 Terra Bella c/o Greater Bay Bancorp
Mountain View, CA 94043 2860 W. Bayshore Road
Palo Alto, CA 94303
- --------------------------------------------------------------------------------
THIS BUSINESS LOAN AGREEMENT between IRIDEX CORPORATION ("Borrower") and
Mid-Peninsula Bank ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of October 1, 1997, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note
and the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion, may require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties
set forth in this Agreement, in the Related Documents, and in any
document or certificate delivered to Lender under this Agreement are
true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance
a condition which would constitute an Event of Default under this
Agreement.
2
10-01-1997 BUSINESS LOAN AGREEMENT PAGE 2
LOAN NO 0108213255 (CONTINUED)
- --------------------------------------------------------------------------------
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Delaware and is validly existing and in good standing in all states
in which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in
which it is presently engaged or presently proposes to engage.
Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary
action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon Borrower or (b) any law, governmental regulation, court decree,
or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to
Lender. Borrower has no material contingent obligations except as
disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for
taxes not presently due and payable, Borrower owns and has good title
to all of Borrower's properties free and clear of all liens and
security interests, and has not executed any security documents or
financing statements relating to such properties. All of Borrower's
properties are titled in Borrower's legal name, and Borrower has not
used, or filed a financing statement under, any other name for at
least the last five (5) years.
HAZARDOUS SUBSTANCES. Except as disclosed to Lender in writing, no
property of Borrower ever has been, or ever will be so long as this
Agreement remains in effect, used for the generation, manufacture,
storage, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
"CERCLA," "SARA," applicable state or Federal laws, or regulations
adopted pursuant to any of the foregoing. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of
the indebtedness and the satisfaction of this Agreement.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
3
10-01-1997 BUSINESS LOAN AGREEMENT PAGE 3
LOAN NO 0108213255 (CONTINUED)
- --------------------------------------------------------------------------------
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and all threatened litigation, claims, investigations,
administrative proceedings or similar actions affecting Borrower or
any guarantor of the Loan which could materially affect the financial
condition of Borrower or the financial condition of any guarantor of
the Loan.
FINANCIAL RECORDS. Maintain its books and records in accordance with
accounting principles acceptable to Lender, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables
and payables, inventory schedules, budgets, forecasts, tax returns,
and other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender
in writing.
PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents
in a timely manner, and promptly notify Lender if Borrower learns of
the occurrence of any event which constitutes an Event of Default
under this Agreement or under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender
of any change in executive and management personnel; conduct its
business affairs in a reasonable and prudent manner and in compliance
with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses
and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding
standards and other requirements of ERISA and other laws applicable
to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and
Borrower's other properties and to examine or audit Borrower's books,
accounts, and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time
hereafter maintains any records (including without limitation
computer generated records and computer software programs for the
generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit
Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at
Borrower's expense.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or (c)
sell with recourse any of Borrower's accounts, except to Lender.
4
10-01-1997 BUSINESS LOAN AGREEMENT PAGE 4
LOAN NO 0108213255 (CONTINUED)
- --------------------------------------------------------------------------------
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that
notwithstanding the foregoing, but only so long as no Event of
Default has occurred and is continuing or would result from the
payment of dividends, if Borrower is a "Subchapter S Corporation" (as
defined in the Internal Revenue Code of 1986, as amended), Borrower
may pay cash dividends on its stock to its shareholders from time to
time in amounts necessary to enable the shareholders to pay income
taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their
status as Shareholders of a Subchapter S Corporation because of their
ownership of shares of stock of Borrower, or (d) purchase or retire
any of Borrower's outstanding shares or alter or amend Borrower's
capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan advances or to disburse Loan proceeds if:
(a) Borrower or any guarantor is in default under the terms of this Agreement or
any other agreement that Borrower or any guarantor has with Lender; (b) Borrower
or any Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
guarantor, or in the value of any collateral securing any Loan; or (d) any
guarantor seeks, claims or attempts to limit, modify or revoke such guarantor's
guaranty of the Loan or any other loan with Lender.
BORROWER'S FINANCIAL REPORTING. Borrower agrees to provide the following:
1) Quarterly financial statement within 50 days of quarter end or its 10Q within
5 days of filing with the SEC.
2) Annual Certified Public Accountant audited financial statement within 120
days of fiscal year end bearing an unqualified opinion.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrowers accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an event of default
("Event of Default") under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.
OTHER DEFAULTS. Failure of Borrower to comply with or to perform when
due any other term, obligation, covenant or condition contained in
this Agreement.
5
10-01-1997 BUSINESS LOAN AGREEMENT PAGE 5
LOAN NO 0108213255 (CONTINUED)
- --------------------------------------------------------------------------------
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower default under any
loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property or
Borrower's ability to repay the Loans or perform Borrower's
obligations under this Agreement or any related document.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower is false or
misleading in any material respect at the time made or furnished,
or becomes false or misleading at any time thereafter.
INSOLVENCY. The dissolution or termination of Borrower's existence as
a going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for
the benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency
laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any grantor of collateral for the Loan. This includes
a garnishment, attachment, or levy on or of any of Borrower's
deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or any
Guarantor dies or becomes incompetent, or revokes or disputes the
validity of, or liability under, any Guaranty of the indebtedness.
Lender, at its option, may, but shall not be required to, permit
the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the indebtedness is impaired.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement immediately will terminate
(including any obligation to make Loan Advances or disbursements), and, at
Lender's option, all indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the rights and remedies provided in the Related Documents or available at
law, in equity, or otherwise. Except as may be prohibited by applicable law, all
of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.
6
10-01-1997 BUSINESS LOAN AGREEMENT PAGE 6
LOAN NO 0108213255 (CONTINUED)
- --------------------------------------------------------------------------------
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
OCTOBER 1, 1997.
BORROWER:
IRIDEX CORPORATION
BY: /s/ Robert Kamenski
-------------------------------------------------------------
ROBERT KAMENSKI, VICE PRESIDENT OF FINANCE AND ADMINISTRATION
LENDER:
MID-PENINSULA BANK
BY: /s/ J. H. Stafford
-------------------------------------------------------------
AUTHORIZED OFFICER
7
PROMISSORY NOTE
- -------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$1,000,000.00 10-01-1997 09-03-1998 0108213255512 Unsec JS
- -------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: IRIDEX CORPORATION Lender: Mid-Peninsula Bank
1212 Terra Bella c/o Greater Bay Bancorp
Mountain View, CA 94043 2860 W. Bayshore Road
Palo Alto, CA 94303
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT: $1,000,000.00 INITIAL RATE: 8.500%
DATE OF NOTE: OCTOBER 1, 1997
PROMISE TO PAY. IRIDEX CORPORATION ("Borrower") promises to pay to Mid-Peninsula
Bank ("Lender'), or order, in lawful money of the United States of America, the
principal amount of One Million & 00/100 Dollars ($1,000,000.00) or so much as
may be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on
September 30,1998. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning October 30, 1997, and all subsequent interest
payments are due on the same day of each month after that. The annual interest
rate for this Note is computed on a 365/360 basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the Wall Street
Journal Prime (Western Edition) (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notice to Borrower. Lender will tell Borrower the current index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each day. The Index currently is 8.500%. The interest rate to be applied to the
unpaid principal balance of this Note will be at a rate equal to the Index,
resulting in an initial rate of 8.500%. NOTICE: Under no circumstances will the
interest rate on this Note be more than the maximum rate allowed by applicable
law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
minimum interest charge of $250.00. Other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $10.00, whichever is greater.
8
10-01-1997 PROMISSORY NOTE PAGE 2
LOAN NO 0108213255 (CONTINUED)
- --------------------------------------------------------------------------------
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, increase the variable interest rate on this Note to 5.000 percentage points
over the Index. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Borrower also will pay any court costs, in
addition to all other sums provided by law. This Note has been delivered to
Lender and accepted by Lender in the State of California. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of Santa Clara County, the State of California. This Note shall be
governed by and construed in accordance with the laws of the State of
California.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
9
10-01-1997 PROMISSORY NOTE PAGE 3
LOAN NO 0108213255 (CONTINUED)
- --------------------------------------------------------------------------------
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. The
following party or parties are authorized to request advances under the line
of credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: Theodore Boutacoff, President
and Chief Executive Officer; and Robert Kamenski, Vice President of Finance and
Administration. Borrower agrees to be liable for all sums either: (a) advanced
in accordance with the instructions of an authorized person or (b) credited to
any of Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or by
Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; or (d) Borrower has applied funds provided pursuant
to this Note for purposes other than those authorized by Lender.
BUSINESS LOAN AGREEMENT. In addition to the terms and conditions contained in
the Note, it is also subject to the terms and conditions contained in that
certain Business Loan Agreement dated October 1, 1997 executed by Borrower in
favor of Lender, which Agreement is hereby incorporated herein by this
reference.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
IRIDEX CORPORATION
BY: /s/ Robert Kamenski
-------------------------------------------------------------
ROBERT KAMENSKI, VICE PRESIDENT OF FINANCE AND ADMINISTRATION
1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Name of Subsidiary Place of Incorporation
- ------------------ ----------------------
IRIS Medical Instruments, Inc. California
Light Solutions Corporation California
IRIDEX Foreign Sales Corporation Barbados
1
Exhibit 23.1
CONSENT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of IRIDEX Corporation and subsidiaries in Form S-8 (File No. 333-4264) of our
reports dated January 22, 1998, on our audits of the consolidated financial
statements and financial statement schedule of IRIDEX Corporation as of
December 31, 1997 and 1996 and for each of the three years ended December 31,
1997, which reports are in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
March 30, 1998
5
1,000
YEAR
DEC-31-1997
JAN-01-1997
DEC-31-1997
9,900
3,588
6,362
(305)
3,976
24,522
3,063
(930)
26,686
2,806
0
0
0
65
23,815
26,686
18,073
18,073
7,612
7,612
7,790
0
0
3,278
(1,180)
0
0
0
0
2,098
0.33
0.31
5
1,000
YEAR
DEC-31-1995
JAN-01-1995
DEC-31-1995
1,227
0
2,861
(383)
1,256
6,041
587
(333)
6,395
1,702
0
0
19
15
4,651
6,395
8,801
8,801
2,798
2,798
4,609
0
(16)
1,452
(452)
0
0
0
0
1,000
.78
.23
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
5
1,000
3-MOS
DEC-31-1996
JAN-01-1996
MAR-31-1996
17,097
0
2,680
(381)
1,430
21,927
631
(366)
22,292
1,527
0
0
0
63
20,702
22,292
2,417
2,417
932
932
1,326
0
0
251
(26)
0
0
0
0
225
.06
.04
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
5
1,000
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
15,402
1,000
2,849
(265)
1,868
20,786
770
(320)
22,336
1,627
0
0
0
63
20,646
22,336
4,903
4,903
1,880
1,880
2,766
0
0
555
(148)
0
0
0
0
407
.08
.07
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
5
1,000
9-MOS
DEC-31-1996
JAN-31-1996
SEP-30-1996
14,504
1,044
3,424
(265)
2,296
21,943
955
(474)
22,524
1,581
0
0
0
66
20,877
22,524
7,538
7,538
2,848
2,848
4,256
0
0
958
(309)
0
0
0
0
649
.12
.10
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
5
1,000
YEAR
DEC-31-1996
JAN-01-1996
DEC-31-1996
14,107
1,007
5,655
(265)
1,859
23,004
1,226
(571)
23,707
2,227
0
0
0
63
21,415
23,707
12,364
12,364
4,899
4,899
6,483
0
0
1,681
(676)
0
0
0
0
1,005
.18
.16
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
5
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
4,282
10,221
5,218
(265)
2,050
18,019
1,289
(650)
23,005
1,341
0
0
0
64
21,600
23,005
3,320
3,320
1,437
1,437
1,745
0
0
293
(108)
0
0
0
0
185
.03
.03
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
5
1,000
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
9,970
5,106
5,381
(250)
2,571
22,817
1,570
(732)
24,699
2,510
0
0
0
64
22,125
24,699
7,676
7,676
3,280
3,280
3,616
0
0
1,095
(396)
0
0
0
0
699
.11
.11
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
9,405
4,152
5,838
(350)
3,261
23,308
2,905
(832)
25,429
2,443
0
0
0
64
22,922
25,429
12,317
12,317
5,267
5,267
5,496
0
0
2,026
(731)
0
0
0
0
1,295
.20
.19
EPS-PRIMARY AND EPS-DILUTED HAS BEEN RESTATED AS REQUIRED BY THE COMPANY'S
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO 128.
