e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
|
|
|
þ |
|
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 31, 2005
or
|
|
|
o |
|
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
(State or other jurisdiction
of incorporation or organization)
|
|
77-0210467
(I.R.S. Employer
Identification Number) |
1212 Terra Bella Avenue, Mountain View CA 94043-1824
(Address of principal executive offices)
(Zip Code)
(650) 940-4700
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act of 1933. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 (the Exchange Act). Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of Registrants 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. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the
Registrant was approximately $ 28,736,448, as of July 2, 2005, the last business day of the
Registrants most recently completed second fiscal quarter, based on the closing price reported for
such date on the NASDAQ National Market System. The registrant did not have any non-voting common
equity outstanding. 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 23, 2006, Registrant had 7,615,618 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Proxy Statement for the Registrants 2006 Annual Meeting of Stockholders
(the Proxy Statement) are incorporated by reference into Part III of this Annual Report on Form
10-K.
PART I
This Annual Report on Form 10-K contains certain 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, such as statements relating to levels of future sales and
operating results; actual order rate and market acceptance of our products; opportunities in the
adjunctive visualization systems market and our efforts to provide total disease management
solutions; expectations for future sales growth, generally, including expectations of additional
sales from our new products and new applications of our existing
products; leveraging our core business and increasing recurring
revenues; broadening our product lines through product innovation;
our marketing programs, generally, including Valued IRIDEX Partner
Program; the innovation potential for
production cost decreases and higher gross estimate of the size of our markets; levels of future
investment in research and development efforts; our ability to develop and introduce new products
through strategic alliances, OEM relationships and acquisitions; results of clinical studies and risks associated
with bringing new products to market, general economic conditions and levels of international
sales. In some cases, forward-looking statements can be identified by terminology, such as may,
will, should, expects, plans, anticipates, believes, estimates, predicts,
intends, potential, continue, or the negative of such terms or other comparable terminology.
These statements involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to differ materially from those expressed or
implied by such forward-looking statements. The reader is strongly urged to read the information
contained under the captions Part I, Item 1, Business, and Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations-Factors That May Affect
Future Results in this Annual Report on Form 10-K for a more detailed description of these significant risks
and uncertainties. The reader is cautioned not to place undue reliance on these forward-looking
statements, which reflect managements analysis only as of the date of this Form 10-K. We
undertake no obligation to update such forward-looking statements to reflect events or
circumstances occurring after the date of this report.
Item 1. Business
General
IRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems and
delivery devices used to treat eye diseases in ophthalmology and skin conditions in dermatology
(also referred to as aesthetics). Our products are sold in the United States predominantly through
a direct sales force and internationally through 77 independent distributors into 107 countries.
Total product sales in 2005, 2004 and 2003 were $37.0 million, $32.8 million and $31.7 million
respectively, which generated a net income (loss) from continuing operations for those
corresponding years of $1,671,000, ($402,000) and $371,000.
Our ophthalmology products are used in the treatment of serious eye diseases, including the
three leading causes of irreversible blindness, age-related macular degeneration (AMD), diabetic
retinopathy and glaucoma. In addition, our ophthalmology products are often used in vitrectomy procedures (proliferative diabetic
retinopathy, macular holes, retinal tears and detachments) which are generally performed in the operating room and requires a disposable single use
laser probe (EndoProbe) to deliver the light to the back of the eye. The current family of
OcuLight laser systems, which accounts for the majority of our revenues, is used for ophthalmic
applications primarily in operating rooms, clinics and doctors offices includes the IRIS Medical
IQ810 Laser System, the OcuLight Symphony (Laser Delivery System), OcuLight SL, OcuLight SLx,
OcuLight GL and OcuLight GLx laser photocoagulation systems. Our ophthalmology products
contributed $30.7 million, $27.8 million and $26.2 million to our total revenues in 2005, 2004 and
2003, respectively.
-1-
Our dermatology products treat skin conditions, primarily vascular and pigmented lesions and
remove unwanted hair. Our dermatology laser systems include the DioLite XP, DioLite 532 and the
VariLite Dual Wavelength Laser systems. In 2005, we discontinued selling the Apex hair removal
laser system. Our dermatology products are primarily used in the practitioners office and
contributed $6.4 million, $5.1 million and $5.5 million to our total revenues in 2005, 2004 and
2003, respectively.
Each ophthalmic and dermatology laser system consists of a small, portable laser console and
delivery devices. While dermatologists almost always use our laser systems in their offices,
ophthalmologists use our laser systems in hospital operating rooms (OR), ambulatory surgical
centers (ASC) and their offices. In the OR and ASC, ophthalmologists use our laser with either an
indirect laser ophthalmoscope (LIO) or a disposable, single use EndoProbe. Our business includes a
recurring revenue component which includes the sales of the disposable, single use laser probes,
EndoProbes, combined with the repair, servicing and extended warranty protection for our laser
systems. Since our first
shipment in 1990, more than 7,775 IRIDEX medical laser systems have been sold worldwide.
IRIDEX Corporation was incorporated in California in February 1989 as IRIS Medical
Instruments, Inc. In 1996, we changed our name to IRIDEX Corporation and reincorporated in
Delaware. Our executive offices are located at 1212 Terra Bella Avenue, Mountain View, California
94043-1824, and our telephone number is (650) 940-4700. We can also be reached at our website at
www.iridex.com, however, the information on, or that can be accessed through, our website is not
part of this report. As used in this Annual Report on Form 10-K, the terms Company, IRIDEX,
we, us and our refer to IRIDEX Corporation, a Delaware corporation, and, when the context so
requires, our wholly owned subsidiaries, IRIS Medical Instruments, Inc. and Light Solutions
Corporation, both California corporations.
The IRIDEX Strategy
We are one of the worldwide leaders in developing, manufacturing, marketing, selling and
servicing innovative medical laser systems. We have three key elements in our strategy: 1)
leveraging our core business and increasing recurring revenues, 2) broadening our product lines
through product innovation, and 3) developing new market opportunities through strategic alliances,
OEM relationships and acquisitions:
1. Leverage our Core Business and Increase Recurring Revenues. We believe that we can
continue to grow our current installed base of more than 7,775 IRIDEX laser systems worldwide. With
the initiatives of our expanded sales and marketing team, we expect to grow the current product
offering by double digit growth in laser systems, delivery devices and disposables. Despite the
fact that the majority of our sales are a replacement market, the features of our laser systems and
new innovations will allow us to increase our market share.
Our
business includes a recurring revenue component which includes the sale of our disposable,
single use laser probes, EndoProbes, combined with the repair, servicing and extended warranty
protection for our laser systems. In 2005 recurring revenues were 36% of the overall
business up from 33% in 2004. With our new sales and marketing programs, we believe that there is an opportunity to
significantly increase our recurring revenues over the next several years. Our new sales programs
include an increase in the number of our domestic area sales managers from 6 to 10 focused on the
entire ophthalmic product offering and their incentive plan is more focused on the recurring
revenue opportunity. Our new U.S. marketing programs include a VIP
(Valued IRIDEX Partner) program
which allows customers to access additional IRIDEX products through a contractual arrangement on
the purchase of disposable laser probes. During the past two years, we have
-2-
introduced many different types of EndoProbes into the market, including our stepped,
intuitive and illuminating probes.
When a customer purchases our laser system, a warranty is included.
In addition, we market extended warranty protection plans which can be purchased at the time of
original acquisition or after the expiration of the warranty. We also
repair products out of warranty under a program which allows our customer to obtain a laser
overnight while their unit is returned for repair. The customer is charged normal and reasonable
charges for these services.
2. Broaden Product Lines through Product Innovation. One of our core strengths has been
our regular introduction of new laser systems, delivery devices and product upgrades to enhance the
benefits of our laser systems. We attempt to leverage our existing products and technology when
developing new products. In 1997, we introduced the DioLite 532, based on the same visible (green)
light technology as the OcuLight GL, for the dermatology market. In 1998, we introduced the
OcuLight GLx, a new version of the OcuLight GL, with increased power and delivery device
capability. In October 1999, we introduced the next generation of OcuLight SLx, which offers added
features to our OcuLight SL, such as LongPulse and MicroPulse operating modes. These features
enable the OcuLight SLx to perform the latest in clinical infrared applications. In October 2000,
we introduced the EasyFit family of portable slit lamp adapters (or SLAs), which allow for improved
viewing clarity of the retina by the physician. In 2001, we introduced the Apex 800, a high
powered infrared laser for hair removal for the dermatology market. In October 2002, we introduced
the OcuLight Symphony Laser Delivery System which combines the clinical versatility and convenience
of infrared and visible photocoagulation consoles into one delivery device. We also introduced an
expanded EndoProbe product line and a 5 millimeter Large Spot Slit Lamp Adapter. In December 2002,
we commenced shipment of the Millennium Endolase module, which we manufacture to be included in
Bausch & Lombs Millennium Microsurgical System. In 2003, we introduced a 50 micron spot slit lamp
adapter, the smallest spot size diameter available on IRIDEX slit lamp adapters. In addition, in
2003 and the first quarter of 2004, we introduced four additions to our Endoprobe product line. In
2004, we launched a new, menu driven infrared platform for ophthalmology, the IQ810, designed to
allow easier physician access to a variety of advanced laser energy delivery modes used to perform
Minimum Intensity Photocoagulation (MIP) procedures. The IQ810 platform also includes some new
delivery devices such as IQ Slit Lamp Adapter with Fiber Check and accessories such as the
SmartControl footswitch and remote control. For the dermatology market, we introduced the
VariLite, a dual wavelength laser in the fourth quarter of 2004 that
offers both high power 532 nm and 940 nm
wavelengths for added clinical versatility and convenience for the physician. In 2005, we
continued to expand our disposable EndoProbe product line with new designs in stepped probes,
intuitive probes and illuminating probes. In 2005, we also launched
the DioLite XP laser which is a high power 532 nm wavelength laser and
ScanLite XP scanner for dermatological applications. The DioLite XP laser offers increased power
to optimize clinical performance. The ScanLite XP scanner offers a large scan area. The
combination of high power and large scan size allows physicians to optimize treatments while
covering twice the treatment area in half the time. The characteristics of these new products
since 1997 are similar to those which have made our previous products successful, such as low cost
ownership, reliability and portability. We intend to continue our investment in research and
product innovation to improve the performance of our systems and broaden our product offerings. We
also intend to develop innovative technologies which can address the customer needs of the
ophthalmic and dermatology markets.
3. Develop New Market Opportunities Through Strategic Alliances, OEM Relationships and
Acquisitions. Based upon our core competencies, we intend to establish strategic alliances and/or
OEM relationships in order to bring new products to market which can help improve gross margins.
As an
-3-
example, in October 2002, we announced our collaboration with Bausch & Lomb to design and
manufacture a solid-state green light laser photocoagulator module called the Millennium Endolase
module. The Millennium Endolase module is designed to be a component of Bausch & Lombs ophthalmic
surgical suite product offering and is not designed to be sold as a stand-alone product. We intend
to pursue additional strategic alliances and OEM relationships in medical segments other than
ophthalmology and dermatology. Our targets will be companies that currently serve medical markets
in which our technology can be utilized. This would allow these companies to add therapeutic based
laser products to their product portfolios creating an opportunity to leverage their current
strengths in those markets. Some of these markets could include cardiovascular, urological and
dental.
In order to achieve the desired level of growth, we must explore opportunities to acquire
technologies or companies which strategically fit our current core competencies. We have an
excellent reputation, within the retinal segment of ophthalmology, as a company with innovative and
reliable technology combined with responsive customer service. Given the level of management experience
within the company and the size of the market opportunity, an acquisition within ophthalmology
would be a good fit strategically. See Managements Discussion and Analysis of Financial Condition
and Results of Operations Factors That May Affect Future Results We Depend on Collaborative
Relationships to Develop, Introduce and Market New Products, Product Enhancements and New
Applications.
Products
We utilize a systems approach to product design. Each system includes a console, which
generates the laser energy, and a number of interchangeable peripheral delivery devices, including
disposable delivery devices, for use in specific clinical applications. This approach allows our
customers to purchase a basic console system and add additional delivery devices as their needs
expand or as new applications develop. We believe that this systems approach also brings
economies-of-scale to our product development and manufacturing efforts because individual
applications do not require the design and manufacture of complete stand-alone products. Our
primary non-disposable products range in price from $2,000 to $60,000, and consist of laser
consoles and specialized delivery devices and our line of disposable
products with a list price of between $150 to $200 to end customers.
Consoles: Our laser consoles incorporate the economic and technical benefits of semiconductor
laser technology.
Infrared Photocoagulator Consoles. These OcuLight and IQ810 photocoagulator consoles used by
ophthalmologists are available in two infrared (810nm) output power ranges: the OcuLight SL
at 2 Watts and the IQ810 and OcuLight SLx at 3 Watts. Each console weighs 14 pounds, has
dimensions of 4H x 12W x 12D, and requires no
external air or water cooling. We believe that the smaller overall sizes, lower weights and
low power requirements to operate represent distinct advantages over competing products.
Visible (or Green) Photocoagulator Consoles. Our OcuLight OR, GL and OcuLight GLx
semiconductor-based photocoagulator consoles used in ophthalmology deliver visible (532nm)
laser light. The OcuLight GLx has increased power and delivery device capability. Our
visible laser light dermatology products, the DioLite XP and DioLite 532 are also based on
semiconductor-based technology. The OcuLight OR/GL/GLx/DioLite XP/DioLite consoles weigh 15
pounds, have dimensions of 6H x 12W x 12D, draw a maximum of 300 Watts of wall power and
require no external air or water cooling. In December 2002, we commenced shipment of the
Millennium Endolase module, which is sold exclusively to Bausch & Lomb for use in their
Millennium Microsurgical System. It integrates 532nm photocoagulator capability into Bausch
& Lombs array
-4-
of microsurgical capabilities for the vitrectomy procedure. The Millennium Endolase module
is compatible with the IRIDEX disposable EndoProbe handpieces and Laser Indirect
Ophthalmoscope.
Combination Infrared/Visible Photocoagulator Consoles. The OcuLight Symphony Laser Delivery
System, is used by ophthalmologists and consists of an OcuLight SLx infrared (810nm)
laser console, OcuLight GLx green (532 nm) laser console, multi-fiber slit lamp adapter,
slit lamp and a custom cart. The OcuLight Symphony Laser Delivery System combines the
clinical versatility and convenience of a 532 nm, 810 nm and large spot 810 nm into one
delivery device for retinal photocoagulation and glaucoma procedures. Our VariLite product which is used in
dermatology is a dual wavelength combination of 532nm and infrared 940nm. The VariLite
wavelength can be changed with just the flip of a single switch and can be used in
conjunction with the ScanLite as well as several different sized handpieces. We believe
that this product offers a unique value-added proposition and the efficiency of dual laser
wavelength delivery in a single product.
Specialized Delivery Devices: Our versatile family of consoles and delivery devices has been
designed to accommodate the addition of new capabilities with a minimal incremental investment.
Users of this product can add capabilities by simply purchasing new interchangeable delivery
devices and utilizing them with their existing console. We have developed both disposable and
nondisposable delivery devices and expect to continue to develop additional devices.
Ophthalmic Delivery Devices:
TruFocus Laser Indirect Ophthalmoscope (LIO). The indirect ophthalmoscope is designed to be
worn on the physicians head and to be used in procedures to treat peripheral retinal disorders,
particularly in infants or adults requiring treatment in the supine position. This product
can be used in both diagnosis and treatment procedures at the point-of-care.
Slit Lamp Adapter (SLA). These adapters allow the physician to utilize a standard slit lamp
in both diagnosis and treatment procedures. Doctors can install a slit lamp adapter in a
few minutes and convert standard diagnostic slit lamps into a therapeutic photocoagulator
delivery system. Slit lamp adapters are used in treatment procedures for both retinal
diseases and glaucoma. These devices are available in a wide variety of spot diameters. In
2003, we introduced a 50 micron spot slit lamp adapter, a reduction in the smallest spot
size diameter available on IRIDEX slit lamp adapters.
Operating Microscope Adapter. These adapters allow the physician to utilize a standard
operating microscope in both diagnosis and laser treatment procedures. These devices are
similar to slit lamp adapters, except that they are oriented horizontally and therefore can
be used to deliver retinal photocoagulation to a supine patient.
EndoProbe. The EndoProbe or laser probe is used for endophotocoagulation, a retinal
treatment procedure performed in the hospital operating room or surgery center during a
vitrectomy procedure. These sterile disposable probes are available in tapered, angled,
fluted, illuminating, stepped, endoocular and intuitive styles.
G-Probe. The G-Probe is used in procedures to treat medically and surgically uncontrolled
glaucoma, in many instances replacing cyclocryotherapy, or freezing of the eye. The
G-Probes non-invasive procedure takes approximately ten minutes, is done to an anesthetized
eye in the doctors office and results in less pain and fewer adverse side effects than
cyclocryotherapy. The G-Probe is a sterile disposable product.
-5-
DioPexy Probe. The DioPexy Probe is a hand-held instrument which is used in procedures to
treat retinal tears and breaks, noninvasively through the sclera, as an alternative method
of attaching the retina. Our DioPexy Probe results in increased precision, less pain and
less inflammation than traditional cryotherapy.
Dermatology Delivery Devices:
DioLite Handpiece. The DioLite Handpiece is a hand held instrument that is used in the
treatment of vascular and pigmented skin lesions. These devices are available in 200, 500,
700, 1000 and 1400 micron spot diameters.
VariLite Handpiece. The VariLite Handpiece is a handheld instrument used in the treatment
of vascular, pigmented cutaneous skin lesions and small area hair removal. Ergonomic
handpieces can be used with both the 532 nm and 940 nm wavelengths and are available in 0.7,
1.0, 1.4, 2.0 and 2.8 spot sizes.
ScanLite Scanner. The ScanLite XP and ScanLite are computer pattern generators with
integrated controls designed to enhance the capabilities of the DioLite XP and DioLite 532
laser systems. They allow rapid and uniform treatment of large-area vascular and pigmented
skin lesions including port wine stains, matted telangiectasia, and cafe au lait stains.
The following chart lists the eye disease procedures that can utilize our photocoagulator
systems, including the console and delivery devices that we offer for use in treating these
diseases. The selection of delivery device is often determined by the severity and location of the
disease. These diseases are treated either within the physicians office, clinic, or the operating
room.
Ophthalmology Treatments:
|
|
|
|
|
|
|
Condition |
|
Procedure |
|
Console |
|
Delivery Devices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age-related Macular
Degeneration
|
|
Retinal Photocoagulation
|
|
Infrared & Visible
|
|
Slit Lamp Adapter |
|
|
|
|
|
|
|
Diabetic Retinopathy |
|
|
|
|
|
|
|
|
|
|
|
|
|
Macular Edema
|
|
Grid Retinal Photocoagulation
|
|
Infrared & Visible
|
|
Slit Lamp Adapter &
Operating Microscope
Adapter, |
|
|
Focal Retinal
Photocoagulation
|
|
Visible
|
|
Slit Lamp Adapter |
|
|
|
|
|
|
|
Proliferative
|
|
Pan-Retinal Photocoagulation
Vitrectomy Procedure
|
|
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
|
|
Infrared & Visible
|
|
Slit Lamp Adapter |
|
|
|
|
|
|
|
Uncontrolled
|
|
Transscleral
Cyclophotocoagulation
|
|
Infrared
|
|
G-Probe* |
|
Retinal
Tears and Detachments
|
|
Retinopexy Retinal
Photocoagulation Vitrectomy Procedure
|
|
Infrared & Visible
|
|
Slit Lamp Adapter, Laser
Indirect Ophthalmoscope,
Operating Microscope
Adapter, EndoProbe* |
|
|
Transscleral Retinal
Photocoagulation
|
|
Infrared
|
|
DioPexy Probe |
|
|
|
|
|
|
|
Retinopathy of Prematurity
|
|
Retinal Photocoagulation
|
|
Infrared
|
|
Laser Indirect Ophthalmoscope |
|
|
|
|
|
|
|
Ocular Tumors
|
|
Retinal Photocoagulation
|
|
Infrared
|
|
Slit Lamp Adapter, Operating
Microscope Adapter, Laser
Indirect Ophthalmoscope |
Macular Holes
|
|
Vitrectomy Procedure
|
|
Visible
|
|
EndoProbe* |
|
|
|
* |
|
Disposable single use products |
The following chart lists the procedures for treating skin diseases that can utilize our dermatology laser systems.
These procedures are normally performed in a physicians office and are elective and private pay.
|
|
|
|
|
|
|
Dermatology Treatments: |
|
|
|
|
|
|
Condition
|
|
Procedure
|
|
Console
|
|
Delivery Devices |
Vascular Lesions
|
|
Selective Photothermolysis
|
|
Visible
|
|
DioLite Handpiece |
|
|
|
|
|
|
|
Pigmented Lesions
|
|
Selective Photothermolysis
|
|
Visible
|
|
DioLite Handpiece |
-6-
Research and Product Innovation
We have close working relationships with researchers, clinicians and practicing
physicians around the world who provide new ideas, test the feasibility of these new ideas and
assist us in validating new products and new applications before they are introduced.
Our product innovation (formerly known as product development) activities are performed by
a current team of 17 engineers with an average of 22 years of experience each in medical products, laser systems and
delivery devices. The core competencies of the team include: mechanical engineering, electrical
engineering, optics, software, firmware or delivery devices. The team is being transitioned with
a focus to introduce innovative products which satisfy the unmet and emerging needs of our
customers. Their approach is a rapid product development process which integrates all the
necessary disciplines of the company from product inception through customer acceptance. This
approach should allow for rapid and reliable new product innovations and a consistent pipeline of innovative
products for our customers.
Our research activities are performed internally by our research staff. From time to time, we
supplement our internal research staff by hiring consultants and/or universities with specialized
expertise. Research efforts are directed toward the development of new products and new
applications for our existing products, as well as the identification of markets which may include
clinical trials and may not be currently addressed by our products.
We are supporting pre-clinical and clinical studies to develop new photocoagulation
treatments and applications using Minimal Intensity Photocoagulation (MIP) protocols. MIP is a
laser treatment approach pioneered by IRIDEX which uses our OcuLight SLx infrared lasers to
maximize
-7-
preservation of sensitive retinal tissues while stimulating a therapeutic effect. We believe
that maintaining a position in MIP will allow us to make a substantial contribution in the
treatment of serious eye diseases such as age-related macular degeneration, diabetic retinopathy
and glaucoma.
The objectives of developing new photocoagluation treatments and 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 with regard to particular eye
afflictions are included in the following paragraphs.
Age-Related Macular Degeneration (AMD) Wet Form. AMD is a progressive disease that
damages the central vision and affects a persons ability to read, see faces, and drive.
About 50 million people worldwide have AMD and, of these, about 5 million have the more
severe wet form. Though the wet form of AMD constitutes about 10% of all AMD, it
accounts for about 80% of all severe vision loss associated with AMD. We are pursuing
several approaches to treat wet AMD at different stages. All of these approaches close new
blood vessels in the eyes macula caused by wet AMD with less damage than conventional laser
treatments. One approach is Transpupillary Thermotherapy (TTT). TTT is a MIP protocol that
uses a milder form of retinal photocoagulation to treat wet AMD while sparing the sensory
retina, as compared to conventional laser photocoagulation techniques. The protocol uses the
OcuLight SLx laser and Large Spot Slit Lamp Adapter to produce favorable therapeutic
responses with minimal side effects and preservation of vision in patients with occult
choroidal neovascularization (CNV) secondary to AMD. In October 2004, we announced that the
preliminary visual outcome data in the intent-to-treat evaluation of the Company supported
TTT4CNV clinical trial showed that TTT, as applied in this trial, while trending favorably,
did not result in a statistically significant beneficial effect relative to an untreated control group. Since that time, results of subgroup
analysis have demonstrated a statistically significant benefit in a subgroup of patients
with baseline visual acuity of 20/100 or worse. 22% of treated eyes improved vision by one
or more lines compared with none of the eyes in the untreated control group. Furthermore,
at 18 months, there was a 2 line benefit in preserving vision in this subgroup when compared
to sham treated eyes. Both of these trends were statistically
significant. A paper is expected to be published during 2006.
Age-Related Macular
Degeneration Dry Form. About 90% of AMD is the dry form. Our approach
to the treatment of dry AMD is to preserve or improve vision by following a MIP protocol
that uses the OcuLight infrared laser to cause resorption of dry AMD deposits (drusen) which
have accumulated in the macula. We are supporting a multi-center clinical trial which is
testing a treatment of eyes with dry age-related macular degeneration (PTAMD trial). At the
American Academy of Ophthalmology meeting in October 2005 Dr. Thomas Friberg presented initial
results from the PTAMD Bilateral Study. In the PTAMD Bilateral Study an eligible patient
must have had dry AMD (at least 5 drusen) in both eyes and have visual acuity between 20/20
and 20/63. One eye was randomized to sub-threshold (MIP) treatment with the 810 nm diode
laser and the other eye observed. 639 patients or 1278 eyes were enrolled in the study and
followed for up to 5 years. The PTAMD tried to answer two
questions: First, was there a
prophylactic benefit from a single subthreshold laser treatment in slowing the progression
of AMD from dry (drusen) to wet (CNV)? Secondly, was there a therapeutic benefit from a
single subthreshold laser treatment in drusen reduction and vision in these eyes? In
answering these two questions: (1) the initial study results showed no benefit in
prophylaxis. There was no indication of a beneficial prophylactic treatment effect on CNV
occurrence; and there was no trend toward a beneficial effect (P=0.63); (2) the study did
show a therapeutic benefit in drusen reduction and vision in treated eyes. Drusen
significantly reduced after a single sub-threshold infrared laser treatment. At 12 months
following treatment 44.5% of treated
-8-
eyes had a significant reduction in drusen compared to
4.5% of observed eyes (P<0.0001). In all
eyes enrolled visual acuity changes showed some indication of a beneficial effect of
treatment at 18 months and onward. At month 24: Treated eyes showed a 1.5 letter
beneficial difference in VA compared to the observed eye (P=0.04). Treated eyes also had a
higher percentage (12% vs. 8%) showing a 2 or more line gain. In a sub-group of eyes with
20/30 or worse baseline VA the beneficial effect treatment was more pronounced. At month
24: Treated eyes showed a 4.0 letter (1 line) beneficial difference in VA with treated eyes
improving 2.9 letters and observed eyes losing 1.1 letters (P=0.0034); Treated eyes had a
higher percentage (31% vs. 19%) showing a 2 or more line gain; Treated eyes also had a lower
percentage (13% vs. 22%) showing a 2 or more line loss. We expect
additional reports to be released in 2006.
Glaucoma. Preliminary studies are underway to evaluate the use of the G-Probe as a primary
surgical treatment modality for glaucoma in various parts of the world.
Diabetic Retinopathy. Other MIP studies are underway to investigate the treatment of
diabetic retinopathy using the MicroPulse operating mode available in our OcuLight SLx
product with the objective of causing regression of the disease with less loss of vision
than conventional laser therapy.
Ocular Tumors. Clinical studies have reported successful treatment of ocular tumors using
OcuLight infrared lasers using the TTT approach.
All of these clinical projects should be considered in the research area and they may or may not
result in additional commercial opportunities. See Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors That May Affect Future Results We are Dependent on
the Successful Outcome of Clinical Trials of Our Products and New Applications Using Our Products.
Customers and Customer Support
Our products are currently sold to ophthalmologists, particularly those specializing in
retina, glaucoma and pediatrics, dermatologists and plastic surgeons. Other customers include
research and teaching hospitals, government installations, surgi-centers and hospitals. No
customer or distributor accounted for 10% or more of total sales in any of 2005, 2004 or 2003. See
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
We are continuing our efforts to broaden our customer base through the development of new
products and new applications of our existing products for use by ophthalmologists and
dermatologists. We currently estimate that there are approximately 15,000-20,000 ophthalmologists in the
United States and 40,000-60,000 internationally who are each potential customers. Additionally, we
estimate that there are approximately 4,900 and 18,000 hospitals in the United States and
internationally, respectively, as well as approximately 4,000 ambulatory surgical centers in the
United States which potentially represent multiple unit sales. We believe there are approximately 10,000
dermatologists and approximately 9,000 plastic surgeons in the United States who are potential
customers. Because independent ophthalmologists and dermatologists frequently practice at their
own offices as well as through affiliation with hospitals or other medical centers, each
independent ophthalmologist, dermatologist, plastic surgeon, office, hospital and medical center is
a potential customer for our products. We are seeking to broaden our customer base by developing
new products directed at addressing the needs of ophthalmologists and dermatologists.
We seek to provide superior customer support and service and therefore created our Global
Customer Care Group with the responsibility for our customer requests and product repairs, which
has resulted in a significant improvement in our response times to customer support and service
issues. We believe that our superior customer service and technical support distinguish our
product offerings from those of our
-9-
competitors. Our customer support representatives assist
customers with orders, warranty returns and other
administrative functions. Our technical support engineers provide customers with answers to
technical and product-related questions. We maintain an around-the-clock telephone service line
to service our customers. If a problem with a product cannot be diagnosed and resolved by
telephone, a replacement unit is shipped overnight to any domestic customer and by the most rapid
delivery means available to any international customer, and the problem unit is returned to us.
The small size and rugged design of our products allows for economical shipment and quick response
to customers almost anywhere in the world.
Sales and Marketing
We market our products in the United States predominantly through our direct sales force. Our
direct sales force of 18 employees are engaged in sales efforts within the United States. Our
sales and marketing organization is based at our corporate headquarters in Mountain View,
California with area sales managers located throughout the United States.
International
product sales represented 38.6%, 39.4% and 36.7% of our sales in 2005, 2004 and
2003, respectively. We believe that our international sales will continue to represent a
significant portion of our revenues for the foreseeable future. Our international sales are made
principally to customers in Europe, Asia, Pacific Rim, Middle East and Latin America. Our products are sold
internationally through our 77 independent distributors into 107 countries. International sales
are administered through our corporate headquarters in Mountain View, California. Our distribution
agreements with our international distributors are generally exclusive and typically can be
terminated by either party without cause on 90 days notice. International sales may be adversely
affected by the imposition of governmental controls, currency fluctuations, restrictions on export
technology, political instability, trade restrictions, changes in tariffs and the economic
condition in each country in which we sell our products. See Item 7, Managements Discussion and
Analysis of Financial Condition and Results of OperationsFactors That May Affect Future ResultsWe
Depend on International Sales.
To support our sales process, we conduct marketing programs which include direct mail, trade
shows, public relations, market research, and advertising in trade and academic journals and
newsletters. We annually participate in approximately 160 trade shows internationally. These meetings allow us to
present our products to existing and prospective buyers. One of our new marketing programs
includes a VIP (Valued IRIDEX Partner) program which allows customers to access additional IRIDEX
products through a contractual agreement on the purchase of disposable laser probes. In 2005,
recurring revenues (including sales of EndoProbes and service
revenue) were 36% of the overall business up from 33% in 2004. During the past two
years, we have introduced many different types of EndoProbes into the market, including our new
stepped, intuitive and illuminating probes.
We believe that educating patients and physicians at an early stage about the long-term health
benefits and cost-effectiveness of diagnosis and treatment of diseases that cause blindness is
critical to market acceptance of our ophthalmic products. The trend toward management of health
care costs in the United States should lead to increased awareness of and early intervention of
disease management with cost-effective treatments and, as a result, will increase demand for our
ophthalmic products. Our marketing efforts are made to promote the education of our customers on these
topics.
Through marketing, we collaborate with our customers to enhance our ability to identify new
applications for our products, validate new procedures using our products and identify new product
applications which help meet their unmet needs. Customers include key opinion leaders who are
often the heads of the departments in which they work or professors at universities. We believe
that these luminaries in the field of ophthalmology and dermatology are key to the successful
introduction of new products and the
-10-
subsequent acceptance of these new products by the general market. Acceptance of our products
by these early adopters is key to our strategy in the validation and commercialization of our new
products.
Operations
The manufacture of our infrared and visible light photocoagulators and the related delivery
devices is a highly complex and precise process. Completed systems must pass quality control and
reliability tests before shipment. Our manufacturing activities consist of specifying, sourcing,
assembling and testing of components and certain subassemblies for assembly into our final product.
As of December 31, 2005, we had a total of 51 employees engaged in manufacturing activities.
The medical devices manufactured by us are subject to extensive regulation by numerous
governmental authorities, including federal, state, and foreign governmental agencies. The
principal regulator in the United States is the Food and Drug Administration (the FDA). In April
1998, we received certification for ISO 9001/EN 46001. ISO 9001/EN 46001 is a documented
international quality system standard that documents compliance to the European Medical Device
Directive. In February 2004, we were certified to ISO 13485:2003 which replaced ISO 9001/EN46001
as the international standard for quality systems as applied to medical devices.
We rely on third parties to manufacture substantially all of the components used in our
products, although we assemble critical subassemblies and the final product at our facility in
Mountain View, California. Some of these suppliers and manufacturers are sole source. We have some long-term or
volume purchase agreements with our suppliers and currently purchase most components on a purchase
order basis. These components may not be available in the quantities required, on reasonable
terms, or at all. Financial or other difficulties faced by our suppliers or significant changes in
demand for these components or materials could limit their availability. Any failures by such
third parties to adequately perform may delay the submission of products for regulatory approval,
impair our ability to deliver products on a timely basis or otherwise impair our competitive
position. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
OperationsFactors That May Affect Future ResultsWe Face Risks of Manufacturing and We Depend on
Key Manufacturers and Suppliers.
International regulatory bodies often establish varying product standards, packaging
requirements, labeling requirements, tariff regulations, duties and tax requirements. As a result
of our sales in Europe, we are required to have all products CE marked, an international symbol
affixed to all products demonstrating compliance to the European Medical Device Directive and all
applicable standards. In July 1998, we received CE mark under Annex II guidelines, the most
stringent path to CE certification. With Annex II CE certification, we have demonstrated our
ability to both understand and comply with all applicable European standards. This allows us to CE
mark any product upon our internal verification of compliance to all applicable European standards.
Currently, all released products are CE marked. Continued certification is based on successful
review of the process by our European Registrar during its annual audit. Any loss of certification
would have a material adverse effect on our business, results of operations and financial
condition. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations Factors That May Affect Future Results-We Are Subject to Government Regulation.
Competition
Competition in the market for laser systems and delivery devices used for ophthalmic and
dermatology treatment procedures is intense and is expected to increase. This market is also
characterized by rapid technological innovation and change, and our products could become obsolete
as a result of future innovations. Our competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use, scalability,
durability and cost. In addition to other companies that manufacture photocoagulators and
dermatological devices, we compete with pharmaceutical solutions, other technologies and other
surgical techniques available in both the dermatologic and ophthalmic markets. Our principal
competitors in ophthalmology are Lumenis Ltd., Nidek, Inc., Carl Zeiss Meditec AG, Alcon Inc. and
Synergetics. All of these companies currently offer a competitive, semiconductor-based laser
system for ophthalmology. Also within ophthalmology pharmaceutical alternative treatments for AMD
such as Visudyne (Novartis), Macugen (Eyetech) and Lucentis (Genentech) compete rigorously with
traditional laser procedures. Our principal competitors in dermatology are Palomar Technologies,
Candela Corporation,
-11-
Syneron, Lumenis Ltd., and Laserscope. Some competitors have substantially greater financial,
engineering, product development, manufacturing, marketing and technical resources than we do.
Some companies also have greater name recognition than us and long-standing customer relationships.
In addition, other medical companies, academic and research institutions, or others, may develop
new technologies or therapies, including medical devices, surgical procedures or pharmacological
treatments and obtain regulatory approval for products utilizing such techniques that are more
effective in treating the conditions targeted by us, or are less expensive than our current or
future products. Our technologies and products could be rendered obsolete by such developments.
Any such developments could have a material adverse effect on our business, financial condition and
results of operations. See Item 7, Managements Discussion and Analysis of Financial Condition
and Results of OperationsFactors That May Affect Future ResultsOur Market is Competitive.
Patents and Proprietary Rights
Our success and ability to compete is dependent in part upon our proprietary information. We
rely on a combination of patents, trade secrets, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect our intellectual property rights.
We file patent applications to protect technology, inventions and improvements that are significant
to the development of our business. We have been issued 15 United States patents and five foreign
patents on the technologies related to our products and processes, which have expiration dates
ranging from 2009 to 2023. We have approximately five pending patent applications in the United
States and five foreign pending patent applications that have been filed. Our patent applications
may not be approved.
In addition to patents, we rely on trade secrets and proprietary know-how which we seek to
protect, in part, through proprietary information agreements with employees, consultants and other
parties. Our proprietary information agreements with our employees and consultants contain
provisions requiring such individuals to assign to us, without additional consideration, any
inventions conceived or reduced to practice by them while employed or retained by us, subject to
customary exceptions See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Factors That May Affect Future Results We Rely on Patents and Proprietary
Rights.
Government Regulation
The medical devices to be marketed and manufactured by us are subject to extensive regulation
by numerous governmental authorities, including federal, state, and foreign governmental agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated
thereunder (the FDA Act), the FDA serves as the principal federal agency within the United States
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, warning letters, fines, injunctions,
civil penalties, recall or seizures of products, total or partial suspension of production, failure
of the government to grant premarket clearance or approval for devices, withdrawal of marketing
approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement
or refund of the cost of any device manufactured or distributed by us.
In the United States, medical devices are classified into one of three classes (Class I, II or
III), on the basis of the controls deemed necessary by the FDA to reasonably assure the safety and
effectiveness of such products. Under FDA regulations, Class I devices are subject to general
controls (for example, labeling, premarket notification and adherence to Quality System Regulations
(QSRs) requirements). Class II
-12-
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.
Unless otherwise exempt, before a new device can be introduced into the market, the
manufacturer must 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 devices safety and efficacy
be performed.
Commercial distribution of a device for which a 510(k) notification is required can begin only
after the FDA issues an order finding the device to be substantially equivalent to a previously
cleared 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 three to six months from the date of submission to grant a 510(k) clearance, but it
may take longer.
A not substantially equivalent determination, or a request for additional information, could
delay the market introduction of new products that fall into this category and could have a
materially adverse effect on our business, financial condition and results of operations. For any
of our products that are cleared through the 510(k) process, such as our IQ810 system,
modifications or enhancements that could significantly affect the safety or efficacy of the device
or that constitute a major change to the intended use of the device will require new 510(k)
submissions.
A PMA application must be submitted if a proposed device is not substantially equivalent to a
legally marketed Class I or Class II device, or if it is a Class III device for which the FDA has
called for PMAs. A PMA application must be supported by valid scientific evidence which typically
includes extensive data, including human clinical trial data, to demonstrate the safety and
effectiveness of the device. The PMA application must also contain the results of all relevant
bench tests, laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must also contain 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 as a result of 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 manufacturers facilities to
ensure that the facilities are in compliance with applicable QSR requirements.
If the FDAs 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
-13-
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, 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.
We have obtained 510(k) clearance for all of our marketed products. We have also modified
aspects of our products since receiving regulatory clearance, but we believe that new 510(k)
clearances are not required for these modifications. After a device receives 510(k) clearance or a
PMA, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, will require a new clearance or approval. The FDA
requires each manufacturer to make this determination initially, but the FDA can review any such
decision and can disagree with a manufacturers determination. If the FDA disagrees with our
determination not to seek a new 510(k) clearance or PMA, the FDA may retroactively require us to
seek 510(k) clearance or premarket approval. The FDA could also require us to cease marketing and
distribution and/or recall the modified device until 510(k) clearance or PMA approval is obtained.
Also, in these circumstances, we may be subject to significant regulating fines or penalties.
Any products manufactured or distributed by us pursuant to FDA clearances or approvals are
subject to pervasive and continuing regulation by the FDA, including record keeping requirements
and reporting of adverse experiences with the use of the device. Device manufacturers are required
to register their establishments and list their devices with the FDA and certain state agencies,
and are subject to periodic inspections by the FDA and certain state agencies. The FDA Act
requires devices to be manufactured to comply with applicable QSR regulations which impose certain
procedural and documentation requirements upon us with respect to design, development,
manufacturing and quality assurance activities. We are subject to unannounced inspections by the
FDA and the Food and Drug Branch of the California Department of Health Services, or CDHS, to
determine our compliance with the QSR and other regulations, and these inspections may include the
manufacturing facilities of our subcontractors.
Labeling and promotion activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting
marketing of products for unapproved uses. We and our products are also subject to a variety of
state laws and regulations in those states or localities where our products are or will be
marketed. Any applicable state or local regulations may hinder our ability to market our products
in those states or localities. Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We
may be required to incur significant costs to comply with such laws and regulations now or in the
future. Such laws or regulations may have a material adverse effect upon our ability to do
business.
-14-
Exports of our products are regulated by the FDA and are covered by the Export Amendment of
1996, which greatly expanded the export of approved and unapproved United States medical devices.
However, some foreign countries require manufacturers to provide an FDA certificate for products
for export (CPE) which requires the device manufacturer to certify to the FDA that the product
has been granted premarket clearance in the United States and that the manufacturing facilities
appeared to be in compliance with QSR at the time of the last QSR inspection. The FDA will refuse
to issue a CPE if significant outstanding QSR violations exist.
We are also regulated under the Radiation Control for Health and Safety Act, which requires
laser products to comply with performance standards, including design and operation requirements,
and manufacturers to certify in product labeling and in reports to the FDA that their products
comply with all such standards. The law also requires laser manufacturers to file new product and
annual reports, maintain manufacturing, testing and sales records and report product defects.
Various warning labels must be affixed and certain protective devices installed, depending on the
class of the product.
The introduction of our products in foreign markets will also subject us to foreign regulatory
clearances which may impose substantial additional 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. The necessary approvals or clearances may
not be granted on a timely basis, if at all. Delays in receipt of, or a failure to receive, such
approvals or clearances, or the loss of any previously received approvals or clearances, could have
a material adverse effect on our business, financial condition and results of operations.
Changes in existing requirements or adoption of new requirements or policies by the FDA or
other foreign and domestic regulatory authorities could adversely affect our ability to comply with
regulatory requirements. Failure to comply with regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations. We may be required
to incur significant costs to comply with laws and regulations in the future. These laws or
regulations may have a material adverse effect upon our business, financial condition or results of
operations.
Reimbursement
The cost of a significant portion of medical care in the United States is funded by government
programs, health maintenance organizations and private insurance plans. Our ophthalmology products
are typically purchased by doctors, clinics, hospitals and other users, which bill various
third-party payers, such as government programs and private insurance plans, for the health care
services provided to their patients. Government imposed limits on reimbursement of hospitals and
other health care providers have significantly impacted the spending budgets of doctors, clinics
and hospitals to acquire new equipment, including our products. Under certain government insurance
programs, a health care provider is reimbursed for a fixed sum for services rendered in treating a
patient, regardless of the actual charge for such treatment. The Center for Medicare and Medicaid
Services (CMS) reimburses hospitals on a prospectively-determined fixed amount for the costs
associated with an in-patient hospitalization based on the patients discharge diagnosis. CMS
reimburses physicians a prospectively-determined fixed amount based on the procedure performed,
regardless of the actual costs incurred by the hospital or physician in furnishing the care and
regardless of the specific devices used in that procedure.
Reimbursement issues have affected sales of our ophthalmic products
to a greater extent than sales of our dermatologic products because
dermatology procedures, in general, are not covered under most
insurance programs and the cost of these procedures are paid for by
the patient.
-15-
Private third-party reimbursement plans are also developing increasingly sophisticated methods
of controlling health-care costs by imposing limitations on reimbursable procedures and the
exploration of more cost-effective methods of delivering health care. In general, these government
and private measures have caused health care providers, including our customers, to be more
selective in the purchase of medical products. In addition, changes in government regulation or in
private third-party payers policies may limit or eliminate reimbursement for procedures employing
our products, which could have a material adverse effect on our business, results of operations and
financial condition. See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations Factors That May Affect Future Results We Depend on Third Party Coverage
and Reimbursement Policies.
Doctors, clinics, hospitals and other users of our products may not obtain adequate
reimbursement for use of our products from third-party payers. While we believe that the laser
procedures using our products have generally been reimbursed, payers may deny coverage and
reimbursement for our products if they determine that the device was not reasonable and necessary
for the purpose used, was investigational or was not cost-effective.
Product Liability and Insurance
We may be subject to product liability claims in the future. Our products are highly complex
and are used to treat extremely delicate eye tissue and skin conditions on and near a patients
face. Our products are often used in situations where there is a high risk of serious injury or
adverse side effects. In addition, although we recommend that our disposable products only be used
once and prominently label these disposables, we believe that certain customers may nevertheless
reuse these disposable products. If a disposable product is not adequately sterilized by the
customer between such uses, a patient could suffer serious consequences, possibly resulting in a
suit against us for damages. Accordingly, the manufacture and sale of medical products entails
significant risk of product liability claims. Although we currently maintain and intend to continue the Companys product liability insurance,
adequate insurance may not be available on acceptable terms, if at all and may not provide adequate
coverage against potential liabilities. Such insurance is expensive and in the
future may not be available on acceptable terms, if at all. A successful claim brought against us
in excess of our insurance coverage could have a material adverse effect on our business, results
of operations and financial condition. To date, we have not experienced any product liability
claims which would result in payments in excess of our policy limits.
Backlog
We generally do not maintain a high level of backlog. As a result, we do not believe that our
backlog at any particular time is indicative of future sales levels.
Employees
At December 31, 2005, we had a total of 114 full-time employees, including 51 in operations,
31 in sales and marketing, 17 in research and product innovation and 15 in finance and
administration. We also employ, from time to time, a number of temporary and part-time employees
as well as consultants on a contract basis. At December 31, 2005, we employed 2 such persons. We
intend to hire additional personnel during the next twelve months primarily in the direct sales and
production areas. Our future success will depend in part on our ability to attract, train, retain
and motivate highly qualified employees, who are in great demand. We may not be successful in
attracting and retaining such personnel. Our employees are not represented by a collective
bargaining organization, and we have never experienced a work stoppage or strike. We consider our
employee relations to be good.
-16-
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are available, free of charge, on our website at
www.iridex.com, as soon as
reasonably practicable after such reports are electronically filed with the Securities and Exchange
Commission, however, the information on, or that can be accessed through, our website is not part
of this report.
Item 2. Properties
Our operating facilities are located in 37,000 square feet of space in Mountain View,
California. This facility is being substantially utilized for all of our manufacturing and
research and development efforts and serves as our headquarter offices. This facility is utilized
for both our ophthalmology medical device segment and our dermatology medical device segment. We
lease these facilities and in September 2003, we entered into a lease amendment for our facility in
Mountain View. The original lease term of this facility, which ended in February 2004, was amended
and extended until February 2009. The lease was also amended to grant us an option to renew this
lease for an additional five year period beginning 2009 and continuing until 2014 at a base monthly
rental amount to be negotiated at the time of the renewal.
Management believes that our facility has capacity adequate for our current needs and that
suitable additional space or alternative space will be available as needed in the future on
commercially reasonable terms.
Item 3. Legal Proceedings
In October 2005, the Company filed a suit against Synergetics, USA, Inc. for
infringement of a patent. The Company seeks injunctive relief, monetary damages, treble damages, cost and
attorneys fees. Synergetics answered the Companys complaint in November 2005 and denied liability for
patent infringement, filing counterclaims seeking a declaratory
judgment that it did not infringe the Companys patent. Synergetics also brought three additional counterclaims for false advertising, commercial
disparagement, trade libel, injurious falsehood, unfair competition, disparagement of property, slander of
goods and defamation, under state and federal law, based upon allegations that the Company had raised
safety issues involving Synergetics product with the Food and Drug Administration and the public.
Synergetics seeks monetary damages, costs and attorneys fees. Our response to these counterclaims was a
denial of any wrongdoing and a reference to the expiration of the
statute of limitations on those claims. Management believes that liabilities resulting from such proceedings, or claims which are pending or known
to be threatened will not have a material adverse effect on the Companys
financial position or results of operations. While we believe its
not material to the companys operations, the company may incur
significant dedication of management resources and legal costs in
connection with this lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-17-
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Market Information for Common Equity
Our common stock is quoted on the NASDAQ National Market under the symbol IRIX since
our initial public offering on February 15, 1996. The following table sets forth for the periods
indicated the high and low sales prices for our common stock, as reported on the NASDAQ National
Market.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Fiscal 2006 |
|
|
|
|
|
|
|
|
First
Quarter (through March 23, 2006) |
|
$ |
11.49 |
|
|
$ |
7.98 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
6.19 |
|
|
$ |
4.21 |
|
Second Quarter |
|
|
6.53 |
|
|
|
5.07 |
|
Third Quarter |
|
|
8.80 |
|
|
|
6.16 |
|
Fourth Quarter |
|
|
8.93 |
|
|
|
6.29 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
9.17 |
|
|
$ |
5.09 |
|
Second Quarter |
|
|
9.15 |
|
|
|
6.08 |
|
Third Quarter |
|
|
7.05 |
|
|
|
5.82 |
|
Fourth Quarter |
|
|
7.19 |
|
|
|
3.80 |
|
Fiscal 2005
On
March 23, 2006, the closing price on the NASDAQ National Market for our common stock was
$10.94 per share. As of March 23, 2006, there were approximately
73 holders of record (not in
street name) of our common stock. Because many of our shares of common stock are held by brokers
and other institutions on behalf of our stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
Dividend Policy
We have never paid cash dividends on our common stock. We currently intend to retain any
earnings for use in our business and do not anticipate paying cash dividends in the foreseeable
future. In addition, the payment of cash dividends to our stockholders is currently prohibited by
our bank line of credit. See Note 4 of Notes to Consolidated Financial Statements.
-18-
Securities Authorized for Issuance Under Equity Compensation Plans
As
of December 31, 2005, we had three equity compensation plans.
These plans are the 2005
Employee Stock Purchase Plan, 1995 Director Option Plan and 1998 Stock Option Plan, all of which
have been approved by our stockholders. The following table summarizes our equity compensation
plans as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for future |
|
|
|
Number of securities to |
|
|
Weighted-average exercise |
|
|
issuance under equity |
|
|
|
be issued upon exercise |
|
|
price of outstanding |
|
|
compensation plans |
|
|
|
of outstanding options, |
|
|
options, warrants and |
|
|
(excluding securities |
|
Plan category |
|
warrants and rights |
|
|
rights |
|
|
reflected in column (a)) |
|
Equity compensation
plans approved by
security holders |
|
|
1,894,899(1) |
|
|
$ |
5.50 |
|
|
|
353,338(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved by security holders
|
|
|
259,104(3) |
|
|
|
6.07 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,154,003 |
|
|
$ |
5.56 |
|
|
|
353,338 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 1,382,935 options to purchase shares outstanding under the 1998 Stock Plan,
101,250 options to purchase shares outstanding under the 1995 Director Option Plan and
410,714, options to purchase shares outstanding under the Amended and Restated 1989
Incentive Stock Plan. |
(2) |
|
Includes 295,516 options available for future issuance under the 1998 Stock Plan and
57,822 shares issuable under the 2005 Employee Stock Purchase Plan. |
(3) |
|
Consists of two items. The first is a Stand-Alone Option granted to Barry G.
Caldwell on July 5, 2005, entitling Mr. Caldwell to purchase up to 234, 104 shares of the
Companys common stock at an exercise price of $6.07 per share, issued as a stand-alone
option, outside of the Companys existing stock plans and as a material inducement to Mr.
Caldwell accepting employment with the Company. The shares covered by the Stand-Alone
Option vest over a four (4) year period, with 1/4th of the total number of
shares subject to the Stand-Alone Option vesting on July 5, 2006 and 1/48th of
the total number of shares subject to the Stand-Alone Option vesting each full month
thereafter, provided that Mr. Caldwell continues to be a service provider to the Company
on each such date. |
|
|
|
The second item is a warrant, issued in conjunction with the employment of the Companys
Chief Executive Officer, in consideration of services performed under a recruiting
contract, to purchase 25,000 shares of the Companys common stock at an exercise price of
$6.07 per share. The warrant is exercisable at any time and expires on July 5, 2008. |
-19-
Item 6. Selected Financial Data
The following selected consolidated financial data as of December 31, 2005 and January 1,
2005, and for the years ended December 31, 2005, January 1, 2005 and January 3, 2004, has been
derived from, and are qualified by reference to, our audited consolidated financial statements
included herein. The selected consolidated statement of operations data for the years ended
December 28, 2002 and December 29, 2001 and the consolidated balance sheet data as of January 3,
2004, December 28, 2002 and December 29, 2001 has been derived from our audited financial
statements not included herein. These historical results are not necessarily indicative of the
results of operations to be expected for any future period.
The data set forth below (in thousands, except per share data) are qualified by reference to,
and should be read in conjunction with Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our consolidated financial statements, related financial
statement notes and other financial information included in Item 8, Financial Statements and
Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Fiscal Year |
|
|
Fiscal Year |
|
|
Fiscal Year |
|
|
Fiscal Year |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
37,029 |
|
|
$ |
32,810 |
|
|
$ |
31,699 |
|
|
$ |
30,634 |
|
|
$ |
27,275 |
|
Cost of sales |
|
|
18,854 |
|
|
|
17,922 |
|
|
|
17,628 |
|
|
|
17,046 |
|
|
|
14,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,175 |
|
|
|
14,888 |
|
|
|
14,071 |
|
|
|
13,588 |
|
|
|
13,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,195 |
|
|
|
4,509 |
|
|
|
4,032 |
|
|
|
4,315 |
|
|
|
4,808 |
|
Selling, general and administrative |
|
|
12,171 |
|
|
|
11,455 |
|
|
|
10,087 |
|
|
|
9,454 |
|
|
|
10,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
16,366 |
|
|
|
15,964 |
|
|
|
14,119 |
|
|
|
13,769 |
|
|
|
15,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,809 |
|
|
|
(1,076 |
) |
|
|
(48 |
) |
|
|
(181 |
) |
|
|
(1,989 |
) |
Interest and other income, net |
|
|
528 |
|
|
|
319 |
|
|
|
212 |
|
|
|
122 |
|
|
|
426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,337 |
|
|
|
(757 |
) |
|
|
164 |
|
|
|
(59 |
) |
|
|
(1,563 |
) |
Benefit from (provision for) income taxes |
|
|
(666 |
) |
|
|
355 |
|
|
|
207 |
|
|
|
209 |
|
|
|
962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
1,671 |
|
|
|
(402 |
) |
|
|
371 |
|
|
|
150 |
|
|
|
(601 |
) |
Income (loss) from operations of
discontinued Laser Research segment (net
of applicable income tax benefit
(provision) of $0, $0, $0, $0 and $124
respectively) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(204 |
) |
Loss on disposal of Laser Research segment
(net of applicable income tax benefit of
$0, $0, $0, $0 and $315 respectively) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
$ |
371 |
|
|
$ |
150 |
|
|
$ |
(1,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
(0.09 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.21 |
|
|
$ |
( 0.06 |
) |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
(0.09 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
$ |
0.21 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income (loss) per
common share basic calculations |
|
|
7,405 |
|
|
|
7,200 |
|
|
|
6,933 |
|
|
|
6,870 |
|
|
|
6,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income (loss) per
common share diluted calculations |
|
|
7,880 |
|
|
|
7,200 |
|
|
|
7,072 |
|
|
|
6,928 |
|
|
|
6,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
January 1, |
|
January 3, |
|
December 28, |
|
December 29, |
|
|
2005 |
|
2005 |
|
2004 |
|
2002 |
|
2001 |
Consolidated Balance
Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents
and available-for-sale
securities |
|
$ |
21,434 |
|
|
$ |
18,028 |
|
|
$ |
16,292 |
|
|
$ |
11,542 |
|
|
$ |
9,102 |
|
Working capital |
|
|
32,330 |
|
|
|
25,342 |
|
|
|
28,462 |
|
|
|
28,072 |
|
|
|
26,374 |
|
Total assets |
|
|
41,104 |
|
|
|
39,093 |
|
|
|
35,839 |
|
|
|
34,272 |
|
|
|
33,788 |
|
Total stockholders equity |
|
|
34,517 |
|
|
|
31,783 |
|
|
|
30,834 |
|
|
|
30,198 |
|
|
|
29,833 |
|
-21-
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
IRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems and
delivery devices used to treat eye diseases in ophthalmology and skin conditions in dermatology
(aesthetics). Our products are sold in the United States predominantly through a direct sales
force and internationally through 77 independent distributors into 107 countries. Total product
sales in 2005, 2004, and 2003 were $37.0 million, $32.8 million, and $31.7 million respectively.
Our revenues arise primarily from the sale of our IRIS Medical OcuLight Systems, IQ810 lasers,
VariLite, DioLite 532 systems, delivery devices, disposables and revenues from service and support
activities. Our current family of OcuLight systems includes the IRIS Medical OcuLight Symphony,
OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems as well as
the IQ810 laser. We also produce the Millennium Endolase module which is sold exclusively to
Bausch & Lomb and incorporated into their Millennium Microsurgical System. We believe that our
future growth in revenue will be based upon the successful implementation of our strategy in these
areas: 1) leveraging our core business and increasing recurring
revenues, 2) broadening our product
lines through product innovation, and 3) developing new market opportunities through strategic
alliances, OEM relationships and acquisitions.
Our business includes a recurring revenue component which includes the sale of our disposable
single use laser probes, EndoProbes, combined with the repair, servicing and extended warranty
protection for our laser systems. In 2005, recurring revenues were 36% of the overall business
up from 33% in 2004. With our new sales and marketing programs, combined with having
sold more than 7,775 IRIDEX laser systems worldwide, we believe that there is an opportunity to
significantly increase our recurring revenues over the next several years. Our new sales programs
include an increase in the number of our domestic area sales managers from 6 to 10 focused on the
entire ophthalmic product offering and their incentive plan is more focused on the recurring
revenue opportunity. Our new marketing programs include a VIP (Valued
IRIDEX Partner) program which allows customers to access additional IRIDEX products through a contractual agreement on the
purchase of disposable laser probes. During the past two years, we have introduced many different types of
EndoProbes into the market, including our new stepped, intuitive and illuminating probes.
Sales to international distributors are made on open credit terms or letters of credit.
Sales of our products internationally currently are denominated in United States dollars and,
accordingly, are subject to risks associated with international monetary conditions and currency
fluctuations. In general, strengthening of the U.S. dollar relative to a foreign currency
increases the cost of our product to our international customers. Other risks that international sales are
subject to include shipping delays, generally longer receivable
collection periods, changes in
applicable regulatory policies, domestic and foreign tax policies, trade restrictions, duties and
tariffs and economic and political instability. Future currency fluctuations or other factors
discussed above may have a material adverse effect on our business, financial condition or results
of operation. See Factors That May Affect Future ResultsWe Depend on International Sales for a
Significant Portion of Our Operating Results.
Cost of sales consists primarily of the cost of purchasing components and sub-systems,
assembling, packaging, shipping and testing components at our facility, and the direct labor and
associated overhead. Research and development expenses consist primarily of personnel costs,
materials and research support provided to clinicians at medical institutions developing new
applications which utilize our products. Research and development costs have been expensed as
incurred. Sales, general and administrative expenses consist primarily of costs of personnel,
sales commissions, travel expenses, advertising and promotional expenses, facilities, legal and
accounting, insurance and other expenses which are not allocated to other departments.
Results of Operations
The following table sets forth certain operating data as a percentage of sales for the periods
indicated:
-22-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
January 1, |
|
January 3, |
|
|
2005 |
|
2005 |
|
2004 |
Sales |
|
|
100 |
% |
|
|
100 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
50.9 |
|
|
|
54.6 |
|
|
|
55.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
49.1 |
|
|
|
45.4 |
|
|
|
44.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
11.3 |
|
|
|
13.7 |
|
|
|
12.7 |
|
Sales, general and administrative |
|
|
32.9 |
|
|
|
35.0 |
|
|
|
31.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
44.2 |
|
|
|
48.7 |
|
|
|
44.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
4.9 |
|
|
|
(3.3 |
) |
|
|
(0.1 |
) |
Other income, net |
|
|
1.4 |
|
|
|
1.0 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
6.3 |
|
|
|
(2.3 |
) |
|
|
0.6 |
|
Benefit from (provision for) income taxes |
|
|
(1.8 |
) |
|
|
1.1 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
4.5 |
% |
|
|
(1.2 |
%) |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth for the years indicated the amount of sales (in thousands) for
our operating segments and sales as a percentage of total sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2005 |
|
|
January 1, 2005 |
|
|
January 3, 2004 |
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
of total |
|
|
|
|
|
|
of total |
|
|
|
|
|
|
of total |
|
|
|
Amount |
|
|
sales |
|
|
Amount |
|
|
sales |
|
|
Amount |
|
|
sales |
|
Domestic |
|
$ |
22,713 |
|
|
|
61.4 |
% |
|
$ |
19,894 |
|
|
|
60.6 |
% |
|
$ |
20,072 |
|
|
|
63.3 |
% |
International |
|
$ |
14,316 |
|
|
|
38.6 |
% |
|
$ |
12,916 |
|
|
|
39.4 |
% |
|
|
11,627 |
|
|
|
36.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,029 |
|
|
|
100.0 |
% |
|
$ |
32,810 |
|
|
|
100.0 |
% |
|
$ |
31,699 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
17,762 |
|
|
|
48.0 |
% |
|
$ |
16,443 |
|
|
|
50.1 |
% |
|
$ |
15,724 |
|
|
|
49.6 |
% |
International |
|
$ |
12,901 |
|
|
|
34.8 |
% |
|
$ |
11,310 |
|
|
|
34.5 |
% |
|
|
10,436 |
|
|
|
32.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,663 |
|
|
|
82.8 |
% |
|
$ |
27,753 |
|
|
|
84.6 |
% |
|
$ |
26,160 |
|
|
|
82.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermatology: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
4,951 |
|
|
|
13.4 |
% |
|
$ |
3,451 |
|
|
|
10.5 |
% |
|
$ |
4,348 |
|
|
|
13.7 |
% |
International |
|
$ |
1,415 |
|
|
|
3.8 |
% |
|
$ |
1,606 |
|
|
|
4.9 |
% |
|
|
1,191 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,366 |
|
|
|
17.2 |
% |
|
$ |
5,057 |
|
|
|
15.4 |
% |
|
$ |
5,539 |
|
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
and Dermatology Sales Overview
We manage and evaluate our business in two major segments Ophthalmology and Dermatology. We
then further break down these major segments by geography Domestic (United States) and
International (the rest of the world). In addition within Ophthalmology we review trends by laser
system sales (laser boxes and delivery devices) and recurring sales (single use disposable probes,
Endoprobes combined with the repair, servicing and extended warranty protection for our laser
systems). Within the dermatology segment we primarily view macro trends surrounding our laser
systems, which include our newly introduced DioLite XP and VariLite
laser systems, the DioLite
laser system, and the Apex hair removal laser which was discontinued in 2005.
In 2005, sales increased by 12.9% to $37.0 million from $32.8 million in 2004. Domestic
sales, which represented 61.4% of total sales, increased by 14.2% to $22.7 million in 2005 from
$19.9 million in 2004. The increase in domestic sales was a result of a $1.5 million increase in
domestic dermatology
-23-
revenue and a $1.3 million increase in domestic ophthalmology revenue.
International sales, which were 38.6% of total sales in 2005, increased by
10.8% to $14.3 million in 2005
from $12.9 million in 2004. The increase in international sales was a result of a $1.6 million
increase in international ophthalmology revenue offset by a $0.2 million decrease in international
dermatology revenue.
In
2004, sales increased to $32.8 million from $31.7 million in 2003. Domestic sales,
decreased by 0.9% to $19.9 million in 2004 from $20.1 million in 2003. The decrease in domestic
sales was a result of $0.9 million decrease in domestic dermatology revenue offset by a $0.7
million increase in domestic ophthalmology revenue. International sales increased by 11.1% to
$12.9 million in 2004 from $11.6 million in 2003. Both international ophthalmology and dermatology
sales increased in 2004, in part, as a result of currency fluctuations. The increase in
international ophthalmology sales in 2004 was $0.9 million while international dermatology sales
increased by $0.4 million.
Overall, with the initiatives of our expanded sales and marketing team, we plan to grow the
current product offering by growth in laser systems, delivery devices and disposables.
Ophthalmology Sales
In 2005, ophthalmology sales increased 10.5% to $30.7 million from $27.8 million in 2004.
The improvement in ophthalmology sales from 2005 to 2004 was
primarily a result of a $2.2 million increase in recurring
revenue and a $0.7 million increase in unit sales of laser systems. Domestic ophthalmology sales increased 8% to $17.8 million in 2005 from $16.4 million in 2004.
International ophthalmology sales increased 14.1% to $12.9 million from $11.3 million in 2004.
In
2004, ophthalmology sales increased to $27.8 million from
$26.2 million in 2003. The
improvement in ophthalmology sales from 2004 to 2003 was primarily a
result of a $1.6 million increase in recurring revenue and a
$0.1 million increase in unit sales of laser systems.
The
increase in recurring revenue in both 2005 and 2004 related to our
increasing installed base.
Total
ophthalmology sales represented 82.8% of our total revenues in 2005,
84.6% of total revenues in 2004, and 82.5% of total revenues in 2003.
We believe that this trend established over the past three years
should continue and ophthalmic sales should represent
approximately 80% of our overall revenues. Domestic
ophthalmology sales increased to $16.4 million in 2004 from $15.7 million in 2003. International ophthalmology sales increased
to $11.3 million in 2004 from $10.4 million in 2003. Of the revenues in
ophthalmology, approximately 60% are expected from the domestic market and 40% from international markets.
Dermatology Sales
Dermatology sales increased 25.9% in 2005 to $6.4 million from $5.1 million in 2004. Domestic
dermatology sales increased 43.5% to $5.0 million in 2005 from $3.5 million in 2004. The increase
in domestic dermatology sales was due primarily to a
$1.1 million increase in unit sales of our newer laser systems (the
VariLite and the DioLite XP) and a $0.2 million increase in
dermatology service revenue offset by decreases in unit sales of the
DioLite and the Apex laser systems.
-24-
International dermatology sales decreased 11.9% to $1.4 million in 2005 from $1.6 million
in 2004. The decrease in international dermatology sales was due to a $0.9 million decrease in
unit sales of the Apex hair removal laser which was discontinued in 2005 offset by a $0.7 million
increase in newer laser system sales.
Dermatology sales decreased in 2004 to $5.1 million from $5.5 million in 2003. Domestic
dermatology sales decreased to $3.5 million in 2004 from $4.3 million in 2003. The decrease in
domestic dermatology sales was due primarily to a decrease in unit
sales of the DioLite laser systems and the Apex hair removal laser
and, to a much lesser degree, a slight change in average selling prices of those
laser systems. These decreases were offset by new VariLite laser
system sales. International dermatology sales increased to
$1.6 million in 2004 from $1.2 million in 2003.
During the past three years, total dermatology sales
represented 17.2% of our total revenues in 2005, 15.4% of total
revenues in 2004 and 17.5% of total revenues in 2003. We believe that
the trends established in dermatology over the past three years
should continue to some degree. We expect that the domestic market
will represent approximately 75% of dermatology revenues in 2006 while the international markets
will be approximately 25%. We also anticipate that the dermatology sales will continue to increase
as a percentage of our overall business to approximate 20% in 2006.
Gross Profit. Gross profit was $18.2 million in 2005, $14.9 million in 2004 and $14.1 million
in 2003. Gross profit represented 49.1% of sales in 2005, 45.4% of sales in 2004 and 44.4% of
sales in 2003. The 3.7% increase in gross profit in 2005 resulted from a 1.9% decrease in direct
costs combined with a 1.8% decrease in overhead spending. Additional factors having a positive
impact on gross margin include the mix impact of the increase in disposable laser probe revenue and
some OEM revenues which may not be repeatable. Overall, we expect gross margins to improve over
the next several years.
The 1.0% increase
in gross profit in 2004 was due to a 2.0% decrease in overhead spending and a 0.3% increase related
to product mix offset by a decrease of 1.2% related to an inventory reserve for saleable, but aging
and potentially excess inventory and a decrease of 0.1% associated with average selling prices.
We intend to continue our efforts to reduce the cost of components and thereby mitigate the
impact of price reductions on our gross profit. We believe gross profit in dollars will increase
as volumes increase and unit production costs will decrease as costs are engineered out of new
products. In addition, as we evaluate gross margins on each of our product lines, we may choose to
place greater focus on product lines with better margins. Overall, however, gross margins as a
percentage of sales will continue to fluctuate due to changes in the relative proportions of
domestic and international sales, the product mix of sales, costs associated with future product
introductions and a variety of other factors. See Factors That May Affect Future Results Our
Operating Results May Fluctuate from Quarter to Quarter and Year to Year.
Research and Development.
Research and development includes the cost of research and product
innovation efforts. Research and product innovation expenses decreased by 7.0%
in 2005 to $4.2 million from $4.5 million in 2004. The decrease in 2005, consisted of a $0.2
million decrease in project spending and $0.1 million in decreased clinical spending. The decrease
in project spending in 2005 was primarily driven by completion of development of the VariLite and
IQ810 lasers in 2004. Research and product innovation expenses increased by 11.8% in 2004 to
$4.5 million from $4.0 million in 2003. The increase in 2004, consisted of $0.6 million in
increased project spending. These expenses were 11.3% of sales in 2005, 13.7% of sales in 2004 and 12.7% of sales in 2003. The decrease, as a percentage of
net sales, from 2004 to 2005 was attributable to the decrease in research and product innovation
spending. The increase in research and product innovation expenses in 2004, as a percentage of
sales, was due to the increase in expenses in absolute dollars relative to the increase in the
level of sales. We expect to continue to
-25-
devote 10% to 12% of our revenues to our research and
product innovation efforts for new products and new applications.
Sales, General and Administrative. Sales, general and administrative expense increased by
6.3% in 2005 to $12.2 million from $11.5 million in 2004. The increase in 2005 was driven by an
increase of $0.3 million in marketing spending, $0.2 million in increased selling expenses and $0.2
million in increased general and administrative costs. The increase in marketing spending was
primarily related to spending on trade shows, advertising and consulting. The increase in selling
expense was due mainly to increased sales headcount and related expenses. General and
administrative expense increased primarily due to spending related to the hiring of a new Chief
Executive Officer as well as increased consulting, legal expenses and public company expenses
offset by a one-time $1.0 million charge to establish a reserve for unpaid sales tax in 2004.
These expenses were 32.9% of sales in 2005, 34.9% of sales in 2004 and 31.8% of sales in 2003. The
decrease, as a percentage of net sales, from 2004 to 2005, was attributable to the level of
increase in sales, general and administrative expense relative to the increase in the level of
sales.
Interest and Other income, net. Other income, net consists primarily of interest income
earned on available-for-sale securities. Interest income was $534,000, $249,000 and
$159,000 in 2005, 2004 and 2003, respectively. Interest income increased in 2005 over 2004 and in
2004 over 2003 based on higher average cash balances and increased
interest rates in 2005 and in 2004.
Income Taxes. In 2005, our effective rate was 28% and in 2004 it was 47%. In 2003, our
effective rate was a benefit of 127%. The tax rate for 2005 was lower than the Federal and State
combined statutory rate of 40% because of certain tax benefits associated with tax-exempt interest
on tax preferred securities and with tax credits for research and development activities. The tax
rates for 2003 resulted primarily due to pretax income approaching breakeven and the level of tax
credits for research and development activities relative to the loss for 2003.
Liquidity and Capital Resources
At December 31, 2005, our primary sources of liquidity included cash and cash equivalents of
$12.7 million and available-for-sale securities of $8.8 million, for a total of $21.5 million. In
addition, we have available $4.0 million under our unsecured line of credit which bears interest at
the banks prime rate and expires in October 2006. As of December 31, 2005, no borrowings were
outstanding under this credit facility. We expect to renew the line of credit in October 2006
assuming that terms continue to be acceptable. We believe that, based on current estimates, our
current cash, available-for-sale securities and the credit facility will be sufficient to meet our
working capital and capital expenditure requirements at least through the next twelve months.
However, we believe that the level of financial resources is a significant competitive factor in
our industry, and accordingly we may choose to raise additional capital through debt or equity
financing prior to the end of 2006.
Net cash generated by operations in 2005 totaled $2.8 million. The primary sources
of cash in 2005 included net income of $1.7 million, a decrease in net accounts receivable of $0.8
million due to a decrease in days sales outstanding and an increase in deferred income taxes of
$0.6 million. Uses of cash in 2005 consisted mainly of a decrease in accrued expenses of $0.7
million due to payments in 2005 against a sales tax reserve offset by
increased bonus accruals for 2005.
Net cash generated by operations in 2004 totaled $0.8 million and consisted mainly of an
increase in net accrued expenses and accounts payable of $2.0 million due primarily to a reserve
for sales tax and associated consulting as well as payroll accruals related to the timing of
payroll, depreciation of $0.4 million, an increase in deferred revenue of $0.3 million based on
increased sales of extended warranty contracts offset by an increase in net accounts receivable of
$0.8 million related mainly to the timing of sales in the fourth quarter of 2004, an increase in
the deferred tax asset of $0.6 million, a net loss of $0.4 million and an increase in inventory of
$0.2 million associated with inventory purchased in connection with new product introductions.
In 2003 net cash generated by operations was $5.1 million resulting from decreases in net
inventories of $2.0 million due to an ongoing inventory reduction program, decreases in net
accounts receivable of $1.4 million based on a decrease in days sales outstanding, depreciation of
$0.7 million, an increase in accrued expenses of $0.6 million due to an increase in income tax
payable as well as payroll accruals related to the timing of payroll and net income of $0.4
million.
We used $1.5 million, $2.3 million and $4.0 million for investing activities in 2005, 2004 and
2003 respectively. Net cash used in investing activities was primarily due to the purchase of
available-for-sale securities and the acquisition of fixed assets.
Net cash provided by financing activities during 2005, 204 and 2003 was $1.0 million, $1.4
million and $0.2 million, respectively, which consisted primarily of issuance of stock in
connection with our employee stock programs.
-26-
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in conformity with United
States Generally Accepted Accounting Principles (GAAP) requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities, net sales and expenses, and the related
disclosures. We base our estimates on historical experience, our knowledge of economic and market
factors and various other assumptions we believe to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or conditions. We believe the
following critical accounting policies are affected by significant estimates, assumptions, and
judgments used in the preparation of our condensed consolidated financial statements.
Revenue Recognition
Revenue from product sales
is recognized upon receipt of a purchase order and product shipment
provided no significant obligations remain and collection of the receivables is reasonably assured.
Shipments are generally made with Free-On-Board (FOB) shipping point terms, whereby title passes
upon shipment from our dock. Any shipments with FOB receiving point terms are recorded as revenue
when the shipment arrives at the receiving point. Up-front fees received in connection with product sales are deferred
and recognized over the associated product shipments. Revenue relating to
extended warranty contracts
is recognized on a straight line basis over the period of the applicable warranty contract. We recognize
service repair revenue upon completion of the work. Cost
is recognized as incurred.
Warranty
The Company accrues for estimated warranty costs upon shipment of products in accordance with
SFAS No. 5, Accounting for Contingencies. Actual warranty costs incurred have not materially
differed
-27-
from those accrued. The Companys warranty policy is effective for shipped products which
are considered defective or fail to meet the product specifications. We analyze failure rates,
replacement cost, and design changes when evaluating the adequacy of our warranty reserve. Warranty
costs are reflected in the income statement as a cost of revenues. Although we believe we have the
ability to reasonably estimate warranty expenses, unforeseen changes in factors affecting the
estimate for warranty could occur and such changes could cause a material change in our warranty
accrual estimate. Such a change would be recorded in the period in which the charge was
identified.
Sales Returns Allowance and Allowance for Doubtful Accounts
In the process of preparing financial statements we must make estimates and assumptions that
affect the reported amount of assets and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reported period. Specifically, we must estimate future product returns related to current period
product revenue. We analyze historical returns and changes in customer
demand and acceptance of our products when evaluating the adequacy of the sales returns allowance
and other allowances. Significant management judgments and estimates must be made and used in
connection with establishing the sales returns and other allowances in any accounting period.
Material differences may result in the amount and timing of our revenue for any period if
management made different judgments or utilized different estimates. The provision for sales
returns amounted to $0.2 million in 2005. Similarly our management must make estimates of the
uncollectibility of our accounts receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit-worthiness and changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Our accounts receivable balance was $6.6 million, net of
allowance for doubtful accounts of $0.6 million as of December 31, 2005.
Inventories.
Inventories are stated at the lower of cost or market and include on-hand inventory, sales
demo inventory and service loaner inventory as well as associated inventory reserves. Cost of
inventory is determined on a standard cost basis which approximates actual cost on a first-in,
first-out (FIFO) method. Adjustments to reduce the cost of inventory to its net realizable value,
if required, are made at the product group level for estimated excess, obsolescence or impaired
inventory and are charged to cost of goods sold. Factors influencing these adjustments include
changes in demand, product life cycle and development plans, component cost trends, product
pricing, physical deterioration and quality issues. Revisions to these adjustments would be
required if these factors differ from our estimates.
Income Taxes
Significant judgment is required in evaluating our tax positions
and determining our provision for income taxes. During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties
based on estimates
of whether, and the extent to which, additional taxes and interest will be due. These reserves are established when,
despite our belief that our tax return positions are fully supportable,
we believe that certain positions are likely to be challenged and may not be sustained on review by tax authorities.
We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit.
The provision for income taxes incudes the impact of reserve provisions and changes to reserves that are considered appropriate as well as any related net interest.
Deferred Assets and Liabilities
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. Changes
in estimate of future levels of taxable income or tax planning strategies could result in the need
to provide or increase the valuation allowance against the net deferred tax assets which could
materially impact earnings in the period of change.
-28-
Contractual Obligations
The following table summarizes purchase commitments and minimum rentals due for our facility
and other leased assets under long-term, non-cancelable operating leases as of December 31,
2005(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 and |
|
|
|
Total |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
thereafter |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
$ |
1,319 |
|
|
$ |
402 |
|
|
$ |
416 |
|
|
$ |
429 |
|
|
$ |
72 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional
Purchase
Obligations* |
|
$ |
1,505 |
|
|
$ |
1,505 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual
Cash Obligations |
|
$ |
2,824 |
|
|
$ |
1,907 |
|
|
$ |
416 |
|
|
$ |
429 |
|
|
$ |
72 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Contractual purchase obligations have varying cancellation terms.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R, Share-Based Payment An Amendment of FASB Statements No. 123 and 95 (SFAS 123R). The
new pronouncement replaces the existing requirements under SFAS 123 and APB 25. According to SFAS
123R, all forms of share-based payments to employees, including employee stock options and employee
stock purchase plans, would be treated the same as any other form of compensation by recognizing
the related cost in the statement of operations. This pronouncement eliminates the ability to
account for stock-based compensation transactions using APB 25 and generally requires that such
transactions be accounted for using a fair-value based method. The statement requires companies to
assess the most appropriate model to calculate the value of the options. We currently use the
Black-Scholes option pricing model to value options; however, we are currently assessing which
model we may use in the future under the new statement and may deem an alternative model to be the
most appropriate. The use of a different model to value options may result in a different fair
value than would result from the use of the Black-Scholes option pricing model. In addition, there
are a number of other requirements under the new standard that would result in different accounting
treatment than is currently required. These differences include, but are not limited to, the
accounting for the tax benefit on employee stock options and for stock issued under our employee
stock purchase plan, and the presentation of these tax benefits
within the statement of cash flows. We will adopt SFAS 123R
using the prospective method of adoption.
-29-
In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB 107). SAB 107 provides guidance on the initial implementation of SFAS 123R. In
particular, the statement includes guidance related to share-based payment awards for
non-employees, valuation methods and selecting underlying assumptions such as expected volatility
and expected term. SAB 107 also gives guidance on the classification of compensation expense
associated with such awards and accounting for the income tax effects of those awards upon the
adoption of SFAS 123R.
In April 2005, the SEC announced the adoption of a new rule that amends the effective date of
SFAS 123R. The effective date of the new standard under these new rules for our financial
statements is January 1, 2006. Adoption of this statement is expected to have a significant impact
on our financial statements as we will be required to expense the fair value of our stock option
grants and stock purchases under our employee stock purchase plan (ESPP) rather than disclose the
impact on our net loss within our footnotes, as is our current practice. The full impact of SFAS
123R on our financial statements and related disclosures is still being evaluated by management but
is expected to be material to our results of operations. Our actual share-based compensation
expense in 2006 will be dependent on a number of factors, including the amount of awards granted
and the fair value of those awards at the time of grant.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections -
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes the
accounting for and reporting of a change in accounting principle by requiring retrospective
application to prior periods financial statements of changes in accounting principle unless
impracticable. SFAS 154 is effective for accounting changes made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on our
results of operations, financial position or cash flows.
Factors That May Affect Future Results
In addition to the other information contained in this Form 10-K, we have identified the
following risks and uncertainties that may have a material adverse effect on our business,
financial condition or results of operation. You should carefully consider the risks described
below before making an investment decision.
We Rely on Continued Market Acceptance of Our Existing Products and Any Decline in Sales of
Our Existing Products Would Adversely Affect Our Business and Results of Operations. We currently
market visible and infrared light therapeutic-based photocoagulator medical laser systems and
delivery devices to the ophthalmology and dermatology markets. We believe that continued and
increased sales, if any, of these medical laser systems is dependent upon a number of factors
including the following:
|
§ |
|
Acceptance of product performance, features, ease of use, scalability and
durability; |
|
|
§ |
|
Acceptance of the companys new marketing programs; |
|
|
§ |
|
Recommendations and opinions by ophthalmologists, dermatologists, other
clinicians, plastic surgeons and their associated opinion leaders, including study
outcomes; |
|
|
§ |
|
Price of our products and prices of competing products and technologies; |
|
|
§ |
|
Availability of competing products, technologies and alternative treatments; and |
|
|
§ |
|
Level of reimbursement for treatments administered with our products. |
-30-
In addition, we derive a meaningful portion of our sales from recurring revenues including
disposable laser probes, EndoProbes and service. Our ability to increase recurring revenues from
the sale of EndoProbes will depend primarily upon the features and product innovation, ease of use
and prices of our products, including the relationship to prices of competing delivery devices.
The level of service revenues will depend on our quality of care, responsiveness and the
willingness of our customers to request our services rather than purchase competing products or
services. Any significant decline in market acceptance of our products or our revenues derived
from the sales of laser consoles, delivery devices or services would have a material adverse effect
on our business, results of operations and financial condition.
We Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the
Foreseeable Future. Competition in the market for devices used for ophthalmic and dermatology
treatment procedures is intense and is expected to increase. Our competitive position depends on a
number of factors including product performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology are Lumenis Ltd.,
Nidek, Carl Zeiss, Inc., Alcon, and Synergetics, Inc. All of these companies currently offer a
competitive semiconductor-based laser system in ophthalmology. Also within ophthalmology
pharmaceutical alternative treatments for AMD such as Visudyne (Novartis) , Macugen (Eyetech) and
Lucentis (Genentech) compete rigorously with traditional laser procedures. Our principal
competitors in dermatology are Palomar Technologies, Candela Corporation, Syneron, Lumenis Ltd. and
Laserscope. Some competitors have substantially greater financial, engineering, product
development, manufacturing, marketing and technical resources than we do. Some companies also have
greater name recognition than we do and long-standing customer relationships. In addition to other
companies that manufacture photocoagulators, we compete with pharmaceuticals, other technologies
and other surgical techniques. Some medical companies, academic and research institutions, or
others, may develop new technologies or therapies that are more effective in treating conditions
targeted by us or are less expensive than our current or future products. Any such developments
could have a material adverse effect on our business, financial condition and results of
operations.
Our Future Success Depends on Our Ability to Develop and Successfully Introduce New Products
and New Applications. Our future success is dependent upon, among other factors, our ability to
develop, obtain regulatory approval or clearance of, manufacture and market new products. Successful commercialization of new products and
new applications will require that we effectively transfer production processes from research and
development to manufacturing and effectively coordinate with our suppliers. In addition, we must successfully sell and
achieve market acceptance of new products and applications and enhanced versions of existing
products. The extent of, and rate at which, market acceptance and penetration are achieved by
future products is a function of many variables, which include, among other things, price, safety,
efficacy,
-31-
reliability, marketing and sales efforts, the development of new applications for these
products, the availability of third-party reimbursement of procedures using our new products, the
existence of competing products and general economic conditions affecting purchasing patterns. Our
ability to market and sell new products may also be subject to government regulation, including
approval or clearance by the United States Food and Drug Administration, or FDA, and foreign
government agencies. Any failure in our ability to successfully develop and introduce new products
or enhanced versions of existing products and achieve market acceptance of new products and new
applications could have a material adverse effect on our operating results and would cause our net
revenues to decline.
If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce Higher Margin Products
to Offset Anticipated Reductions in the Average Unit Price of Our Products, Our Operating Results
May Suffer. We have experienced declines in the average unit price of our products and expect to
continue to suffer from declines in the future. The average unit price of our products may
decrease in the future in response to changes in product mix, competitive pricing pressures, new
product introductions by our competitors or other factors. If we are unable to offset the
anticipated decrease in our average selling prices by increasing our sales volumes or through new
product introductions, our net revenues will decline. In addition, to maintain our gross margins,
we must continue to reduce the manufacturing cost of our products. If we cannot maintain our gross
margins, our business could be seriously harmed, particularly if the average selling price of our
products decreases significantly without a corresponding increase in sales.
We Depend on Sales of Our Ophthalmology Products for a Significant Portion of Our Operating
Results. We derive, and expect to continue to derive, a large portion of our revenue and profits
from sales of our ophthalmology products. In 2005, 2004 and 2003 sales of our ophthalmology
products were $30.7 million, $27.8 million and $26.2 million or 82.8%, 84.6% and 82.5%,
respectively, of total sales. We anticipate that sales of our ophthalmology products will continue
to account for a significant portion of our revenues in the foreseeable future.
We Depend on International Sales for a Significant Portion of Our Operating Results. We
derive, and expect to continue to derive, a large portion of our revenue from international sales.
In 2005, 2004 and 2003, our international sales were $14.3 million, $12.9 million and $11.6 million
or 38.7%, 39.4% and 36.7%, respectively, of total sales. We anticipate that international sales
will continue to account for a significant portion of our revenues, particularly ophthalmology, in
the foreseeable future. None of our international revenues and costs has been denominated in
foreign currencies. As a result, an increase in the value of the U.S. dollar relative to foreign
currencies makes our products more expensive and thus less competitive in foreign markets. The
factors stated above could have a material adverse effect on our business, financial condition or
results of operations. Our international operations and sales are subject to a number of other
risks including:
|
§ |
|
Impact of recessions in economies outside of the United States; |
|
|
§ |
|
Performance of our international channel of distributors; |
|
|
§ |
|
Foreign certification requirements, including continued ability to use the
CE mark in Europe; |
-32-
|
§ |
|
Reduced or limited protections of intellectual property rights in
jurisdictions outside the United States; |
|
|
§ |
|
Longer accounts receivable collection periods; |
|
|
§ |
|
Potentially adverse tax consequences; and |
|
|
§ |
|
Multiple protectionist, adverse and changing foreign governmental laws and
regulations. |
Any one or more of these factors stated above could have a material adverse effect on our business,
financial condition or results of operations. For additional discussion about our foreign currency
risks, see Item 3, Quantitative and Qualitative Disclosures about Market Risk.
We Rely on Our Direct Sales Force and Network of International Distributors to Sell Our
Products and any Failure to Maintain Our Direct Sales Force and Distributor Relationships Could
Harm Our Business. Our ability to sell our products and generate revenue depends upon our direct
sales force within the United States and relationships with independent distributors outside the
United States. Currently our direct sales force consists of 18 employees and we maintain
relationships with 77 independent distributors internationally selling our products into 107
countries through four direct Area Sales Managers. We generally grant our distributors exclusive
territories for the sale of our products in specified countries. The amount and timing of
resources dedicated by our distributors to the sales of our products is not within our control.
Our international sales are entirely dependent on the efforts of these third parties. If any
distributor breaches or fails to generate sales of our products, we may be forced to replace the
distributor and our ability to sell our products into that exclusive sales territory would be
adversely affected.
We do not have any long-term employment contracts with the members of our direct sales force. We
may be unable to replace our direct sales force personnel with individuals of equivalent technical
expertise and qualifications, which may limit our revenues and our ability to maintain market
share. The loss of the services of these key personnel would harm our business. Similarly, our
distributorship agreements are generally terminable at will by either party and distributors may
terminate their relationships with us, which would affect our international sales and results of
operations.
If
We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability
to Manage Our Business Could Be Impaired. Our future success depends upon the continued service of
our key management, technical, sales, and other critical personnel. Our officers and other key
personnel are employees-at-will, and we cannot assure you that we will be able to retain them. Key
personnel have left our company in the past and there likely will be additional departures of key
personnel from time to time in the future. The loss of any key employee could result in significant
disruptions to our operations, including adversely affecting the timeliness of product releases,
the successful implementation and completion of company initiatives, and the results of our
operations. Competition for these individuals is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel. Competition for qualified personnel in our
industry and the San Francisco Bay Area, as well as other geographic markets in which we recruit,
is intense and characterized by increasing salaries, which may increase our operating expenses or
hinder our ability to recruit qualified candidates. In addition, the integration of replacement
personnel could be time consuming, may cause additional disruptions to our operations, and may be
unsuccessful.
We Face Manufacturing Risks. The manufacture of our infrared and visible light
photocoagulators and the related delivery devices (including
EndoProbes) is a highly complex and precise process. We
assemble critical subassemblies and all of our final products at our facility in Mountain View,
California. We may experience manufacturing difficulties, quality control issues or assembly
constraints, particularly with regard to new products that we may introduce. We may not be able to
manufacture sufficient quantities of our products, which may require that we qualify other
manufacturers for our products. Furthermore, we may experience delays, disruptions, capacity
constraints or quality control problems in our manufacturing operations and, as a result, product
shipments to our customers could be delayed, which would negatively impact our net revenues.
If We Fail to Accurately Forecast Demand For Our Product and Component Requirements For the
Manufacture of Our Product, We Could Incur Additional Costs or Experience Manufacturing Delays and
May Experience Lost Sales or Significant Inventory Carrying Costs. We use quarterly and annual
forecasts based primarily on our anticipated product orders to plan our manufacturing efforts and
determine our requirements for components and materials. It is very important that we accurately
predict both the demand for our product and the lead times required to obtain the necessary components and materials.
Lead times for components vary significantly and depend on numerous factors, including the specific
supplier, the size of
-33-
the order, contract terms and current market demand for such components. If
we overestimate the demand for our product, we may have excess inventory, which would increase our
costs. Over the past several quarters, we have placed a high priority on our asset management
efforts to, among other things, reduce overall inventory levels and increase our cash position. If
we underestimate demand for our product and, consequently, our component and materials
requirements, we may have inadequate inventory, which could interrupt our manufacturing, delay
delivery of our product to our customers and result in the loss of customer sales. Any of these
occurrences would negatively impact our business and operating results.
We Depend on Sole Source or Limited Source Suppliers. We rely on third parties to manufacture
substantially all of the components used in our products, including optics, laser diodes and
crystals. We have some long term or volume purchase agreements with our suppliers and currently
purchase components on a purchase order basis. Some of our suppliers and manufacturers are sole or
limited sources. In addition, some of these suppliers are relatively small private companies that
may discontinue their operations at any time. There are risks associated with the use of
independent manufacturers, including the following:
|
§ |
|
Unavailability of, shortages or limitations on the ability to obtain supplies of
components in the quantities that we require; |
|
|
§ |
|
Delays in delivery or failure of suppliers to deliver critical components on the
dates we require; |
|
|
§ |
|
Failure of suppliers to manufacture components to our specifications, and
potentially reduced quality; and |
|
|
§ |
|
Inability to obtain components at acceptable prices. |
Our business and operating results may suffer from the lack of alternative sources of supply for
critical sole and limited source components. The process of qualifying suppliers is complex,
requires extensive testing with our products, and may be lengthy, particularly as new products are
introduced. New suppliers would have to be educated in our production processes. In addition, the
use of alternate components may require design alterations to our products and additional product
testing under FDA and relevant foreign regulatory agency guidelines, which may delay sales and
increase product costs. Any failures by our vendors to adequately supply limited and sole source
components may impair our ability to offer our existing products, delay the submission of new
products for regulatory approval and market introduction, materially harm our business and
financial condition and cause our stock price to decline. Establishing our own capabilities to
manufacture these components would be expensive and could significantly decrease our profit
margins. We do not currently intend to manufacture any of these components. Our business, results
of operations and financial condition would be adversely affected if we are unable to continue to
obtain components in the quantity and quality desired and at the prices we have budgeted.
Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year. Our sales and
operating results may vary significantly from quarter to quarter and from year to year in the
future. Our operating results are affected by a number of factors, many of which are beyond our
control. Factors contributing to these fluctuations include the following:
|
|
|
General economic uncertainties and political concerns; |
|
|
|
|
The timing of the introduction and market acceptance of new products, product
enhancements and new applications; |
-34-
|
|
|
Changes in demand for our existing line of dermatology and ophthalmic products; |
|
|
|
|
The cost and availability of components and subassemblies, including the ability of our
sole or limited source suppliers to deliver components at the times and prices that we have
planned; |
|
|
|
|
Our ability to maintain sales volumes at a level sufficient to cover fixed manufacturing
and operating costs; |
|
|
|
|
Fluctuations in our product mix between dermatology and ophthalmic products and foreign
and domestic sales; |
|
|
|
|
The effect of regulatory approvals and changes in domestic and foreign regulatory
requirements; |
|
|
|
|
Introduction of new products, product enhancements and new applications by our
competitors, entry of new competitors into our markets, pricing pressures and other
competitive factors; |
|
|
|
|
Our long and highly variable sales cycle; |
|
|
|
|
Changes in the prices at which we can sell our products; |
|
|
|
|
Changes in customers or potential customers budgets as a result of, among other
things, reimbursement policies of government programs and private insurers for treatments
that use our products; and |
|
|
|
|
Increased product innovation costs. |
In addition to these factors, our quarterly results have been, and are expected to continue to be,
affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If sales levels in a particular
quarter do not meet expectations, we may be unable to adjust operating expenses quickly enough to
compensate for the shortfall of sales, and our results of operations may be adversely affected. In
addition, we have historically made a significant portion of each quarters product shipments near
the end of the quarter. If that pattern continues, any delays in shipment of products could have a
material adverse effect on results of operations for such quarter. Due to these and other factors,
we believe that quarter to quarter and year to year comparisons of our past operating results may
not be meaningful. You should not rely on our results for any quarter or year as an indication of
our future performance. Our operating results in future quarters and years may be below
expectations, which would likely cause the price of our common stock to fall.
Our Stock Price Has Been and May Continue to be Volatile and an Investment in Our Common Stock
Could Suffer a Decline in Value. The trading price of our common stock has been subject to wide
fluctuations in response to a variety of factors, some of which are beyond our control, including
quarterly variations in our operating results, announcements by us or our competitors of new
products or of significant clinical achievements, changes in market valuations of other similar
companies in our industry and general market conditions. From time to
time, we meet with investors and potential investors. In addition, we receive attention by securities
analysts and present at analyst meetings when invited. Our common stock may experience an
imbalance between supply and demand resulting from low trading volumes. In addition, the stock
market has experienced extreme volatility in the last few years that has often been unrelated to
the performance of particular companies. These broad market fluctuations could have a significant
impact on the market price of our common stock regardless of our performance.
We Are Subject To Government Regulation Which May Cause Us to Delay or Withdraw the
Introduction of New Products or New Applications for Our Products. The medical devices that we
market and manufacture are subject to extensive regulation by the FDA and by foreign and state
governments. Under the Federal Food, Drug and Cosmetic Act and the related regulations, the FDA
regulates the design, development, clinical testing, manufacture, labeling, sale, distribution and
promotion of medical devices. Before a new device can be introduced into the market, the product
must undergo rigorous testing and an extensive regulatory review process implemented by the FDA
under federal law. Unless otherwise exempt, a device manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier premarket approval
application (PMA) process. Depending upon the type, complexity and novelty of the device and the
nature of the disease or disorder to be treated, the FDA process can take several years, require
extensive clinical testing and result in significant expenditures. Even if regulatory approval is
obtained, later discovery of previously unknown safety issues may result in restrictions on the
product, including withdrawal of the product from the market. Other countries also have extensive
regulations regarding clinical trials and testing prior to new product introductions. Our failure
to obtain government approvals or any delays in receipt of such approvals would have a material
adverse effect on our business, results of operations and financial condition.
The FDA imposes additional regulations on manufacturers of approved medical devices. We are
required to comply with the applicable Quality System regulations and our manufacturing facilities
are subject to ongoing periodic inspections by the FDA and corresponding state agencies, including
unannounced inspections, and must be licensed as part of the product approval process before being
utilized for commercial manufacturing. Noncompliance with the applicable requirements can result
in, among other things, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, withdrawal of marketing approvals, and criminal prosecution. The FDA also has the
authority to request repair, replacement or refund of the cost of any device we manufacture or
distribute. Any of these actions by the FDA would materially and adversely affect our ability to
continue operating our business and the results of our operations.
In addition, we are also subject to varying product standards, packaging requirements,
labeling requirements, tariff regulations, duties and tax requirements. As a result of our sales
in Europe, we are required to have all products CE marked, an international symbol affixed to all
products demonstrating compliance with the European Medical Device Directive and all applicable
standards. While currently all of our released products are CE marked, continued certification is
based on the successful review of our quality system by our European Registrar during their annual
audit. Any loss of certification would have a material adverse effect on our business, results of
operations and financial condition.
We Depend on Collaborative Relationships to Develop, Introduce and Market New Products,
Product Enhancements and New Applications. We depend on both clinical and commercial collaborative
relationships. We have entered into collaborative relationships with academic medical centers and
physicians in connection with the research and innovation and clinical testing of our products.
Commercially, we currently collaborate with Bausch & Lomb to design and manufacture a solid-state
green wavelength (532 nm) laser photocoagulator module, called the Millennium Endolase module. The
Millennium Endolase module is designed to be a component of Bausch & Lombs ophthalmic surgical suite product offering and is not expected to
be sold as a stand-alone product. Sales of the Millennium Endolase module are dependent upon the
actual order rate from and shipment rate to Bausch & Lomb, which depends on the efforts of our
partner and is beyond our control. We cannot assure you that our relationship with
-35-
Bausch & Lomb will result in further sales of our Millennium Endolase module.
The failure to obtain any additional future clinical or commercial
collaborations and the resulting failure or success of such
arrangements of any current or future clinical or commercial collaboration relationships could have
a material adverse effect on our ability to introduce new products or applications and therefore
could have a material adverse effect on our business, results of operations and financial
condition.
We Face Risks Associated with our Collaborative and OEM Relationships. Our collaborators may
not pursue further development and commercialization of products resulting from collaborations with
us or may not devote sufficient resources to the marketing and sale of such products. For example,
in 2005 we developed and sold a laser system on an OEM basis for a third party which positively impacted the
gross margins during the third quarter. We cannot be assured that these types of relationships
will continue over a longer period. Our reliance on others for clinical development,
manufacturing and distribution of our products may result in unforeseen problems. Further, our
collaborative partners may develop or pursue alternative technologies either on their own or in
collaboration with others. If a collaborator elects to terminate its agreement with us, our
ability to develop, introduce, market and sell the product may be significantly impaired and we may
be forced to discontinue altogether the product resulting from the collaboration. We may not be
able to negotiate alternative collaboration agreements on acceptable terms, if at all. The failure
of any current or future collaboration efforts could have a material adverse effect on our ability
to introduce new products or applications and therefore could have a material adverse effect on our
business, results of operations and financial condition.
We are Dependent on the Successful Outcome of Clinical Trials of Our Products and New
Applications Using Our Products. Our success will depend in part on the successful outcome of
clinical trials of our products and new applications using our products. Clinical trials are long,
expensive and uncertain processes. If the future results of any clinical trial regarding our products fails to demonstrate
improved outcomes of treatment using our products, our ability to generate revenues from new
products or new applications using our products would be adversely affected. We have supported
several clinical trials, including, for example, the TTT4CNV and the PTAMD clinical trials.
The TTT4CNV clinical trial was a physician initiated multi-center, prospective, double-masked,
placebo-controlled, randomized trial conducted at 22 centers in the United States conducted to
determine whether TTT laser treatment using our OcuLight SLx infrared laser system and Large Spot
Slit Lamp Adapter can reduce the risk of vision loss for patients with wet age-related macular
degeneration (wet AMD) compared to a randomized control. In October 2004, we announced that the
preliminary visual outcome data in the intent-to-treat evaluation showed that TTT, as applied in
the TTT4CNV trial, showed favorable trends but overall did not demonstrate a significant beneficial
effect relative to sham treatments and announced that further subgroup analysis would be conducted.
Since that time, results of subgroup analysis have demonstrated a statistically significant benefit
in a subgroup of patients with baseline visual acuity of 20/100 or worse. Within the TTT4CNV
Clinical trial, about 41% of the patients enrolled had baseline vision of 20/100 or worse.
Specifically, at 12 months following treatment 23% of TTT treated eyes improved vision by one or
more lines and 14% of TTT treated eyes improved vision by three or more lines compared with none of
the eyes in the placebo treated control group. Furthermore, at 18 months, there was a 2 line
benefit in preserving vision in this subgroup when compared to placebo treated eyes. Specifically,
TTT treated eyes on average lost 2 lines of visual acuity while placebo treated eyes lost 4 lines.
Comparing these results to alternative therapies, it is not clear where TTT will eventually fit
into the treatment regimen of wet AMD, therefore any impact on laser sales related to these trial
results may take a number of years.
The PTAMD clinical trial was a physician initiated multi-center, prospective, randomized trial
conducted at 21 centers in the North America conducted to determine whether a MIP laser treatment
using our OcuLight SLx infrared laser system and Slit Lamp Adapter could (1) Provide a
prophylactic benefit from a single subthreshold laser treatment in slowing the progression
of AMD from dry (drusen) to wet (CNV); and (2) Was there a therapeutic benefit from a
single subthreshold laser treatment in drusen reduction and vision in these eyes compared to a
randomized control. Eligible patients with dry AMD were enrolled into one of two arms. Patients
with dry AMD in one eye and wet AMD in the other eye were placed in one arm (The Unilateral study
arm), while patients with dry AMD in both eyes were placed in the second arm (The Bilateral study
arm). In April 2000, we announced that enrollment of patients into the Unilateral study arm
was stopped at 243 patients as results showed that: (1) Treatment did not reduce the incidence of
choroidal neovascularization and, in fact, was associated with a significantly higher incidence of
CNV compared to observed eyes; and (2) Treatment did not improve
visual acuity. In October 2005,
initial results from the PTAMD Bilateral study arm were presented. A total of 1278 eyes
were enrolled in the Bilateral study arm and followed for up to 5 years. Results showed that: (1)
There was no beneficial prophylactic treatment effect on CNV occurrence; and there was no trend
toward a beneficial effect; and (2) The study did show a therapeutic benefit in drusen reduction
and vision in treated eyes. Drusen significantly reduced after a single sub-threshold infrared
laser treatment at 12 months and at 24 months (P<0.0001). In all eyes enrolled visual acuity
changes showed some indication of a beneficial effect of treatment at 18 months and onward. At
month 24 treated eyes showed a 1.5 letter beneficial difference in VA compared to the observed eye
(P=0.04); Treated eyes also had a higher percentage (12% vs. 8%) showing a 2 or more line gain. In
a sub-group of eyes with 20/30 or worse baseline VA the beneficial effect of treatment was more
pronounced. At month 24 treated eyes showed a 4.0 letter (~1 line) beneficial difference in VA with
treated eyes improving 2.9 letters and observed eyes losing 1.1 letters (P=0.0034). Treated eyes had a higher percentage (31% vs. 19%) showing a 2 or more line gain. and a
lower percentage (13% vs. 22%) showing a 2 or more line loss. Additional results will be presented
during 2006. It is still too early to determine the eventual position of laser treatment of drusen
in the overall treatment regimen of dry AMD, therefore any impact on laser sales related to these
trial results may take a number of years.
-36-
Our products could be subject to recalls even after receiving FDA approval or clearance. A
recall would harm our reputation and adversely affect our operating results. The FDA and similar
governmental authorities in other countries in which we market and sell our products have the
authority to require the recall of our products in the event of material deficiencies or defects in
design or manufacture. A government mandated recall, or a voluntary recall by us, could occur as a
result of component failures, manufacturing errors or design defects, including defects in
labeling. A recall could divert managements attention, cause us to incur significant expenses,
harm our reputation with customers and negatively affect our future sales.
If we modify one of our FDA approved or cleared devices, we may need to seek new approvals or
clearances which, if not granted, would prevent us from selling our modified products.
Any modifications to an FDA-approved or cleared device that would significantly affect its
safety or effectiveness or that would constitute a major change in its intended use would require a
new 510(k) clearance or possibly a PMA approval. We may not be able to obtain additional 510(k)
clearances or PMA approvals for new products or for modifications to, or additional intended uses
or indications for, our existing products in a timely fashion, or at all. Delays in obtaining
future clearances would adversely affect our ability to introduce new or enhanced products in a
timely manner, which in turn would harm our revenue and future profitability. We have made
modifications to our devices and the labeling of our devices in the past and may make additional
modifications in the future that we believe do not or will not require additional clearances or
approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we
may be required to recall and stop marketing the modified devices, which could harm our operating
results and require us to redesign or relabel our products.
We Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business.
Our success and ability to compete is dependent in part upon our proprietary information. We rely
on a combination of patents, trade secrets, copyright and trademark laws, nondisclosure and other
contractual agreements and technical measures to protect our intellectual property rights. We file
patent applications to protect technology, inventions and improvements that are significant to the
development of our business. We have been issued fifteen United States patents and five foreign
patents on the technologies related to our products and processes. We have approximately five
pending patent applications in the United States and five foreign pending patent applications that
have been filed. Our patent applications may not be approved. Any patents granted now or in the
future may offer only limited protection against potential infringement and development by our
competitors of competing products. Moreover, our competitors, many of which have substantial
resources and have made substantial investments in competing technologies, may seek to apply for
and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our
products either in the United States or in international markets.
-37-
In addition to patents, we rely on trade secrets and proprietary know-how which we seek to
protect, in part, through proprietary information agreements with employees, consultants and other
parties. Our proprietary information agreements with our employees and consultants contain
industry standard provisions requiring such individuals to assign to us without additional
consideration any inventions conceived or reduced to practice by them while employed or retained by
us, subject to customary exceptions. Proprietary information agreements with employees,
consultants and others may be breached, and we may not have adequate remedies for any breach.
Also, our trade secrets may become known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent litigation regarding patent
and other intellectual property rights. Companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. Numerous patents are held by
others, including academic institutions and our competitors. Until recently patent applications
were maintained in secrecy in the United States until the patents issued. Patent applications
filed in the United States after November 2000 generally will be published eighteen months after
the filing date. However, since patent applications continue to be maintained in secrecy for at
least some period of time, both within the United States and with regards to international patent
applications, we cannot assure you that our technology does not infringe any patents or patent
applications held by third parties. We have, from time to time, been notified of, or have
otherwise been made aware of, claims that we may be infringing upon patents or other proprietary
intellectual property owned by others. If it appears necessary or desirable, we may seek licenses
under such patents or proprietary intellectual property. Although patent holders commonly offer
such licenses, licenses under such patents or intellectual property may not be offered or the terms
of any offered licenses may not be reasonable.
Any claims, with or without merit, and regardless of whether we are successful on the merits,
would be time-consuming, result in costly litigation and diversion of technical and management
personnel, cause shipment delays or require us to develop noninfringing technology or to enter into
royalty or licensing agreements. An adverse determination in a judicial or administrative
proceeding and failure to obtain necessary licenses or develop alternate technologies could prevent
us from manufacturing and selling our products, which would have a material adverse effect on our
business, results of operations and financial condition. In October 2005, the Company filed suit
against Synergetics, USA, Inc. for infringement of a patent. The Company seeks injunctive relief,
monetary damages, treble damages, cost and attorneys fees. Synergetics answered the Companys
complaint in November 2005 and denied liability for patent infringement, filing counterclaims
seeking a declaratory judgment that it did not infringe the Companys patent. Synergetics also
brought three additional counterclaims for false advertising, commercial disparagement, trade
libel, injurious falsehood, unfair competition, disparagement of property, slander of goods and
defamation, under state and federal law, based upon allegations that the Company had raised safety
issues involving Synergetics product with the Food and Drug Administration and the public.
Synergetics seeks monetary damages, costs and attorneys fees.
While we believe its not material to the Companys operation,
the company may incur significant dedication of management resources
and legal costs in connection with this lawsuit.
The Requirements of Complying with the Sarbanes-Oxley Act of 2002 Might Strain Our Resources,
Which May Adversely Affect Our Business and Financial Condition. We are subject to a number of
requirements, including the reporting requirements of the Securities Exchange Act of 1934, as
amended, and the Sarbanes-Oxley Act of 2002. These requirements might place a strain on our systems and
resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial reporting. In order to
maintain and improve the effectiveness of our disclosure controls and procedures and internal
control over financial reporting, significant resources and management oversight will be required.
As a result, our managements attention might be diverted from other business concerns, which could
have a material adverse effect on our business, financial condition, and operating results. In
addition, we might need to hire additional accounting and financial staff with appropriate public
company experience and technical accounting knowledge, and we might not be able to do so in a
timely fashion.
Our Operating Results May be Adversely Affected by Changes in Third Party Coverage and
Reimbursement Policies and any Uncertainty Regarding Healthcare Reform Measures. Our ophthalmology
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 are increasingly scrutinizing and
challenging the coverage of new products and the level of reimbursement for covered products.
Doctors, clinics, hospitals and other users of our products may not obtain adequate reimbursement
for use of our products from third-party payers. While we believe that the laser procedures using
our products have generally been reimbursed, payers may deny
-38-
coverage and reimbursement for our products if they determine that the device was not reasonable and necessary for the purpose used, was investigational or was not cost-effective. In addition, third party payers
may not initiate coverage of new procedures using our products for a significant period. In
September 2000, the Center for Medicare and Medicaid Services, or CMS, advised that claims for
reimbursement for certain age related macular degeneration, or AMD, procedures which use our
OcuLight SLx laser system, could be submitted for reimbursement, with coverage and payment to be
determined by the local medical carriers at their discretion. To date five carriers representing 17
states have written reimbursement coverage policies on Transpupillary Thermotherapy, or TTT. The
states reimbursing for TTT are Alaska, Arizona, California, Colorado, Hawaii, Iowa, Idaho,
Mississippi, North Carolina, North Dakota, Nevada, Oregon, Pennsylvania, South Dakota, Tennessee,
Washington and Wyoming. Domestic sales of the OcuLight SLx laser system may continue to be
limited until more local medical carriers reimburse for performing such AMD procedures or until CMS
advises that claims for these procedures may be submitted directly to CMS at the national level.
The clinical results of the TTT4CNV trial and other clinical trials may influence the individual
state or CMS decision to reimburse for certain laser procedures. In
November 2005, IRIDEX filed a CPT (Current Procedural Terminology)
Change Request Form seeking the extension of Category III
(Emerging Technology) codes 0016T and 0017T for wet and dry forms of
AMD.
Changes in government legislation or regulation or in private third-party payers policies
toward reimbursement for procedures employing our products may prohibit adequate reimbursement.
There have been a number of legislative and regulatory proposals to change the healthcare system,
reduce the costs of healthcare and change medical reimbursement policies. Doctors, clinics,
hospitals and other users of our products may decline to purchase our products to the extent there
is uncertainty regarding reimbursement of medical procedures using our products and any healthcare
reform measures. Further proposed legislation, regulation and policy changes affecting third party
reimbursement are likely. We are unable to predict what legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement may be enacted in
the future, or what effect such legislation or regulation may have on us. However, denial of
coverage and reimbursement of our products would have a material adverse effect on our business,
results of operations and financial condition.
If Product Liability Claims are Successfully Asserted Against Us, We may Incur Substantial
Liabilities That May Adversely Affect Our Business or Results of Operations. We may be subject to
product liability claims from time to time. Our products are highly complex and some are used to
treat extremely delicate eye tissue and skin conditions on and near a patients face. Although we
maintain product liability insurance with coverage limits of $10.0 million per occurrence and an
annual aggregate maximum of $10.0 million, our coverage from our insurance policies may not be
adequate. Product liability insurance is expensive. We might not be able to obtain product
liability insurance in the future on acceptable terms or in sufficient amounts to protect us, if at
all. A successful claim brought against us in excess of our insurance coverage could have a
material adverse effect on our business, results of operations and financial condition.
If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted Which Could Harm Our
Operating Results. We have experienced and may continue to experience growth in our business.
We have made and expect to continue to make significant investments to enable our future growth
through, among other things, new product innovation and clinical trials for new applications and
products. We must also be prepared to expand our work force and to train, motivate and manage
additional employees as the need for additional personnel arises. Our personnel, systems,
procedures and controls may not be adequate to support our future operations. Any failure to
effectively manage future growth could have a material adverse effect on our business, results of
operations and financial condition.
If Our Facilities Were To Experience Catastrophic Loss, Our Operations Would Be Seriously
Harmed. Our facilities could be subject to catastrophic loss such as fire, flood or earthquake.
All of our research and
-39-
product innovation activities, manufacturing, our corporate headquarters
and other critical business operations are located near major earthquake faults in Mountain View,
California. Any such loss at any of our facilities could disrupt our operations, delay production, shipments and revenue and result in large
expense to repair and replace our facilities.
We May Need Additional Capital, which May Not Be Available, and Our Ability to Grow May be
Limited as a Result. We believe that our existing cash balances, available-for-sale securities,
credit facilities and cash flow expected to be generated from future operations will be sufficient
to meet our capital requirements at least through the next 12 months. However, we may be required,
or could elect, to seek additional funding prior to that time. The development and marketing of
new products and associated support personnel requires a significant commitment of resources. If
cash from available sources is insufficient, we may need additional capital, which may not be
available on favorable terms, if at all. If we cannot raise funds on acceptable terms, we may not
be able to develop or enhance our products, take advantage of future opportunities, fund potential
acquisitions or respond to competitive pressures or unanticipated requirements. Any inability to
raise additional capital when we require it would seriously harm our business.
Failure to Remediate the Material Weaknesses in Our Disclosure Controls and Procedures in a
Timely Manner, or At All, Could Harm Our Operating Results or Cause Us to Fail to Meet Our
Regulatory or Reporting Obligations. We evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report and, based on this evaluation,
management concluded that as of December 31, 2005, our disclosure controls and procedures were not
effective because of the material weaknesses detailed in Item 9A, Part II (Controls and Procedures)
of this report. In particular, the material weakness was identified related to a failure to
maintain adequate period-end review procedures over general ledger accounts. As a result, an error
in a system generated custom inventory report and errors in two key spreadsheets related to
warranty and deferred revenue resulted in incorrect entries being recorded to the financial
statements which were not identified and corrected by management in a timely manner. While we
believe that the material weaknesses did not have a material effect on our reported results, they
nevertheless constituted deficiencies in our disclosure controls and procedures. In addition, to
remediate the material weaknesses summarized above, we may need to implement additional controls
over the preparation and review of key spreadsheets, implement automated general ledger reports to
replace existing key spreadsheets where possible, correct a system generated custom report to
include additional information necessary to prepare accurate financial information, implement
additional review procedures and enhance the current capabilities of the finance function. If,
despite our remediation efforts, we fail to ameliorate our material weaknesses, we could be subject
to regulatory scrutiny and a loss of public confidence in our disclosure controls and procedures.
These remediation efforts will likely increase our general and administrative expenses and could,
therefore, have an adverse effect on our reported net income.
Even if we are to successfully remediate such material weaknesses, because of its inherent
limitations, our disclosure controls and procedures may not prevent or detect misstatements or
material omissions. Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures
We are exposed to market risks inherent in our operations, primarily related to interest rate
risk and currency risk. These risks arise from transactions and operations entered into in the
normal course of business. We do not use derivatives to alter the interest characteristics of our
marketable securities or our debt instruments. We have no holdings of derivative or commodity
instruments.
Interest Rate Risk. We are subject to interest rate risks on cash and cash equivalents,
available-for-sale marketable securities and any future financing requirements. Interest rate risks
related to marketable securities are managed by managing maturities in our marketable securities
portfolio. As of December 31, 2005, our available-for-sale
marketable securities have an average of 50 days to maturity. We have no long-term debt as of December 31, 2005.
The fair value of our investment portfolio or related income would not be significantly
impacted by changes in interest rates since the marketable securities maturities do not extend
beyond fiscal year 2006 and the interest rates are primarily fixed.
Qualitative Disclosures
Interest Rate Risk. Our primary interest rate risk exposures relate to:
-40-
|
|
|
The available-for-sale securities will fall in value if market interest rates increase. |
|
|
|
|
The impact of interest rate movements on our ability to obtain adequate financing to
fund future operations. |
We have the ability to hold at least a portion of the fixed income investments until maturity
and therefore would not expect the operating results or cash flows to be affected to any
significant degree by a sudden change in market interest rates on our short and long-term
marketable securities portfolio.
Management evaluates its financial position on an ongoing basis.
Currency Rate Risk.
We do not hedge any balance sheet exposures against future movements in foreign exchange
rates. The exposure related to currency rate movements would not have a material impact on future
net income or cash flows.
Item 8. Financial Statements and Supplementary Data
Our consolidated balance sheets as of December 31, 2005 and January 1, 2005 and the
consolidated statements of operations, comprehensive income (loss), stockholders equity and cash
flows for each of the three years in the period ended December 31, 2005, together with the related
notes and the report of our independent auditors, are on the following pages. Additional required
financial information is described in Item 14.
-41-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of IRIDEX Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of IRIDEX Corporation and
its subsidiaries at December 31, 2005 and January 1, 2005, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2005 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 31, 2006
-42-
IRIDEX Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
|
|
|
|
31, |
|
|
January 1, |
|
|
|
2005 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,655 |
|
|
$ |
10,381 |
|
Available-for-sale securities |
|
|
8,779 |
|
|
|
3,323 |
|
Accounts receivable, net of allowance for doubtful accounts of $559
in 2005 and $466 in 2004 |
|
|
6,589 |
|
|
|
7,404 |
|
Inventories, net |
|
|
8,594 |
|
|
|
8,922 |
|
Prepaids and other current assets |
|
|
885 |
|
|
|
814 |
|
Short term deferred income taxes |
|
|
1,415 |
|
|
|
1,808 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
38,917 |
|
|
|
32,652 |
|
Long term portion of available-for-sale securities |
|
|
|
|
|
|
4,324 |
|
Property and equipment, net |
|
|
1,114 |
|
|
|
852 |
|
Deferred income taxes |
|
|
1,073 |
|
|
|
1,265 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
41,104 |
|
|
$ |
39,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,094 |
|
|
$ |
1,233 |
|
Accrued expenses |
|
|
4,421 |
|
|
|
5,167 |
|
Deferred revenue |
|
|
1,072 |
|
|
|
910 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,587 |
|
|
|
7,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 5). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Convertible Preferred Stock, $.01 par value: |
|
|
|
|
|
|
|
|
Authorized: 2,000,000 shares;
|
|
|
|
|
|
|
|
|
Issued and outstanding: none |
|
|
|
|
|
|
|
|
Common Stock, $.01 par value: |
|
|
|
|
|
|
|
|
Authorized: 30,000,000 shares;
|
|
|
|
|
|
|
|
|
Issued and outstanding: 7,520,358 shares in 2005 and 7,308,857
shares in 2004 |
|
|
76 |
|
|
|
74 |
|
Additional paid-in capital |
|
|
26,334 |
|
|
|
25,281 |
|
Accumulated other comprehensive loss |
|
|
(27 |
) |
|
|
(35 |
) |
Treasury stock, at cost |
|
|
(430 |
) |
|
|
(430 |
) |
Retained earnings |
|
|
8,564 |
|
|
|
6,893 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
34,517 |
|
|
|
31,783 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
41,104 |
|
|
$ |
39,093 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-43-
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Sales |
|
$ |
37,029 |
|
|
$ |
32,810 |
|
|
$ |
31,699 |
|
Cost of sales |
|
|
18,854 |
|
|
|
17,922 |
|
|
|
17,628 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,175 |
|
|
|
14,888 |
|
|
|
14,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,195 |
|
|
|
4,509 |
|
|
|
4,032 |
|
Sales, general and administrative |
|
|
12,171 |
|
|
|
11,455 |
|
|
|
10,087 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
16,366 |
|
|
|
15,964 |
|
|
|
14,119 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,809 |
|
|
|
(1,076 |
) |
|
|
(48 |
) |
Interest and other income, net |
|
|
528 |
|
|
|
319 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,337 |
|
|
|
(757 |
) |
|
|
164 |
|
Benefit from (provision for) income taxes |
|
|
(666 |
) |
|
|
355 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
$ |
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
$ |
0.21 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income (loss) per
common share basic calculations |
|
|
7,405 |
|
|
|
7,200 |
|
|
|
6,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income (loss) per
common share diluted
calculations |
|
|
7,880 |
|
|
|
7,200 |
|
|
|
7,072 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-44-
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Stock |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Total |
|
Balances, December 28, 2002 |
|
|
6,905,998 |
|
|
$ |
70 |
|
|
$ |
23,631 |
|
|
$ |
(430 |
) |
|
$ |
3 |
|
|
$ |
6,924 |
|
|
$ |
30,198 |
|
Issuance of Common Stock
under Stock Option
Plan |
|
|
52,466 |
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
Issuance of Common Stock under
Employee Stock Purchase
Plan |
|
|
28,569 |
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
Tax Benefit of Employee Stock
Option Plan |
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Change in unrealized gains on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371 |
|
|
|
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 3, 2004 |
|
|
6,987,033 |
|
|
|
70 |
|
|
|
23,900 |
|
|
|
(430 |
) |
|
|
(1 |
) |
|
|
7,295 |
|
|
|
30,834 |
|
Issuance of Common Stock
under Stock Option Plan |
|
|
294,852 |
|
|
|
4 |
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085 |
|
Issuance of Common Stock
under Employee Stock
Purchase Plan |
|
|
26,972 |
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
Tax Benefit of Employee Stock
Option Plan |
|
|
|
|
|
|
|
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178 |
|
Change in unrealized gains on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
(34 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(402 |
) |
|
|
(402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2005 |
|
|
7,308,857 |
|
|
|
74 |
|
|
|
25,281 |
|
|
|
(430 |
) |
|
|
(35 |
) |
|
|
6,893 |
|
|
|
31,783 |
|
Issuance of Common Stock
under Stock Option Plan |
|
|
183,873 |
|
|
|
2 |
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
663 |
|
Issuance of Common Stock
under Employee Stock
Purchase Plan |
|
|
27,628 |
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
Tax Benefit of Employee Stock
Option Plan |
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171 |
|
Change in unrealized gains on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Warrants issued for services |
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,671 |
|
|
|
1,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 |
|
|
7,520,358 |
|
|
$ |
76 |
|
|
$ |
26,334 |
|
|
$ |
(430 |
) |
|
$ |
(27 |
) |
|
$ |
8,564 |
|
|
$ |
34,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-45-
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
$ |
371 |
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
435 |
|
|
|
384 |
|
|
|
703 |
|
Issuance of warrant |
|
|
87 |
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
|
132 |
|
|
|
376 |
|
|
|
(142 |
) |
Provision for inventories |
|
|
407 |
|
|
|
694 |
|
|
|
(63 |
) |
Deferred income taxes |
|
|
585 |
|
|
|
(579 |
) |
|
|
(235 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
683 |
|
|
|
(1,232 |
) |
|
|
1,631 |
|
Inventories |
|
|
(436 |
) |
|
|
(895 |
) |
|
|
2,067 |
|
Prepaids and other current assets |
|
|
(71 |
) |
|
|
120 |
|
|
|
(175 |
) |
Accounts payable |
|
|
(139 |
) |
|
|
204 |
|
|
|
372 |
|
Accrued expenses |
|
|
(746 |
) |
|
|
1,787 |
|
|
|
356 |
|
Deferred revenue |
|
|
162 |
|
|
|
314 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,770 |
|
|
|
771 |
|
|
|
5,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(8,770 |
) |
|
|
(7,681 |
) |
|
|
(5,755 |
) |
Proceeds from maturity of available-for-sale securities |
|
|
7,646 |
|
|
|
5,751 |
|
|
|
2,356 |
|
Acquisition of property and equipment |
|
|
(340 |
) |
|
|
(386 |
) |
|
|
(603 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,464 |
) |
|
|
(2,316 |
) |
|
|
(4,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock purchase and option
plans |
|
|
968 |
|
|
|
1,385 |
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
968 |
|
|
|
1,385 |
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
2,274 |
|
|
|
(160 |
) |
|
|
1,355 |
|
Cash and cash equivalents, beginning of year |
|
|
10,381 |
|
|
|
10,541 |
|
|
|
9,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
12,655 |
|
|
$ |
10,381 |
|
|
$ |
10,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
209 |
|
|
$ |
25 |
|
|
$ |
138 |
|
The accompanying notes are an integral part of these consolidated financial statements.
-46-
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
$ |
371 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized losses on
available-for-sale securities, net |
|
|
6 |
|
|
|
(34 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,677 |
|
|
$ |
(436 |
) |
|
$ |
367 |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an itegral part of these consolidated
financial statements.
-47-
IRIDEX Corporation
Notes to Consolidated Financial Statements
1. |
|
Business of the Company |
Description of Business
IRIDEX Corporation is a
worldwide provider of therapeutic based laser systems used to treat
eye diseases in ophthalmology and skin lesions in dermatology.
2. |
|
Summary of Significant Accounting Policies |
Financial Statement Presentation
The consolidated financial statements include our accounts and our wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents. The Company invests primarily in money market
funds and government paper; accordingly, these investments are subject to minimal credit risk.
Available-for-Sale Securities
All marketble securities as of December 31, 2005 and January 1, 2005 are considered to be
available-for-sale and therefore are carried at fair value. Available-for-sale securities are
classified as current assets when they have scheduled maturities of less than one year.
Available-for-sale securities are classified as non current assets when they have scheduled
maturities of more than one year. Marketable securities include auction rate and floating rate
securities. These securities are structured as short-term, highly liquid investments that can be
readily converted into cash every 30, 60 or 90 days. However, since the stated or contractual
maturities of these securities is greater than 90 days, these securities are classified as
marketable securities and not cash equivalents. 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.
Sales Returns Allowance and Allowance for Doubtful Accounts
In the process of preparing financial statements we must make estimates and assumptions that
affect the reported amount of assets and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reported period. Specifically, we must estimate future product returns related to current period
product revenue. We analyze historical returns, and changes in customer
demand and acceptance of our products when evaluating the adequacy of the sales returns allowance
and other allowances. Significant management judgments and estimates must be made and used in
connection with establishing the sales returns and other allowances in any accounting period.
Material differences may result in the amount and timing of our revenue for any period if
management made different judgments or utilized different estimates. The provision for sales
returns amounted to $0.2 million in 2005, 2004 and 2003. Similarly our management must make estimates of the
uncollectibility of our accounts receivable. Management specifically analyzes accounts receivable
and
-48-
analyzes historical bad debts, customer concentrations, customer credit-worthiness, current
economic trends and changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts.
Inventories
Inventories are stated at the lower of cost or market and include on-hand inventory, sales
demo inventory and service loaner inventory. Cost is determined on a standard cost basis which
approximates actual cost on a first-in, first-out (FIFO) method. Lower of cost or market is
evaluated by considering obsolescence, excessive levels of inventory, deterioration and other
factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are
made for estimated excess, obsolescence or impaired inventory and are charged to cost of goods
sold. Factors influencing these adjustments include changes in demand, product life cycle and
development plans, component cost trends, product pricing, physical deterioration and quality
issues. Revisions to these adjustments would be required if these factors differ from our
estimates.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is provided on a straight-line basis over the estimated useful lives of the assets,
which is generally three years. Amortization of leasehold improvements and property and equipment
is computed using the straight-line method over the estimated useful life of the related assets,
typically three years.
Revenue Recognition
Revenue from product sales is recognized upon receipt of a purchase order and product shipment
provided no significant obligations remain and collection of the receivables is reasonably assured.
Shipments are generally made with Free-On-Board (FOB) shipping point terms, whereby title passes
upon shipment from our dock. Any shipments with FOB receiving point terms are recorded as revenue
when the shipment arrives at the receiving point. Up-front fees received in connection with
product sales are deferred and recognized over the associated product
shipments. Revenue relating to extended warranty contracts is
recognized on a straight line basis over the period of the applicable
warranty contract. We recognize service repair revenue upon
completion of the work. Cost is recognized as incurred.
Deferred Revenue
Revenue related to warranty contracts is recognized on a straight line basis over the
period of the applicable contract. Cost is recognized as incurred. A reconciliation of the
changes in the Companys deferred revenue balances for the years ended January 1, 2005 and December
31, 2005 follows (in thousands):
|
|
|
|
|
Balance, January 3, 2004 |
|
$ |
596 |
|
|
Additions to deferral |
|
|
1,146 |
|
|
Revenue recognized |
|
|
(832 |
) |
|
|
|
|
|
Balance, January 1, 2005 |
|
|
910 |
|
|
Additions to deferral |
|
|
1,451 |
|
|
Revenue recognized |
|
|
(1,289 |
) |
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
1,072 |
|
|
|
|
|
-49-
Warranty
The Company accrues for estimated warranty costs upon shipment of products. Actual warranty
costs incurred have not materially differed from those accrued. The Companys warranty policy is
effective for shipped products which are considered defective or fail to meet the product
specifications. Warranty costs are reflected in the statement of operations as a cost of sales. A
reconciliation of the changes in the Companys warranty liability for the years ended January 1,
2005 and December 31, 2005 follows (in thousands):
|
|
|
|
|
Balance, January 3, 2004 |
|
$ |
801 |
|
|
|
|
|
|
Accruals for warranties issued during the year |
|
|
861 |
|
|
|
|
|
|
Settlements made in kind during the year |
|
|
(729 |
) |
|
|
|
|
|
|
|
|
|
Balance, January 1, 2005 |
|
$ |
933 |
|
|
|
|
|
|
Accruals for warranties issued during the year |
|
|
1,163 |
|
|
|
|
|
|
Settlements made in kind during the year |
|
|
(968 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
1,128 |
|
|
|
|
|
Research
and Development
Research
and development expenditures are charged to operations as incurred.
Advertising
We expense advertising costs as they are incurred. Advertising expenses for 2005, 2004 and
2003 were $288,000, $218,000 and $311,000, respectively.
Fair Value of Financial Instruments
Carrying amounts of our financial instruments including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value due to their short
maturities.
-50-
Estimated fair values for available-for-sale securities, which are separately
disclosed elsewhere, are based on quoted market prices for the same or similar instruments.
Income Taxes
Deferred assets and liabilities are recognized for the future consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with provisions
of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees)
and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) as amended by SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123.
Under APB 25, compensation expense for grants to employees is based on the difference, if any,
on the date of the grant, between the fair value of the Companys stock and the options exercise
price. SFAS 123 defines a fair value based method of accounting for an employee stock option or
similar equity investment. The pro forma disclosure of the difference between compensation expense
included in net loss and the related cost measured by the fair value method is presented below.
The following table provides a reconciliation of net income (loss) to pro forma net loss as if
the fair value method had been applied to all awards (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Net income (loss), as reported |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
$ |
371 |
|
|
Add: Total stock based
compensation expense determined
under fair value based method for
all awards, net of tax |
|
|
(966 |
) |
|
|
(560 |
) |
|
|
(534 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
705 |
|
|
$ |
(962 |
) |
|
$ |
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.10 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.21 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.09 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
-51-
The fair value of each option grant has been estimated on the date of grant using the
Black-Scholes multiple option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
Group A |
|
Group B |
|
Group A |
|
Group B |
|
Group A |
|
Group B |
Risk-free Interest Rates |
|
|
4.40 |
% |
|
|
4.40 |
% |
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
3.30 |
% |
|
|
3.30 |
% |
Expected Life |
|
7 years |
|
5 years |
|
4 years |
|
4 years |
|
4 years |
|
4 years |
Volatility |
|
|
0.83 |
|
|
|
0.77 |
|
|
|
0.88 |
|
|
|
0.88 |
|
|
|
0.88 |
|
|
|
0.88 |
|
Dividend Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average expected life was calculated based on the exercise behavior of each
group. Group A represents officers and directors who are a smaller group holding a greater average
number of options than other option holders and who tend to exercise later in the vesting period.
Group B are all other option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period.
The weighted average grant-date fair value per share of those options granted in 2005, 2004
and 2003 was $4.45, $4.89 and $2.96, respectively.
The Company accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees, or in Conjunction with Selling Goods and
Services, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure an Amendment of FASB Statement No. 123. Stock-based compensation expense related to
stock options granted to non-employees is recognized on a straight line basis as the stock options
are earned. The stock-based compensation expense will fluctuate as the deemed fair market value of
the common stock fluctuates. There were no equity instruments issued to non-employees in 2005,
2004 and 2003.
The Company has also estimated the fair value for the purchase rights issued under our 1995
Employee Stock Purchase Plan, under the Black-Scholes valuation model using the following
assumptions for 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Risk-free Interest Rates |
|
|
4.20 |
% |
|
|
2.56 |
% |
|
|
1.45 |
% |
Expected Life |
|
0.5 year |
|
0.5 year |
|
0.5 year |
Volatility |
|
|
0.46 |
|
|
|
0.84 |
|
|
|
0.86 |
|
Dividend Yield |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value per share of those purchase rights granted in
2005, 2004 and 2003 was $2.19, $1.37 and $1.01, respectively.
Concentration of Credit Risk and Other Risks and Uncertainties
The Companys cash and cash equivalents are deposited in demand and money market accounts of
three financial institutions. Deposits held with banks may exceed the amount of insurance provided
on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal
risk.
-52-
The Company markets its products to distributors and end-users throughout the world. Sales to
international distributors are generally made on open credit terms and letter of credit. Management
performs ongoing credit evaluations of our customers and maintains an allowance for potential
credit losses. Historically, the Company has not experienced any significant losses related to
individual customers or group of customers in any particular geographic area. For the years ended
December 31, 2005, January 1, 2005 and January 3, 2004 no customer accounted for greater than 10%
of revenue. As of December 31, 2005, January 1, 2005 and January 3, 2004 no customers accounted
for more than 10% of accounts receivable.
The Companys products require approvals from the Food and Drug Administration and
international regulatory agencies prior to commercialized sales. The Companys future products may
not receive required approvals. If the Company were denied such approvals, or if such approvals
were delayed, it would have a materially adverse impact on the Companys business, results of
operations and financial condition.
Reliance on Certain Suppliers
Certain components and services used by the Company to manufacture and develop its products
are presently available from only one or a limited number of suppliers or vendors. The loss of any
of these suppliers or vendors would potentially require a significant level of hardware and/or
software development to incorporate the products or services into the Companys products.
Use of Estimates
In accordance with accounting principles generally accepted in the United States of America,
management utilizes certain estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expense during the reporting period. The primary estimates underlying the Companys financial
statements include allowance for doubtful accounts receivable, reserves for obsolete and slow
moving inventory, product warranty, income taxes and accrual for other liabilities. Actual results
could differ from those estimates.
Fiscal Year
The Companys fiscal year covers a 52 or 53 week period and ends on the Saturday nearest
December 31. Fiscal year 2004 and 2005 included 52 weeks. Fiscal year 2003 included 53 weeks.
Net Income (loss) per Share
Basic and diluted net income (loss) per share are computed by dividing net income (loss) for
the year by the weighted average number of shares of common stock outstanding during the period.
The calculation of diluted net income (loss) per share excludes potential common stock if their
effect is anti-dilutive. Potential common stock consists of incremental common shares issuable
upon the exercise of stock options. See Note 10.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
"Share-Based Payment An Amendment of FASB Statements No. 123 and 95 (SFAS 123R). The new
pronouncement replaces the existing requirements under SFAS 123 and APB 25. According to SFAS 123R,
all forms of share-based payments to employees, including employee stock options and employee stock
purchase plans, would be treated the same as any other form of compensation by recognizing the
related cost
-53-
in the statement of operations. This pronouncement eliminates the ability to account
for stock-based compensation transactions using APB 25 and generally requires that such
transactions be accounted for using a fair-value based method. The statement requires companies to
assess the most appropriate model to calculate the value of the options. We currently use the
Black-Scholes option pricing model to value options; however, we are currently assessing which
model we may use in the future under the new statement and may deem an alternative model to be the
most appropriate. The use of a different model to value options may result in a different fair
value than would result from the use of the Black-Scholes option pricing model. In addition, there
are a number of other requirements under the new standard that would result in different accounting
treatment than is currently required. These differences include, but are not limited to, the
accounting for the tax benefit on employee stock options and for stock issued under our employee
stock purchase plan, and the presentation of these tax benefits within the statement of cash flows.
We will adopt SFAS 123R using the prospective method of adoption.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB 107). SAB 107 provides guidance on the initial implementation of SFAS 123R. In
particular, the statement includes guidance related to share-based payment awards for
non-employees, valuation methods and selecting underlying assumptions such as expected volatility
and expected term. SAB 107 also gives guidance on the classification of compensation expense
associated with such awards and accounting for the income tax effects of those awards upon the
adoption of SFAS 123R.
In April 2005, the SEC announced the adoption of a new rule that amends the effective date of
SFAS 123R. The effective date of the new standard under these new rules for our financial
statements is January 1, 2006. Adoption of this statement is expected to have a significant impact
on our financial statements as we will be required to expense the fair value of our stock option
grants and stock purchases under our employee stock purchase plan (ESPP) rather than disclose the
impact on our net loss within our footnotes, as is our current practice. The full impact of SFAS
123R on our financial statements and related disclosures is still being evaluated by management but
is expected to be material to our results of operations. Our actual share-based compensation
expense in 2006 will be dependent on a number of factors, including the amount of awards granted
and the fair value of those awards at the time of grant.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections -
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes the
accounting for and reporting of a change in accounting principle by requiring retrospective
application to prior periods financial statements of changes in accounting principle unless
impracticable. SFAS 154 is effective for accounting changes made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on our
results of operations, financial position or cash flows.
-54-
Available-for-sale securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Estimated |
|
|
Maturity |
|
|
Cost |
|
|
Gain (Loss) |
|
|
Fair Value |
|
|
Dates |
As of December 31, 2005, available-for-sale securities consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
|
$ |
5,442 |
|
|
$ |
(19 |
) |
|
$ |
5,423 |
|
|
|
2/066/06 |
|
Government agencies |
|
|
3,364 |
|
|
|
(8 |
) |
|
|
3,356 |
|
|
|
1/063/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,806 |
|
|
$ |
(27 |
) |
|
$ |
8,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2005, short term available-for-sale securities consisted of the following : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
|
$ |
3,345 |
|
|
$ |
(22 |
) |
|
$ |
3,323 |
|
|
|
5/05 8/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,345 |
|
|
$ |
(22 |
) |
|
$ |
3,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2005, long term available-for-sale securities consisted of the following : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
|
$ |
4,312 |
|
|
$ |
(12 |
) |
|
$ |
4,324 |
|
|
|
2/06 5/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,312 |
|
|
$ |
(12 |
) |
|
$ |
4,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no realized capital gains or losses recognized in 2005, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
January 1, |
|
|
|
2005 |
|
|
2005 |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and work in process |
|
$ |
5,191 |
|
|
$ |
5,460 |
|
Finished goods |
|
|
3,403 |
|
|
|
3,462 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
8,594 |
|
|
$ |
8,922 |
|
|
|
|
|
|
|
|
Property and Equipment: |
|
|
|
|
|
|
|
|
Equipment |
|
$ |
4,937 |
|
|
$ |
4,264 |
|
Leasehold improvements |
|
|
1,921 |
|
|
|
1,903 |
|
Less: accumulated depreciation and amortization |
|
|
(5,744 |
) |
|
|
(5,315 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
1,114 |
|
|
$ |
852 |
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment was $435,000, $384,000 and $703,000 for the
years ended
December 31, 2005, January 1, 2005 and January 3, 2004.
|
|
|
|
|
|
|
|
|
Accrued Expenses: |
|
|
|
|
|
|
|
|
Accrued payroll, vacation and related expenses |
|
$ |
1,671 |
|
|
$ |
1,100 |
|
Accrued warranty |
|
|
1,129 |
|
|
|
933 |
|
Income taxes payable |
|
|
552 |
|
|
|
783 |
|
Sales and use tax payable |
|
|
220 |
|
|
|
1,277 |
|
Other accrued expenses |
|
|
849 |
|
|
|
1,074 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
4,421 |
|
|
$ |
5,167 |
|
|
|
|
|
|
|
|
4. Bank Borrowings
The Company has a revolving line of credit agreement with a bank expiring on October 5, 2006,
which provides for borrowings of up to $4.0 million at the banks prime rate (7.25% at December 31,
2005).
-55-
The agreement contains restrictive covenants including prohibiting payment of dividends
without the banks prior consent. There were no borrowings against the credit line at December 31,
2005.
5. Commitments and Contingencies
Lease Agreements
The Company leases its operating facilities under a noncancelable operating lease. In
September 2003, the Company entered into a lease amendment for our facility in Mountain View. The
original lease term of this facility, which ended in February 2004, was amended and extended until
February 2009. The lease was also amended to grant the Company an option to renew this lease for
an additional five year period beginning 2009 until 2014 at a base monthly rental amount to be
negotiated at the time of the renewal. Rent expense totaled $403,000, $403,000 and $606,000 for
the years ended December 31, 2005, January 1, 2005 and January 3, 2004 respectively.
Future minimum lease payments under current operating leases at December 31, 2005 are
summarized as follows (in thousands):
|
|
|
|
|
Fiscal Year |
|
Operating Lease Payments |
|
2006 |
|
$ |
402 |
|
2007 |
|
|
416 |
|
2008 |
|
|
429 |
|
2009 |
|
|
72 |
|
|
|
|
|
|
|
$ |
1,319 |
|
|
|
|
|
License Agreements
The Company is obligated to pay royalties equivalent to 5% and 7.5% of sales on certain
products under certain license agreements. Royalty expense was $71,000, $80,000 and $93,000 for
the years ended December 31, 2005, January 1, 2005 and January 3, 2004, respectively.
Contingencies
In October 2005, the Company filed suit against Synergetics, USA, Inc. for infringement of a
patent. The Company seeks injunctive relief, monetary damages, treble damages, cost and attorneys
fees. Synergetics answered the Companys complaint in November 2005 and denied liability for
patent infringement, filing counterclaims seeking a declaratory judgment that it did not infringe
the Companys patent. Synergetics also brought three additional counterclaims for false
advertising, commercial disparagement, trade libel, injurious falsehood, unfair competition,
disparagement of property, slander of goods and defamation, under state and federal law, based upon
allegations that the Company had raised safety issues involving Synergetics product with the Food
and Drug Administration and the public. Synergetics seeks monetary damages, costs and attorneys
fees. The Companys response to those counterclaims was a denial of wrongdoing and a reference to
the expiration of the statute of limitations on those claims. Management believes that liabilities
resulting from such proceedings, or claims which are pending or known to be threatened will not
have a material adverse effect on the Companys financial position or results of operation. While
we believe its not material to the companys operations, the company may incur significant
dedication of management resources and legal costs in connection with this lawsuit.
-56-
The Company enters into standard indemnification arrangements in our ordinary course of
business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to
reimburse the indemnified parties for losses suffered or incurred by the indemnified party,
generally our business partners or customers, in connection with any trade secret, copyright,
patent or other intellectual property infringement claim by any third party with respect to our
products. The term of these indemnification agreements is generally perpetual anytime after the
execution of the agreement. The maximum potential amount of future payments the Company could be
required to make under these agreements is not determinable. The Company has never incurred costs
to defend lawsuits or settle claims related to these indemnification agreements. As a result, the
Company believes the estimated fair value of these agreements is minimal.
The Company has entered into indemnification agreements with its directors and officers that
may require the Company: to indemnify its directors and officers against liabilities that may arise
by reason of their status or service as directors or officers, other than liabilities arising from
willful misconduct of a culpable nature; to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and to make good faith determination
whether or not it is practicable for the Company to obtain directors and officers insurance. The
Company currently has directors and officers insurance.
6. Stockholders Equity
Convertible Preferred Stock
Our Articles of Incorporation authorize 2,000,000 shares of undesignated preferred stock.
Preferred Stock may be issued from time to time in one or more series. As of December 31, 2005, we
had no preferred stock issued and outstanding.
Treasury Stock
In December 1998, we instituted a stock repurchase program whereby up to 150,000 shares of our
Common Stock may be repurchased in the open market. We plan to utilize all of the reacquired
shares for reissuance in connection with our employee stock programs. In 2003, 2004 and 2005, no
shares of Common Stock were repurchased. As of December 31, 2005 we have repurchased 103,000
shares of common stock. There are no plans to repurchase additional shares as the stock repurchase
program has been discontinued in 2005.
Stock Option Plans
Amended and Restated 1989 Incentive Stock Plan
The Amended and Restated 1989 Plan (the 1989 Plan) provided for the grant of options and
stock purchase rights to purchase shares of our Common Stock to employees and consultants. The
terms of the 1989 Plan, which expired in August 1999, are substantially the same as the 1998 Plan
described below.
1998 Stock Plan
The 1998 Stock Plan
(the 1998 Plan), as amended, 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, stock
purchase rights (SPRs), restricted stock, restricted stock units, performance shares, performance
units and stock appreciation rights. The
-57-
exercise price of incentive stock options and stock
appreciation rights granted under the 1998 Plan must be at least equal to the fair market value of
the shares at the time of grant. With respect to any recipient who owns stock possessing more than
10% of the voting power of our outstanding capital stock, the exercise price of any option or SPR
granted must be at least equal to 110% of the fair market value at the time of grant. Options
granted under the 1998 Plan are exercisable at such times and under such conditions as determined
by the Administrator; generally over a four year period. The maximum term of incentive stock
options granted to any recipient must not exceed ten years; provided, however, that the maximum
term of an incentive stock option granted to any recipient possessing more than 10% of the voting
power of our outstanding capital stock must not exceed five years. In the case of SPRs, unless the
Administrator determines otherwise, we have a repurchase option exercisable upon the voluntary or
involuntary termination of the purchasers employment with us for any reason (including death or
disability). Such repurchase option lapses at a rate determined by the Administrator. The
purchase price for shares repurchased by us is the original price paid by the purchaser. As of
December 31, 2005 and January 1, 2005, no shares were subject to repurchase. The form of
consideration for exercising an option or stock purchase right, including the method of payment, is
determined by the Administrator. The 1998 Plan expires in June 2008.
1995 Director Option Plan
In October 1995, we adopted the 1995 Director Option Plan (the Director Plan), under which
members of the Board of Directors are granted options to purchase 11,250 shares upon the first to
occur of their appointment or the adoption of the Director Plan (First Option) and an option to
purchase 3,750 shares (Subsequent Option) on July 1 of each year thereafter provided that he or
she has served on the Board for at least the preceding six months. The options granted are at fair
market value on the date of grant. The First Option becomes exercisable as to one-twelfth (1/12)
of the shares subject to the First Option for each quarter over a three-year period. Each
Subsequent Option becomes exercisable as to one-fourth (1/4) of the shares subject to the
Subsequent Option for each quarter, commencing one quarter after the First Option and any
previously granted Subsequent Options have become fully exercisable. Options granted under the
Director Plan have a term of 10 years.
In the event of our merger with or into another corporation, resulting in a change of control,
or the sale of substantially all of our assets, each Director Plan options become exercisable in
full and shall be exercisable for 30 days after written notice to the holder of the event causing
the change in control.
The Director Plan terminated in 2005.
Stand-Alone Option
In July 2005, in connection with the employment of the Companys Chief Executive Officer, the
Companys Board of Directors granted a stand alone option, outside of the Companys existing stock
plans, to the Chief Executive Officer. The option entitles Mr. Caldwell to purchase up to 234,104
shares of the Companys common stock at an exercise price of $6.07 per share. In conjunction with
the employment of the Companys Chief Executive Officer, in consideration of services performed
under a recruiting contract, the Company issued a warrant to purchase 25,000 shares of the
Companys common stock at an exercise price of $6.07 per share. The warrant is exercisable at any
time and expires on July 5, 2008. The fair value of the warrants of $87,000 was recorded as an
expense for the twelve month period ended December 31, 2005. The fair value of the warrant was
calculated using the Black-Scholes pricing model with the following assumptions: dividend yield 0
percent, contractual life of 3 years, risk free rates of 4.04 percent and volatility of 83 percent.
At December 31, 2005, the warrant remains outstanding.
-58-
2005 Employee Stock Purchase Plan
Our 2005 Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of
Directors in June 2005. The total number of shares of common stock reserved for issuance under the
Purchase Plan at December 31, 2005 was 57,822. The Purchase Plan permits eligible employees
(including officers) to purchase Common Stock through payroll deductions, which may not exceed 10%
of an employees compensation. No employee may purchase more than $25,000 worth of stock in any
calendar year or more than 2,000 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.
Information with respect to activity under these option plans are set forth below (in
thousands except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
|
Shares |
|
|
|
|
|
|
|
|
Weighted |
|
|
Available |
|
|
Number |
|
|
Aggregate |
|
|
Average |
|
|
for Grant |
|
|
of Shares |
|
|
Price |
|
|
Exercise Price |
Balances, December 28, 2002 |
|
|
399,747 |
|
|
|
1,700,863 |
|
|
|
8,687 |
|
|
5.11 |
Additional shares reserved |
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(395,000 |
) |
|
|
395,000 |
|
|
|
1,516 |
|
|
3.84 |
Options exercised |
|
|
|
|
|
|
(52,466 |
) |
|
|
(179 |
) |
|
3.40 |
Options cancelled |
|
|
(649 |
) |
|
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
39,114 |
|
|
|
(39,114 |
) |
|
|
(189 |
) |
|
4.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 3, 2004 |
|
|
313,212 |
|
|
|
2,004,283 |
|
|
|
9,835 |
|
|
4.91 |
Additional shares reserved |
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(214,750 |
) |
|
|
214,750 |
|
|
|
1,379 |
|
|
6.42 |
Options exercised |
|
|
|
|
|
|
(294,852 |
) |
|
|
(1,085 |
) |
|
3.68 |
Options cancelled |
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
100,789 |
|
|
|
(100,789 |
) |
|
|
(701 |
) |
|
6.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2005 |
|
|
454,251 |
|
|
|
1,823,392 |
|
|
|
9,428 |
|
|
5.18 |
Additional shares reserved |
|
|
434,104 |
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(622,050 |
) |
|
|
622,050 |
|
|
|
3,791 |
|
|
6.09 |
Warrants issued |
|
|
(25,000 |
) |
|
|
25,000 |
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(183,873 |
) |
|
|
(663 |
) |
|
3.60 |
Options cancelled |
|
|
(78,355 |
) |
|
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
132,566 |
|
|
|
(132,566 |
) |
|
|
(866 |
) |
|
6.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 |
|
|
295,516 |
|
|
|
2,154,003 |
|
|
$ |
11,845 |
|
|
$5.50 |
|
|
|
|
|
|
|
|
|
|
|
|
-59-
The following table summarizes information with respect to stock options outstanding at
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Weighted Average |
|
|
Number |
|
|
Weighted Average |
|
|
|
Outstanding |
|
|
Contractual Life |
|
|
Exercise |
|
|
Exercisable |
|
|
Exercise |
|
Range of Exercise Prices |
|
at 12/31/05 |
|
|
(Years) |
|
|
Price |
|
|
at 12/31/05 |
|
|
Price |
|
$2.94- $3.50 |
|
|
271,482 |
|
|
|
7.17 |
|
|
$ |
3.36 |
|
|
|
176,327 |
|
|
$ |
3.38 |
|
$3.52 - $3.98 |
|
|
162,558 |
|
|
|
6.13 |
|
|
|
3.67 |
|
|
|
138,433 |
|
|
|
3.68 |
|
$4.00 - $4.00 |
|
|
284,289 |
|
|
|
1.80 |
|
|
|
4.00 |
|
|
|
284,289 |
|
|
|
4.00 |
|
$4.01 - $5.00 |
|
|
222,710 |
|
|
|
5.50 |
|
|
|
4.42 |
|
|
|
177,420 |
|
|
|
4.41 |
|
$5.08 - $5.50 |
|
|
228,334 |
|
|
|
7.01 |
|
|
|
5.24 |
|
|
|
84,272 |
|
|
|
5.29 |
|
$5.56 - $6.00 |
|
|
119,838 |
|
|
|
8.62 |
|
|
|
5.64 |
|
|
|
38,828 |
|
|
|
5.62 |
|
$6.07 - $6.07 |
|
|
300,000 |
|
|
|
9.51 |
|
|
|
6.07 |
|
|
|
0 |
|
|
|
0.00 |
|
$6.19 - $7.25 |
|
|
228,154 |
|
|
|
7.85 |
|
|
|
6.66 |
|
|
|
102,821 |
|
|
|
6.72 |
|
$7.38 - $9.00 |
|
|
247,950 |
|
|
|
5.03 |
|
|
|
8.49 |
|
|
|
175,431 |
|
|
|
8.62 |
|
$9.06 - $14.88 |
|
|
88,688 |
|
|
|
4.47 |
|
|
|
10.22 |
|
|
|
83,063 |
|
|
|
10.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.94 - $14.88 |
|
|
2,154,003 |
|
|
|
6.31 |
|
|
$ |
5.50 |
|
|
|
1,260,884 |
|
|
|
5.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2005 and January 3, 2004 options to purchase 1,823,392 and 1,354,937 shares
of common stock were exercisable at a weighted average exercise price of $ 5.36 and $5.29,
respectively.
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. On April 1, 2000 the Company commenced a Company match for
the 401(k) in the amount of 50% of employee contributions up to an annual maximum of $1,000 per
year. The Company contributions totaled $94,000 in 2005, $88,000 in 2004 and $89,000 in 2003.
8. Income Taxes
The provision for income taxes includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
59 |
|
|
$ |
212 |
|
|
$ |
19 |
|
State |
|
|
31 |
|
|
|
14 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
226 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
451 |
|
|
|
(519 |
) |
|
|
(148 |
) |
State |
|
|
125 |
|
|
|
(62 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
576 |
|
|
|
(581 |
) |
|
|
(235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) |
|
$ |
666 |
|
|
$ |
(355 |
) |
|
$ |
(207 |
) |
|
|
|
|
|
|
|
|
|
|
-60-
The Companys effective tax rate differs from the statutory federal income tax rate as
shown in the following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Income tax provision at statutory rate |
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
State income taxes, net of federal benefit |
|
|
6 |
% |
|
|
8 |
% |
|
|
6 |
% |
Tax exempt interest |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Nondeductible permanent differences |
|
|
1 |
% |
|
|
(5 |
%) |
|
|
19 |
% |
Research and development credits |
|
|
(13 |
%) |
|
|
12 |
% |
|
|
(164 |
%) |
Other |
|
|
0 |
% |
|
|
(2 |
%) |
|
|
(22 |
%) |
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
28 |
% |
|
|
47 |
% |
|
|
(127 |
%) |
|
|
|
|
|
|
|
|
|
|
The tax effect of temporary differences and carry-forwards that give rise to significant
portions of the net deferred tax assets are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
January 1, |
|
|
|
2005 |
|
|
2005 |
|
Fixed assets |
|
$ |
558 |
|
|
$ |
640 |
|
Accrued liabilities |
|
|
595 |
|
|
|
1,039 |
|
Allowance for excess and obsolete inventories |
|
|
599 |
|
|
|
514 |
|
Research credit |
|
|
514 |
|
|
|
626 |
|
State tax |
|
|
1 |
|
|
|
1 |
|
Allowance for doubtful accounts |
|
|
215 |
|
|
|
184 |
|
Other |
|
|
6 |
|
|
|
69 |
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
2,488 |
|
|
$ |
3,073 |
|
|
|
|
|
|
|
|
As
of December 31, 2005, the Company had Federal and State research
credit carryforwards of approximately $192,000 and $451,000 available
to offset future liabilities. The Federal credits will begin expiring
in 2022 if not used. The state research credits do not expire.
9. Major Customers and Business Segments
The Company operates in two reportable segments: the ophthalmology medical device segment and
the dermatology medical device segment. In both segments, the Company
develops, manufactures and
markets medical devices. Our revenues arise from the sale of consoles, delivery devices,
disposables and service and support activities.
In the years ended December 31, 2005, January 1, 2005 and January 3, 2004, no customer
individually accounted for more than 10% of our revenue.
Revenue information shown (in thousands) by geographic region is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
22,713 |
|
|
$ |
19,894 |
|
|
$ |
20,072 |
|
Europe |
|
$ |
7,138 |
|
|
|
6,498 |
|
|
|
5,297 |
|
Rest of Americas |
|
$ |
1,703 |
|
|
|
631 |
|
|
|
1,000 |
|
Asia/Pacific Rim |
|
$ |
5,475 |
|
|
|
5,787 |
|
|
|
5,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,029 |
|
|
$ |
32,810 |
|
|
$ |
31,699 |
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on location of customers.
In the years ended December 31, 2005, January 1, 2005 and January 3, 2004, no country
individually accounted for more than 10% of the Companys sales, except for the United States,
which accounted for 61.4% of sales in 2005, 60.6% in 2004 and 63.3% in 2003.
-61-
Information on reportable segments for the three years ended December 31, 2005, January 1,
2005, and January 3, 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
|
Ophthalmology |
|
|
Dermatology |
|
|
|
|
|
|
Medical Devices |
|
|
Medical Devices |
|
|
Total |
|
Sales |
|
$ |
30,663 |
|
|
$ |
6,366 |
|
|
$ |
37,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of goods sold |
|
$ |
10,374 |
|
|
$ |
3,138 |
|
|
$ |
13,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct gross margin |
|
$ |
20,289 |
|
|
$ |
3,228 |
|
|
$ |
23,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated indirect costs |
|
|
|
|
|
|
|
|
|
$ |
21,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
$ |
1,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 1, 2005 |
|
|
|
Ophthalmology |
|
|
Dermatology |
|
|
|
|
|
|
Medical Devices |
|
|
Medical Devices |
|
|
Total |
|
Sales |
|
$ |
27,753 |
|
|
$ |
5,057 |
|
|
$ |
32,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of goods sold |
|
$ |
9,876 |
|
|
$ |
2,898 |
|
|
$ |
12,774 |
|
|
|
|
|
|
|
|
|
|
|
|
Direct gross margin |
|
$ |
17,877 |
|
|
$ |
2,159 |
|
|
$ |
20,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated indirect costs |
|
|
|
|
|
|
|
|
|
$ |
21,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
|
|
|
|
$ |
(1,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 3, 2004 |
|
|
|
Ophthalmology |
|
|
Dermatology |
|
|
|
|
|
|
Medical Devices |
|
|
Medical Devices |
|
|
Total |
|
Sales |
|
$ |
26,160 |
|
|
$ |
5,539 |
|
|
$ |
31,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of goods sold |
|
$ |
9,217 |
|
|
$ |
2,782 |
|
|
$ |
11,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct gross margin |
|
$ |
16,943 |
|
|
$ |
2,757 |
|
|
$ |
19,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated indirect costs |
|
|
|
|
|
|
|
|
|
$ |
19,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
|
|
|
|
$ |
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
-62-
Indirect costs of manufacturing, research and development and selling, general and
administrative costs are not allocated to the segments.
The Companys assets and liabilities are not evaluated on a segment basis. Accordingly, no
disclosure on segment assets and liabilities is provided.
10. Computation of Net Income Per Common Share and Per Diluted Common Share
A reconciliation of the numerator and denominator of net income (loss) per common share and
diluted net income (loss) per common share is provided as follows (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
$ |
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding |
|
|
7,405 |
|
|
|
7,200 |
|
|
|
6,933 |
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock options |
|
|
475 |
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
Total weighted average stock and options outstanding |
|
|
7,880 |
|
|
|
7,200 |
|
|
|
7,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
$ |
0.21 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
In 2005 and 2003, there were 454,918 and 791,406 outstanding options to purchase shares,
respectively, at weighted average exercise prices of $8.48 and $6.99 per share, respectively, that
were not included in the computation of diluted net income (loss) per common share since, in each
case, the exercise price of the options exceeded the market price of the common stock. In 2004,
there were 463,588 options outstanding at a weighted average exercise price of $8.65 that were not
included in the computation of diluted net loss per common share because their effect was
antidilutive. These options could dilute earnings per share in future periods.
11. Selected Quarterly Financial Data, (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
(In thousands, except per share amounts) |
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
8,145 |
|
|
$ |
9,387 |
|
|
$ |
9,081 |
|
|
$ |
10,416 |
|
Gross profit |
|
$ |
3,678 |
|
|
$ |
4,545 |
|
|
$ |
4,879 |
|
|
$ |
5,073 |
|
Net income (loss) |
|
$ |
(20 |
) |
|
$ |
430 |
|
|
$ |
879 |
|
|
$ |
381 |
|
Net income (loss) per common share |
|
$ |
(0.00 |
) |
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
Diluted net income (loss) per common share |
|
$ |
(0.00 |
) |
|
$ |
0.05 |
|
|
$ |
0.11 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 1, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
7,392 |
|
|
$ |
8,109 |
|
|
$ |
8,178 |
|
|
$ |
9,131 |
|
Gross profit |
|
$ |
3,215 |
|
|
$ |
3,807 |
|
|
$ |
3,470 |
|
|
$ |
4,396 |
|
Net income (loss) |
|
$ |
(17 |
) |
|
$ |
133 |
|
|
$ |
(720 |
) |
|
$ |
202 |
|
Net income (loss) per common share |
|
$ |
(0.00 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
Diluted net income (loss) per common share |
|
$ |
(0.00 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
-63-
Item 9. Changes in And Disagreements with Accountants On Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures.
a) Evaluation of disclosure controls and procedures.
The Companys management evaluated, with the participation of its Chief Executive Officer (CEO) and
its Chief Financial Officer (CFO), the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13A-15(e) and Rule 15d-15(e) of the Securities Exchange
Act of 1934 (the 34 Act) as of the end of the period covered by this report.
Disclosure controls and procedures are designed with the objective of ensuring that (i) information
required to be disclosed in the Companys reports filed under
the 34 Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and (ii)
information is accumulated and communicated to management, including the CEO and CFO, is
appropriate to allow timely decisions regarding required disclosure. Internal control procedures,
which are designed with the objective of providing reasonable assurance that the Companys
transactions are properly authorized, its assets are safeguarded against unauthorized or improper
use and its transactions are properly recorded and reported, are intended to permit the preparation
of the Companys financial statements in conformity with generally accepted accounting principles.
To the extent that elements of our internal control over financial reporting are included within
our disclosure controls and procedures, they are included in the scope of our quarterly controls
evaluation.
Based on that evaluation, the CEO and CFO concluded, due to the material weakness described below,
that as of the end of the period covered by this report, the disclosure controls and procedures
were ineffective in ensuring that all material information required to be disclosed in the reports
the Company files and submits under the 34 Act has been made known to them on a timely basis and
that such information has been properly recorded, processed, summarized and reported, as required.
As discussed in (b) below, the Company is taking steps to remediate the material weakness.
In connection with the annual audit of the Companys financial statements as of December 31, 2005,
the Companys independent registered public accounting firm communicated to the Companys
management and the Audit Committee of the Board of Directors that they had identified a control
deficiency that existed in the design or operation of the Companys internal controls over
financial reporting that they considered to be a material weakness, because the control deficiency
resulted in more than a remote likelihood that a material misstatement could occur in the Companys
annual financial statements and not be prevented or detected. The material weakness identified by
the Companys independent accountants relates to a failure to maintain adequate period-end review
procedures over general ledger accounts. As a result, an error in a system generated custom
inventory report and errors in two key spreadsheets related to warranty and deferred revenue
resulted in incorrect entries being recorded to the financial statements which were not identified
and corrected by management in a timely manner.
b) Changes in internal control over financial reporting.
In response to the deficiencies noted above, the Company has identified the following corrective
actions necessary to address the material weakness described above, as follows:
|
|
Implement additional controls over the preparation and review of key spreadsheets |
|
|
|
Implement automated general ledger reports to replace existing key spreadsheets where
possible, |
|
|
|
Correct a system generated custom report to include additional information necessary to
prepare accurate financial information |
|
|
|
Implement additional review procedures |
|
|
|
Enhance the current capabilities of the finance function. |
The Company has begun implementing these corrective actions and believes that these corrective
actions, once implemented, will mitigate the material weakness that was identified.
In addition, we reviewed our internal controls during the quarter ended December 31, 2005, and
there were no other changes in our internal controls or in other factors that could significantly
affect those controls during the period covered by this report.
Item 9B. Other Information
Not applicable.
-64-
PART III
Certain information required by Part III has been omitted from this Form 10-K. This
information is instead incorporated herein by reference to our definitive Proxy Statement for our
2006 Annual Meeting of Stockholders (the Proxy Statement), which we will file within 120 days
after the end of our fiscal year pursuant to Regulation 14A in time for our Annual Meeting of
Stockholders to be held June 8, 2006.
Item 10. Directors and Executive Officers of the Registrant
Information regarding our directors is incorporated herein by reference to Proposal One -
Election of DirectorsNominees in our Proxy Statement. The information concerning our current
executive officers is incorporated herein by reference to Executive Officers in our Proxy
Statement. Information regarding delinquent filers is incorporated by reference to Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy Statement. Information regarding our code
of business conduct and ethics is incorporated herein by reference to Proposal One Election of
Directors Corporate Governance Matters Code of Business Conduct and Ethics in our Proxy
Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to Executive
Compensation in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated herein by reference to Security
Ownership of Certain Beneficial Owners and Management in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference to Certain
Relationships and Related Transactions in our Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated herein by reference to Proposal Five
Ratification of Appointment of Independent Accountants in our Proxy Statement.
-65-
PART IV
Item 15. 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 |
|
|
|
|
|
|
42 |
|
|
|
|
43 |
|
|
|
|
44 |
|
|
|
|
45 |
|
|
|
|
46 |
|
|
|
|
47 |
|
|
|
|
48 |
|
|
2. Financial Statement Schedule |
|
|
|
|
The following financial statement
schedule of IRIDEX Corporation for the years ended December 31, 2005,
January 1, 2005 and January 3, 2004 is filed as part of this Annual
Report and should be read in conjunction with the Consolidated
Financial Statements of IRIDEX Corporation. |
|
|
|
|
|
|
68 |
Other schedules have been omitted because they are either not required, not applicable, or the
required information is included in the consolidated financial statements or notes thereto.
3. Exhibits
|
|
|
Exhibits |
|
Exhibit Title |
|
3.1(1)
|
|
Amended and Restated Certificate of
Incorporation of Registrant. |
|
3.2(2)
|
|
Amended and Restated Bylaws of Registrant. |
|
10.1(1)
|
|
Form of Indemnification Agreement with directors and officers. |
|
10.2(1)
|
|
2005 Employee Stock Purchase Plan. |
|
10.3(5)
|
|
Employment Agreement with
Barry G. Caldwell dated July 5, 2005. |
|
10.4(6)
|
|
Executive Transition Agreement
entered into by and between the Company and Theodore A.
Boutacoff dated April 28, 2005. |
|
10.5(6)
|
|
Amended and Restated Severance and
Change of Control Agreement entered into by and between the Company
and Larry Tannenbaum on April 29, 2005. |
|
10.6(4)
|
|
Lease Agreement dated December 6, 1996 by and between Zappettini
Investment Co. and the Registrant, as amended. |
|
10.7(3)
|
|
1998 Stock Option Plan, as amended. |
|
21.1(1)
|
|
Subsidiaries of Registrant. |
|
23.1
|
|
Consent of Independent Registered
Public Accounting Firm. |
|
24.1
|
|
Power of Attorney (See page 69). |
|
31.1
|
|
Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
-66-
|
|
|
Exhibits |
|
Exhibit Title |
|
31.2
|
|
Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared
effective on February 15, 1996. |
|
(2) |
|
Incorporated by reference to the Exhibits in Registrants Report on Form 10-Q for the quarter ended October 3, 1998. |
|
(3) |
|
Incorporated by reference to the Exhibits in Registrants Proxy Statement for the Companys 1998 Annual Meeting of Stockholders which
was filed April 30, 1998. |
|
(4) |
|
Incorporated by reference to the Exhibits in Registrants Report on Form 10-Q for the quarter ended September 27, 2003. |
Trademark Acknowledgments
IRIDEX, the IRIDEX logo, IRIS Medical, OcuLight, IQ810, VariLite, DioLite XP, SmartKey, EndoProbe and Apex are our registered trademarks. IRIDERM,
G-Probe, DioPexy, DioVet, TruFocus, TrueCW, UltraView, DioLite 532, Long Pulse, MicroPulse Scanlite Scanner, ColdTip Handpiece, Varispot Handpiece and EasyFit
product names are our trademarks. All other trademarks or trade names appearing in this Annual Report on Form 10-K are the property of their respective owners.
-67-
Schedule II
IRIDEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
|
|
|
|
Balance |
|
|
Beginning of |
|
Costs and |
|
|
|
|
|
at End of |
Description |
|
The Period |
|
Expenses |
|
Deductions |
|
The Period |
Balance for
the year ended January 3, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable |
|
$ |
262 |
|
|
$ |
|
|
|
$ |
(142 |
) |
|
$ |
120 |
|
Provision for inventory |
|
$ |
1,106 |
|
|
$ |
|
|
|
$ |
(63 |
) |
|
$ |
1,043 |
|
Balance for
the year ended January 1, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable |
|
$ |
120 |
|
|
$ |
376 |
|
|
$ |
(30 |
) |
|
$ |
466 |
|
Provision for inventory |
|
$ |
1,043 |
|
|
$ |
694 |
|
|
$ |
|
|
|
$ |
1,737 |
|
Balance for
the year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable |
|
$ |
466 |
|
|
$ |
132 |
|
|
$ |
(39 |
) |
|
$ |
559 |
|
Provision for inventory |
|
$ |
1,737 |
|
|
$ |
407 |
|
|
$ |
(89 |
) |
|
$ |
2,055 |
|
-68-
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, 2006.
|
|
|
|
|
|
IRIDEX CORPORATION
|
|
|
By: |
/s/ Barry G. Caldwell
|
|
|
|
Barry G. Caldwell |
|
|
|
President, Chief Executive Officer,
and Director |
|
|
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Barry G. Caldwell and Larry Tannenbaum, 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 Annual 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, or 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/ Barry G. Caldwell |
|
President, Chief Executive Officer,
and Director |
|
March 31, 2006 |
|
|
|
|
|
(Barry G. Caldwell) |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Larry Tannenbaum |
|
Chief Financial Officer
and Vice President, Administration |
|
March 31, 2006 |
|
|
|
|
|
(Larry Tannenbaum) |
|
(Principal Financial and
Accounting Officer) |
|
|
|
|
|
|
|
/s/ James L. Donovan |
|
Vice President, Corporate
Business |
|
March 31, 2006 |
|
|
|
|
|
(James L. Donovan) |
|
Development and Director |
|
|
|
|
|
|
|
/s/ Robert K. Anderson |
|
Director |
|
March 31, 2006 |
|
|
|
|
|
(Robert K. Anderson) |
|
|
|
|
|
|
|
|
|
/s/ Donald L. Hammond |
|
Director |
|
March 31, 2006 |
|
|
|
|
|
(Donald L. Hammond) |
|
|
|
|
|
|
|
|
|
/s/ Sanford Fitch |
|
Director |
|
March 31, 2006 |
|
|
|
|
|
(Sanford Fitch) |
|
|
|
|
|
|
|
|
|
/s/ Garrett A. Garrettson |
|
Director |
|
March 31, 2006 |
|
|
|
|
|
(Garett A. Garrettson) |
|
|
|
|
|
|
|
|
|
/s/ Theodore A. Boutacoff |
|
Chairman of the Board |
|
March 31, 2006 |
|
|
|
|
|
(Theodore A. Boutacoff) |
|
|
|
|
-69-
Exhibit Index
|
|
|
Exhibits |
|
Exhibit Title |
3.1(1) |
|
Amended and Restated Certificate of Incorporation of Registrant. |
|
3.2(2) |
|
Amended and Restated Bylaws of Registrant. |
|
10.1(1) |
|
Form of Indemnification Agreement with directors and officers. |
|
10.2(1) |
|
2005 Employee Stock Purchase Plan. |
|
10.3(5)
|
|
Employment Agreement with
Barry G. Caldwell dated July 5, 2005. |
|
10.4(6)
|
|
Executive Transition Agreement
entered into by and between the Company and Theodore A.
Boutacoff dated April 28, 2005. |
|
10.5(6)
|
|
Amended and Restated Severance and
Change of Control Agreement entered into by and between the Company
and Larry Tannenbaum on April 29, 2005. |
|
|
|
10.6(4) |
|
Lease Agreement dated December 6,
1996 by and between Zappettini Investment Co. and the Registrant, as amended. |
|
|
|
10.7(3) |
|
1998 Stock Option Plan, as amended. |
|
21.1(1) |
|
Subsidiaries of Registrant. |
|
23.1 |
|
Consent of Independent Registered
Public Accounting Firm. |
|
24.1 |
|
Power of Attorney (See page 69). |
|
31.1 |
|
Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Incorporated by reference to the Exhibits filed with the Registration
Statement on Form SB-2 (No. 333-00320-LA) which was declared effective on February
15, 1996. |
|
(2) |
|
Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended October 3, 1998. |
|
(3) |
|
Incorporated by reference to the Exhibits in Registrants Proxy
Statement for the Companys 2005 Annual Meeting of Stockholders which was filed
April 29, 2005. |
|
(4) |
|
Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended September 27, 2003. |
|
(5) |
|
Incorporated by reference to the Exhibits filed with the
Registrants Report on Form 8-K dated July 5, 2005. |
|
(6) |
|
Incorporated by reference to the Exhibits filed with the
Registrants Report on Form 8-K dated April 28, 2005. |
exv23w1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (No.
333-117885, 333-127716, 333-32161, 333-57573, 333-86091, 333-45736, 333-67480, 333-97541 and
333-107700) of Iridex Corporation of our report dated March 31, 2006 relating to the financial
statements and financial statement schedules which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 31, 2006
exv31w1
EXHIBIT 31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 13(a) or 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Barry G. Caldwell, certify that:
|
1. |
|
I have reviewed this report on Form 10-K of IRIDEX Corporation; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statement were made, not misleading with
respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
|
|
4. |
|
The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared; |
|
|
b) |
|
Evaluated the effectiveness of the registrants disclosure control
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
c) |
|
Disclosed in this report any changes in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth fiscal quarter in the case of the annual
report) that has materially affected, or is reasonably likely to materially affect
the registrants internal control over financial reporting; |
|
5. |
|
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons performing
the equivalent functions): |
|
a) |
|
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrants ability to record, process, summarize and
report financial information; and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: March 31, 2006
|
|
|
|
|
By: /s/ BARRY G. CALDWELL |
|
|
|
|
|
Name: Barry G. Caldwell |
|
|
Title: President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
exv31w2
EXHIBIT 31.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 13(a) or 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Larry Tannenbaum certify that:
|
1. |
|
I have reviewed this report on Form 10-K of IRIDEX Corporation; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statement made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
|
|
4. |
|
The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) for the registrant and have: |
|
(a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual
report is being prepared; |
|
|
(b) |
|
Evaluated the effectiveness of the registrants disclosure control and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures , as of the end of the period covered by this report based on such
evaluation; and |
|
|
(c) |
|
Disclosed in this report any changes in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of the annual report) that has materially
affected, or is reasonably likely to materially affect the registrants internal control
over financial reporting; |
|
5. |
|
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions): |
|
(a) |
|
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
|
|
|
(b) |
|
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
Date: March 31, 2006
|
|
|
|
|
By: /s/ LARRY TANNENBAUM |
|
|
|
|
|
Name: Larry Tannenbaum |
|
|
Title: Chief Financial Officer and Vice President,
Administration |
|
|
(Principal Financial and Accounting Officer) |
exv32w1
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Barry G. Caldwell, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of IRIDEX Corporation on Form 10-K for
the fiscal year ended December 31, 2005 (i) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Annual
Report on Form 10-K fairly presents, in all material respects, the financial condition and results
of operations of IRIDEX Corporation.
Date: March 31, 2006
|
|
|
|
|
By: /s/ BARRY G. CALDWELL |
|
|
|
|
|
Name: Barry G. Caldwell |
|
|
Title: President and Chief Executive Officer |
|
|
(Principal
Executive Officer) |
exv32w2
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Larry Tannenbaum, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of IRIDEX Corporation on Form 10-K for
the fiscal year ended December 31, 2005 (i) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Annual
Report on Form 10-K fairly presents, in all material respects, the financial condition and results
of operations of IRIDEX Corporation.
Date: March 31, 2006
|
|
|
|
|
By: /s/ LARRY TANNENBAUM |
|
|
|
|
|
Name: Larry Tannenbaum |
|
|
Title: Chief Financial Officer and Vice President,
Administration |
|
|
(Principal Financial and Accounting Officer) |