UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549








Form 10-K





(Mark
One)


þ
            ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended January 1, 2010


or


 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





For
the transition period from        
      to





Commission
file number: 0-11634







STAAR
SURGICAL COMPANY


(Exact
name of registrant as specified in its charter)





Delaware
                
                95-3797439(State
      or other jurisdiction of
                  incorporation
      or organization)
                
                (I.R.S.
      Employer
                  Identification
      No.)





1911
Walker Avenue 91016


Monrovia,
California


(Address
of principal executive offices)




(626) 303-7902


Registrant’s
telephone number, including area code


Securities
registered pursuant to Section 12(b) of the Act:





(Title of each class)
            
            (Name of each exchange on which
      registered)Common
      Stock, $0.01 par value
            
            Nasdaq
      Global Market





Securities
registered pursuant to Section 12(g) of the Act:


None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yes ̈No þ





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.  Yes ̈No 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 Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes þNo ̈





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).  Yes ̈No ̈





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):





 ̈Large accelerated
      filer
              
              þAccelerated
      filer
              
               ̈Non-accelerated
      filer
              
               ̈Smaller reporting
      company(Do
      not check if a smaller reporting company)





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).  Yes ̈No þ





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of July 3, 2009, the last business day
of the registrant’s most recently completed second fiscal quarter, was
approximately $80,835,000 based on the closing price per share of $2.33 of the
registrant’s Common Stock on that date (used actual close price on July 2, 2009
as markets were closed on July 3, 2009).





The
number of shares outstanding of the registrant’s Common Stock as
of  March 29, 2010 was 34,866,728.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s definitive proxy statement relating to its 2010 annual
meeting of stockholders, which will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days of the close of
the registrant’s last fiscal year, are incorporated by reference into
Part III of this report.













TABLE
OF CONTENTS





PagePART IItem 1.
                      Business
                      
                      1Item 1A.
                      Risk
      Factors
                      
                      19Item 1B.
                      Unresolved
      Staff Comments
                      
                      27Item 2.
                      Properties
                      
                      28Item 3.
                      Legal
      Proceedings
                      
                      28Item 4.
                      Submission
      of Matters to a Vote of Security Holders
                      
                      28PART IIItem 5.
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      28Item 6.
                      Selected
      Financial Data
                      
                      30Item 7.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      30Item 7A.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      57Item 8.
                      Financial
      Statements and Supplementary Data
                      
                      57Item 9.
                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      
                      57Item 9A.
                      Controls
      and Procedures
                      
                      58Item 9B.
                      Other
      Information
                      
                      59PART IIIItem 10.
                      Directors,
      Executive Officers and Corporate Governance
                      
                      59Item 11.
                      Executive  Compensation
                      
                      59Item 12.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      59Item 13.
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      
                      59Item 14.
                      Principal
      Accountant Fees and Services
                      
                      59PART IVItem 15.
                      Exhibits
      and Financial Statement Schedules
                      
                      60Signatures
                      
                      63










PART I




This
Annual Report on Form 10-K contains statements that constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements include comments regarding the intent, belief or current
expectations of the Company and its management. Readers can recognize
forward-looking statements by the use of words like “anticipate,” “estimate,”
“expect,” “project,” “intend,” “plan,” “believe,” “will,” “target,” “forecast”
and similar expressions in connection with any discussion of future operating or
financial performance. STAAR Surgical Company cautions investors and prospective
investors that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements. See
“Item 1A. Risk Factors.”




Item 1.  Business




A
glossary of terms used in the Report may be found on page 15.




General




STAAR
Surgical Company designs, develops, manufactures and sells implantable lenses
for the eye.  We make lenses both for use in surgery that treats
cataracts, and for use in corrective or “refractive” surgery.  All of
the leases we make are foldable, which permits the surgeon to insert them
through a small incision in minimally invasive surgery.Cataract surgery
is a relatively simple outpatient procedure where the eye’s natural lens is
removed and replaced with an artificial lens called an intraocular lens (IOL) to
restore the patient’s vision.  Refractive surgery is performed to
correct the type of visual disorders that have traditionally been treated with
glasses or contact lenses.  We refer to our lenses used in refractive
surgery as “implantable Collamer® lenses” or “ICLs.”   Refractive
surgery includes lens-based or laser-based procedures.  Successful
refractive eye surgery can correct common vision disorders such as myopia,
hyperopia and astigmatism.  Originally incorporated in California in
1982, STAAR Surgical Company reincorporated in Delaware in 1986. Unless the
context indicates otherwise “we,” “us,” the “Company,” and “STAAR” refer to
STAAR Surgical Company and its consolidated subsidiaries.




STAAR®,
Visian®, Collamer®, nanoFLEXTM, nanoPOINTTM, STAARVISC®, Elastimide®, and
AquaFlowTM are trademarks or registered trademarks of STAAR in the U.S. and other
countries. Collamer® is the brand name for STAAR’s proprietary collagen
copolymer lens material.




Intraocular
lenses.We generate approximately half of our sales
manufacturing and selling foldable IOLs. A foldable IOL is a prosthetic lens
used to replace a cataract patient’s natural lens after it has been extracted in
minimally invasive small incision cataract surgery. STAAR manufactures IOLs out
of silicone and out of Collamer®, STAAR’s proprietary biocompatible collagen
copolymer lens material. STAAR’s IOLs are available in both three-piece and
one-piece designs.  STAAR also markets internationally an
independently sourced acrylic IOL, preloaded using STAAR
technology.   Over the years, we have expanded our range of IOLs
to include the following:




·
            The silicone Toric IOL, used in
      cataract surgery to treat preexisting astigmatism.  Astigmatism
      is a condition that causes blurred vision due to the irregular shape of
      the cornea which prevents light from focusing properly on the
      retina;





·
            The Preloaded Injector, a
      three-piece silicone or acrylic IOL preloaded into a single-use disposable
      injector;





·
            Aspheric  IOLs,
      available in silicone or Collamer, designed to provide a clearer image
      than traditional spherical IOLs, by reducing spherical aberrations and
      improving contrast
sensitivity;





·
            The nanoFLEX IOL, a single-piece
      Collamer aspheric IOL that can be implanted through a 2.2 mm incision with
      the nanoPOINT injector
system.




Implantable Collamer lenses.
  Manufacturing and selling lenses used in refractive surgery is an
increasingly important source of sales for STAAR. We have used our proprietary
biocompatible Collamer material to develop and manufacture implantable Collamer
lenses, or ICLs. STAAR’s VISIAN ICL and VISIANToric
ICL, or TICLTM, treat refractive disorders such as myopia (near-sightedness),
hyperopia (far-sightedness) and astigmatism. These disorders of vision affect a
large proportion of the population. Unlike the IOL, which replaces a cataract
patient’s cloudy lens, these products are designed to work with the patient’s
natural lens to correct refractive disorders. The surgeon implants the foldable
Visian lens through a tiny incision, under topical anesthesia. STAAR began
selling the Visian ICL outside the U.S. in 1996 and inside the U.S. in 2006.
STAAR began selling the Visian TICL outside the U.S. in 2002. These products are
sold in more than 45 countries.  STAAR’s goal is to establish the
position of the ICL and TICL throughout the world as one of the primary choices
for refractive surgery.


1





Other Surgical
Products.We also sell other related instruments, devices,
surgical packs and equipment that we manufacture or that are manufactured by
others but began deemphasizing these products beginning in 2009 due to their
lower overall gross profit margins.




Operations




STAAR has
significant operations both within and outside the U.S. Sales from activities
outside the U.S. accounted for 79% of our total sales in fiscal year 2009.
STAAR’s principal business units and their operations are as
follows:




·
            United
      States.STAAR operates its
      global administrative headquarters and a manufacturing facility in
      Monrovia, California. The Monrovia manufacturing facility principally
      makes Collamer and silicone IOLs and injector systems for IOLs and ICLs.
      STAAR also manufactures the Collamer material in a facility in Aliso
      Viejo, CA.





·
            Switzerland.  STAAR operates an
      administrative, manufacturing and distribution facility in Nidau,
      Switzerland under its wholly owned subsidiary, STAAR Surgical AG. The
      Nidau manufacturing facility makes all of STAAR’s ICLs and TICLs and also
      manufactures the AquaFlow Device. STAAR Surgical AG handles distribution
      and other administrative affairs for Europe and other territories outside
      North America and Japan.





·
            Japan.   STAAR operates
      administrative, manufacturing and distribution facilities in Japan under
      its wholly owned subsidiary, STAAR Japan Inc.  STAAR Japan’s
      administrative and distribution facility is located in Shin-Urayasu and
      its manufacturing facility in located in Ichikawa City. All of STAAR’s
      preloaded injectors are manufactured at the Ichikawa City
      facility.  Following its approval by the Japanese Ministry of
      Health, Labor and Welfare on February 2, 2010, STAAR Japan began
      marketing and distributing the Visian ICL in
  Japan.





·
            Germany.  Until March
      2, 2010, STAAR owned Domilens GmbH (“Domilens”), a leading distributor of
      ophthalmic products in Germany. Products sold by Domilens include
      implantable lenses, related surgical equipment, consumables and other
      supplies. Domilens sells custom surgical kits that incorporate a surgeon’s
      preferred supplies and consumables in a single ready-to-use package, and
      services phacoemulsification and other surgical equipment. In addition to
      distributing and servicing products of third party manufacturers, Domilens
      has distributed STAAR’s IOLs, ICLs and Preloaded Injectors in
      Germany.  On March 2, 2010, STAAR sold all of its interests in
      Domilens through a management buyout led by funds managed by Hamburg-based
      Small Cap Buyout Specialist BPE Unternehmensbeteiligungen
      GmbH.  STAAR and Domilens have entered into a Distribution
      Agreement providing for the continued sale of STAAR products in Germany
      and Austria.  The sale of Domilens is discussed in greater
      detail inManagement’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.




The
global nature of STAAR’s business operations subjects it to risks, including the
effect of changes in currency exchange rates, differences in laws, including
laws protecting intellectual property and regulating medical devices, political
risks and the challenge of managing foreign subsidiaries. See “Item 1A. Risk
Factors — The global nature of our business may result in fluctuations
and declines in our sales and profits” and “ — The success of our
international operations depend on our successfully managing our foreign
subsidiaries.”




The
Human Eye




The
following discussion provides background information on the structure, function
and some of the disorders of the human eye to enhance the reader’s understanding
of our products described in this report. The human eye is a specialized sensory
organ capable of receiving visual images and transmitting them to the visual
center in the brain. Among the main parts of the eye are the cornea, the iris,
the lens, the retina, and the trabecular meshwork. The cornea is the clear
window in the front of the eye through which light first passes.  The
interior surface of the cornea is lined with a single layer of flat, tile-like
endothelial cells, whose function is to maintain the transparency of the
cornea.  The iris is a muscular curtain located behind the cornea
which opens and closes to regulate the amount of light entering the eye through
the pupil, an opening at the center of the iris. The lens is a clear structure
located behind the iris that changes shape to focus light to the retina, located
in the back of the eye. The medical term for the natural lens that is present in
the eye from birth is “crystalline lens. ” The retina is a layer of nerve tissue
consisting of millions of light receptors called rods and cones, which receive
the light image and transmit it to the brain via the optic nerve. The posterior
chamber of the eye, located behind the iris, is filled with a watery fluid
called the aqueous humor, while the portion of the eye behind the lens is filled
with a jelly-like material called the vitreous humor. The anterior chamber is
the space in the eye behind the cornea and in front of the iris.  The
trabecular meshwork, a drainage channel located between the iris and the
surrounding white portion of the eye, maintains a normal pressure in the
anterior chamber of the eye by draining excess aqueous humor.




2





The eye
can be affected by common visual disorders, disease or trauma. One of the most
prevalent ocular disorders is cataracts. Cataract formation is generally an
age-related disorder that involves the hardening and loss of transparency of the
natural crystalline lens, impairing visual acuity.




Refractive
disorders, which are generally not age-related, include myopia, hyperopia, and
astigmatism. A normal, well functioning eye receives images of objects at
varying distances from the eye and focuses the images on the retina. Refractive
errors occur when the eye’s natural optical system does not properly focus an
image on the retina. Myopia, also known as nearsightedness, occurs when the
eye’s lens focuses images in front of the retina. Hyperopia, or farsightedness,
occurs when the eye’s lens focuses images behind the plane of the retina.
Individuals with myopia or hyperopia may also have astigmatism. Astigmatism is
blurred vision caused when an irregularly shaped cornea or, in some cases, a
defect in the natural lens, produces a distorted image on the retina. Presbyopia
is an age-related condition caused by the loss of elasticity of the natural
crystalline lens, reducing the eye’s ability to accommodate or adjust its focus
for varying distances.




History
of STAAR




STAAR
developed, patented, and licensed the first foldable intraocular lens, or IOL,
for cataract surgery. Made of pliable material, the foldable IOL permitted
surgeons for the first time to replace a cataract patient’s natural lens with
minimally invasive surgery. The foldable IOL became the standard of care for
cataract surgery throughout the world. STAAR introduced its first versions of
the lens, made of silicone, in 1991.




In 1996
STAAR began selling the Visian ICL outside the U.S. Made of STAAR’s proprietary
biocompatible Collamer lens material, the ICL is implanted behind the iris and
in front of the patient’s natural lens to treat refractive errors such as
myopia, hyperopia and astigmatism. Lenses of this type are generically called
“phakic IOLs” or “phakic implants” because they work along with the patient’s
natural lens, or phakos, rather than replacing
it.  The ICL received CE Marking in 1997, permitting sale in countries
that require the European Union CE Mark, and it received FDA approval for the
treatment of myopia in the U.S. in December 2005.  The ICL is now sold
in approximately 50 countries and has been implanted in more than 150,000 eyes
worldwide.




Other
milestones in STAAR’s history include the following:




·
            In 1998, STAAR introduced the
      Toric IOL, the first implantable lens approved for the treatment of
      preexisting astigmatism.  Used in cataract surgery, the Toric
      IOL was STAAR’s first venture into the refractive market in the United
      States.





·
            In 2000, STAAR introduced an IOL
      made of the Collamer material, making its clarity, refractive qualities,
      and biocompatibility available to cataract patients and their
      surgeons.





·
            In 2001, STAAR commenced
      commercial sales of its Visian Toric ICL or TICL, which corrects both
      astigmatism and myopia, outside the U.S.  In 2002 the TICL
      received CE Marking, allowing commercial sales in countries that require
      the European Union CE Mark.  Other significant markets for the
      TICL include China, Korea, and
Canada.





·
            In late 2003, STAAR Japan
      introduced the first preloaded IOL lens injector system in international
      markets. The Preloaded Injector offers surgeons improved convenience and
      reliability. The Preloaded Injector is not yet available in the
      U.S.




3





·
            On December 22, 2005, the
      FDA approved the Visian ICL for the treatment of myopia, making it the
      first, and to date only, small incision phakic IOL commercially available
      in the United States.





·
            Beginning in 2007, STAAR
      introduced its first aspheric IOLs made of silicone and
      Collamer and has received New Technology IOL “NTIOL” designation
      which qualify them for an additional $50 reimbursement through February
      26, 2011.





·
            On December 29, 2007 (fiscal
      2008), we acquired the 50% remaining interests in STAAR
      Japan.





·
            On February 2, 2010, the
      Japanese Ministry of Health, Labor and Welfare approved the Visian ICL,
      making it the first phakic IOL available for sale in
      Japan.




Financial
Information about Segments and Geographic Areas




STAAR’s
principal products are IOLs, ICLs, and other complementary products used in
ophthalmic surgery.  Because 100% of STAAR’s sales are generated from
the ophthalmic surgical product segment, the Company operates as one operating
segment for financial reporting purposes. See Note 18 to the Consolidated
Financial Statements for financial information about product lines and
operations in geographic areas.




Principal
Products




Our
products are designed to:




·
            Improve patient
      outcomes,





·
            Minimize patient risk and
      discomfort, and





·
            Simplify ophthalmic procedures or
      post-operative care for the surgeon and the
  patient.




Minimally Invasive Intraocular
Lenses (IOLs). We produce and market a line of foldable IOLs
for use in minimally invasive cataract surgical procedures. Because they can be
folded, our IOLs can be implanted into the eye through an incision less than 3mm
in length, and for one model as small as 2.2 mm. Surgeons prefer foldable lenses
and small incisions because clinical evidence has overwhelmingly shown that
larger incisions can induce corneal astigmatism, extend healing times, and
increase the possibility of infection.  Once inserted, the IOL unfolds
naturally to replace the cataractous lens.




In most
countries a process of government reimbursement for cataract surgery
and IOLs exist.  In some countries the ability for ophthalmic
surgeons and surgical centers to collect an additional fee from the patients is
evolving.  STAAR’s strategic direction is to offer additional
IOLs that fall within the categories which offer an opportunity to increase
average selling prices.  As an example here is the pricing landscape
in the U.S. for IOLs today:




·
            Standard or conventional
      IOLs  are reimbursed by the Center for Medicare and Medicaid
      Services (“CMS ”)  at a rate of approximately
      $150.  STAAR’s non-aspheric silicone and Collamer IOLs fall
      within this category.





·
            IOLs with New Technology
      Intraocular Lens (“NTIOL”) designation by CMS are reimbursed an additional
      $50 or about $200 when implanted at Ambulatory Surgical Center
      facility.  STAAR’s new aspheric silicone and Collamer IOLs fall
      within this category.





·
            Premium channel IOLs are
      reimbursed at the standard IOL rate by CMS plus an additional payment is
      allowable from the patient.  STAAR’s Silicone Toric IOL falls
      within this category.




Currently,
our foldable IOLs are manufactured from both our proprietary Collamer material
and silicone. Both materials are offered in two differently configured styles:
the single-piece plate haptic design and the three-piece design where the optic
is combined with PolyimideTM loop haptics. The selection of one style over the
other is primarily based on the preference of the ophthalmologist.  We
also market foldable IOLs packaged in a preloaded delivery system with an
independently sourced acrylic lens in various markets outside the
U.S.




STAAR'S
development efforts have led to the introduction of aspheric IOLs beginning in
2007. Aspheric IOLs use advanced optical designs intended to provide a clearer
image than traditional spherical lenses, especially in low light, which has led
to significant market share gains for aspheric designs.  STAAR
introduced its first aspheric IOLs made of silicone and Collamer in 2007 and
received NTIOL designation for both products in 2008 which qualify them for
additional reimbursement.  During 2009, STAAR introduced the nanoFLEX
IOL, which has NTIOL approval and can be delivered through a 2.2 mm
micro-incision using STAAR’s new nanoPOINT Injection System.




4





We have
developed and currently market, principally in the U.S., the Toric IOL, a toric
version of our single-piece silicone IOL, which is specifically designed for
cataract patients who also have pre-existing astigmatism.




STAAR
Japan introduced the first Preloaded Injector in international markets in late
2003. The Preloaded Injector is a silicone or acrylic IOL packaged and shipped
in a pre-sterilized, disposable injector ready for use in cataract surgery. We
believe the Preloaded Injector offers surgeons improved convenience and
reliability. In 2006 STAAR Japan began selling in Japan an acrylic-lens-based
Preloaded Injector employing a lens supplied by Nidek Inc., a Japanese
ophthalmic company. The acrylic Preloaded Injector is now sold in Europe and
other Asian countries as well. Nidek also assembles and sells the acrylic
Preloaded Injector under its own brand, using injector parts purchased from
STAAR Japan. STAAR Japan’s agreement with Nidek provides for the sale of the
acrylic Preloaded Injector in additional territories by mutual agreement of the
two companies.




Sales of
IOLs accounted for approximately 45% of our total sales for the 2009 fiscal
year, 44% of our total sales for the 2008 fiscal year and 39% of total sales for
the 2007. Domilens has accounted for a significant portion of our sales of IOL
products or approximately 22% in 2009. The sale of Domilens on March 2, 2010 is
expected to increase the percentage of our sales derived from IOL
products.




Visian ICL (ICLs).ICLs are implanted
into the eye in order to correct refractive disorders such as myopia, hyperopia
and astigmatism. The ICL is capable of correcting refractive errors over a wide
range.




The ICL
is folded and implanted into the eye behind the iris and in front of the natural
crystalline lens using minimally invasive surgical techniques similar to those
used to implant an IOL during cataract surgery, except that the natural lens is
not removed. The surgical procedure to implant the ICL is typically performed
with topical anesthesia on an outpatient basis. Visual recovery usually occurs
within one to 24 hours.




The ICL
for myopia was approved by the FDA for use in the United States on December 22,
2005. The ICL and TICL are approved in countries that require the European Union
CE Mark, China, Canada, Korea and Singapore. The ICL for myopia was approved for
sale in Japan on February 2, 2010, and an application is pending in Australia.
The Company is working to obtain new approvals for the ICL and TICL in other
countries. The Company submitted its application for U.S. approval of the TICL
to the FDA in 2006 and it is currently under review (see “Regulatory Matters – Regulatory
Requirements in the United States – Status of Toric ICL
Submission”).




The
Hyperopic ICL, which treats far-sightedness, is approved for use in countries
that require the European Union CE Mark and in China and Canada.




The ICL
is available for myopia in the United States in four lengths and 27 powers for
each length, and internationally in four lengths, with 41 powers for each
length, and outside the U.S. the HICL for hyperopia is available in four
lengths, with 37 powers for each length, which equates to 420 inventoried parts.
This requires the Company to carry a significant amount of inventory to meet the
customer demand for rapid delivery. The Toric ICL is available for myopia in the
same powers and lengths but carries additional parameters of cylinder and axis
with 11 and 180 possibilities, respectively. Accordingly, the Toric ICL is often
made to order.




Sales of
ICLs (including TICLs) accounted for approximately 29% of our total sales for
the 2009 fiscal year, 25% in the 2008 fiscal year and 26% in 2007 fiscal year.
The sale of Domilens on March 2, 2010 is expected to increase the percentage of
our sales derived from ICLs.




Other
Surgical Products




The
Company also sells other related instruments, devices, surgical packs and
equipment that we manufacture or that are manufactured by others, but has been
deemphasizing these products in recent quarters due to their lower overall gross
profit margins.




5





Sales of
other surgical products accounted for approximately 26% of our total sales for
the 2009 fiscal year, 31% of our total sales for the 2008 fiscal year fiscal
year and 35% of total sales for the 2007 fiscal year. Domilens has accounted for
a significant portion of our sales of other surgical products or approximately
81% in 2009. The sale of Domilens on March 2, 2010 is expected to reduce
significantly the percentage of our sales derived from other surgical
products.




German
Distribution Business




During
fiscal year 2009 STAAR owned Domilens, a German ophthalmic distribution company.
Domilens principally resells and services products manufactured by third
parties, along with STAAR’s ICLs and Preloaded Injectors. Domilens generates
substantially all of its sales from the ophthalmic surgical products market.
Domilens reported sales of $24.3 million in fiscal year 2009, $25.1 million in
fiscal year 2008 and $23.7 million in fiscal year 2007. STAAR sold all of its
interests in Domilens on March 2, 2010.




Sources
and Availability of Raw Materials




The
Company uses a wide range of raw materials in the production of our products.
Most of the raw materials and components are purchased from external suppliers.
Some of our raw materials are single-sourced due to regulatory constraints, cost
effectiveness, availability, quality, and vendor reliability issues. Many of our
components are standard parts and are available from a variety of sources
although we do not typically pursue regulatory and quality certification of
multiple sources of supply.




Our
sources of supply for raw materials can be threatened by shortages of raw
materials and other market forces, by natural disasters, by the supplier’s
failure to maintain adequate quality or a recall initiated by the supplier. Even
when substitute suppliers are available, the need to certify regulatory
compliance and quality standards of substitute suppliers could cause significant
delays in production and a material reduction in our sales. We try to mitigate
this risk by maintaining high inventory of raw materials when practical and
identifying secondary suppliers, but the risk cannot be entirely eliminated. For
example, the failure of one of our suppliers could be the result of an
unforeseen industry-wide problem, or the failure of our supplier could create an
industry-wide shortage affecting secondary suppliers as well.




In
particular, the proprietary collagen-based raw material used to manufacture our
IOLs, ICLs and the AquaFlow Device is internally sole-sourced from one of our
facilities in California. If the supply of these collagen-based raw materials is
disrupted we know of no alternative supplier, and therefore, any such disruption
could result in our inability to manufacture the products and would have a
material adverse effect on the Company. In addition, the loss of our external
supply source for silicone could cause us material harm.




Patents,
Trademarks and Licenses




We strive
to protect our investment in the research, development, manufacturing and
marketing of our products through the use of patents, licenses, trademarks, and
copyrights. We own or have rights to a number of patents, licenses, trademarks,
copyrights, trade secrets and other intellectual property directly related and
important to our business. As of January 1, 2010, we owned approximately 128
United States and foreign patents and had approximately 12 patent applications
pending.




The
Company considers its patents to be significant when they protect the
exclusivity of its material products in the marketplace or provide an
opportunity to obtain material royalties or cross-licenses of intellectual
property from other manufacturers. Because the Company has limited knowledge of
the research and development efforts and strategic plans of its competitors, it
can only estimate the value of its patents and the significance of any
particular patent’s expiration. Competitors may be able to design products that
avoid infringing on patents that the Company regards as valuable, or they may
find patents that the Company regards as less significant to be obstacles to
their development of competing products. The Company’s internal assessments of
its patents include confidential information, the disclosure of which would
cause significant competitive harm to the Company.




The
Company’s material patents generally fall within three areas of technology: (1)
design of a posterior chamber phakic intraocular lens used to treat refractive
errors of the eye (ICLs), (2) the Collamer® lens material, and (3) lens delivery
systems for folding intraocular lenses (injectors and cartridges).




6





Posterior
Chamber Phakic Intraocular Lens to treat Refractive Errors




The
Company’s Visian ICL is the only posterior chamber phakic IOL approved for sale
in the U.S., and the Company believes it is the world’s largest selling phakic
IOL. The Company believes that its leadership in commercializing this technology
results from a number of factors, including proprietary design features and the
biocompatibility of the Collamer material. (The proprietary nature of Collamer
is discussed in further detail below).




The
Company has several patents covering design features that the Company believes
are essential to the safety and effectiveness of its phakic IOLs, and that the
Company believes would be necessary or desirable for any competing posterior
chamber phakic IOL. These patents expire between 2014 and 2016.




Collamer
Lens Material




The
Company believes that the biocompatibility of the Collamer material used for the
Visian ICL (and TICL) is a significant factor in the ability to safely place
this lens in the posterior chamber of the eye. Because the Visian ICL is well
tolerated in the eye, complications that have prevented the introduction of
other posterior chamber PIOL designs are less likely to occur. Compared to
lenses placed in the anterior chamber, the Company believes that placement in
the posterior chamber provides superior optical results and superior cosmetic
appearance, poses less risk of damage to the cornea, and better allows for the
correction of a patient’s astigmatism through the use of toric
optics.




The
Company believes that the physical and optical properties of Collamer also give
it distinct advantages as a material for prosthetic IOLs used in cataract
surgery.




Collamer
belongs to a family of materials known as collagen copolymers. Collagen
copolymers are compounds formed by joining molecules of collagen derived from
biological sources with synthetic monomer molecules. The patents that underlie
the specific Collamer formulation and manufacturing methods expire between 2014
and 2016.




The
Company also held an exclusive license throughout most of the world on an early
patent on a biocompatible collagen copolymer for ophthalmic use, which was
acquired from the Federov Institute of Russia in 1996, and which patent expired
in November 2009. Because the Collamer material is a different collagen
copolymer formulation with improved optical and physical characteristics, which
is covered by the subsequent STAAR patents described above as well as
significant trade secrets, STAAR does not believe that the expiration of the
Federov patent has materially diminished the proprietary nature of the Collamer
material.




Lens
Delivery Systems




STAAR
owns numerous patents covering the technology of foldable lens delivery systems,
including injectors, cartridges and preloaded injectors and their specific
design features. This group of patents includes relatively recent patents with
up to 10 years of life remaining. However, a select group of these patents
covering the more fundamental lens delivery technologies will expire between
2012 and 2014.




Worldwide,
all of our major products are sold under trademarks we consider to be important
to our business. The scope and duration of trademark protection varies widely
throughout the world. In some countries, trademark protection continues only as
long as the mark is used. Other countries require registration of trademarks and
the payment of registration fees. Trademark registrations are generally for
fixed but renewable terms.




We
protect our proprietary technology, in part, through confidentiality and
nondisclosure agreements with employees, consultants and other parties. Our
confidentiality agreements with employees and consultants generally contain
standard provisions requiring those individuals to assign to STAAR, without
additional consideration, inventions conceived or reduced to practice by them
while employed or retained by STAAR, subject to customary
exceptions.




Seasonality




We
generally experience lower sales during the third quarter due to the effect of
summer vacations on elective procedures. In particular, because sales activity
in Europe drops dramatically in the summer months, and European sales have
recently accounted for a greater proportion of our total sales, this seasonal
variation in our results has become even more pronounced.




7





The first
quarter of each fiscal year tends to have the lowest cash flow of the year
because of accounting fees related to the annual audit of our financial
statements, professional fees for our consultant on internal controls pursuant
to the Sarbanes-Oxley Act of 2002, and holiday closures of facilities during
December that reduce the processing and payment of invoices by STAAR during the
last weeks of the fourth quarter, resulting in a significant increase in cash
payments by STAAR as it catches up during the first month of the first
quarter.




Distribution
and Customers




We market
our products to a variety of health care providers, including surgical centers,
hospitals, managed care providers, health maintenance organizations, group
purchasing organizations and government facilities. The primary user of our
products is the ophthalmologist. No material part of our business, taken as a
whole, is dependent upon a single or a few customers.




We
distribute products directly to the physician or facility in the United States
and Australia, and rely primarily on local distributors in other countries. In
Japan we both sell directly and through a local distributor. Where we distribute
products directly, we rely on local sales representatives to help generate sales
by promoting and demonstrating our products with physicians. In Japan and
Australia, sales representatives are primarily employed directly by us. In the
U.S., we rely on both directly employed representatives and independent sales
representatives to sell our products under the supervision of directly employed
sales managers.




Our
internal marketing department develops the strategies to be employed by our
agents, employees and distributors through the activities of our internal
marketing department. The marketing department supports selling efforts by
developing and providing promotional materials, educational courses, speakers’
programs, participation in trade shows and technical presentations.




The
dollar amount of the Company’s backlog orders is not significant in relation to
total annual sales. The Company generally keeps sufficient inventory on hand to
ship product when ordered.




Competition




Competition
in the ophthalmic surgical product market is intense and characterized by
extensive research and development and rapid technological change. Development
by competitors of new or improved products, processes or technologies may make
our products obsolete or less competitive. Accordingly, we must devote continued
efforts and significant financial resources to enhance our existing products and
to develop new products for the ophthalmic industry.




Our ICL
faces significant competition in the marketplace from other products and
procedures that improve or correct refractive conditions, such as corrective
eyeglasses, external contact lenses, and conventional and laser refractive
surgical procedures. These products and procedures are long established in the
marketplace and familiar to patients in need of refractive vision correction. In
particular, eyeglasses and external contact lenses are much cheaper in the short
term and more easily obtained, because a prescription for the product is usually
written following a routine eye examination in a doctor’s office, without
admitting the patient to a hospital or surgery center.





We
believe that the following providers of laser surgical procedures comprise our
primary competition in the marketplace for patients seeking surgery to correct
refractive conditions: Alcon Laboratories (“Alcon”); Abbott Medical Optics
(“Abbott”), previously known as Advanced Medical Optics (“AMO”); and Bausch
& Lomb. All of these companies market Excimer lasers for corneal refractive
surgery. Approval of custom laser ablation, along with the addition of wavefront
technology, has increased awareness of corneal refractive surgery by patients
and practitioners. In the phakic implant market, there are only two approved
phakic IOLs available in the U.S., our Visian ICL and the Ophtec Artisan®, also
VerisyseTM marketed by Abbott. In international markets, our ICL’s main
competition is the Verisyse/Artisan lens, although there are several other
phakic IOLs, manufactured by various companies that are also
available.




We
believe our primary competitors in the development and sale of products used to
surgically correct cataracts, specifically foldable IOLs, include Alcon, Abbott
and Bausch & Lomb. According to a 2009 Market Scope report, Alcon holds 54%
of the global IOL market, followed by Abbott with 16% and Bausch & Lomb with
10%. Market Scope estimates STAAR’s global revenue market share at 2.3%. We hold
approximately 8% to 9% market share in both Germany and Japan and approximately
3% of the U.S. IOL market. Our competitors have been established for longer
periods of time than we have and have significantly greater resources than we
have, including greater name recognition, larger sales operations, greater
ability to finance research and development and proceedings for regulatory
approval, and more developed regulatory compliance and quality control
systems.




8





According
to Market Scope, acrylic, which is marketed as an advanced material, is the most
preferred material for an IOL in the world, followed by silicone and PMMA.
Acrylic IOLs currently account for a 79% share of the U.S. IOL market. We
believe that we are positioned to compete effectively in the advanced material
market segment with the Collamer IOL. As part of our effort to increase market
uptake of our Collamer IOLs, we introduced an aspheric three-piece Collamer IOL
in November 2007 and in 2009 introduced the nanoFLEX IOL which can be delivered
using STAAR’s nanoPOINTTM injector, through a 2.2 mm incision.




Outside
the U.S. STAAR markets the KS-X IOL line, which mates STAAR’s proprietary
preloaded delivery system with an independently sourced acrylic lens. The KS-X
preloaded delivery system enables the lens to be delivered into the eye through
a 2.8 millimeter incision. The lens material used is a hydrophobic acrylic which
is the
material preferred by most surgeons on the market.




The
addition of aspheric optics to STAAR’s IOL designs has been a primary focus of
STAAR’s recent development efforts. Aspheric IOLs use advanced optical designs
intended to provide a clearer image than traditional spherical lenses,
especially in low light, which has led to significant market share gains for
aspheric designs. All of STAAR's aspheric lenses feature a proprietary optical
design (patent pending) that is optimized for the naturally curved surface of
the retina and certain other anatomical features of the human eye, and provides
outstanding image quality even if decentered. In recognition of these advantages
the Centers for Medicare and Medicaid Services (“CMS”) grants New Technology IOL
(“NTIOL”) status to aspheric IOLs that can demonstrate improved visual
performance over conventional IOLs, allowing an extra $50 reimbursement per lens
implanted in an ASC (ambulatory surgical center). Because the overwhelming
majority of IOL purchases in the U.S. are implanted at ASCs and reimbursed
through Medicare, NTIOL status significantly increases STAAR’s potential margin
on qualifying lenses. During 2008 CMS granted NTIOL status to STAAR’s
single-piece and three-piece aspheric Collamer IOLs, and to its three-piece
silicone aspheric IOL. STAAR believes it is the first company to be granted
three NTIOL designations. NTIOL designation for aspheric IOLs that demonstrate
improved visual performance extends until February 26, 2011.





Although
the market for silicone IOLs, which currently account for 18% of the U.S. IOL
market, has declined in recent years, we believe they still provide an
opportunity for us as we continue to introduce improvements to the silicone IOL
technology and build awareness of our Collamer IOLs and improved injection
systems. In particular, we believe that our recently introduced aspheric
silicone three-piece lens and the expected 2010 introduction of preloaded
injectors to deliver this lens will enhance STAAR’s ability to maintain market
share within the silicone market sector.





“Presbyopic
IOLs” sold by our major U.S. competitors are lenses that offer to make patients
less dependent on reading glasses or contact lenses to provide near and far
vision after cataract surgery. FDA-approved and CE-marked lenses of this type
include a lens produced by Bausch & Lomb that has been found to restore some
of the eye’s natural ability to focus, and multifocal lenses produced by Alcon
and AMO that create zones in the visual field for distance, far and near vision,
similar to the near and far zones in bifocal glasses. In the U.S., CMS rules
permit a cataract patient implanted with a presbyopic lens to receive
reimbursement at the rate allowed for surgery with a standard IOL, and to pay
out of pocket the balance of the lens cost and surgical fee for the premium
presbyopic IOL. Presbyopic lenses have gained significant share of the overall
IOL marketplace. STAAR plans to conduct clinical tests to substantiate the
accommodating performance of its current nanoFLEX lens and on a new IOL designed
to optimize the potential accommodating power of the Collamer IOL platform.
However, at present, STAAR does not have a product approved by the FDA for the
treatment of presbyopia in order to compete in this market sector.




Regulatory
Matters




Nearly
all countries where we sell our products have regulations requiring advance
approval or certification of medical devices. We are also subject to various
federal, state, local and foreign laws that apply to our operations including,
among other things, working conditions, laboratory and manufacturing practices,
and the use and disposal of hazardous or potentially hazardous
substances.




9





The
requirements for approval or clearance to market medical products vary widely by
country. The requirements range from minimal requirements to requirements
comparable to those established by the U.S. Food and Drug Administration
(“FDA”). For example, many countries in South America have minimal regulatory
requirements, while many others, such as Japan, have requirements at least as
stringent as those of the FDA. The process of obtaining approval to distribute
medical products is costly and time-consuming in virtually all of the major
markets where we sell medical devices. We cannot assure that any new medical
devices we develop will be approved in a timely or cost-effective manner or
approved at all. The regulatory requirements in our most important current
markets, the U.S., Europe and Japan, are discussed below.





Regulatory
Requirements in the United States.




Under the federal Food,
Drug & Cosmetic Act, as amended (the “Act”), the FDA has the authority to
adopt, and has adopted, regulations that do the following:




·
            set standards for medical
      devices,





·
            require proof of safety and
      effectiveness prior to marketing of devices that the FDA believes require
      pre-market approval,





·
            require approval prior to
      clinical evaluation of human
use,





·
            permit detailed inspections of
      device manufacturing
facilities,





·
            establish “good manufacturing
      practices” that must be followed in device
    manufacture,





·
            require reporting of serious
      product defects, associated adverse events, and certain recalls or field
      actions to the FDA, and





·
            prohibit the export of devices
      that do not comply with the Act unless they comply with specified
      requirements, including but not limited to requirements that exported
      devices comply with applicable foreign regulations, do not conflict with
      foreign laws, and that the export not be contrary to public health in the
      U.S. or the importing
country.




Most of
our products are medical devices intended for human use within the meaning of
the Act and, therefore, are subject to FDA regulation.




The FDA
establishes procedures for compliance based upon regulations that designate
devices as Class I (general controls, such as establishment registration and
device listing with FDA, labeling and record-keeping requirements), Class II
(performance standards in addition to general controls) or Class III (pre-market
approval (“PMA”) required before commercial marketing). Class III devices are
the most extensively regulated because the FDA has determined they are
life-supporting, are of substantial importance in preventing impairment of
health, or present a potential unreasonable risk of illness or injury. The
effect of assigning a device to Class III is to require each manufacturer to
submit to the FDA a PMA that includes information on the safety and
effectiveness of the device. The FDA reviews device applications and
notifications through its Office of Device Evaluation, or “ODE.”




510(k) Clearance. A medical
device that is substantially equivalent to a directly related medical device
previously in commerce may be eligible for the FDA’s pre-market notification
“510(k) review” process. FDA clearance under Section 510(k) of the Act does not
imply that the safety, reliability and effectiveness of the medical device has
been approved or validated by the FDA, but merely means that the medical device
is substantially equivalent to a previously cleared commercial medical device.
The review period and FDA determination as to substantial equivalence generally
is made within 90 days of submission of a 510(k) application, unless additional
information or clarification or clinical studies are requested or required by
the FDA. As a practical matter, the review process and FDA determination may
take longer than 90 days.




After a
device receives 510(k) clearance, any modification that could significantly
affect its safety or effectiveness, or that would constitute a major change in
its intended use, will require a new 510(k) clearance or could require premarket
approval. The FDA requires each manufacturer to make its own initial
determination as to whether a change significantly affects safety or
effectiveness. However, the FDA can review any such decision and can disagree
with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s
determination, the FDA can require the manufacturer to cease marketing or recall
the modified device until 510(k) clearance or premarket approval is obtained. If
the FDA requires us to seek 510(k) clearance or premarket approval for any
modifications to a previously cleared product, we may be required to cease
marketing or recall the modified device until we obtain this clearance or
approval. Also, in these circumstances, we may be subject to significant
regulatory fines or penalties.




10




In
September 2009 the FDA requested that the Institute of Medicine perform a study
on whether legislative, regulatory or administrative changes are needed to the
FDA’s 510(k) process. The Institute of Medicine report is due in March 2011. The
FDA also announced an internal working group to evaluate and improve the
consistency of FDA decision making in the clearance process, and recently
released an internal report in which FDA officials questioned the 510(k) process
in general. Various committees of the U.S. Congress also have indicated that
they may consider investigating the FDA’s 510(k) process. If these actions
result in a limitation or elimination of the 510(k) approval path STAAR may find
it much more costly and time consuming to develop and introduce new products in
the U.S.




Premarket Approval. When
510(k) clearance is not available, the more rigorous PMA process requires us to
independently demonstrate that the new medical device is safe and effective. As
an initial step the process of developing the product must be stringently
managed and documented – along with any later changes in design – in a “design
history file” that will be submitted with the PMA. The next step is pre-clinical
testing, which includes chemical analysis, toxicity testing and other bench
testing, and animal trials. The results of this early testing are submitted to
the FDA along with a detailed research plan. Only after approval of this
submission can a non-approved device receive an “investigational device
exemption” or IDE, which permits the device to be used to treat human subjects
in a supervised study.




Clinical
trials on human subjects are expensive and time consuming, often taking years
from design to completion. The FDA must approve in advance any use of an
unapproved device – an “investigational device” or IDE – in human clinical
trials, and approves the design of the related study. The trial, once approved,
is subject to extensive oversight. In addition to FDA oversight through the ODE
and the FDA’s Division of Bioresearch Monitoring (“BIMO”), the company
sponsoring the research must designate a private Independent Review Board
(“IRB”) to approve and monitor the research and assure that it is ethical,
scientifically sound and regulated. The company sponsoring the research must
adopt and observe stringent procedures for overseeing research, collecting and
analyzing data, and will be subject to BIMO audits to verify
compliance.




If
clinical research supports the safety and efficacy of the device, the sponsor
prepares and submits the PMA, which consists of several volumes and includes not
only research data and analysis, but also design history files. In addition to
its own review, the FDA may organize an independent advisory panel of experts to
review the PMA whenever a device is the first of its kind or the FDA otherwise
determines panel review is warranted. Panels are held on a regular basis, but
the need to schedule panel review usually adds some weeks or months to the
review process.




Following
its review, the FDA will authorize commercial release if it determines there is
reasonable assurance that the medical device is safe and effective. This FDA
decision is based on a determination that the device’s benefit outweighs the
risk to the population for which treatment with the device is
intended.




If a
manufacturer plans to modify an approved PMA device in a manner that affects
safety or effectiveness, the manufacturer must submit an application called a
“PMA Supplement” regarding the change. The FDA generally reviews PMA Supplements
on a 180-day agency timetable, which may be extended if significant questions
arise in review of the supplement. A change that enhances safety may be
implemented prior to the FDA’s review of the PMA Supplement. The FDA designates
some PMA Supplements as “panel track” supplements, which means that the agency
believes review by an advisory panel may be warranted.  Designation as a
panel-track supplement does not necessarily mean that panel review will actually
occur; often it does not.


11




Our IOLs,
ICLs, and AquaFlow Devices are Class III devices, and our lens injectors are
Class I devices. We have received PMA approval for our IOLs, the ICL for the
treatment of myopia, and the AquaFlow Device.  We have received 510(k)
clearance for our lens injectors.




Oversight
of compliance with quality, medical device reporting and other
regulations.Both before and after a product is commercially
released, we have ongoing responsibilities under FDA regulations. The FDA Office
of Compliance reviews design and manufacturing practices, labeling and
record keeping, and manufacturers’ required reports of adverse experiences and
other information to identify potential problems with marketed medical
devices.  We are also subject to periodic inspection by the FDA for
compliance with the FDA’s quality system regulations as well as other FDA
requirements, such as restrictions on advertising and promotion. The GMP
regulations govern the methods used in, and the facilities and controls used
for, the design, manufacture, packaging and servicing of all finished medical
devices intended for human use. If the FDA were to conclude that we are not in
compliance with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable health risk, the FDA could
require us to notify health professionals and others that the devices present
unreasonable risks of substantial harm to the public health, order a recall,
repair, replacement, or refund of such devices, detain or seize adulterated or
misbranded medical devices, or ban such medical devices. The FDA may also impose
operating restrictions, enjoin and restrain certain violations of applicable law
pertaining to medical devices, and assess civil or criminal penalties against
our officers, employees, or us. The FDA may also recommend prosecution to the
Department of Justice.




BIMO
Review of Clinical Research Activities.Our activities as a sponsor
of clinical research are subject to review by the FDA’s BIMO division. 
BIMO conducts facilities inspections as part of a program designed to ensure
that data and information contained in requests for IDEs, PMA applications, and
510(k) submissions are scientifically valid and accurate. Another objective of
the program is to ensure that human subjects are protected from undue hazard or
risk during the course of scientific
investigations.




Recent
FDA Reviews of STAAR’s Quality Systems.The FDA’s most recent
general quality inspections of STAAR’s facilities were regularly scheduled
inspections of the Nidau, Switzerland facility between June 2 and June 5, 2009,
the Monrovia, California facility, between February 23 and March 4,
2009, and a post-market inspection of the Aliso Viejo, California facility
on August 7, 2006.  The recent inspection of the Nidau, Switzerland
facility that concluded on June 5, 2009 resulted in the inspector issuing two
observations of nonconformity on Form FDA-483.  STAAR agreed with the
observations and at the conclusion of the inspection both of the observations
were annotated as corrected and one was additionally annotated as
verified.  The recent inspection of the Monrovia, California facility that
concluded on March 4, 2009 resulted in the issuance of three observations by the
investigators of nonconformity on Form FDA-483.  STAAR has agreed with the
observations and has completed corrective actions to address each
observation.  We prepared and submitted a comprehensive response to
the investigators’ observations that we believe appropriately addresses each of
the issues raised on the Form FDA-483.  The post-market inspection of Aliso
Viejo, California resulted in no observations of noncompliance.  Based in
part on these inspections, STAAR believes that it is substantially in compliance
with the FDA’s Quality System Regulations and Medical Device Reporting
regulations.




STAAR’s
ability to continue its U.S. business depends on the continuous improvement of
its quality systems and its ability to demonstrate compliance with FDA
regulations. Accordingly, for the foreseeable future STAAR’s management expects
to continue to devote significant resources and attention to those
efforts.




Recent
BIMO Review of STAAR’s  Clinical Research Activities.BIMO
conducted an inspection related to STAAR’s TICL supplemental premarket
application between February 15, 2007 and March 14, 2007, which resulted in
eight inspectional observations.  On June 26, 2007, BIMO issued a
Warning Letter in which it noted four areas of noncompliance in STAAR’s clinical
research procedures and data reporting.  The BIMO observations and Warning
Letter also resulted in the ODE placing STAAR’s TICL application on integrity
hold notwithstanding STAAR’s written responses to the observations and Warning
Letter, on August 3,
2007.




In order
to address BIMO’s concerns and remove the integrity hold, STAAR took a number of
corrective actions, including engaging an independent third party auditor to
conduct an audit of patient records in the TICL clinical study, along with an
audit of clinical systems to ensure accuracy and completeness of data before
resubmitting the application.  Following submission of the third party
auditor’s reports to FDA in late 2008, the reports were released to STAAR in
2009 and STAAR submitted a corrective action plan to address the reported
findings.  On July 21, 2009, the FDA notified STAAR that as a result of
various corrective actions the integrity hold had been removed and that
consideration of the TICL application would resume.




12




While the
past instances of noncompliance with procedures noted in the BIMO Warning Letter
were serious in nature and required comprehensive corrective and preventative
actions, STAAR does not believe that these nonconformities undermined the
scientific validity and accuracy of its clinical data, or that human subjects
were subjected to undue hazard or risk.  STAAR believes that its corrective
actions have substantially remedied BIMO’s concerns.  However, in releasing
the integrity hold, the FDA noted that for a period of two years it will require
STAAR to obtain certification from an independent third party auditor for some
of its filings.  This requirement may increase the cost and time necessary
for some FDA submissions.




Status
of TICL Submission.STAAR submitted a Pre-Market Approval
Application (PMA) supplement for the TICL to the FDA on April 28, 2006. The
FDA’s consideration of the application, which has been designated as a
panel-track supplement, was suspended on August 3, 2007, when the FDA notified
STAAR of the integrity hold.  Among the actions required to resolve the
integrity hold was an independent third party audit of patient records in the
TICL clinical file, along with a clinical systems audit to ensure accuracy and
completeness of data before resubmission of the
application.




The third
party auditors completed their audits and submitted reports of their findings
directly to the FDA in late 2008.  The reports were released to STAAR in
2009 and STAAR completed a corrective action plan to address the reported
findings.  The corrective action plan was submitted to the FDA on May 25,
2009. On July 21, 2009 the FDA removed the integrity hold and resumed
substantive review of the TICL application.  Subsequent to the release from
integrity hold, the FDA and STAAR resolved a number of questions related to the
TICL supplement in an interactive process during August and
September.




On
February 3, 2010, STAAR received a letter of deficiency from the FDA outlining
additional questions and requested labeling changes related to the TICL
application.  The letter provides that STAAR has 180 days to present its
response to the FDA; STAAR is actively working on the preparation of the
comprehensive response to the items in this letter.




Regulatory
Requirements outside the United States.




CE
Marking.  The member countries of the European Union require that
all medical products sold within their borders carry a Conformite Europeane Mark
(“CE Mark”). The CE Mark on a medical device indicates that it has been found to
comply with European Directives and associated guidelines concerning the design
and manufacture of medical devices, including clinical trials, labeling, quality
control, technical specifications, adverse event reporting, and biological,
chemical and clinical safety.  We have obtained the CE Mark for all of our
principal products including our ICL and TICL, IOLs (excluding IOL’s with
aspheric optics), injectors and our AquaFlow
Device.




A CE
Marked device may be sold throughout the 27 countries in Europe.  Other
countries, such as Switzerland, have voluntarily adopted laws and regulations
that mirror those of the European Union with respect to medical devices, and a
number of countries outside of Europe permit importation of devices bearing the
CE Mark.  The method of assessing conformity varies depending on the class
of the product, but normally involves a combination of self-assessment by the
manufacturer and a third-party assessment by a “Notified Body.” Notified Bodies
are a group of private quality-monitoring organizations that have been
accredited to approve medical devices and to monitor quality systems and adverse
event reporting.  The independent Notified Bodies perform, on a privatized
basis, functions similar to the FDA in the U.S. and the PMDA in Japan.  Our
facilities in the U.S., Japan and Switzerland are all subject to regular
inspection by a designated Notified Body.




Medical
Device Regulation in Japan.The Japanese Ministry of Health, Labor,
and Welfare (MHLW) regulates the sale of medical devices under Japan’s
Pharmaceutical Affairs Law (PAL). The Pharmaceutical and Medical Devices Agency
(PMDA), a quasi-governmental organization, performs many of the medical device
review functions for MHLW.   Medical devices generally must undergo
thorough safety examinations and demonstrate medical efficacy before the MHLW
grants shonin
(pre-market device approval) or ninsho
(certification).  Manufacturers and resellers (referred to as Marketing
Authorization Holders or MAHs) must also satisfy certain requirements before the
MHLW grants a business license, or kyoka. 
Requirements for manufacturers and MAHs include compliance with Japanese
regulations covering GQP (good quality control practice) and GVP (good vigilance
practice), which include conformity to the ISO 13485 standard and are similar to
good manufacturing practice and post-market surveillance requirements in the
U.S., as well as the assignment of internal supervisors over marketing, quality
assurance and safety
control.




13




Approval
for a new medical device that lacks a substantial equivalent in the Japanese
market will generally require the submission of clinical trial data.  Only
a licensed MAH can apply for premarket device approval in Japan, and in most
cases the clinical trial data must include data gathered from Japanese
subjects.  For example, STAAR Japan conducted a separate clinical trial in
Japan for the shonin
application for the Visian ICL.  Also, approval for a new medical device
will require the manufacturer to undertake to reexamine the safety and efficacy
of the device with a review of postmarket data gathered within a certain period
- normally four years - after approval.  The specific postmarket
reexamination requirement for a medical device is announced at the time of
approval.




STAAR
Japan currently holds shonin
approval for the Visian ICL, preloaded injectors and their associated lenses,
and kyoka
licensing as a manufacturer and MAH of medical devices.  The sponsor of a
clinical trial submitted to the MHLW must strictly follow Good Clinical Practice
(GCP) standards, and must follow the trial with standard Good Postmarket Study
Practice (GPSP) reporting and a follow-up program.  MHLW and PMDA also
assess the quality management systems of manufacturers and the conformity of
products to the requirements of PAL.  STAAR is subject to inspection for
compliance by these agencies. A company’s failure to comply with PAL can result
in severe penalties, including revocation or suspension of a company’s business
license and possible criminal sanctions.




Research
and Development




We are
focused on furthering technological advancements in the ophthalmic products
industry through the development of innovative ophthalmic products and materials
and related surgical techniques. We maintain an active internal research and
development program which also includes clinical activities and regulatory
affairs and is comprised of 46 employees. In order to achieve our business
objectives, we will continue the investment in research and
development.




STAAR
Japan’s research and development department has been a leader in injector
technology, enabling that company to introduce the first Preloaded Injector to
international markets in late 2003 and in 2009 introduced the Epiphany injector
system to the U.S. market.  Since STAAR completed its acquisition of the
remaining 50% interest in STAAR Japan in early fiscal year 2008, STAAR has
incorporated the efforts of STAAR Japan’s research and development staff into
its global research and development strategy, which is expected to accelerate
STAAR’s efforts to improve its injector technology and bring preloaded
technology to more markets.




During
2009 STAAR introduced the nanoFLEXTM Aspheric Collamer IOL, which can be
delivered through the nanoPOINT injector, and the advanced EpiphanyTM 
injector system for the Afinity Collamer IOL.  Outside the U.S. STAAR
introduced the KS-X Preloaded Hydrophobic Acrylic Injector System in Europe and
the KS-Ni Preloaded Silicone IOL Injector System in Japan.




The
introduction of the nanoFLEX IOL provided the opportunity to evaluate the near
and intermediate vision provided by this new lens. A group of eight surgeons
referred to as the Collamer Accommodating Study Team or “CAST” implanted the
lens in both eyes of their patients and tested these patients for distance
corrected near and intermediate visual acuity using a calibrated reading card.
The result of this evaluation indicated that the nanoFLEX IOL provides better
best distance corrected near vision than other standard IOLs on the market and
better distance corrected intermediate vision than premium IOLs. Based on these
encouraging results STAAR is organizing a formal clinical study where
the distance corrected near and intermediate vision of nanoFLEX IOL patients
will be evaluated with the objective of gaining FDA approval for a labeling
claim.




During
2010 our goal is  to continue our focus on research and development in the
following areas:


·
              Introduction
      of the silicone preloaded injector system in the
  U.S.
 
 ·
              Introduction
      of a small incision injector system for
ICLs
  14
  ·
              Continue
      development of a Collamer Toric IOL to complement our pioneering silicone
      Toric IOL
 
 ·
              Development
      of accommodating or presbyopic IOLs
 
 ·
              Development
      of preloaded injector systems for Collamer IOLs and
  ICLs




Research
and development expenses were approximately $5.9 million, $7.9 million, and $6.7
million for our 2009, 2008 and 2007 fiscal years, respectively. STAAR expects to
invest approximately 10% of sales for research and development in
2010.




Environmental
Matters




The
Company is subject to federal, state, local and foreign environmental laws and
regulations. We believe that our operations comply in all material respects with
applicable environmental laws and regulations in each country where we do
business. We do not expect compliance with these laws to materially affect our
capital expenditures, earnings or competitive position. We currently have no
plans to invest in material capital expenditures for environmental control
facilities for the remainder of our current fiscal year or for the next fiscal
year. We are not aware of any pending actions, litigation or significant
financial obligations arising from current or past environmental practices that
are likely to have a material adverse impact on our financial position. However,
environmental problems relating to our properties could develop in the future,
and such problems could require significant expenditures. In addition, we cannot
predict changes in environmental legislation or regulations that may be adopted
or enacted in the future and that may adversely affect us.




Significant
Subsidiaries




As of
March 15, 2010, the Company’s principal and wholly owned subsidiaries were
STAAR Surgical AG and STAAR Japan Inc. The activities of each are described
above.




Employees




As of March 15, 2010,
we employed approximately 296 persons.




Code
of Ethics




STAAR has adopted a Code
of Ethics that applies to all of its directors, officers, and employees. The
Code of Ethics is posted on the Company’s website, www.staar.com—
Investor Relations: Corporate
Governance.




Additional
Information




We make
available free of charge through our website, www.staar.com,
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after those reports are filed with or furnished to the Securities
and Exchange Commission (“SEC”).




The
public may read any of the items we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding the
Company and other issuers that file electronically with the SEC at http://www.sec.gov.




Glossary




The
following glossary is intended to help the reader understand some of the terms
used in this Report.




accommodation–the eye’s ability to adjust its focus at all distances
between near and far.  This ability tends to decline with
age.




accommodating
IOL –a type of IOL designed to restore some degree of variable
near-and-far focus after cataract
surgery.




acrylic
– a broadly used family of plastics.  Acrylic materials used in IOLs have
been both water repelling (hydrophobic)
and water-absorbing (hydrophilic).
The most popular IOLs in the U.S., Europe and Japan are made of a flexible,
water-repellent acrylic
material.




15




anterior
chamber – the space in the eye between the cornea and the
iris.




aspheric
– aspheric lenses are lenses that are designed in a shape that creates a more
clearly focused image than traditional spheric
lenses. By reducing spheric
aberrations,IOLs that feature aspheric optics generally deliver better
night vision and contrast sensitivity than spheric
IOLs.




astigmatism
is a refractive disorder in which partially blurred vision results from an
irregularly shaped cornea or, in some cases, a defect in the natural lens,
produces a distorted image on the retina.  The astigmatic eye is sometimes
said to be slightly football-shaped rather than being a perfect sphere.




cataract–a common age-related eye disorder that involves the hardening and loss of
transparency of the natural crystalline lens, impairing visual
acuity.




CMS–the Centers for Medicare and Medicaid Services, the U.S. federal agency
that administers and establishes rules for the Medicare and Medicaid
reimbursement systems.




collagen
copolymer - collagen copolymers are compounds formed by joining molecules
of collagen derived from biological sources with synthetic monomer
molecules.  STAAR’s Collamer® is a collagen copolymer engineered
specifically for use in implantable
lenses.




Collamer®
- the brand name for STAAR’s proprietary collagen copolymer lens material. 
Collamer is composed of a poly-HEMA-based copolymer, collagen and a UV-absorbing
chromophore.  Collamer lenses have a high water content, are biocompatible
and are designed to mimic the optical properties and flexibility of the natural
lens in the human eye.




contrast
sensitivity - the ability to visually distinguish an object from its
background.




crystalline
lens – the natural lens that is present in the eye at birth, which is a
clear structure located behind the iris that changes shape to focus light onto
the retina.




decentration
– decentration of an IOL is a displacement of an IOL after implantation in the
eye such that the ICL’s central axis is not perfectly aligned with the visual
axis of the eye. STAAR developed its proprietary aspheric design to perform
well even if decentered.




excimer
laser– a specialized ultraviolet laser used in ophthalmology to cut or
shape eye tissue. The excimer laser is used during LASIK and PRK
surgery.




foldable
IOL – an intraocular lens made of flexible material, which can be
inserted with an injector system through a small incision in minimally invasive
cataract surgery.




glaucoma–a progressive and degenerative condition, usually associated with
elevated fluid pressure in the eye, in which the optic nerve may be damaged,
resulting in irreversible loss of vision.  Glaucoma is a leading cause of
blindness
worldwide.




haptic
– the part of an IOL that contacts the structures of the eye and holds the IOL
in place. IOLs in which the haptic is also a part of the optic material is
called a single-piece IOL while IOLs in which the haptics are attached to the
optic is called a three-piece
IOL.




16




hyperopia
– the refractive disorder commonly known as farsightedness, which occurs when
the eye’s lens focuses images behind the plane of the retina.  A person
with hyperopia cannot see close objects without glasses or contact
lenses. Because presbyopia often results in the need for reading glasses,
it is sometimes confused with
farsightedness.




HICL
– a Visian ICL product used to treat hyperopia
(farsightedness).




ICL– an abbreviation for “implantable Collamer lens,” the Visian ICL is a
folding lens implanted in the eye to correct refractive errors like myopia that
have traditionally been corrected with eyeglasses or contact lenses.  The
ICL is within a product category referred to as phakic
IOLS or phakic
implants because they work  with the patient’s natural lens, or
phakos,
rather than replacing it.




intraocular
– within the eye.




iris
– the muscular curtain located behind the cornea, which opens and closes to
regulate the amount of light entering the eye through the pupil, which is an
opening at the center of the iris. The iris carries the blue or brown pigment
that gives the eye its
color.




injector
or injector system – a device, in the form of a syringe, that is used to
deliver a foldable IOL into the eye through a slender nozzle in minimally
invasive cataract
surgery.




laser
eye surgery – a generic term for LASIK and
PRK.




LASIK
– an acronym for laser-assisted
in-situ keratomileusis, a surgical operation that reshapes the cornea to
correct nearsightedness, farsightedness, or astigmatism.  LASIK involves
first the cutting of a hinged flap to separate the surface layer of the cornea,
using a microkeratome
(a special blade) or a laser.  An excimer
laser is then used to burn tissue away and reshape the inner
cornea, after which the flap is returned to
position.




multifocal
IOL– a type of IOL that creates zones in the visual field for
distance, far and near vision, similar to the near and far zones in bifocal
glasses.




myopia
– the refractive disorder also known as nearsightedness, which occurs when the
eye’s lens focuses images in front of the retina rather than on the retinal
surface.  A person with myopia cannot clearly see distant objects without
glasses or contact
lenses.




nanoFLEX
–a single-piece Collamer aspheric IOL that can be implanted through a
2.2 mm incision with the complementary nanoPOINT injector
system.




ophthalmologist
– a surgeon who specializes in the diseases and disorders of the eye and the
visual pathway related to it.  Sometimes confused with optometrist,
a doctor who diagnoses disorders of the eye and prescribes eyeglasses and
contact lenses for refractive disorders, but does not perform
surgery.




ophthalmic–
of or related to the eye.




optic
– the central part of an IOL, the part that functions as a lens and focuses
images on the retina.




phakic
IOL or phakic implant – an artificial lens that is implanted to work
along with the patient’s natural lens is called a phakic IOL or phakic implant,
from the Greek word for lens, phakos. 
This is the product class to which the Visian line of products belongs. 
IOLs that treat cataracts are sometimes called aphakic
IOLsbecause they are implanted in patients whose natural lenses have
been removed.




phacoemulsificationis
a small-incision procedure used to remove a cataract patient’s cloudy lens
before implantation of an IOL.  Phacoemulsification uses ultrasound to
break up the tissue of the crystalline lens, and then uses suction to draw the
tissue out through the small
incision.




posterior
chamberis
the space in eye behind the
iris.




NTIOL–an abbreviation for New Technology Intraocular Lens.  The Centers
for Medicare and Medicaid Services (CMS)
will grant NTIOL status to IOLs that can demonstrate improved visual
performance over conventional IOLs, allowing an extra $50 reimbursement per lens
implanted in an ASC (ambulatory surgical center). The majority of IOL purchases
in the U.S. are implanted at ASCs and reimbursed through
Medicare.




17






Preloaded
Injector -  a silicone or acrylic IOL packaged and shipped in a
pre-sterilized, disposable injector ready for use in cataract surgery.  The
conventional method of packaging IOLs requires the surgeon or an assistant to
manually load each lens into an injector before
surgery.




presbyopia–an age-related condition in which the crystalline lens loses its ability
to focus on both near and far objects.  People who have had normal vision
will typically begin to need glasses for reading or other close tasks at some
point after age 40 due to
presbyopia.




presbyopic
IOLsare IOLs that can restore some degree of near and far visual acuity
after cataract
surgery.




PRK–an abbreviation for photorefractive
keratectomy,a surgical operation that reshapes the surface of the cornea
to correct nearsightedness, farsightedness and astigmatism.  PRK involves
the use of an excimer
laser to ablate, or burn, small amounts of tissue from the cornea. 
PRK differs from LASIK, which employs a flap to gain access to the corneal bed,
then uses the excimer laser to shape the corneal bed rather than the surface of
the cornea.




refractive
disorders are visual disorders that affect the ability of the eye’s
optical system to create a sharply focused image.  Refractive disorders
include myopia (nearsightedness), hyperopia (farsightedness), astigmatism and
presbyopia.  These are the visual disorders that have traditionally been
treated with eyeglasses and contact lenses, and more recently with refractive
surgery.  Glaucoma, cataracts and macular degeneration are examples of
visual impairment that are not
refractive disorders.




refractive
market– as used in this report “refractive market” means the overall
market volume for refractive surgical procedures of all kinds, including LASIK,
PRK, the Visian product family and other phakic IOLs.  As used in this
report, the term does not does not include sales of non-surgical products like
eyeglasses and contact
lenses.




refractive
surgery–
operative procedures intended to correct or reduce refractive disorders. 
In addition to the implantation of the Visian ICL, common refractive surgeries
include LASIK and PRK.




retina
- a layer of nerve tissue at the back of the eye consisting of millions of light
receptors called rods and cones, which receive the light image and transmit it
to the brain via the optic
nerve.




silicone
– a type of plastic often used in implantable devices that is inert, generally
flexible and
water-repelling.




single-piece
IOL – in a single piece IOL the haptics and the optic are fashioned from
a single piece of lens material.  The two principal design categories of
IOLs are three-piece IOLs and single-piece
IOLs.




spheric
lenses – a spheric lens has surfaces that are shaped like sections of a
sphere.  The sphere is not an ideal shape for an optically accurate lens,
but spherical surfaces have historically been the simplest lens shape to
make.  Spheric lenses have spheric
aberrations – small errors in focus that become more pronounced at the
edge of the lens  When a spheric IOL is placed in the human eye, these
aberrations can reduce night vision and contrast
sensitivity.




three-piece
IOL – a three-piece IOL has a central, disk-shaped optic and two
spring-like plastic haptics attached at either side.  The haptics are
positioned against structures of the eye to hold the IOL in
place.




toric–refers to the shape of a lens designed to correct astigmatism, which has
greater refractive power in some sections of the lens than
others.




18




TICL
– an abbreviation for “Toric implantable Collamer lens,” a variant of the ICL
that corrects both myopia and
astigmatism.




Visian
– STAAR’s brand name for its family of phakic intraocular lenses, including the
Visian ICL, Visian TICL and Visian
HICL.




Item 1A. 
Risk Factors




Our short
and long-term success is subject to many factors that are beyond our control.
Investors and prospective investors should consider carefully the following risk
factors, in addition to other information contained in this report. This Annual
Report on Form 10-K contains forward-looking statements, which are subject to a
variety of risks and uncertainties.  We have identified our known,
significant risk factors below.




Risks
Related to Our Business




We
have a history of losses which could continue in the future.




We have
reported losses in each of the last several fiscal years and have an accumulated
deficit of $132.1 million as of January 1, 2010.  There can be no assurance
that we will report net income in any future period.




We
have only limited working capital and limited access to financing.




We began
generating cash from operations in 2009 after six consecutive years when our
cash requirements exceeded the level of cash generated by operations.  We
may not be able to sustain positive cash flow, and unexpected cash needs could
exceed the amount of cash we generate.  Among our challenges in maintaining
and increasing positive cash flow is the March 2, 2010 sale of Domilens, in
which we divested one of our historical sources of cash.  While we believe
our capital resources and funds generated by operations are sufficient to
operate our business and satisfy our obligations, if unexpected events increase
our expenses or harm the performance of our business we may need to seek
additional financing.  We may also be presented with opportunities to
expand our business that require additional financing.  Should we need
additional working capital, our ability to raise financing through sales of
equity securities depends on general market conditions and the demand for
STAAR’s common stock. We may be unable to raise adequate capital through sales
of equity securities, and if our stock has a low market price at the time of
such sales our existing stockholders could experience substantial
dilution.  Because of our history of losses STAAR may also have difficulty
obtaining debt financing on acceptable terms.  An inability to secure
additional financing if it is needed in the future could require us to forego
opportunities for expansion, reduce exiting operations, or even jeopardize our
ability to continue operations.




Our
defined benefit pension plans are currently underfunded and we may be subject to
significant increases in pension benefit obligations under those pension
plans.




We
sponsor two defined benefit pension plans through our wholly owned Swiss and
Japanese subsidiaries. Both plans are underfunded and may require significant
cash payments. We contributed $238,000 to our Swiss Plan and $76,000 to our
Japan Plan during 2009.




Beginning
October 1, 2009, as part of the Amendment of the Japan Plan discussed in Note 12
to the consolidated financial statements included in this report, STAAR Japan
will maintain and administer the Japan Plan, including paying the pension
benefits as they are due solely from its continuing operations. STAAR Japan is
not required to, and does not expect to make any contributions to the Japan Plan
in order to meet future pension benefit obligations. Therefore, STAAR Japan has
no plan assets now and does not expect to have any in the future.




STAAR
determines its pension benefit obligations and funding status using many
assumptions, such as inflation, investment rates, mortality, turnover and
interest rates, as applicable, any of which could prove to be different than
projected. If the investment performance does not meet our expectations, or if
other actuarial assumptions are modified, or not realized, we may be required to
contribute more than we currently expect and increase our future pension benefit
obligations to be funded from our operations.




19




Our
pension plans in the aggregate are underfunded by approximately $2.0 million
($0.9 million for the Japan Plan and $1.1 million for the Swiss Plan) as of
January 1, 2010 (based on the actuarial assumptions used for FASB ASC 715-30,
“Defined Benefits Plans — Pensions” purposes and comparing our projected benefit
obligation to the fair value of plan assets).




If our
cash flow from operations is insufficient to fund our worldwide pension
obligations, we may be materially and adversely harmed and have to seek
additional capital.




The
divestiture of Domilens will reduce our sales.




Domilens
GmbH, our former German subsidiary, was profitable and provided a significant
part of our sales.  In 2009, Domilens accounted for $24,286,000, or 32% of
our total sales. While sales from STAAR’s remaining business generate higher
gross profit margins than the sales generated from Domilens, STAAR will have to
significantly increase its sales from its core IOL and ICL business, or
significantly reduce its expenses, to achieve its target of positive cash flow
in 2010.  If STAAR does not achieve positive cash flows in 2010, it may
need to seek additional sources of financing to maintain
operations.




We
may have limited ability to fully use our recorded tax loss
carryforwards.




We have
accumulated approximately $120.9 million of federal net operating loss
carryforwards as of January 1, 2010 to be used in future quarters if we become
profitable. If we were to experience a significant change in ownership, Internal
Revenue Code Section 382 may restrict the future utilization of these tax loss
carryforwards even if we become profitable and these tax loss carryforwards will
begin to expire between 2020 and 2029.




FDA
compliance issues have delayed approvals and we expect to devote significant
resources to maintaining compliance in the future.




The
Office of Compliance of the FDA’s Center for Devices and Radiological Health
regularly inspects STAAR’s facilities to determine whether we are in compliance
with the FDA Quality System Regulations relating to such things as manufacturing
practices, validation, testing, quality control, product labeling and complaint
handling, and in compliance with FDA Medical Device Reporting regulations and
other FDA regulations. The FDA also regularly inspects for compliance with
regulations governing clinical investigations.




Based on
the results of regularly scheduled inspections of the Nidau, Switzerland
facility between June 2 and June 5, 2009 and of the Monrovia, California
facility, between February 23 and March 4, 2009, STAAR believes that it is
substantially in compliance with the FDA’s Quality System Regulations and
Medical Device Reporting regulations. However, between December 29, 2003 and
July 5, 2005 we received Warning Letters and other correspondence indicating
that the FDA found STAAR’s Monrovia, California facility in violation of
applicable regulations, warning of possible enforcement action and suspending
approval of new implantable devices. The FDA’s findings of compliance
deficiencies during that period delayed FDA approval of the ICL.




On June
26, 2007 STAAR received a Warning Letter from the FDA citing four areas of
noncompliance noted by the FDA’s Bioresearch Monitoring branch during its
inspection of STAAR’s clinical study procedures, practices, and documentation
related to the TICL.  The Office of Device Evaluation cited the same
deficiencies in a letter placing integrity hold on the TICL application. 
On July 21, 2009, the FDA indicated that it was satisfied with corrective
actions taken by STAAR to resolve these deficiencies, and removed the integrity
hold.




STAAR’s
ability to continue its U.S. business depends on the continuous improvement of
its quality systems and its compliance with FDA regulations. Accordingly, for
the foreseeable future STAAR’s management expects to continue to devote
significant resources and attention to those efforts. STAAR cannot ensure that
its efforts will be successful. Any failure to demonstrate substantial
compliance with FDA regulations can result in enforcement actions that
terminate, suspend or severely restrict our ability to continue manufacturing
and selling medical devices. Please see the related risks discussed under the
headings “We
are subject to extensive government regulation, which increases our costs and
could prevent us from selling our products” and “Weare subject to federal and state regulatory investigations.”




20




FDA
approval of the Toric ICL, which could have a significant U.S. market, has been
considerably delayed.




Part of
STAAR’s strategy to increase U.S. sales of refractive products has been a plan
to introduce the Toric ICL, or TICL, a variant of the ICL that corrects both
astigmatism and myopia in a single lens and that is currently marketed outside
the U.S. STAAR believes the TICL also has a significant potential market in the
U.S. and could accelerate growth of the overall refractive product line. 
STAAR submitted a supplemental premarket approval application (PMA) for the TICL
in April 2006.  In August 2007 the FDA placed an integrity hold on the PMA
and suspended its consideration of the PMA until STAAR completed specified
actions to satisfy FDA concerns regarding deficiencies in STAAR’s oversight of
past clinical activities.  The integrity hold was removed, and
consideration of the application resumed on July 21, 2009.  On February 3,
2010, STAAR received a letter of deficiency from the FDA outlining additional
questions and requesting labeling changes related to the TICL application. 
The letter provides that STAAR has 180 days to present its response to the
FDA.  STAAR cannot predict when or if the Toric ICL may be
approved.




Continued
effects of the global recession could reduce sales of our refractive
products.




The
global economy has been affected by a severe recession.  Since at least
mid-2008 consumer spending has decreased in the U.S. as credit has become less
available, unemployment has increased, and consumer confidence has
declined.  Despite indications that the U.S. economy has resumed growth,
employment, consumer spending and consumer confidence have not recovered to
pre-recession levels in the U.S.  Many regions of the world remain severely
affected, including Spain, which has been a significant market for the ICL and
TICL.




Refractive
surgery is an elective procedure generally not covered by health
insurance.  Patients must pay for the procedure, frequently through
installment financing arrangements.  They can defer the choice to have
refractive surgery if they lack the disposable income to pay for it or do not
feel their income is secure in the current economic climate.  Laser
refractive surgery has experienced a significant decrease in demand
globally.  STAAR believes that seven of the top ten refractive markets
experienced a decline in total refractive procedures during 2009.  The U.S.
market, where we believe procedures have declined to approximately 50% of their
level two years ago, appears to be the worst affected.  Visian ICL
sales have not been as badly affected, and grew worldwide in 2009.  If the
economic recovery does become stronger, or if the global economy falls back into
recession, Visian ICL sales could continue to grow slowly or decline. 
Because the Visian ICL is STAAR’s fastest growing and highest gross margin
product, restricted growth or a decline in its sales could materially harm
STAAR’s business.




Negative
publicity concerning complications of laser eye surgery could reduce the demand
for our refractive products as well.




Negative
publicity about laser eye surgery has appeared in the U.S. and some other
refractive surgery markets.  For example, on April 25, 2008, the FDA
Ophthalmic Devices Panel held a public meeting to discuss reports of medical
complications and customer satisfaction following refractive surgery.  The
resulting publicity broadened public awareness of the potential complications of
refractive surgery and potential patient dissatisfaction, in particular as a
result of LASIK and other corneal laser-based procedures.  These concerns
may have, in part, been a factor in the steep decline in demand for such
procedures during 2008 and 2009.  Concerns about complications of
refractive laser eye surgery could encourage more patients and doctors to select
the Visian ICL as an alternative, but could also decrease patient interest in
all refractive surgery, including Visian ICL. Depending on the nature and
severity of future negative publicity about refractive surgery, the growth of
ICL sales in the U.S. could be limited or sales could decline as a result.
Because nearly all candidates for refractive surgery can achieve acceptable
vision through the use of spectacles or contact lenses, for most patients the
decision to have refractive surgery is a lifestyle choice that depends on high
confidence in achieving a satisfactory outcome.




Strikes,
slow-downs or other job actions by doctors can reduce sales of cataract-related
products.




In many
countries where STAAR sells its products, doctors, including ophthalmologists,
are employees of the government, government-sponsored enterprises or large
health maintenance organizations. In recent years employed doctors who object to
salary limitations, working rules, reimbursement policies or other conditions
have sought redress through strikes, slow-downs and other job actions. These
actions often result in the deferral of non-essential procedures, such as
cataract surgeries, which affects sales of our products. For example, in fiscal
year 2006, strikes and slow-downs by doctors in Germany were partly responsible
for a drop in sales by our then wholly owned subsidiary Domilens GmbH, which
distributes ophthalmic products in Germany. Such problems could occur again in
Germany or other regions and, depending on the importance of the affected region
to STAAR’s business, the length of the action and its pervasiveness, job actions
by doctors can materially reduce our sales and earnings.




21




Our
sales are subject to significant seasonal variation.




We
generally experience lower sales during the third quarter due to the effect of
summer vacations on elective procedures. In particular, because sales activity
in Europe and Japan drops dramatically in July and August, and these sales have
recently accounted for a greater proportion of our total sales, this seasonal
variation in our results has become even more pronounced.




We
could experience losses due to product liability claims.




We have
been subject to product liability claims in the past and may experience such
claims in the future.  Product liability claims against us may exceed the
coverage limits of our insurance policies or cause us to record a loss in excess
of our deductible. A product liability claim in excess of applicable insurance
could have a material adverse effect on our business, financial condition and
results of operations. Even if any product liability loss is covered by an
insurance policy, these policies have retentions or deductibles that provide
that we will not receive insurance proceeds until the losses incurred exceed the
amount of those retentions or deductibles. To the extent that any losses are
below these retentions or deductibles, we will be responsible for paying these
losses. The payment of retentions or deductibles for a significant amount of
claims could have a material adverse effect on our business, financial
condition, and results of operations.




Any
product liability claim would divert managerial and financial resources and
could harm our reputation with customers. We cannot assure you that we will not
have product liability claims in the future or that such claims would not have a
material adverse effect on our business.




We
compete with much larger companies.




Our
competitors, including Alcon, Abbot Medical Optics and Bausch & Lomb have
much greater financial resources than we do and some of them have large
international markets for a full suite of ophthalmic products. Their greater
resources for research, development and marketing, and their greater capacity to
offer comprehensive products and equipment to providers, make it difficult for
us to compete. We have lost significant market share to some of our
competitors.




The
global nature of our business may result in fluctuations and declines in our
sales and profits.




Our
products are sold in approximately 50 countries. Sales from international
operations make up a significant portion of our total sales. For the fiscal year
ended January 1, 2010, sales from international operations were 79% of our total
sales. The results of operations and the financial position of certain of our
foreign operations are reported in the relevant local currencies and then
translated into U.S. dollars at the applicable exchange rates for inclusion in
our consolidated financial statements, exposing us to translation risk. In
addition, we are exposed to transaction risk because some of our expenses are
incurred in a different currency from the currency in which our sales are
received. Our most significant currency exposures are to the Japanese Yen, Euro,
and the Swiss Franc. The exchange rates between these and other local currencies
and the U.S. dollar may fluctuate substantially. We have not attempted to offset
our exposure to these risks by investing in derivatives or engaging in other
hedging transactions.




Economic,
social and political conditions, laws, practices and local customs vary widely
among the countries in which we sell our products. Our operations outside of the
U.S. are subject to a number of risks and potential costs, less stringent
protection of intellectual property and economic, political and social
uncertainty in some countries, especially in emerging markets. Our continued
success as a global company depends, in part, on our ability to develop and
implement policies and strategies that are effective in anticipating and
managing these and other risks in the countries where we do business. These and
other risks may have a material adverse effect on our operations in any
particular country and on our business as a whole. We price some of our products
in U.S. dollars, and as a result changes in exchange rates can make our products
more expensive in some offshore markets and reduce our sales. Inflation in
emerging markets also makes our products more expensive there and increases the
credit risks to which we are exposed.




22




The
success of our international operations depends on our successfully managing our
foreign subsidiaries.




We
conduct most of our international business through wholly owned subsidiaries.
Managing distant subsidiaries and fully integrating them into STAAR’s business
is challenging. While STAAR seeks to integrate its foreign subsidiaries fully
into its operations, direct supervision of every aspect of their operations is
impossible, and as a result STAAR relies on its local managers and staff.
Cultural factors, language differences and the local legal climate can result in
misunderstandings among internationally dispersed personnel, and increase the
risk of failing to meet U.S. and foreign legal requirements, including with
respect to the Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices
Act. These risks increased after we completed the acquisition of STAAR Japan
Inc., and, notwithstanding the March 2, 2010 sale of Domilens, our German
distribution subsidiary, these risks remain significant. The risk that
unauthorized conduct may go undetected will always be greater in foreign
subsidiaries.




Our
activities involve hazardous materials and emissions and may subject us to
environmental liability.




Our
manufacturing, research and development practices involve the use of hazardous
materials. We are subject to federal, state and local laws and regulations in
the various jurisdictions in which we have operations governing the use,
manufacturing, storage, handling and disposal of these materials and certain
waste products. We cannot completely eliminate the risk of accidental
contamination or injury from these materials. Remedial environmental actions
could require us to incur substantial unexpected costs, which would materially
and adversely affect our results of operations. If we were involved in an
environmental accident or found to be in substantial non-compliance with
applicable environmental laws, we could be held liable for damages or penalized
with fines.




We
depend on key employees.




We depend
on the continued service of our senior management and other key employees. The
loss of a key employee could hurt our business. We could be particularly hurt if
any key employee or employees went to work for competitors. Our future success
depends on our ability to identify, attract, train, motivate and retain other
highly skilled personnel. Failure to do so may adversely affect our
results.




Changes
in accounting standards could affect our financial results.




The
accounting rules applicable to public companies like STAAR are subject to
frequent revision. Future changes in accounting standards could require us to
change the way we calculate income, expense or balance sheet data, which could
result in significant change to our reported results of operation or financial
condition.




We
are subject to international tax laws that could affect our financial
results.




STAAR
conducts international operations through its subsidiaries. Tax laws affecting
international operations are highly complex and subject to change. STAAR’s
payment of income tax in the different countries where it operates depends in
part on internal settlement prices and administrative charges among STAAR and
its subsidiaries. These arrangements require judgments by STAAR and are subject
to risk that tax authorities will disagree with those judgments and impose
additional taxes, penalties or interest on STAAR. In addition, transactions that
STAAR has arranged in light of current tax rules could have unforeseeable
negative consequences if tax rules change.




If
we suffer loss to our facilities due to catastrophe, our operations could be
seriously harmed.




We depend
on the continuing operation of our manufacturing facilities in California, Japan
and Switzerland, which have little redundancy or overlap among their activities.
Our facilities are subject to catastrophic loss due to fire, flood, earthquake,
terrorism or other natural or man-made disasters. Our California and Japanese
facilities are in areas where earthquakes could cause catastrophic loss. If any
of these facilities were to experience a catastrophic loss, it could disrupt our
operations, delay production, shipments and revenue and result in large expenses
to repair or replace the facility. Our insurance for property damage and
business interruption may not be sufficient to cover any particular loss, and we
do not carry insurance or reserve funds for interruptions or potential losses
arising from earthquakes or terrorism.




23




Most
of our products have single-site manufacturing approvals, exposing us to risks
of business interruption.




We
manufacture all of our products at our facilities in California, Switzerland,
and Japan. Most of our products are approved for manufacturing only at one of
these sites. Before we can use a second manufacturing site for an implantable
device we must obtain the approval of regulatory authorities. Because this
process is expensive we have generally not sought approvals needed to
manufacture at an additional site. If a natural disaster, fire, or other serious
business interruption struck one of our manufacturing facilities, it could take
a significant amount of time to validate a second site and replace lost product.
We could lose customers to competitors, thereby reducing sales, profitability
and market share.




If
we are unable to protect our information systems against data corruption,
cyber-based attacks or network security breaches, our operations could be
disrupted.




We are
significantly dependent on information technology networks and systems,
including the Internet, to process, transmit and store electronic information.
In particular, we depend on our information technology infrastructure for
electronic communications among our locations around the world and between our
personnel and our subsidiaries, customers, and suppliers. Security breaches of
this infrastructure can create system disruptions, shutdowns or unauthorized
disclosure of confidential information. If we are unable to prevent such
security breaches, our operations could be disrupted or we may suffer financial
damage or loss because of lost or misappropriated information.




Risks
Related to the Ophthalmic Products Industry




If
we recall a product, the cost and damage to our reputation could harm our
business.




Medical
devices must be manufactured to the highest standards and tolerances, and often
incorporate newly developed technology. From time to time defects or technical
flaws in medical devices may not come to light until after the products are sold
or consigned. In those circumstances, like others in our industry, we have
voluntarily recalled our products.  Similar recalls could take place again.
We may also be subject to recalls initiated by manufacturers of products we
distribute. Courts or regulators can also impose mandatory recalls on us, even
if we believe our products are safe and effective.  STAAR believes that in
recent years it has been less affected by recalls than most of its U.S.
competitors, but cannot eliminate the risk of a material recall in the
future.  Recalls can result in lost sales of the recalled products
themselves, and can result in further lost sales while replacement products are
manufactured, especially if the replacements must be redesigned. If recalled
products have already been implanted, we may bear some or all of the cost of
corrective surgery. Recalls may also damage our professional reputation and the
reputation of our products. The inconvenience caused by recalls and related
interruptions in supply, and the damage to our reputation, could cause
professionals to discontinue using our products.




If
we fail to keep pace with advances in our industry or fail to persuade
physicians to adopt the new products we introduce, customers may not buy our
products and our sales may decline.




Constant
development of new technologies and techniques, frequent new product
introductions and strong price competition characterize the ophthalmic industry.
The first company to introduce a new product or technique to market usually
gains a significant competitive advantage. Our future growth depends, in part,
on our ability to develop products to treat diseases and disorders of the eye
that are more effective, safer, or incorporate emerging technologies better than
our competitors’ products. Sales of our existing products may decline rapidly if
one of our competitors introduces a superior product, or if we announce a new
product of our own. If we fail to make sufficient investments in research and
development or if we focus on technologies that do not lead to better products,
our current and planned products could be surpassed by more effective or
advanced products. In addition, we must manufacture these products economically
and market them successfully by persuading a sufficient number of eye-care
professionals to use them.




Resources
devoted to research and development may not yield new products that achieve
commercial success.




We spent
about 8% of our sales on research and development during the fiscal year ended
January 1, 2010, and we expect to spend approximately 10% of our sales for this
purpose in future periods. Development of new implantable technology, from
discovery through testing and registration to initial product launch, is
expensive and typically takes from three to seven years. Because of the
complexities and uncertainties of ophthalmic research and development, products
we are currently developing may not complete the development process or obtain
the regulatory approvals required for us to market the products successfully.
Any of the products currently under development may fail to become commercially
successful.




24


Changes in reimbursement for our products by
third-party payors could reduce sales of our products or make them less
profitable.
  Many of
our products, in particular IOLs and products related to the treatment of
glaucoma, are used in procedures that are typically covered by health insurance,
HMO plans, Medicare, Medicaid, or other governmental sponsored programs in the
U.S. and Europe. Third party payors in both government and the private sector
continue to seek to manage costs by restricting the types of procedures they
reimburse to those viewed as most cost-effective and by capping or reducing
reimbursement rates. Whether they limit reimbursement prices for our products or
limit the surgical fees for a procedure that uses our products, these policies
can reduce the sales volume of our reimbursed products, their selling prices or
both. For example, the Centers for Medicaid and Medicare have recently reduced
the reimbursement rate for glaucoma procedures such as the implantation of our
AquaFlow Device.  Future cost cutting initiatives could result in
unexpected reductions in the reimbursement rates for IOLs and related
products.  In some countries government insurers have sought to control
costs by limiting the total number of procedures they will reimburse.  The
U.S. Congress is currently considering legislative proposals that would
significantly change the system of public and private health care reimbursement,
and will likely consider such changes again in the future. We are not able to
predict whether new legislation or changes in regulations will take effect at
the state or federal level, but if enacted these changes could significantly and
adversely affect our business.
  We
are subject to extensive government regulation worldwide, which increases our
costs and could prevent us from selling our products.
  STAAR is
regulated by regional, national, state and local agencies.  In the U.S our
regulators include the Food and Drug Administration, the Department of Justice,
the Federal Trade Commission, the Office of the Inspector General of the U.S.
Department of Health and Human Services and other regulatory bodies, as well as
governmental authorities in those foreign countries in which we manufacture or
distribute products. The Federal Food, Drug, and Cosmetic Act, the Public Health
Service Act and other federal and state statutes and regulations govern the
research, development, manufacturing and commercial activities relating to
medical devices, including their pre-clinical and clinical testing, approval,
production, labeling, sale, distribution, import, export, post-market
surveillance, advertising, dissemination of information and
promotion.
  We are
subject to similar regulatory regimes in other key regions of Europe and Asia,
in particular Japan.   Regulations worldwide are becoming more
stringent.  We have described in detail the regulations governing approval
of medical devices and their manufacturing in the “Business – Regulatory
Matters” section of this Report.  We are also subject to government
regulation over the prices we charge and any rebates we may offer to customers.
Complying with government regulation substantially increases the cost of
developing, manufacturing and selling our products.
  Competing
in the ophthalmic products industry requires us to introduce new or improved
products and processes continuously, and to submit these to the FDA for
approval. Obtaining FDA approval is a long and expensive process, and approval
is never certain. In addition, our operations are subject to periodic inspection
by the FDA and international regulators. An unfavorable outcome in an FDA
inspection may result in the FDA ordering changes in our business practices or
taking other enforcement action, which could be costly and severely harm our
business.
  Our new
products could take a significantly longer time than we expect to gain
regulatory approval and may never gain approval. If a regulatory authority
delays approval of a potentially significant product, the potential sales of the
product and its value to us can be substantially reduced. Even if the FDA or
another regulatory agency approves a product, the approval may limit the
indicated uses of the product, or may otherwise limit our ability to promote,
sell and distribute the product, or may require post-marketing studies. If we
cannot obtain timely regulatory approval of our new products, or if the approval
is too narrow, we will not be able to market these products, which would
eliminate or reduce our potential sales and earnings.
  25
  Investigations
and allegations, whether or not they lead to enforcement action or litigation,
can materially harm our business and our reputation.
  Failure
to comply with the requirements of the FDA or other regulators can result in
civil and criminal fines, the recall of products, the total or partial
suspension of manufacture or distribution, seizure of products, injunctions,
whistleblower lawsuits, failure to obtain approval of pending product
applications, withdrawal of existing product approvals, exclusion from
participation in government healthcare programs and other sanctions. Any
threatened or actual government enforcement action can also generate adverse
publicity and require us to divert substantial resources from more productive
uses in our business. Enforcement actions could affect our ability to distribute
our products commercially and could materially harm our business.
  From time
to time STAAR is subject to formal and informal inquiries by regulatory
agencies, which could lead to investigations or enforcement actions. Even when
an inquiry results in no evidence of wrongdoing, is inconclusive or is otherwise
not pursued, the agency generally is not required to notify STAAR of its
findings and may not inform STAAR that the inquiry has been
terminated.
  STAAR
maintains a hotline for employees to report any violation of laws, regulations
or company policies anonymously, which is intended to permit STAAR to identify
and remedy improper conduct. Nevertheless, present or former employees may elect
to bring complaints to regulators and enforcement agencies. The relevant agency
will generally be obligated to investigate such complaints to assess their
validity and obtain evidence of any violation that may have occurred. In
response to reports that its policies or applicable laws or regulations have
been violated, STAAR may find it necessary to conduct its own intense
investigations, which may be extensive. Even without a finding of misconduct,
negative publicity about investigations or allegations of misconduct could harm
our reputation with professionals and the market for our common stock.
Responding to investigations or conducting internal investigations can be
costly, time-consuming and disruptive to our business.
  We
depend on proprietary technologies, but may not be able to protect our
intellectual property rights adequately.
  We rely
on patents, trademarks, trade secrecy laws, contractual provisions and
confidentiality procedures and copyright laws to protect the proprietary aspects
of our technology. These legal measures afford limited protection and may not
prevent our competitors from gaining access to our intellectual property and
proprietary information. Any of our patents may be challenged, invalidated,
circumvented or rendered unenforceable. Any of our pending patent applications
may fail to result in an issued patent or fail to provide meaningful protection
against competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Any litigation could
result in substantial expense, may reduce our profits and may not adequately
protect our intellectual property rights. In addition, we may be exposed to
future litigation by third parties based on claims that our products infringe
their intellectual property rights. This risk is exacerbated by the fact that
the validity and breadth of claims covered by patents in our industry may
involve complex legal issues that are open to dispute. Any litigation or claims
against us, whether or not successful, could result in substantial costs and
harm our reputation. Intellectual property litigation or claims could force us
to do one or more of the following:
  ·
              cease selling or using any of our
      products that incorporate the challenged intellectual property, which
      would adversely affect our
sales;
 
 ·
              negotiate a license from the
      holder of the intellectual property right alleged to have been infringed,
      which license may not be available on reasonable terms, if at all;
      or
 
 ·
              redesign our products to avoid
      infringing the intellectual property rights of a third party, which may be
      costly and time-consuming or impossible to
    accomplish.
  We
may not successfully develop and launch replacements for our products that lose
patent protection.
  Most of
our products are covered by patents that, if valid, give us a degree of market
exclusivity during the term of the patent. We have also earned revenue in the
past by licensing some of our patented technology to other ophthalmic companies.
Generally, the legal life of a patent in the U.S. is 20 years from application.
Patents covering our products will expire from this year through the next 20
years. Upon patent expiration, our competitors may introduce products using the
same technology.  Key patents covering the Collamer formulation and
essential design features of the Visian ICL and TICL will expire between 2014
and 2016.   As a result of this possible increase in competition, we
may need to reduce our prices to maintain sales of our products, which would
make them less profitable. If we fail to develop and successfully launch new
products prior to the expiration of patents for our existing products, our sales
and profits with respect to those products could decline significantly. We may
not be able to develop and successfully launch more advanced replacement
products before these and other patents expire.
  26
  Risks
Related to Ownership of Our Common Stock
  Our
charter documents could delay or prevent an acquisition or sale of our
company.
  Our
Certificate of Incorporation empowers the Board of Directors to establish and
issue a class of preferred stock, and to determine the rights, preferences and
privileges of the preferred stock. These provisions give the Board of Directors
the ability to deter, discourage or make more difficult a change in control of
our company, even if such a change in control could be deemed in the interest of
our stockholders or if such a change in control would provide our stockholders
with a substantial premium for their shares over the then-prevailing market
price for the common stock. Our bylaws contain other provisions that could have
an anti-takeover effect, including the following:
  ·
              stockholders have limited ability
      to remove directors;
 
 ·
              stockholders cannot act by
      written consent;
 
 ·
              stockholders cannot call a
      special meeting of stockholders;
and
 
 ·
              stockholders must give advance
      notice to nominate
directors.
 
 Anti-takeover
provisions of Delaware law could delay or prevent an acquisition of our
company.
  We are
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which regulates corporate acquisitions. These provisions could
discourage potential acquisition proposals and could delay or prevent a change
in control transaction. They could also have the effect of discouraging others
from making tender offers for our common stock or prevent changes in our
management.
  Future
sales of our common stock could reduce our stock price.
  Our Board
of Directors could issue additional shares of common or preferred stock to raise
additional capital or for other corporate purposes without stockholder approval.
In addition, the Board of Directors could designate and sell a class of
preferred stock with preferential rights over the common stock with respect to
dividends or other distributions. Sales of common or preferred stock could
dilute the interest of existing stockholders and reduce the market price of our
common stock. Even in the absence of such sales, the perception among investors
that additional sales of equity securities may take place could reduce the
market price of our common stock.
  The
market price of our common stock is likely to be volatile.
  Our stock
price has fluctuated widely, ranging from $0.79 to $4.26 per share during the
year ended January 1, 2010 and was $3.63 on March 9, 2010.  Our stock
price could continue to experience significant fluctuations in response to
factors such as market perceptions, quarterly variations in operating results,
operating results that vary from the expectations of securities analysts and
investors, changes in financial estimates, changes in market valuations of
competitors, announcements by us or our competitors of a material nature,
additions or departures of key personnel, future sales of Common Stock and stock
volume fluctuations. Also, general political and economic conditions such as
recession or interest rate fluctuations may adversely affect the market price of
our stock.
  Item 1B. 
Unresolved Staff Comments
  None.
  27
  Item 2. 
Properties
  Our
operations are conducted in leased facilities throughout the world. Our
executive offices, manufacturing, warehouse and distribution, and primary
research facilities are located in Monrovia, California. STAAR Surgical AG
maintains office, manufacturing, and warehouse and distribution facilities in
Nidau, Switzerland. The Company has one additional facility in Aliso Viejo,
California for raw material production and research and development activities.
STAAR Japan maintains executive offices and distribution facilities in
Shin-Urayasu, Japan and a manufacturing and R&D facility in Ichikawa City,
Japan. The Company leases an additional sales and distribution facility in
Australia. We believe our manufacturing facilities in the U.S., Switzerland and
Japan are suitable and adequate for our current and future planned requirements.
The Company could increase capacity by adding additional shifts at our existing
facilities.
  Item 3. 
Legal Proceedings
  Two lawsuits
against STAAR, Parallax
Medical Systems v. STAAR Surgical Company(California Superior Court,
County of Orange, Case No. 07CC10136) and Moody v. STAAR Surgical Company;(California Superior Court, County of Orange, Case No. 07CC10132) were
settled on March 30, 2010.  On that date STAAR and all other parties to the
matters entered into a Stipulation for Settlement that globally resolves all
pending disputes among them.  This settlement satisfies in full the $4.9
million judgment against STAAR in the Parallax matter and the $6.5 million
judgment against STAAR in the Moody matter.  In exchange for complete
mutual releases, the Stipulation provides for payment by STAAR of $4 million as
its contribution to the global settlement.  STAAR’s contribution will be
paid from the $7.4 million restricted deposit that STAAR placed with the Court
on June 22, 2009.  The balance of those funds, approximately $3.4 million,
will be returned to STAAR.  In connection with the settlement, STAAR will
voluntarily dismiss its appeals in both cases.  The cases are described in
greater detail below.
 
 The
Parallax Case.
 
 The
California Superior Court, County of Orange, rendered final judgment in the
Parallax case on May
11, 2009, in accordance with a March 2, 2009 jury verdict finding that STAAR was
liable for approximately $2.2 million in actual damages and $2.7 million in
punitive damages to Parallax Medical Systems, Inc. for intentional and negligent
interference with prospective business advantage. Parallax is a former
independent regional manufacturer’s representative (“RMR”) of STAAR. Parallax
promoted sales of STAAR products in the southeastern region of the U.S. under a
contract that expired on July 31, 2007.  The jury found that STAAR had
interfered with Parallax’s prospective economic advantage when it informed a
regional IOL distributor that Parallax had a covenant restricting the sale of
competing products.  On July 14, 2009, the Court in part granted STAAR’s
motion to strike or reduce Parallax’s claim for approximately $109,000 in
trial-related costs, of which approximately $56,000 was awarded to Parallax. On
August 18, 2009, the Court amended its final judgment to include these costs and
approximately $20,000 in pre-judgment interest, for a total judgment of
$4,966,000.
 
 On
October 22, 2009, STAAR’s general liability insurer agreed to pay a portion of
the legal fees incurred by STAAR after July 1, 2009 for the appeal in the Parallax case. The insurer’s
agreement to defend was subject to a full reservation of its rights and
defenses.
 
 STAAR
filed notice of appeal of the Parallax judgment, and on
June 22, 2009, deposited $7.3 million into a restricted account with the Court
to assure payment of the judgment, thereby staying any enforcement of the
judgment pending the appeal.  The deposit account bears interest, and as of
the date of this Report the account balance is approximately $7.4 million. 
STAAR filed its appellate Opening Brief on January 22, 2010.  Pursuant to
the March 30, 2010 global settlement of the Parallax and Moody matters STAAR will
voluntarily dismiss its appeal of the Parallax judgment;  $4
million of the funds deposited with the Court will be disbursed as directed by
counsel for the Parallax and Moody plaintiffs.  The
balance of approximately $3.4 million will be refunded to STAAR.
 
 The
Moody Case
 
 The
California Superior Court, County of Orange, rendered judgment in the Moody case against STAAR on
December 8, 2009 in accordance with a December 1, 2009 jury verdict finding
that STAAR was liable for $4 million in actual damages and $2.5 million in
punitive damages to Scott C. Moody, Inc. (“SMI”) for intentional and negligent
interference with prospective business advantage.  SMI, also a former RMR
of STAAR, filed a complaint against STAAR on the same day that Parallax filed its
complaint.  Moody promoted sales of STAAR products in the southwestern
region of the U.S., under a contract that, like Parallax’s, expired on July 31,
2007.  The jury found that STAAR had interfered with SMI’s prospective
economic advantage when it informed a regional IOL distributor that SMI had a
covenant restricting the sale of competing products. Notice of judgment on
post-trial motions in the case was served on February 8, 2010.  In
post-trial motions the court granted the plaintiff’s motions for costs of
$24,842 and for approximately $130,000 in legal fees and other assessments that
STAAR has already paid separately from the funds to be contributed to the March
30, 2010 global settlement.
 
 On
October 14, 2009, STAAR’s general liability insurer agreed to pay a portion of
the legal fees incurred by STAAR after July 1, 2009 for its defense of the Moody case.  The
insurer’s agreement to defend was subject to a full reservation of its rights
and defenses.
  On
January 29, 2010, attorneys representing STAAR and SMI signed a stipulation
extending the date for potential enforcement and execution of the $6.5 million
Moody judgment to April
30, 2010.   The purpose of the extension was to allow the parties
involved, including certain insurers, to attempt to negotiate a global
settlement, along with the Parallax matter, in a
mediation that took place on March 29-30, 2010, and to avoid the necessity of
STAAR posting an appeal bond during the term of the stipulation.
 
 STAAR
filed notice of its appeal of the Moody judgment on
March 8, 2010.  Pursuant to the March 30, 2010 global settlement
of the Parallax and
Moody matters STAAR
will voluntarily dismiss its appeal of the Moody judgment.
 
 From time
to time the Company is subject to various claims and legal proceedings arising
out of the normal course of our business. These claims and legal proceedings
relate to contractual rights and obligations, employment matters, and claims of
product liability. STAAR maintains insurance coverage for product liability
claims. While the Company does not believe that any of the claims known is
likely to have a material adverse effect on its financial condition or results
of operations, new claims or unexpected results of existing claims could lead to
significant financial harm.
  Item 4. 
Submission of Matters to a Vote of Security Holders
  There
were no matters submitted to a vote of security holders during the quarter ended
January 1, 2010.
  PART II
  Item 5. 
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
  Our
Common Stock is traded on the Nasdaq Global Market under the symbol “STAA.” The
following table sets forth the reported high and low bid prices of the Common
Stock as reported by Nasdaq for the fiscal
quarters indicated:
 
 Period
                      
                      High
                      
                      
                      Low2009Fourth
      Quarter
                      
                      $
                      4.24
                      
                      
                      $
                      2.47Third
      Quarter
                      
                      
                      4.26
                      
                      
                      
                      1.90Second
      Quarter
                      
                      
                      3.44
                      
                      
                      
                      0.79First
      Quarter
                      
                      
                      2.78
                      
                      
                      
                      0.802008Fourth
      Quarter
                      
                      $
                      4.71
                      
                      
                      $
                      1.16Third
      Quarter
                      
                      
                      5.98
                      
                      
                      
                      2.98Second
      Quarter
                      
                      
                      3.89
                      
                      
                      
                      2.23First
      Quarter
                      
                      
                      2.68
                      
                      
                      
                      2.00
 
 On March
9, 2010, the closing price of the Company’s Common Stock was $3.63 per share.
Stockholders are urged to obtain current market quotations for the Common
Stock.
  As of
March 11, 2010, there were approximately 504 record holders of our Common
Stock.
  We have
not paid any cash dividends on our Common Stock since our inception. We
currently expect to retain any earnings for use to further develop our business
and not to declare cash dividends on our Common Stock in the foreseeable future.
The declaration and payment of any such dividends in the future depends upon the
Company’s earnings, financial condition, capital needs and other factors deemed
relevant by the Board of Directors and may be restricted by future agreements
with lenders.
  As of
March 10, 2010, options to purchase 3,145,281 shares of Common Stock were
exercisable.
  28
  Stock
Performance Graph
  The
following graph compares the yearly and cumulative return on an investment in
STAAR’s common stock over the last five fiscal years to the yearly and
cumulative return of the following over the same time period: (1) the composite
of all United States and foreign companies listed on the Nasdaq Stock Market
(the “Nasdaq Index”); and (2) the composite of all United States and foreign
companies listed on the Nasdaq Stock Market that operate in the surgical,
medical and dental instrument and supply industries (the “Peer Index”), based on
Standard Industrial Classification (“SIC”) codes in the range of 3840 through
3849. The Company’s SIC code is 3845. The comparison assumes $100 was invested
on December 31, 2004 in STAAR’s common stock and in each of those indices, and
that dividends were reinvested. The Center for Research in Security Prices of
the University of Chicago’s Graduate School of Business compiled the Peer Index
and produced the graph. The stock price performance on the following graph is
not necessarily indicative of future stock price performance.
  In any of
our filings under the Securities Act or Exchange Act that incorporate this Proxy
Statement by reference, this graph will be considered excluded from the
incorporation by reference and it will not be deemed a part of any such other
filing unless we expressly state that the graph is so incorporated.
  
 
 CRSP
      Total Returns Index for:
                    
                    
                    12/2004
                    
                    
                    
                    12/2005
                    
                    
                    
                    12/2006
                    
                    
                    
                    12/2007
                    
                    
                    
                    1/2009
                    
                    
                    
                    1/2010STAAR
      SURGICAL CO
                    
                    
                    100.0
                    
                    
                    
                    126.00
                    
                    
                    
                    111.82
                    
                    
                    
                    42.11
                    
                    
                    
                    37.97
                    
                    
                    
                    49.44Nasdaq
      Stock Market (US & Foreign)
                    
                    
                    100.0
                    
                    
                    
                    102.27
                    
                    
                    
                    112.80
                    
                    
                    
                    124.68
                    
                    
                    
                    59.76
                    
                    
                    
                    86.89NASDAQ
      Stocks (SIC 3840 – 3849 US + Foreign) Surgical, Medical, and Dental
      Instruments and Supplies
                    
                    
                    100.0
                    
                    
                    
                    109.81
                    
                    
                    
                    115.73
                    
                    
                    
                    147.16
                    
                    
                    
                    79.25
                    
                    
                    
                    115.55
  Notes:
  A. The lines
represent monthly index levels derived from compounded daily returns that
include all dividends.
  B. The indexes
are reweighted daily, using the market capitalization on the previous trading
day.
  C. If the
monthly interval, based on the fiscal year-end, is not a trading day, the
preceding trading day is used.
  D. The index
level for all series was set to $100.0 on December 31, 2004.
  29
  Item 6. 
Selected Financial Data
  The
following table sets forth selected consolidated financial data with respect to
the five most recent fiscal years ended January 1, 2010, January 2, 2009,
December 28, 2007, December 29, 2006 and December 30, 2005. The selected
consolidated statement of operations data set forth below for each of the three
most recent fiscal years, and the selected consolidated balance sheet data set
forth below at January 1, 2010 and January 2, 2009, are derived from our
consolidated financial statements, which have been audited by BDO Seidman, LLP,
independent registered public accounting firm, whose report is included in
this Form 10-K. The selected consolidated statement of operations data set forth
below for each of the two fiscal years in the periods ended December 29, 2006
and December 30, 2005, and the consolidated balance sheet data set forth below
at December 28, 2007, December 29, 2006 and December 30, 2005 are derived from
audited consolidated financial statements of the Company not included in this
Annual Report. The selected consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company, and the
Notes thereto, included in this Annual Report, and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Item
7.
 
 Fiscal
      Year EndedJanuary 1,
                                      2010
                                    
                                    
                                    January 2,
                                      2009
                                    
                                    
                                    December 28,
                                      2007
                                    
                                    
                                    December 29,
                                      2006
                                    
                                    
                                    December 30,
                                      2005(In
      thousands except per share data)Statement
      of OperationsNet
      sales
                                    
                                    $
                                    75,345
                                    
                                    
                                    $
                                    74,894
                                    
                                    
                                    $
                                    59,363
                                    
                                    
                                    $
                                    56,951
                                    
                                    
                                    $
                                    51,303Cost
      of sales
                                    
                                    
                                    33,452
                                    
                                    
                                    
                                    34,787
                                    
                                    
                                    
                                    30,097
                                    
                                    
                                    
                                    30,801
                                    
                                    
                                    
                                    27,517Gross
      profit
                                    
                                    
                                    41,893
                                    
                                    
                                    
                                    40,107
                                    
                                    
                                    
                                    29,266
                                    
                                    
                                    
                                    26,150
                                    
                                    
                                    
                                    23,786Selling,
      general and administrative expensesGeneral
      and administrative
                                    
                                    
                                    15,710
                                    
                                    
                                    
                                    15,730
                                    
                                    
                                    
                                    12,951
                                    
                                    
                                    
                                    10,891
                                    
                                    
                                    
                                    9,727Marketing
      and selling
                                    
                                    
                                    24,257
                                    
                                    
                                    
                                    27,053
                                    
                                    
                                    
                                    23,723
                                    
                                    
                                    
                                    22,112
                                    
                                    
                                    
                                    18,552Research
      and development
                                    
                                    
                                    5,893
                                    
                                    
                                    
                                    7,938
                                    
                                    
                                    
                                    6,711
                                    
                                    
                                    
                                    7,080
                                    
                                    
                                    
                                    5,573Other
      operating expenses (recovery), net
                                    
                                    
                                    (238
                                    )
                                    
                                    
                                    9,773
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (331
                                    )
                                    
                                    
                                    746Total
      selling, general and administrative expenses
                                    
                                    
                                    45,622
                                    
                                    
                                    
                                    60,494
                                    
                                    
                                    
                                    43,385
                                    
                                    
                                    
                                    39,752
                                    
                                    
                                    
                                    34,598Operating
      loss
                                    
                                    
                                    (3,729
                                    )
                                    
                                    
                                    (20,387
                                    )
                                    
                                    
                                    (14,119
                                    )
                                    
                                    
                                    (13,602
                                    )
                                    
                                    
                                    (10,812
                                    )Total
      other (expense) income, net
                                    
                                    
                                    (979
                                    )
                                    
                                    
                                    (1,285
                                    )
                                    
                                    
                                    (1,037
                                    )
                                    
                                    
                                    95
                                    
                                    
                                    
                                    854Loss
      before income taxes and non-controlling interest
                                    
                                    
                                    (4,708
                                    )
                                    
                                    
                                    (21,672
                                    )
                                    
                                    
                                    (15,156
                                    )
                                    
                                    
                                    (13,507
                                    )
                                    
                                    
                                    (9,958
                                    )Income
      tax provision
                                    
                                    
                                    1,492
                                    
                                    
                                    
                                    1,523
                                    
                                    
                                    
                                    843
                                    
                                    
                                    
                                    1,537
                                    
                                    
                                    
                                    1,239Non-controlling
      interest
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (22
                                    )Net
      loss
                                    
                                    $
                                    (6,200
                                    )
                                    
                                    $
                                    (23,195
                                    )
                                    
                                    $
                                    (15,999
                                    )
                                    
                                    $
                                    (15,044
                                    )
                                    
                                    $
                                    (11,175
                                    )Basic
      and diluted net loss per share
                                    
                                    $
                                    (0.19
                                    )
                                    
                                    $
                                    (0.79
                                    )
                                    
                                    $
                                    (0.57
                                    )
                                    
                                    $
                                    (0.60
                                    )
                                    
                                    $
                                    (0.47
                                    )Weighted
      average number of basic and diluted shares
                                    
                                    
                                    32,498
                                    
                                    
                                    
                                    29,474
                                    
                                    
                                    
                                    28,121
                                    
                                    
                                    
                                    25,227
                                    
                                    
                                    
                                    23,704Balance
      Sheet DataWorking
      capital
                                    
                                    $
                                    13,466
                                    
                                    
                                    $
                                    10,807
                                    
                                    
                                    $
                                    21,006
                                    
                                    
                                    $
                                    14,363
                                    
                                    
                                    $
                                    22,735Total
      assets
                                    
                                    
                                    58,681
                                    
                                    
                                    
                                    52,582
                                    
                                    
                                    
                                    54,179
                                    
                                    
                                    
                                    47,770
                                    
                                    
                                    
                                    52,755Notes
      payable, net of discount
                                    
                                    
                                    —
                                    *
                                    
                                    
                                    4,414
                                    
                                    
                                    
                                    4,166
                                    
                                    
                                    
                                    1,802
                                    
                                    
                                    
                                    1,676Other
      long-term liabilities
                                    
                                    
                                    3,887
                                    
                                    
                                    
                                    3,910
                                    
                                    
                                    
                                    2,500
                                    
                                    
                                    
                                    1,079
                                    
                                    
                                    
                                    854Stockholders’
      equity
                                    
                                    
                                    21,070
                                    
                                    
                                    
                                    16,027
                                    
                                    
                                    
                                    36,225
                                    
                                    
                                    
                                    31,760
                                    
                                    
                                    
                                    40,366
  * 
 included in current liabilities
 
 Item 7. 
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
  The
matters addressed in Management’s Discussion and Analysis of Financial Condition
and Results of Operations that are not historical information constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Readers can recognize forward-looking statements by the use of words
like “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,”
“will,” “target,” “forecast” and similar expressions in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions, prospective products or product
approvals, future performance or results of current and anticipated products,
sales efforts, expenses, interest rates, foreign exchange rates, the outcome of
contingencies, such as legal proceedings, and financial results.
  30
  Although
the Company believes that the expectations reflected in these forward-looking
statements are reasonable, such statements are inherently subject to risks and
the Company can give no assurance that its expectations will prove to be
correct. Actual results could differ from those described in this report because
of numerous factors, many of which are beyond the control of the Company. These
factors include, without limitation, those described in this Annual Report in
“Item 1A — Risk Factors.” The Company undertakes no obligation to
update these forward-looking statements after the date of this report to reflect
future events or circumstances or to reflect actual outcomes.
  The
following discussion should be read in conjunction with the audited consolidated
financial statements of STAAR, including the related notes, provided in this
report.
  Overview
  Strategy
  Performance
Against 2009 Key Operational Metrics
  During
2009, STAAR focused on the following key operational metrics:
  ·
              to improve cash flow from
      operations;
 
 ·
              to increase gross profit
      margin;
 
 ·
              to continue cost reduction
      efforts;
 
 ·
              to secure key regulatory
      approvals;
 
 ·
              to increase the ICL’s share of
      the refractive market in key
territories.
  Achievement
against these goals is discussed below.
  Improve cash flow from operations.For several years prior to 2009 STAAR had not generated enough cash to
sustain its operations.  STAAR has steadily reduced its use of cash
significantly in recent quarters primarily through cost reductions, and in the
second quarter of 2009 generated $286,000 in cash from operations, its first
positive cash flow from operations after six consecutive negative years. 
In the fourth quarter of 2009 STAAR generated $1,125,000 in cash from operating
activities, compared to $991,000 used for operating activities in the fourth
quarter of 2008.  During fiscal year 2009 STAAR generated $1.4 million in
cash from operating activities, compared to $8.2 million in cash used for
operating activities in 2008.
  Improving
cash flow and achieving profitability remain key goals of STAAR during
2010.  The sale of Domilens in the first quarter of 2010 will present a
challenge in meeting these goals, because Domilens has historically been
profitable and generated cash for STAAR.  STAAR’s objectives for earnings
growth and continued positive cash flow, and risks related to their achievement,
are discussed in detail below under “2010 Operational
Goals.”
  STAAR
exited 2009 with cash, cash equivalents, and restricted cash of $13.7
million, compared with $5.2 million at January 2, 2009.  STAAR’s cash
position was enhanced by the $8.5 million net cash proceeds of a registered
direct offering of common stock completed on June 17, 2009.  STAAR
also received approximately $12.5 million in net cash proceeds from the sale of
Domilens in the first quarter of 2010.  The adequacy of cash we expect to
generate from operations in 2010, along with the recently obtained capital, to
satisfy STAAR’s needs is discussed below under “Liquidity and Capital
Resources”
  31
  During
fiscal year 2008 and 2009 STAAR’s cash flow has been significantly affected by
the cost of defending the Parallax and Moody lawsuits.  Both
lawsuits were settled on March 30, 2009.  As a result, STAAR expects
its legal costs to be approximately $1.5 million lower in 2010 than in
2009.
  Increase gross profit margins.In recent quarters STAAR has generally experienced increased sales in ICL
and IOL sales.  While growth in sales remains an important goal, STAAR
believes that the key to achieving sustainable profitability is to increase its
gross profit margins.  Despite a number of initiatives to improve gross
profit margins, STAAR’s gross profit margin for 2009 was 55.6%, up 200 basis
points only because 2008 gross profit margins of 53.6% were negatively impacted
by $1.5 million in purchase accounting charges recorded in the first quarter of
2008 related to the acquisition of STAAR Japan.
  Several
initiatives of STAAR helped gross profit margins in 2009, in particular
increased worldwide sales of ICLs and TICLs, increased average selling prices of
IOLs in the U.S., and de-emphasis on selling non-lens products. 
 However, a number of unexpected challenges offset these
improvements:  reduced manufacturing yields; decreased average selling
prices of IOLs and ICLs outside the U.S., and increased cost of goods in
Germany, primarily as a result of changes in exchange rates.  Decreased
average selling prices for IOLs primarily resulted from unusually strong price
competition in Japan.  Decreased average selling prices for ICLs and TICLs
primarily resulted from a pricing concession we made to our Korean distributor
to enable the distributor to invest in intensified marketing efforts. We believe
we have addressed most of the issues negatively impacting gross profit margins
and that those efforts resulted in higher gross profit margins in the fourth
quarter of 2009 compared with the third quarter of 2009.
  The
March 2, 2010 sale of Domilens GmbH is expected to significantly improve
STAAR’s gross profit margins.  This and other initiatives to improve gross
profit margin in 2010 are discussed below under “2010 Operational
Goals.”
  Continue Cost Reduction
Efforts.Achieving greater operating and administrative efficiency
through reduced costs has been a key goal of STAAR, and is a significant element
in achieving our goal of profitability.  In particular, while STAAR’s
international operations have generally generated cash or have been cash flow
neutral in recent quarters, losses from U.S. operations have been the principal
cause of cash use and losses on a consolidated basis.  During 2009 STAAR
continued cost reduction initiatives that began in the fourth quarter of 2007,
yielding a combined reduction in marketing and selling and research and
development expenses of $4.8 million in 2009 compared to 2008.  This
included the following:
  ·
              a 10.3% reduction in marketing
      and selling expense year-over-year, from $27.1 million to $24.3 million,
      principally as a result of decrease salaries, travel, consulting,
      promotional activities and commissions in the U.S;
    and
 
 ·
              a 25.8% reduction R&D
      expenses year-over-year, from $7.9 million to $5.9 million, principally as
      a result of decreased salaries, reduced consulting fees and general cost
      containment.
  STAAR
believes that the global settlement of the Parallax and Moody litigation on March 30,
2010 will eliminate much of the litigation defense expense that STAAR
experienced in 2008 and result in much lower legal expenses in 2010 compared to
2009.  Prior to the settlement, the availability of reimbursement for our
legal fees from our insurance carrier, along with the transition of the lawsuits
from trial to appeal, had already begun to reduce legal defense expense. 
 On October 14, 2009, STAAR’s general liability insurer agreed to pay a
portion of the legal fees incurred by STAAR after July 1, 2009 for its defense
of the Moody
case.  On October 22, 2009 the insurer agreed to pay a portion of the legal
fees incurred by STAAR after July 1, 2009 for the appeal in theParallax case.  STAAR
received $780,000 in reimbursement payments related to the Moody case in 2009,
and through the date of this report has received $342,000 in 2010.  In
connection with the global settlement of the Parallax and Moody cases STAAR will
voluntarily dismiss its appeals, and except for minor post-settlement matters
legal expenditures related to the cases will cease.
  32
  Secure Key Regulatory
Approvals.Regulatory approvals of high gross profit margin
products in significant markets can yield rapid growth in sales and improvements
in profitability.  During 2009 the most significant approvals sought by
STAAR were for sale of the Visian ICL and TICL in Japan and the TICL in the
U.S.
  As a
result of progress made during 2009, Japan’s Ministry of Health, Labor and
Welfare (MHLW) approved the sale of the ICL on February, 2, 2010, making it the
first phakic IOL approved for the Japanese market.  STAAR intends to file a
partial change application for approval of the VISIAN Toric ICL, and is
currently in discussions with the Pharmaceuticals and Medical Device Agency
(PMDA) regarding that process. MHLW generally requires up to one year to fully
process a partial change application, although that timeline can change based on
the nature of the product under review.  Following a two-year process in
which STAAR addressed a number of agency concerns, on July 21, 2009, the U.S.
Food and Drug Administration (“FDA”) notified STAAR that as a result of STAAR’s
corrective actions the FDA had removed an integrity hold on our application for
approval of the TICL, and would resume its consideration of the
application.  Substantive discussions with the FDA regarding the
application resumed at that time. On February 3, 2010 STAAR received a letter of
deficiency from the FDA requesting additional analysis of data supporting the
safety and effectiveness of the TICL and requesting changes in proposed labeling
for the product.  STAAR is preparing a comprehensive response to the items
in this letter.
  Increase the ICL’s Share of the
Refractive Market in Key Territories.After introducing the ICL in
international markets in 1996 STAAR has secured approval for sale in over 40
countries.  While sales have increased as new territories were added, we
have achieved significant sales and increased share of the refractive surgical
market in a select number of territories:  in particular, the U.S., Korea,
China, India, Spain, Germany, and Latin America.  In order to increase ICL
sales most effectively, in 2009 STAAR adopted a strategy of focusing on
increasing the ICL’s share of the refractive market in those territories. 
Based on growth in STAAR’s sales in those countries, and statistics indicating a
general decline in the overall refractive market, STAAR believes it succeeded in
increasing market share in each of those territories in 2009.  The most
significant growth took place in the Korean market, where sales reported by
STAAR’s independent distributor indicate that the Visian products exceeded a 10%
share of the overall refractive market.  Along with its new opportunity in
Japan, STAAR intends to continue to focus its Visian ICL marketing efforts on
this group of key markets in 2010.
  Key
Operational Metrics for 2010
  During
2010, STAAR is focused on the following key operational metrics which are
designed to enable the company to pursue new growth strategies:
  ·
              Double digit growth in sales from
      core ICL and IOL products;
 
 ·
              Improvement in gross profit
      margins to the mid-60% level for the
  year;
 
 ·
              Progress toward profitability
      throughout the year, with a goal of achieving net income for the full
      year;
  33
  ·
              Continued generation of
      cash;
 
 ·
              Improve financial condition by
      retiring obligations and strengthening the balance
      sheet.
  Double digit growth in sales from
core ICL and IOL products.  To continue generating cash from
operations and reach profitability, STAAR must significantly improve sales
derived from its higher value products.   The sale of Domilens, which
has significantly reduced the portion of STAAR’s sales derived from lower gross
profit margin sales such as third party products, disposables and surgical kits,
provides an opportunity for STAAR to focus on its core ICL and IOL
products.
  STAAR
achieved approximately 15% growth in worldwide ICL sales during 2009, and
believes similar growth is achievable in 2010, especially with expansion into
the Japanese market following the February 2, 2010 approval of the ICL. 
However, the rate of growth in Visian ICL sales will partly depend on continued
improvement in worldwide economic conditions.  ICL surgery is a relatively
expensive elective procedure and is seldom reimbursed by insurers or government
agencies.  STAAR believes that that global recession has reduced overall
demand for refractive surgery.
  STAAR
will continue to focus its ICL marketing efforts in the key territories where it
has established significant market share, based on the success of this strategy
in 2009.  Japan will be added to the list in 2010; like other Asian
countries, Japan has a high mean rate of myopia, which makes it a promising new
market.  The key territories in which STAAR will seek to enhance Visian
sales during 2010 are the U.S., Japan, Korea, China, India, Spain, Germany,
U.K., and France.  STAAR believes that the singular success of Visian
products in Korea, where STAAR believes it has exceed a 10% penetration rate
among all refractive surgical procedures, may provide a model of best practices
to increase market share in other key territories.
  U.S.
military forces currently represent the largest single customer for ICLs in the
U.S.  Military purchases of ICLs accounted for most of STAAR’s 2.5% growth
in 2009 U.S. ICL sales over 2008.  STAAR does not believe that private
sector purchases of ICLs will resume growing significantly until consumer
confidence improves, which depends on continued recovery in the U.S.
economy.
  During
2009 STAAR’s international IOL sales increased by 7.6% and U.S. IOL sales
decreased by 8.3%.  Challenges faced by STAAR in selling IOLs in 2009
included stronger than usual price competition in Japan, where average IOL
selling prices are typically higher than in other countries.  To maintain
gross profit margins of STAAR Japan, STAAR has chosen not to the match deep
discounts offered by some competitors, which may limit opportunities to increase
Preloaded Injector sales in Japan until economic conditions
improve.
  STAAR has
seen its U.S. IOL sales volume decline steadily for the last several
years.  However, the rate of decline has recently decreased and STAAR’s
introduction of aspheric IOLs with NTIOL status in 2008 and 2009 has resulted in
higher average selling price for STAAR’s IOLs in the U.S., further reducing
erosion in sales.  STAAR introduced three new products in the U.S. in 2009
to drive growth in its IOL market, the nanoFLEX IOL, the nanoPOINT injection
system, and the advanced Epiphany injector for STAAR’s three-piece Collamer
aspheric lens.  These products did not have a significant impact on sales
within 2009 due to timing of introduction, but STAAR believes they will have
greater impact in 2010, especially the nanoFLEX IOL.  STAAR believes its
recent product introductions have given the company a very competitive IOL
product line with unique features and benefits, and offer an opportunity to
regain lost IOL market share.  STAAR intends to support these products with
sales and marketing growth based  initiatives in 2010.
  STAAR
also expects to obtain FDA approval to sell its silicone Preloaded Injectors in
the U.S. during 2010.  STAAR believes this product will further enhance its
U.S. IOL offering, and will help STAAR maintain or increase its market share in
the silicone IOL segment.
  34
  Improvement in gross profit margins
to the mid-60% level for the year.  As noted above, STAAR did not
make the progress it had planned towards increasing gross profit margin in
2009.   However, in 2008 STAAR had significantly improved gross profit
margin from 49.3% in 2007 to 53.6% in 2008, and STAAR believes it has an
opportunity to again increase gross profit margins significantly in 2010. 
An important factor in this expected improvement is the March 2, 2010 sale
of Domilens, which will remove some of the lowest gross profit margin sales from
STAAR’s product mix:  third party products, supplies and disposables like
surgical drapes, and assembly of custom surgical kits.  STAAR will seek to
further increase gross profit margin through the following:
 
 ·
              Increasing
      ICL sales as a percentage of STAAR’s overall product mix.  Visian ICLs and TICLs
      generally yield an 80% gross profit margin.  The Visian product line
      is STAAR’s most profitable product family and the largest contributor to
      enhanced gross profit margins.  During 2010 we expect the launch of
      ICL sales in Japan, and expanding market share in existing markets, to
      improve STAAR’s profitability.  The sale of Domilens, whose products
      were overwhelmingly in the cataract area and included many non-lens
      products, has significantly increased the portion of our sales derived
      from the Visian product
line.
 
 ·
              Reducing Cost
      of Preloaded Injectors.In Japan IOLs enjoy higher
      average selling prices than in most countries, and as a result the Japan
      IOL business can yield significant gross profit margins and contribute
      significantly to STAAR’s improvement in gross profit margins. 
      However, price competition has recently increased in the Japan IOL market,
      indicating that STAAR must reduce the cost of producing Preloaded
      Injectors to sustain or improve IOL gross profit margins in Japan. 
      STAAR believes opportunities exist to further reduce manufacturing costs
      for its products sold in Japan, which could better enable STAAR to
      maintain profits in the face of such
  competition.
 
 ·
              Increase
      sales of Higher Value IOLs in the U.S.In 2007 and 2008 STAAR began
      converting its U.S. IOL product offering from lower value legacy products
      to newer aspheric designs that are eligible for enhanced CMS reimbursement
      as NTIOLs.  With the introduction of the nanoFLEX IOL in 2009, STAAR
      has introduced aspheric versions for both of its IOL product
      platforms.  As STAAR’s customers switch to aspheric lenses, and STAAR
      sells down its inventories of non-aspheric lenses, U.S. IOL gross profit
      margins have increased.  This process will continue in 2010.  In
      addition, early results of marketing efforts for the nanoFLEX lens suggest
      that this product may attract new customers to STAAR IOLs and rebuild U.S.
      IOL market share, further enhancing gross profit
      margins.
 
 ·
              Continue to
      Implement Centers of Excellence Program.  STAAR believes that it
      has an opportunity to reduce costs while continuing its history of
      innovation by rationalizing its business among its worldwide operations
      through its Centers of Excellence program.  During 2009 STAAR moved
      the production of silicone IOLs for use in Preloaded Injectors from Japan
      to the U.S., centralizing all silicone lens production in the U.S.,
      thereby reducing STAAR’s overall IOL costs.  During 2010 STAAR
      intends to complete the transfer of IOL and ICL injector system
      manufacturing and R&D from the U.S. to Japan, which is expected to
      lead to cost savings and a greater focus on STAAR Japan’s more advanced
      lens injector designs.  STAAR also intends to take further efforts to
      improve silicone manufacturing efficiency in the U.S., based in part on
      the efficiencies of scale made possible by centralized
      manufacturing.
  Progress toward profitability
throughout the year, with a goal of achieving net income for the full
year.  STAAR has reported net losses in each period since
1999.  Having achieved positive cash flow from operations in 2009, STAAR is
now focused on the goal of delivering net income for fiscal year 2010. 
Achieving this goal will require further reductions in STAAR’s expenses and
success in the initiatives to improve profitability contained in our other 2010
objectives.
  Continued generation of cash flow
from operations.  STAAR achieved positive cash flow from operations
in 2009, and intends to continue its initiatives to improve cash flow in
2010.  To be successful, cash previously generated by Domilens, which
accounted for $1.8 million of STAAR’s cash from operations in 2009, will need to
be replaced with increased cash from STAAR’s remaining operations, although it
is anticipated that reduced legal fees should offset a significant portion of
the lost cash flow from Domilens. STAAR has been especially challenged to meet
its cash flow goals in the first quarter.  The first quarter of each fiscal
year tends to have the lowest cash flow of the year because of accounting fees
related to the annual audit of our financial statements, professional fees for
our consultant on internal controls pursuant to the Sarbanes-Oxley Act of 2002,
and holiday closures of facilities during December that reduce the processing
and payment of invoices by STAAR during the last weeks of the fourth quarter,
resulting in a significant increase in cash payments by STAAR as it catches up
during the first month of the first quarter.
  35
  Improve financial condition by
retiring obligations and strengthening the balance sheet. Although the
$12.5 million in cash raised from the sale of Domilens significantly improved
the cash position of the Company, as discussed below under “Liquidity and Capital
Resources,” some of the cash may be needed to meet current financial
obligations in 2010 as follows:
 
 ·
              repayment of the $5 million
      principal balance on the Broadwood Note due on December 14,
      2010;
 
 ·
              the right of the holders of 1.7
      million shares of our Series A Convertible Preferred stock to redeem them
      at $4 per share or $6.8 million in aggregate beginning on
      December 29, 2010.
  STAAR’s
goal is resolve all of its major obligations with existing capital reserves and
cash generated from operations.  It also seeks to reserve any future
capital raising efforts for initiatives to expand its business, rather than
meeting existing obligations.  Nevertheless, depending on STAAR’s cash
position during the remainder of 2010, it may find it necessary to seek
additional financing.  See “Financing Strategy”
below.
  Other
Highlights
  Divestiture
of Domilens.
  On March
2, 2010 we completed the divestiture of all of our interest in our former German
distribution subsidiary, Domilens GmbH through a management buyout led by funds
managed by Hamburg-based Small Cap Buyout Specialist BPE
Unternehmensbeteiligungen GmbH (“BPE”).  STAAR’s financial advisor in the
transaction was Berenberg Bank, a German investment bank headquartered in
Hamburg.
  The
decision to divest Domilens resulted primarily from a need to raise working
capital.
  STAAR
originally purchased Domilens in a series of stock purchases from the founder of
the business between 1998 and 2003.  STAAR originally intended to use
Domilens as a channel for increased sales in the German market.  However,
by 2009 sales of STAAR product accounted for only approximately 7.6% of Domilens
sales.  The majority of Domilens sales have been third party products,
including IOLs of other manufacturers, disposables and other supplies such as
surgical drapes, and the assembly of custom surgical kits containing a package
of mostly third party products needed for a single procedure.  While
profitable, this business operates at gross profit margins that are
significantly lower than STAAR’s overall average.
  A
distribution agreement between STAAR and Domilens provides that Domilens will
continue to purchase STAAR products at the unit sales volume previously
projected for 2010 through 2012.  Because of the nature of the Domilens
business and the promise of continued distribution in Germany and Austria at
projected levels, STAAR determined that the sale of Domilens would not impede
its core business, and would permit management to focus on higher value core
business of developing, manufacturing and selling its own advanced ophthalmic
products.
  36
  STAAR
also determined that the gross purchase price for Domilens, at approximately 6.9
times Domilens’ earnings before income taxes, represented a reasonable value for
its investment in Domilens, and that these funds were of greater use to STAAR as
working capital.  The Stock Purchase Agreement provides for a Purchase
Price of €10,512,100 (approximately $14.3 million at currently prevailing
exchange rates).  After adjusting for €800,000 in cash dividends received
by STAAR from Domilens in December 2009 and January 2010, and the exclusion of
expenses related to compliance with the Sarbanes-Oxley Act of 2002, at closing
on March 2, 2010 Domilens Akquisitions paid a cash Net Purchase Price of
€9,685,700 (approximately $13.2 million at currently prevailing exchange
rates).  €100,000 of the Net Purchase Price was paid into an escrow
account, to be held against payment of any unaccrued taxes assessed for periods
prior to December 31, 2009.  Funds remaining after the resolution of such
potential liabilities, if any, will be distributed to STAAR from the escrow
account, no later than December 31, 2011.
  After
expenses of €358,000 (~$485,000) related to investment banking fees, and
excluding the escrowed funds and any earn-out payments, STAAR received net cash
proceeds of approximately €9.2 million from the Transaction (approximately $12.5
million at the Closing Date foreign exchange rate).  The Company will pay a
$64,000 marketing allowance in 2010 for Domilens to market STAAR’s products post
the Transaction.  Taxes related to the disposition of Domilens were
estimated to be insignificant.
  Based on
the performance of Domilens in fiscal years 2010, 2011 and 2012, STAAR may earn
up to an additional €675,000 (approximately $920,000 at currently prevailing
exchange rates).  These additional “earn-out” payments will be paid on
achievement of specified earnings before income tax (“EBIT”) as set forth
below.  If a target is missed in any year, but in the following year
Domilens achieves the target and also makes up for the earlier shortfall, the
payments for both years will be earned and paid.
  Fiscal
      Year
                      
                      Domilens
      EBIT
                      
                      Earn-Out
      Payment2010
                      
                      €2,500,000
      (~ $3.4 million)
                      
                      €200,000
      (~$273,000)2011
                      
                      €2,900,000
      (~ $3.9 million)
                      
                      €225,000
      (~$307,000)2012
                      
                      €3,500,000
      (~ $4.7 million)
                      
                      €250,000
      (~$340,000)
  The
benefits expected to be achieved from the Domilens divestiture include the
following: approximately $12.5 million in net cash proceeds; greater focus on
STAAR’s core business; significantly enhanced gross profit margins; and a
contractual commitment to meet projected sales levels for STAAR products in
Germany and Austria through 2012.
  The
earn-out payments will be earned only if Domilens significantly improves its
performance over levels it has historically been able to achieve. Domilens may
not be able to achieve these improvements.  The escrow account will be used
to pay any additional unaccrued taxes that the German tax authorities may assess
after their next tax audit, which the Company cannot predict and may leave
little or no funds in the escrow account remaining for distribution to the
Company.
  U.S.
ICL Sales.
  U.S. ICL Sales.We consider
ICL sales growth in the U.S. market to be important because of the size of the
U.S. refractive surgery market and the perceived worldwide leadership of the
U.S. in adopting innovative medical technologies. The Visian ICL was approved by
the FDA for treatment of myopia on December 22, 2005.
  Visian
ICL sales in the U.S. grew by 2.5% during 2009 compared to prior year, and grew
18% in 2008 when compared to 2007 levels.  Most of the U.S. growth in
ICL sales has been in sales to the military, while most of the private sector
suffered similar declines to the overall refractive market in the
U.S.  Despite these continuing challenges to the LASIK market the
Visian ICL has continued to grow market share.
  37


In order to significantly
increase U.S. sales of the ICL, private sector sales must also resume
growth.  STAAR believes that the continued global recession represents
the largest challenge to increased growth in U.S. private sector ICL sales.
Refractive surgery is an elective procedure generally not covered by health
insurance. Patients must pay for the procedure, frequently through installment
financing arrangements.  STAAR believes that the lack of growth in
private sector ICL sales in the U.S. results from the significantly lower volume
of patients seeking refractive surgery in the last two years, which has reduced
the number of patients to whom the ICL is offered. While ICL sales have been
much more resistant to the recession than laser-based procedures, unless the
recent economic recovery continues and consumer spending levels also recover,
private sector ICL sales will not grow significantly and may
decline.  STAAR believes that its share of the U.S. refractive market
has grown during the past two years, which will position the ICL for strong
sales growth when conditions improve. By contrast, the U.S. refractive market
has declined by approximately 50% during the past two years.




The ICL
has continued to benefit from positive media coverage during 2009 and early
2010.  For example, in February 2010, it was widely reported that
Steve Holcomb, who won a gold medal in 2010 Winter Olympics as pilot of the U.S.
four-man bobsled team, had been able to continue his successful athletic career
only because he had receive ICLs to correct his severe myopia approximately two
years ago.




In
addition to poor conditions in the general economy and in particular the
refractive surgery market, other challenges to sustained growth in U.S. Visian
ICL sales include the following:




·       the
U.S. refractive surgery market has been dominated by corneal laser-based
techniques, which continue to be better known than the Visian ICL among
potential refractive patients;




·       other
newly introduced surgical products will continue to compete with the Visian ICL
for the attention of surgeons seeking to add new, high value surgical products,
in particular multifocal and accommodating IOLs;




·       negative
publicity about complications of LASIK could reduce interest in all refractive
surgical procedures; and




·       FDA
approval of the TICL, which STAAR sells in international markets for treating
patients affected by both myopia and astigmatism, has been delayed.




On April
25, 2008, the FDA Ophthalmic Devices Panel held a public meeting to discuss
issues of medical complications and customer satisfaction following refractive
surgery. While the panel also discussed phakic IOLs such as the Visian ICL, most
of its discussions centered on LASIK and testimony regarding customer
dissatisfaction following LASIK surgery. The Panel recommended enhanced patient
warnings of possible complications for LASIK and created a task force to study
methods of better identifying those patients who are more likely to have an
unsatisfactory outcome from laser vision correction. On October 15, 2009, the
FDA announced a three-phase collaborative study on the potential impact of LASIK
surgery on a patient’s quality of life, and also issued warning letters to
seventeen ambulatory surgery centers citing inadequate systems for reporting
adverse events resulting from LASIK. These FDA activities have been widely
reported in the U.S. While it is difficult to assess precisely the impact that
the FDA’s increased scrutiny on LASIK has had on patient attitudes or the
recommendations of practicing surgeons, it is possible that reduced demand for
laser eye surgery observed in 2008 and 2009 was caused in part by concerns
regarding complications and potential patient dissatisfaction. Patient concerns
about LASIK could increase interest in the Visian ICL as an alternative for
patients who have a greater risk of complications from LASIK. The fact that the
Visian ICL is removable if a patient is dissatisfied with the outcome may also
be appealing to some patients with new concerns about risks of refractive
surgery. However, STAAR believes the negative publicity concerning LASIK has
decreased patient interest in all refractive surgery, including Visian ICL.
Because nearly all candidates for refractive surgery can achieve acceptable
vision through the use of spectacles or contact lenses, for most patients the
decision to have refractive surgery is a lifestyle choice that depends on high
confidence in achieving a satisfactory outcome.


38


STAAR
makes the ICL available to selected surgeons only after completion of a training
program that includes proctoring of selected supervised surgeries. STAAR
believes that this carefully guided method of product release is essential to
help ensure the consistent quality of patient outcomes and the high levels of
patient satisfaction needed to establish wide acceptance of the ICL as a primary
choice for refractive surgery.




As the
U.S. market for ICLs has matured, STAAR has placed less emphasis on increasing
its overall customer base and devoting more attention to identifying and
supporting those practices that show potential for significant repeat business
through a professional commitment to the ICL technology.




Because
the refractive surgery market has been dominated by corneal laser-based
techniques, STAAR faces special challenges in introducing an intraocular
refractive implant. STAAR has developed a number of marketing tools and practice
support programs to increase the use of the ICL and awareness of its advantages
in refractive surgery centers throughout the U.S. and around the
world.




U.S.
IOL Sales.




For
several years STAAR has experienced a decline in U.S. market share of IOLs. The
rate of decline has slowed as STAAR has begun replacing older lens designs with
higher priced NTIOL lenses. During 2009 U.S. IOL sales declined 8% compared to
rates of decline of 16% 2008 and 20% in 2007. Factors contributing to long-term
decline in U.S. IOL sales include the slow pace of product improvement and
enhancement during a period when we devoted most of our research and development
resources to introducing the ICL and to resolving the regulatory and compliance
issues raised by the FDA. This long-term trend was intensified in 2007 by
disruption in STAAR’s independent sales force when STAAR was unable to reach a
new contract with regional manufacturer’s representatives in the third quarter
of 2007. In addition the trend was exacerbated by STAAR’s lagging behind its
competitors in the introduction of IOLs with advanced aspheric optics, and by
the entry of Alcon as a competitor in the Toric IOL market.




STAAR’s
strategy to achieve its gross profit margin target in its U.S. IOL business is
to rationalize its product offering around its higher value products, including
recently introduced products and products planned for introduction in the near
future. This has included aspheric optics across all IOL platforms, approval of
higher reimbursement from Medicare for these lenses, improved delivery systems
for Collamer IOLs to broaden their appeal and preloaded delivery systems for
silicone lenses. Successful implementation of this strategy is subject to risks,
including the risk of delays in developing new products or securing regulatory
approval.




STAAR’s
initiatives to enhance its IOL product line have resulted in the following
recent developments:




·
            the
      introduction of STAAR’s aspheric three-piece Collamer IOL in April
      2007;




·
            the
      introduction of STAAR’s aspheric three-piece silicone IOL November
      2007;




·
            the
      April 2008 introduction of the nanoPOINT injector, which delivers
      STAAR’s single-piece Collamer IOL, through a 2.2 mm
      incision;




·
            the
      grant of New Technology IOL (“NTIOL”) status for the aspheric three-piece
      Collamer IOL in March 2008;




·
            the
      grant of NTIOL status for the nanoFLEX aspheric single-piece Collamer IOL
      and the aspheric three-piece silicone IOL in July
  2008;




·
            the
      introduction of the nanoFLEX aspheric single-piece Collamer IOL in the
      second quarter of 2009, which brings advanced aspheric optics to the
      micro-incision nanoPOINT platform;
and




·
            the
      launch of the Epiphany injector for the Collamer three-piece lens in the
      third quarter of 2009 which brings smoother and more controlled delivery
      to one of STAAR’s most advanced lenses and paves the way for U.S.
      introduction of the silicone preloaded
injector.




39




The
addition of aspheric optics to STAAR’s IOL designs has been a primary focus of
STAAR’s recent development efforts. Aspheric IOLs use advanced optical designs
intended to provide a clearer image than traditional spherical lenses,
especially in low light, which has led to significant market share gains for
aspheric designs. In recognition of these advantages the Centers for Medicare
and Medicaid Services (“CMS”) will grant NTIOL status to aspheric IOLs that can
demonstrate improved visual performance over conventional IOLs, allowing an
extra $50 reimbursement per lens implanted in an ASC (ambulatory surgical
center). This additional reimbursement expires on February 26, 2011 for all IOLs
in this class. Because the majority of IOL purchases in the U.S. are implanted
at ASCs and reimbursed through Medicare, NTIOL status significantly increases
STAAR’s potential margin on qualifying lenses.




All of
STAAR’s aspheric lenses sold in the U.S. feature a proprietary optical design
(patent pending) that is optimized for the naturally curved surface of the
retina and certain other anatomical features of the human eye, and provides
outstanding image quality even if decentered.




STAAR
intends to continue to focus on the following projects designed to make our IOL
product offering more competitive:




·
            Complete
      the development of the Collamer Toric IOL to complement our pioneering
      silicone Toric IOL and better compete with the Alcon acrylic Toric IOL.
      The Collamer Toric IOL should provide a product with advanced optic
      materials and rotational stability to provide superior outcomes for
      cataract patients with astigmatism;




·
            Gain
      approval for a preloaded silicone IOL injector system in the U.S. in
      2010;




·
            Develop
      a preloaded injector system for our Collamer
  IOLs;




·
            Initiate
      a formal post-market clinical evaluation to support a possible submission
      to the FDA of claims that the lens offers patients less spectacle
      dependence or accommodation; and




·
            Initiate
      a clinical study of a new IOL we have designed to enhance the
      accommodating properties of
Collamer.




STAAR
cautions that the successful development and introduction of new products is
subject to risks and uncertainties, including the risk of unexpected delays and,
in some cases, approval of regulatory authorities.




STAAR’s
development efforts aim to realize the full market potential for Collamer IOLs
by continuously improving lens delivery systems and differentiating STAAR’s
silicone IOL offering through the Preloaded Injector. Approximately one-half of
IOLs sold by STAAR in the U.S. are made of silicone, which was the original
material used for foldable IOLs. Physician preferences in the U.S. have shifted
to toward acrylic IOLs and silicone IOLs now account for approximately 18% of
the U.S. IOL market. STAAR believes that its Collamer lenses have outstanding
optical qualities and superior biocompatibility, and should be capable of
competing with any of our competitor’s acrylic lens products in the advanced
material sector. In addition, increasing use of the ICL, which relies on the
outstanding optical properties of Collamer, has also introduced the advantages
of the Collamer material to a growing number of surgeons. However, growth of the
Collamer IOL market has been limited by the difficulty of perfecting delivery
systems for the soft Collamer material. Although acrylic lenses do not have the
same level of optical performance in the eye as Collamer and often introduce
glare or glistening into the visual field, the stiffness and toughness of the
acrylic material makes design of delivery systems less difficult. STAAR has
completed a number of development projects in place intended to make Collamer
lenses easier to deliver and broaden customer appeal. The nanoPOINT injector
system, which delivers the nanoFLEX one-piece Collamer IOL through a 2.2 mm
incision, was the first of these projects to reach market and was launched in
April 2008. In addition the launch of the Epiphany injector for the Collamer
three-piece lens in the third quarter of 2009 brings smoother and more
controlled delivery to one of STAAR’s most advanced lenses.


40


Over the
past several years surgeons implanting the nanoFLEX IOL have reported that their
cataract patients have better than expected near vision. In late 2008, STAAR
organized the Collamer Accommodating Study Team or “CAST.” The CAST consists of
eight prominent physicians across the U.S. who are implanting the recently
launched nanoFLEX IOL and are checking both near and intermediate vision
approximately one month post operation. Feedback from the group indicates that
the near vision achieved is better than that of any conventional IOL where we
have comparative data. The feedback also indicates that the intermediate
vision is better than “presbyopia correcting” IOLs that have been studied
and near vision approaches that of presbyopia correcting IO that
are already on the market.




While
introduction of the nanoFLEX lens did not result in increased U.S. IOL sales in
2009, STAAR believes that surgeon interest in the product is growing and that it
represents a significant opportunity to increase STAAR’s U.S. IOL market
share.  To further pursue this opportunity, in the first quarter of
2010 STAAR initiated a program called the “nanoFLEX challenge” which is intended
to facilitate an interested surgeon’s evaluation of the visual outcomes for
patients receiving nanoFLEX IOLs compared with the outcomes from any other
standard IOL currently used by the surgeon.




The 2009
introduction of the Epiphany injector, an advanced system which makes delivery
of the three-piece Collamer aspheric IOL more reliable and predictable, has not
resulted in increased sales of this advanced lens. Based on surgeon feedback,
STAAR has developed an easier loading mechanism for this injector, which it
intends to introduce in the first half of 2010.  STAAR believes that
this lens also has the potential to improve STAAR’s market share, particularly
among surgeons who prefer loop haptics to the plate haptic design of the
nanoFLEX.   It plans concerted marketing efforts for the
three-piece Collamer aspheric lens once the improved Epiphany injector becomes
available.




While the
market share of silicone IOLs has been slowly declining overall, a significant
number of surgeons continue to select silicone lenses for their patients. Among
U.S. IOL sales, STAAR believes that its recently introduced aspheric,
three-piece silicone IOL offers outstanding optical performance and with its
recently granted NTIOL status could enable STAAR to retain or possibly increase
its market share within the silicone IOL sector, especially if STAAR’s efforts
are successful in securing FDA approval to make it available in a Preloaded
Injector.




Reversing
the decline in U.S. IOL sales will require STAAR to overcome several short and
long-term challenges, including successfully meeting its objectives to develop
new and enhanced products, organizing, training and managing a specialized
cataract sales force, managing independent local sales representatives, and
competing with much larger companies. We cannot assure that this strategy will
ultimately be successful.




Medical Device Regulatory
Compliance, Clinical Oversight and TICL Approval.  As discussed
above under the caption “Business — Regulatory
Matters,” STAAR’s ability to develop, manufacture and distribute its
products depends heavily on maintaining good standing with the FDA and other
regulatory agencies. Based, in part, on the results of the FDA inspections
of STAAR’s California facilities in 2009 and 2006 and STAAR’s Nidau, Switzerland
facility in 2009, STAAR believes that it is substantially in compliance with the
FDA’s Quality System Regulations and Medical Device Reporting
regulations.  STAAR has invested significant resources in maintaining
regulatory compliance and expects to continue to do so in the
future.




Financing
Strategy




STAAR has
reported losses and negative cash flows on a consolidated basis over the last
several years, primarily as a result of losses in the U.S. business. During this
period STAAR has raised additional funds to support operations through sales of
equity and debt securities. As cash flow improved in recent quarters, STAAR has
sought to avoid further financings and to operate exclusively on self-generated
cash. This strategy was challenged in the first quarter of 2009, when cash
reserves were drawn down to low levels, positive cash flow had not yet been
achieved, and the Company suffered an adverse litigation judgment in the amount
of approximately $4.9 million. At the time the judgment became final, STAAR did
not have adequate cash or cash equivalents either to satisfy the judgment or to
deposit $7.3 million with the court to obtain a stay of enforcement of the
judgment while the appeal was pending.


41


On June
17, 2009, the Company completed a registered public offering (the “Offering”)
with certain existing institutional investors, raising a total of $8.5 million
in cash by issuing 4.6 million shares of Company’s common stock. The proceeds
were primarily applied to posting the required $7.3 million deposit with the
Superior Court of California, County of Orange, while the Parallax verdict is on
appeal. On June 22, 2009, following the receipt of proceeds from the Offering,
STAAR timely posted this deposit with the Court just before the expiration of a
temporary stay of enforcement that had been granted by the court.





Avoiding
a similar short-term cash shortfall was a principal consideration in STAAR’s
divestiture of Domilens on March 2, 2010.  Among the expected demands
on STAAR’s capital resources underlying this decision, the most pressing was the
$6.5 million verdict rendered in the Moody case, and the potential
need to post a $9.8 million appeal bond on or before April 30,
2010.  The Domilens divestiture yielded a total of approximately $12.5
million in net cash proceeds to STAAR.  The potential need to post an
appeal bond was eliminated by the global settlement of the Parallax and Moody cases on March 30,
2010.  STAAR’s $4 million contribution to the global settlement will
be paid from the $7.4 million restricted deposit that STAAR already had placed
with the Court on June 22, 2009 in connection with the Parallax case.  As
a result, STAAR will be able to apply the entire $12.5 million in net cash
proceeds from the Domilens sale to working capital, along with approximately
$3.4 million that will be refunded to STAAR from the restricted
deposit.




Other
recent financing activity includes the December 14, 2007 borrowing by STAAR of
$5 million from Broadwood Partners, L.P., at an interest rate of 7% per annum,
primarily to fund the acquisition of STAAR’s remaining interest in the Canon
Staar Joint Venture. On April 2, 2009, after preliminary judgment was entered in
the Parallax case, Broadwood and the Company entered into a Temporary Waiver
Agreement with respect to any event of default that may occur, or may be deemed
to have occurred, under the Broadwood note as a result of the judgment. In
consideration of the Temporary Waiver Agreement, STAAR agreed to amend the
Original Note to grant to Broadwood a security interest in substantially all of
STAAR’s assets to secure STAAR’s obligations under the Original Note. To
effectuate this grant of a security interest, as of April 13, 2009, the Company
and Broadwood entered into an Amended and Restated Senior Secured Promissory
Note and Security Agreement. The Temporary Waiver Agreement had provided that no
such default was deemed to have occurred until June 23, 2009, when a temporary
stay of judgment expired.




On June
24, 2009, following the posting of the deposit and satisfaction of conditions of
the Temporary Waiver, Broadwood and STAAR again amended the Note by replacing
the Temporary Waiver with a provision stating that because the Company secured a
stay of enforcement of judgment until the completion of the appeal by posting
the required deposit with the Court, any default that may have otherwise
resulted from the Parallax judgment is cured. Broadwood remained entitled to
receive interest at the rate of 20% per annum beginning on June 23, 2009, as
would have been applicable in the event a default had occurred under the
original terms of the Note.  Under the terms of the amended Note, the
final resolution of the Parallax and Moody cases results in the
interest rate on the loan returning to the 7% pre-default level.  Such
final resolution occurred on March 30, 2010.




The
Broadwood Note prohibits STAAR and its subsidiaries from disposing of any of its
assets without prior written consent of Broadwood.  On
February 23, 2010, Broadwood provided written consent to the sale of all of
STAAR’s interests in Domilens.


42


On
October 14, 2009, STAAR’s general liability insurer agreed to pay a portion of
the legal fees incurred by STAAR after July 1, 2009 for its defense of the Moody
case.  On October 22, 2009 the insurer agreed to pay a portion of the legal
fees incurred by STAAR after July 1, 2009 for the appeal in the Parallax
case.  The insurer’s agreement to defend these cases was subject to a full
reservation of its rights and defenses.  STAAR received $780,000 in
reimbursement payments related to the Moody in 2009, and through the date of
this report has received $342,000 in 2010.   Prior to the March 31,
2010 global settlement of the Parallax and Moody cases, the availability of
reimbursement for our legal fees from our insurance carrier, along with the
transition of the lawsuits from trial to appeal, began to reduce our legal
defense expenses significantly.  In connection with the global settlement,
STAAR will voluntarily dismiss its appeals, and except for minor post-settlement
matters legal expenditures related to the cases will cease.




STAAR’s
need for working capital, and the terms on which financing may be available,
will depend in part on its degree of success in achieving and maintaining
positive cash flow and earnings through the strategies described above under the
caption “Strategy.” STAAR cannot assure that such financing will be available on
acceptable terms, if at all, if the need arises.


43


Results
of Operations




The
following table sets forth the percentage of total sales represented by certain
items reflected in the Company’s consolidated statement of operations for the
period indicated and the percentage increase or decrease in such items over the
prior period.





Percentage of Net Sales
                                                              
                                                              
                                                              Percentage ChangeJanuary 1,
                                                                2010
                                                              
                                                              
                                                              January 2,
                                                                2009
                                                              
                                                              
                                                              December 28,
                                                                2007
                                                              
                                                              
                                                              2009
                                                                vs.
                                                                2008
                                                              
                                                              
                                                              2008
                                                                vs.
                                                                2007Net
      sales
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              0.6
                                                              %
                                                              
                                                              
                                                              26.2
                                                              %Cost
      of sales
                                                              
                                                              
                                                              44.4
                                                              %
                                                              
                                                              
                                                              46.4
                                                              %
                                                              
                                                              
                                                              50.7
                                                              %
                                                              
                                                              
                                                              (3.8
                                                              )%
                                                              
                                                              
                                                              15.6
                                                              %Gross
      profit
                                                              
                                                              
                                                              55.6
                                                              %
                                                              
                                                              
                                                              53.6
                                                              %
                                                              
                                                              
                                                              49.3
                                                              %
                                                              
                                                              
                                                              4.5
                                                              %
                                                              
                                                              
                                                              37.0
                                                              %General
      and administrative
                                                              
                                                              
                                                              20.9
                                                              %
                                                              
                                                              
                                                              21.0
                                                              %
                                                              
                                                              
                                                              21.8
                                                              %
                                                              
                                                              
                                                              (0.1
                                                              )%
                                                              
                                                              
                                                              21.5
                                                              %Marketing
      and selling
                                                              
                                                              
                                                              32.2
                                                              %
                                                              
                                                              
                                                              36.1
                                                              %
                                                              
                                                              
                                                              40.0
                                                              %
                                                              
                                                              
                                                              (10.3
                                                              )%
                                                              
                                                              
                                                              14.0
                                                              %Research
      and development
                                                              
                                                              
                                                              7.8
                                                              %
                                                              
                                                              
                                                              10.6
                                                              %
                                                              
                                                              
                                                              11.3
                                                              %
                                                              
                                                              
                                                              (25.8
                                                              )%
                                                              
                                                              
                                                              18.3
                                                              %Other operating
      expenses (recovery), net
                                                              
                                                              
                                                              (0.3
                                                              )%
                                                              
                                                              
                                                              13.1
                                                              %
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              *
                                                              
                                                              
                                                              —
                                                              *Operating
      loss
                                                              
                                                              
                                                              (5.0
                                                              )%
                                                              
                                                              
                                                              (27.2
                                                              )%
                                                              
                                                              
                                                              (23.8
                                                              )%
                                                              
                                                              
                                                              (81.7
                                                              )%
                                                              
                                                              
                                                              44.4
                                                              %Total
      other (expense) income, net
                                                              
                                                              
                                                              (1.3
                                                              )%
                                                              
                                                              
                                                              (1.7
                                                              )%
                                                              
                                                              
                                                              (1.7
                                                              )%
                                                              
                                                              
                                                              (23.8
                                                              )%
                                                              
                                                              
                                                              23.9
                                                              %Loss
      before income taxes
                                                              
                                                              
                                                              (6.3
                                                              )%
                                                              
                                                              
                                                              (28.9
                                                              )%
                                                              
                                                              
                                                              (25.5
                                                              )%
                                                              
                                                              
                                                              (78.3
                                                              )%
                                                              
                                                              
                                                              43.0
                                                              %Provision
      for income taxes
                                                              
                                                              
                                                              2.0
                                                              %
                                                              
                                                              
                                                              2.0
                                                              %
                                                              
                                                              
                                                              1.4
                                                              %
                                                              
                                                              
                                                              (2.0
                                                              )%
                                                              
                                                              
                                                              80.7
                                                              %Net
      loss
                                                              
                                                              
                                                              (8.3
                                                              )%
                                                              
                                                              
                                                              (30.9
                                                              )%
                                                              
                                                              
                                                              (26.9
                                                              )%
                                                              
                                                              
                                                              (73.3
                                                              )%
                                                              
                                                              
                                                              45.0
                                                              %





*  Denotes
change is greater than 100%





2009
Fiscal Year Compared to 2008 Fiscal Year




Net
sales




Net
product sales for 2009 were $75.3 million, a 1% increase over the $74.9 million
reported for 2008. Increased sales of ICLs and IOLs were largely offset by a 15%
decrease in non-lens sales. Non-lens sales decreased, as expected, as a result
of the Company’s decision to deemphasize lower gross profit margin
product.




International
sales for 2009 were $59.3 million, up 6% from $56.0 million in
2008.  International Visian ICL sales were $17.0 million, up 19.6%
over the $14.2 million reported in 2008.  The increase in sales was
led by strong international sales of ICLs, primarily in Korea, China, and
France. Visian ICL unit volume was up 33% while dollar sales increased by
20%.  International IOL sales were $25.2 million, up 7.6% over the
$23.4 million reported in 2008.  International IOL unit volume
increased by 6% while dollar sales increased by 8% despite relatively unchanged
average selling price per unit (ASP).




U.S.
sales for 2009 were $16.1 million, down 15% from $18.9 million in
2008.  U.S. Visian ICL sales were $5.0 million, up 2.5% over $4.9
million in 2008 mainly due to higher ASP as units were flat compared to
2008.  U.S. IOL sales were $8.7 million compared to $9.5 million in
the prior year, an 8% decrease mostly due to 16% lower volumes in 2009 compared
to 2008 offset by an increase in average selling prices of 9% in
2009.




Gross
profit margin




Gross
profit margin for 2009 was 55.6%, compared with 53.6% for 2008, which included
purchase accounting charges recorded in the first quarter of 2008 of $1.5
million. A number of factors favorably impacted gross profit margin including
increased mix of ICL sales, increased ASPs of US IOLs and decreased sales of low
margin non-lens product sales.  The impact of these positive factors
was offset by negative factors that reduced gross profit margin such as
manufacturing yield issues, decreased IOL ASPs in Japan and decreased ICL ASPs
in Korea, and increased cost of goods in Germany due to fluctuating exchange
rates.


44


General
and administrative




General
and administrative expense in 2009 and 2008 was $15.7 million.  STAAR
expects general and administrative expense to decrease by approximately $1.5
million in 2010 due to decreased legal fees as a result of the settlement of all
outstanding litigation on March 30, 2010 (see “Item 3 – Legal
Proceedings”).




Marketing
and selling




Marketing
and selling expense for 2009 was $24.2 million, a 10.4% decrease over the $27.1
million incurred in 2008 due to decreased salaries, travel, consulting fees,
promotional activities and commissions in the U.S.  STAAR expects
marketing and selling expenses to decrease approximately $9 million as a result
of the divestiture of Domilens.




Research
and development




Research
and development expense for 2009 was $5.9 million, a 25.8% decrease over the
$7.9 million incurred in 2008.  The decrease is due primarily to
decreased salaries, consulting fees and general cost containment efforts in the
U.S.  The Company expects to spend approximately 10% of sales in
fiscal 2010 on its research and development activities.




Other operating
expenses (recovery), net




Other
operating expenses (recovery), net of $0.2 million for fiscal year 2009 include
the reversal of $0.8 million in accrued judgment costs resulting from the
settlement of litigation in the matters involving Scott C. Moody, Inc. and
Parallax Medical Systems  (see “Item 3 – Legal Proceedings”). The
reversal of accrued judgment costs were largely offset by a $0.6 million charge
associated with certain patents that were determined to have shorter useful
lives than originally estimated.




Income
taxes




The
Company recorded an income tax provision of $1.5 million for both fiscal years
2009 and 2008. The tax provision is primarily related to the Company’s current
and deferred foreign taxes due to pre-tax profits generated by STAAR Surgical AG
and unremitted foreign earnings due to STAAR’s intent to repatriate all of its
foreign earnings.




2008
Fiscal Year Compared to 2007 Fiscal Year




Net
sales




Net sales
for the year ended January 2, 2009 (“fiscal 2008”) were $74.9 million, an
increase of 26.2% compared with net sales for the year ended December 28, 2007
(“fiscal 2007”) of $59.4 million. Changes in currency exchange rates had a
favorable $1.6 million impact on net sales for fiscal
2008.   During fiscal 2008, global sales of ICLs and TICLs grew
24.1% to $19.1 million compared with $15.4 million in fiscal 2007; global sales
of IOLs increased 40.8% to $32.9 million compared with $23.4 million in fiscal
2007 as a result of the acquisition of STAAR Japan, which contributed $12.2
million in 2008 in total IOL sales.  Sales of other surgical products,
generally used during cataract surgery, increased 11.1%.




U.S. net
sales for fiscal 2008 decreased 4.0% to $18.9 million compared with fiscal 2007,
due to a 16.0% decrease in IOL sales which was largely offset by a 17.9%
increase in ICL sales and a 6.4% increase in other product
sales.  Although IOL sales declined 16% for the full year, the year
over year rate of decline has slowed from 26% in the fourth quarter of 2007 to
5% in the fourth quarter of 2008.


45


International
net sales for fiscal 2008 were $56 million, an increase of 41.2% compared with
fiscal 2007.  International IOL sales were $23.5 million, up 93.8%,
compared with $12.1 million in 2007.  The significant increase in IOL
sales is due to the acquisition of STAAR Japan at the beginning of 2008,
partially offset by a decrease in IOL sales in international markets outside of
Japan. During 2008, international sales of ICLs increased 26.3% to $14.2
million, compared with $11.2 million in fiscal 2007 and other surgical product
sales increased 12.3% to $18.3 million, compared with $16.3 million in fiscal
2007.




Gross
profit margin




Gross
profit margin for the fiscal 2008 was 53.6% compared with 49.3% for fiscal 2007.
The increase in gross profit margin is due to sales of preloaded IOLs in Japan
which yield higher average selling prices than in other countries, increased
sales of ICLs, particularly in the U.S. where prices are higher, and increased
sales of TICLs.  The improvement in gross profit margin was partially
offset by the STAAR Japan acquired inventory, which was recorded at fair value
in accordance with purchase accounting rules. This higher valued inventory was
sold during 2008 resulting in $1.5 million in additional cost of goods
sold.




General
and administrative




General
and administrative expenses for fiscal 2008 were $15.7 million, representing a
21% increase over the $13.0 million reported in fiscal 2007, entirely due to
$3.7 million incurred by STAAR Japan, offset by $0.9 million reduction in the
rest of the Company despite significant legal costs associated with the sales
representative litigation.




Marketing
and selling




Marketing
and selling expenses for fiscal 2008 were $27.1 million, representing a 14%
increase over the $23.7 million reported in fiscal 2007. The increase in
marketing and selling expenses for fiscal 2008 was due to the $4.1 million in
costs associated with STAAR Japan.  Marketing and selling expenses in
the U.S. decreased $2.4 million and this decrease was partially offset by a $1.6
million increase in international expenses outside of Japan and the U.S. to
support the increase in ICL sales.




Research
and development




Research
and development expenses, including regulatory and clinical expenses, for fiscal
2008 were $7.9 million, representing an 18% increase over the $6.7 million
reported in fiscal 2007. The increase is due to the $2.2 million in costs
associated with STAAR Japan, offset by a decrease of $0.9 million as a result of
cost reduction measures taken in the U.S. to improve cash flows.




Other
operating expenses




Other
operating expenses for fiscal 2008 were $9.8 million and consisted of the
following:  1) loss on settlement of pre-existing distribution
arrangement in the amount of $3.9 million recorded in connection with the
Company’s acquisition of STAAR Japan and represented the portion of the
consideration paid by STAAR for the termination of the pre-existing distribution
arrangement that was deemed unfavorable to STAAR Japan and to STAAR when
compared to an at market arrangement as of the closing date of the
acquisition;  2) patent impairment charges in the amount of $1.0
million which was recorded in connection with certain patents that were
determined to have minimal fair value to the Company pursuant to the annual
impairment review; and 3) jury verdict in favor of Parallax Medical Systems,
Inc. reached subsequent to year end in the amount of $4.9 million (see “Item 3 –
Legal Proceedings”).




Income
taxes




The
Company recorded an income tax provision of $1.5 million and $0.8 million for
fiscal 2008 and 2007 respectively. The increase in the provision of $0.7 million
was primarily due to increases in the Company’s current foreign tax provision of
$0.9 million due to pre-tax profits generated by STAAR Surgical AG, offset by a
decrease in the foreign deferred tax provision of $0.2 million.


46


Liquidity
and Capital Resources




The
Company has managed its liquidity through a series of debt and equity financing
transactions and from its foreign operations, and recently, through a sale of a
subsidiary.  Although the Company is now generating cash from
operations and expects to continue to do so in 2010, after paying expected 2010
obligations its cash resources will continue to be limited.


47


The
Company intends to continue to manage its liquidity through certain planned cost
reduction initiatives and operational goals.  The following is a
summary of significant cost reduction and other planned actions contemplated by
the Company:




The
Company has previously disclosed certain key metrics that it intends to continue
to make its priority to achieve in the forthcoming year in order to remain a
going concern.




First,
the Company must continue to generate cash from operations by continuing to
drive cost reduction initiatives and vigilantly manage the Company’s
spending.  Although no assurances can be made, this can be achieved by
continuing recent trends coupled with the expected savings in legal fees in 2010
compared to 2009, despite the sale of Domilens in March 2010.




Second,
the Company has to drive overall increase in sales and improvement in the gross
profit margins by increasing sales of the Visian ICL products and higher margin
IOLs.  In 2009, ICL sales globally increased by 15% globally in
dollars and 26% in units compared to 2008 principally from the international
markets.  In February 2010, the Japanese Ministry of Health, Labor and
Welfare approved the sale of the ICL in Japan.




The
success of the Company and management’s plans necessarily depends on several
factors and events directly outside of its control including an improvement of
global economic conditions and continuation of our operations in the normal
course of business in our international markets.  The Company’s plans
also assume that our trade suppliers will continue to conduct business with us
on terms consistent with historical practice. The suppliers may request faster
payment of invoices, new or increased deposits or other
assurances.  If this were to happen, the Company’s need for cash would
be intensified and we might be unable to make payments to our suppliers as they
become due and the Company may need additional financing as necessary to
continue normal operations and such financing may not be available at terms
acceptable to the Company, if at all, which can jeopardize the operations of the
Company.




Overview
of changes in cash and cash equivalents and other working capital
accounts.




Net cash
provided by operations was $1.4 million in 2009 compared to net cash used in
operating activities of $8.2 million and $11.2 million in fiscal 2008 and 2007,
respectively. For fiscal 2009 the cash provided by operations was mainly due to
lower net loss of $17 million in 2009 compared to 2008.  For fiscal
2008 and 2007 cash used in operations was the result of increased net losses,
adjusted for depreciation, amortization, stock-based compensation expense, and
other miscellaneous non-cash items, and net decreases in working
capital.




Net cash
used in investing activities was approximately $7.6 million in fiscal 2009
compared to $1.1 million cash provided by investing activities in 2008 and $4.7
million cash used in 2007.  In June 2009, STAAR posted a $7.3 million
bond with the Court pending the appeal of the Parallax judgment.  The
Court maintains full control of, and access to the deposit, including the
ultimate disbursement of any and all amounts, plus interest.  STAAR
has no access to these funds and limited information as to their investment
status.  The Court will pay approximately 1% interest per annum on the
deposit, which will be reinvested into the deposit account by the Court and is
subject to the same restrictions as the principal amount.  STAAR has
classified this restricted cash deposit and considers this deposit to be akin to
a purchase of a temporary investment with the Court and any activity in this
account from its inception to liquidation will be included as investing cash
outflows and inflows STAAR’s consolidated statements of cash flows. Under
the Stipulation for Settlement resolving the Parallax and Moody cases, STAAR will
stipulate to the payment of $4.0 million from this deposit as its contribution
to the settlement.  The remaining $3.4 million will be refunded to
STAAR.  Other investing activities in 2009 include the purchase of
property, plant and equipment of $0.6 million.  In fiscal year 2008
the net cash provided by investing was mainly due to $2.2 million of cash
acquired in the STAAR Japan acquisition offset by $1.1 million of property and
equipment purchases.  Included in cash used in investing activities
for fiscal 2007, was the $4.0 million advance payment toward the purchase price
for the 50% acquisition of Canon Staar and the acquisition of $0.7 million in
property and equipment.




Net cash
provided by financing activities was approximately $7.4 million, $1.0 million,
and $18.7 million for fiscal 2009, 2008, and 2007, respectively.  In
2009, cash provided by financing activities resulted from the $8.5 million cash
proceeds from the sale of STAAR common stock in order to fund the Parallax bond
discussed above, which was offset by $1.1 million repayment of principal on
capital lease obligations.  In 2008, cash provided by financing
activities resulted from net proceeds of $2 million from a line of credit in
Japan offset by payments made on assets under a capital lease of $1
million.  In 2007, cash provided by financing activities resulted from
the receipt of net proceeds of $16.6 million from a public offering of 3.6
million shares of the Company’s common stock and $0.6 million received from the
exercise of the stock options.  Additionally in 2007 the Company
borrowed $9.0 million from Broadwood, of which $4 million was repaid in the
second quarter and $5.0 million was intended to be used to fund the acquisition
of the remaining 50% interest in the Canon joint venture and related transaction
costs. In addition, the Company repaid $1.8 million outstanding on its Swiss
line of credit and repaid $1 million related to the 2004 acquisition of the
minority interest of our Australian subsidiary and $0.7 million in payments
under capital lease lines of credit.


48


Accounts
receivable was $9.3 million as of January 1, 2010 and $8.4 million as of January
2, 2009.  The increase in accounts receivable is due to increased
sales in the international markets during fiscal 2009. Days’ Sales Outstanding
(“DSO”) were 43 days in 2009 and 42 days in 2008. The Company expects to
maintain DSO within a range of 40 to 45 days during the course of fiscal
2010.




Inventories
at the end of fiscal 2009 and 2008 were $14.8 million and $16.7 million,
respectively. Days’ inventory on hand were 110 days in 2009 and 142 days in 2008
based on finished goods inventory as of January 1, 2010 and January 2,
2009.




Credit
Facilities, Contractual Obligations and Commitments




Credit
Facilities




The
Company has credit facilities with different lenders to support operations in
the U.S. and Japan.




On
December 14, 2007, the Company borrowed $5 million from Broadwood Partners, L.P.
(“Broadwood”), a stockholder in the Company, pursuant to a Senior Promissory
Note between the Company and Broadwood, with a scheduled maturity of December
14, 2010.  Among the events of default under the Senior Promissory Note is
any judgment against the Company in excess of $500,000 that “shall remain
unpaid.”  On April 2, 2009, after preliminary judgment was entered in
the Parallax case,
Broadwood and STAAR entered into a Temporary Waiver Agreement with respect to
any event of default that may occur, or may be deemed to have occurred, under
the Note as a result of the judgment.  In consideration of the Temporary
Waiver Agreement, STAAR agreed to amend the Senior Promissory Note to grant
to Broadwood a security interest in substantially all of STAAR’s assets to
secure STAAR’s obligations under the original Senior Promissory Note.  To
effectuate this grant of a security interest, as of April 13, 2009, the Company
and Broadwood entered into an Amended and Restated Senior Secured Promissory
Note (the “Note”) and Security Agreement.  All other key terms of the Note
remained unchanged.  The Temporary Waiver Agreement provided that if the
Company secured a stay of enforcement of judgment prior to June 23, 2009 (the
expiration date of a temporary stay granted by the Court), no default was deemed
to have occurred with respect to the judgment.  On June 24, 2009, following
the timely posting of the deposit and satisfaction of the provisions of the
Temporary Waiver, Broadwood and STAAR again amended the Note by replacing the
Temporary Waiver with a provision stating that because the Company secured a
stay of enforcement of judgment until the completion of the appeal by posting
the required deposit with the Court, any default resulting from the Parallax judgment is deemed
to be cured.




Broadwood was
entitled to receive interest at the rate of 20% per annum beginning on June 23,
2009, as would have been applicable in the event a default had occurred under
the original terms of the Note.  However, the terms
of the Note also provided that if the Company fully satisfies the judgments and
finally resolves all material litigation, which occurred on March 30, 2010, the
interest rate shall be reduced to 7% per annum from the date of such final
resolution




49


Capital
Lease Agreements




The
Company’s lease agreement with Farnam Street Financial, Inc. (“Farnam”), as
amended on October 9, 2006, provided for purchases of up to $1,500,000 of
property, plant and equipment.  Purchases under this facility are
accounted for as capital leases and generally have a thirty-month to three-year
term. Under the agreement, the Company has the option to purchase any item of
the leased property at the end of that item’s lease term, at a mutually
agreed-upon fair value.  If the Company decides not to purchase the
equipment, it will continue to pay monthly rent on the equipment. On April 1,
2007, the Company signed an additional leasing schedule with Farnam, which
provided for additional purchases of $800,000 during 2008. The terms of this new
schedule conform to the amended agreement dated October 9,
2006.  There are no borrowings available under the
agreement.




Line
of Credit




The
Company’s Japanese subsidiary, STAAR Japan, has an agreement, as amended on June
30, 2009, with Mizuho Bank which provides for borrowings of up to 300,000,000
Yen (approximately $3.2 million based on the rate of exchange on January 1,
2010), at an interest rate equal to the Tokyo short-term prime interest rate
(approximately 1.475% as of January 1, 2010) plus 1.125% and terminates on April
20, 2010, but may be renewed annually.  The credit facility is not
collateralized.  The Company had 200,000,000 Yen outstanding on the
line of credit as of January 1, 2010 and January 2, 2009, (approximately $2.2
million based on the foreign exchange rates on January 1, 2010 and January 2,
2009, respectively).  If a default occurs, the interest rate will be
increased to 14% per annum.




Our
limited borrowing capacity could cause a shortfall in working capital or prevent
us from making expenditures to expand or enhance our business. Although we were
compliant with our line of credit covenants as of January 1, 2010, a default on
our line of credit could cause an immediate termination and jeopardize our
ability to continue operations.


Redeemable,
convertible preferred stock
  Under its
Certificate of Incorporation the Company has had 10,000,000 shares of “blank
check” preferred stock, which the Board of Directors is authorized to issue with
such rights, preferences and privileges as the Board may determine. On October
22, 2007, the Board approved the designation of 1,700,000 shares of the
preferred stock as Series A Redeemable Convertible Preferred Stock (“Preferred
Stock”) to be issued in connection with the acquisition of the 50% interest in
Canon Staar Co., Inc. which was consummated on December 29, 2007. On December
29, 2007, the Company issued the 1,700,000 shares of Preferred Stock to the
Canon companies as partial consideration for their shares of Canon Staar Co.,
Inc. at an estimated fair value of $4.00 per share, or $6.8 million in the
aggregate.
  The
Preferred Stock is redeemable by the Company at any time on or after the first
anniversary of the issuance date at a price of $4.00 per share plus any accrued
or declared but unpaid dividends (“Redemption Price”). The holders of the
Preferred Stock have a right, exercisable at any time on or after the third
anniversary (December 29, 2010) of the issuance date by a majority vote of the
Preferred Stock holders with at least 30 days’ written notice, to require the
Company to redeem the Preferred Stock at the Redemption Price.  If such a
redemption is made, the Company would be obligated to pay the $6.8 million in
cash.




The
following table represents the Company’s known contractual obligations as of
January 1, 2010 (in thousands):





Payments Due by PeriodContractual Obligations
                          
                          Total
                          
                          
                          Less
                            Than
                            1 Year
                          
                          
                          1-3
                            Years
                          
                          
                          3-5
                            Years
                          
                          
                          More
                            Than
                            5 YearsNote
      payable
                          
                          $
                          5,000
                          
                          
                          $
                          5,000
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —Interest
      on note payable
                          
                          
                          988
                          
                          
                          
                          988
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Line
      of credit
                          
                          
                          2,160
                          
                          
                          
                          2,160
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Capital
      lease obligations
                          
                          
                          1,983
                          
                          
                          
                          971
                          
                          
                          
                          833
                          
                          
                          
                          179
                          
                          
                          
                          —Operating
      lease obligations
                          
                          
                          9,282
                          
                          
                          
                          2,575
                          
                          
                          
                          3,499
                          
                          
                          
                          3,208
                          
                          
                          
                          —Pension
      obligations
                          
                          
                          1,579
                          
                          
                          
                          67
                          
                          
                          
                          184
                          
                          
                          
                          247
                          
                          
                          
                          1,081Open
      purchase orders
                          
                          
                          906
                          
                          
                          
                          906
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
                          
                          $
                          21,898
                          
                          
                          $
                          12,667
                          
                          
                          $
                          4,516
                          
                          
                          $
                          3,634
                          
                          
                          $
                          1,081


50


Critical
Accounting Policies




The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of sales and expenses during
the reporting period. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, allowances for doubtful accounts and sales
return, inventory reserves and income taxes, among others.  Our
estimates are based on historical experiences, market trends and financial
forecasts and projections, and on various other assumptions that management
believes are reasonable under the circumstances and at that certain point in
time. Actual results may differ, significantly at times, from these if actual
conditions differ from our assumptions.




We
believe the following represent our critical accounting policies.




·
            Revenue Recognition and
      Accounts Receivable.   We recognize revenue when realized
      or realizable and earned, which is when the following criteria are met:
      persuasive evidence of an arrangement exists; delivery has occurred; the
      sale price is fixed and determinable; and collectability is reasonably
      assured in accordance with ASC 605-10-S99 (formerly Staff Accounting
      Bulletin No. 104 “Revenue Recognition” (“SAB 104”).  The Company
      records revenue from non-consignment product sales when title and risk of
      ownership has been transferred, which is typically at shipping point,
      except for our STAAR Japan subsidiary, which is typically recognized when
      the product is received by the customer.  STAAR Japan does not
      have significant deferred revenues as delivery to the customer is
      generally made within the same or the next date of shipment. Our products
      are marketed to ophthalmic surgeons, hospitals, ambulatory surgery centers
      or vision centers, and distributors. IOLs may be offered to surgeons and
      hospitals on a consignment basis.  We maintain title and risk of
      loss of consigned inventory.  In accordance with ASC 605-10, we
      recognize revenue for consignment inventory when we are informed the IOL
      has been implanted and not upon shipment to the surgeon. We believe our
      revenue recognition policies are appropriate.We
      ship ICLs only for use by surgeons who have already been certified, or for
      use in scheduled training surgeries.
              
              For
      all sales, we are the Principal in the transaction in accordance with ASC
      605-45-45 (formerly Emerging Issues Task Force (“EITF”) Issue
      No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an
      Agent”) as we, among other factors, bear general inventory risk, credit
      risk, have latitude in establishing the sales price and bear authorized
      sales returns inventory risk and therefore, sales are recognized gross
      with corresponding cost of sales in the statement of operations instead of
      a single, net amount.  Cost of sales includes cost of
      production, freight and distribution, royalties, and inventory provisions,
      net of any purchase discounts.
              
              We
      present sales tax we collect from our customers on a net basis (excluded
      from our revenues), a presentation which is prescribed as one of two
      methods available under ASC 605-45 (formerly EITF Issue No. 06-03,
      “How Sales Taxes Collected from Customers and Remitted to Governmental
      Authorities Should Be Presented in the Income Statement (That Is, Gross
      Versus Net Presentation).”
              
              We
      generally permit returns of product if the product is returned within the
      time allowed by our return policies, and in good condition. We provide
      allowances for sales returns based on an analysis of our historical
      patterns of returns matched against the sales from which they originated.
      While such allowances have historically been within our expectations, we
      cannot guarantee that we will continue to experience the same return rates
      that we have in the past.  Measurement of such returns requires
      consideration of, among other factors, historical returns experience and
      trends, including the need to adjust for current conditions and product
      lines, the entry of a competitor, and judgments about the probable effects
      of relevant observable data. We consider all available information in our
      quarterly assessments of the adequacy of the allowance for sales
      returns.  Sales are reported net of estimated
      returns.  If the actual sales returns are higher or lower than
      estimated by management, additional reduction or increase in sales may
      occur.


51





We
      maintain provisions for uncollectible accounts based on estimated losses
      resulting from the inability of our customers to remit payments. If the
      financial condition of customers were to deteriorate, thereby resulting in
      an inability to make payments, additional allowances could be required. We
      perform ongoing credit evaluations of our customers and adjust credit
      limits based upon customer payment history and current creditworthiness,
      as determined by our review of our customers’ current credit information.
      We continuously monitor collections and payments from our customers and
      maintain a provision for estimated credit losses based upon our historical
      experience and any specific customer collection issues that have been
      identified. Amounts determined to be uncollectible are written off against
      the allowance for doubtful accounts. While such credit losses have
      historically been within our expectations and the provisions established,
      we cannot guarantee that we will continue to experience the same credit
      loss rates that we have in the past. Measurement of such losses requires
      consideration of historical loss experience, including the need to adjust
      for current conditions, and judgments about the probable effects of
      relevant observable data, including present economic conditions such as
      delinquency rates and financial health of specific customers. We consider
      all available information in our assessments of the adequacy of the
      reserves for uncollectible accounts.·
            Stock-Based
      Compensation.  We account for the issuance of stock
      options to employees and directors in accordance with ASC 718-10 (formerly
      SFAS No. 123R and the issuance of stock options and warrants for services
      from non-employees in accordance with SFAS No. 123, “Accounting for
      Stock-Based Compensation,” and ASC 718-10-S99 (formerly Financial
      Accounting Standards Board (FASB) Emerging Issues Task Force Issue (EITF)
      No. 96-18, “Accounting For Equity Instruments That Are Issued To Other
      Than Employees For Acquiring Or In Conjunction With Selling Goods Or
      Services,”) by estimating the fair value of options and warrants issued
      using the Black-Scholes pricing model. This model’s calculations include
      the exercise price, the market price of shares on grant date, risk-free
      interest rates, expected term of the option or warrant, expected
      volatility of our stock and expected dividend yield. The amounts recorded
      in the financial statements for share-based expense could vary
      significantly if we were to use different
  assumptions.




·
            Accounting for
      Warrants.We account for the issuance of Company
      derivative equity instruments such as the warrants, in accordance with ASC
      815-40 (formerly Emerging Issues Task Force Issue No. 00-19, “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled
      in, a Company’s Own Stock” (“EITF 00-19”). We agreed to use our best
      efforts to register and maintain registration of the common shares
      underlying certain warrants (the “Warrant Shares”) that were issued by us
      with debt instruments, so that the warrant holder may freely sell the
      Warrant Shares if the warrant is exercised, and we agreed that in any
      event we would secure effective registration within a certain time period
      after issuance (typically up to five months from issuance). In addition,
      while the relevant warrant agreement does not require cash settlement if
      we do not maintain continuous registration of certain Warrant Shares, the
      agreement does not specifically preclude cash settlement. As a result ASC
      815-40 requires us to assume that in the absence of continuous effective
      registration we may be required to settle some of these warrants for cash
      when they are exercised. Accordingly, our agreement to register and
      maintain registration of certain Warrant Shares without express terms for
      settlement in the absence of continuous effective registration is presumed
      to create a liability to settle these warrants in cash, requiring
      liability classification. We have issued other warrants under another
      agreement that expressly provides that if we fail to satisfy registration
      requirements we will be obligated only to issue additional common stock as
      the holder’s sole remedy, with no possibility of settlement in cash. In
      this circumstance, we account for those warrants as equity because
      additional shares are the only form of settlement available to the holder.
      We use the Black-Scholes option pricing model as the valuation model to
      estimate the fair value of those warrants. We evaluate the balance sheet
      classification of the warrants during each reporting period. Expected
      volatilities are based on historical volatility of our stock. The expected
      life of the warrant is determined by the amount of time remaining on the
      original six-year term of the relevant warrant agreement. The risk-free
      rate of return for periods within the contractual life of the warrant is
      based on the U.S. Treasury yield curve in effect at each reporting period.
      Any gains or losses resulting from the changes in fair value of the
      warrants classified as a liability from period to period are included as
      an increase or decrease of other income (expense). The warrants that are
      accounted for as equity are only valued on the issuance date and not
      subsequently revalued.


52


·
              Income
      Taxes.We
      account for income taxes under the asset and liability method, whereby
      deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective
      tax bases. Deferred tax assets and liabilities are measured using enacted
      tax rates expected to apply in the years in which those temporary
      differences are expected to be recovered or settled. The effect on
      deferred tax assets and liabilities of a change in tax rates is recognized
      in income in the period that includes the enactment date. We evaluate the
      need to establish a valuation allowance for deferred tax assets based on
      the amount of existing temporary differences, the period in which they are
      expected to be recovered and expected levels of taxable income. A
      valuation allowance to reduce deferred tax assets is established when it
      is “more likely than not” that some or all of the deferred tax assets will
      not be realized. As of January 1, 2010, the valuation allowance fully
      offsets the value of deferred tax assets on the Company’s balance sheet.
      Net increases to the valuation allowance were $3,093,000, $2,289,000 and
      $4,983,000 in 2009, 2008 and 2007,
  respectively.
 
 We
      expect to continue to maintain a full valuation allowance on future tax
      benefits until, and if, an appropriate level of profitability is
      sustained, or we are able to develop tax strategies that would enable us
      to conclude that it is more likely than not that a portion of our deferred
      tax assets would be realizable.
 
 In
      the normal course of business, the Company is regularly audited by
      federal, state and foreign tax authorities, and is periodically challenged
      regarding the amount of taxes due. These challenges include questions
      regarding the timing and amount of deductions and the allocation of income
      among various tax jurisdictions. We believe that our tax positions comply
      with applicable tax law and intend to defend our positions. Our effective
      tax rate in a given financial statement period could be impacted if we
      prevailed in matters for which reserves have been established, or were
      required to pay amounts in excess of established
  reserves.
 
 ·
              Inventories.We provide estimated
      inventory allowances for excess, slow moving, expiring and obsolete
      inventory as well as inventory whose carrying value is in excess of net
      realizable value. These reserves are based on current assessments about
      future demands, market conditions and related management initiatives. If
      market conditions and actual demands are less favorable than those
      projected by management, additional inventory write-downs may be required.
      We value our inventory at the lower of cost or net realizable market
      values. We regularly review inventory quantities on hand and record a
      provision for excess and obsolete inventory based primarily on the
      expiration of products with a shelf life of less than four months,
      estimated forecasts of product demand and production requirements for the
      next twelve months. Several factors may influence the realizability of our
      inventories, including decisions to exit a product line, technological
      change and new product development. These factors could result in an
      increase in the amount of obsolete inventory quantities on hand.
      Additionally, estimates of future product demand may prove to be
      inaccurate, in which case the provision required for excess and obsolete
      inventory may be understated or overstated. If in the future, we determine
      that our inventory was overvalued, we would be required to recognize such
      costs in cost of sales at the time of such determination. Likewise, if we
      determine that our inventory was undervalued, cost of sales in previous
      periods could have been overstated and we would be required to recognize
      such additional operating income at the time of sale. While such inventory
      losses have historically been within our expectations and the provisions
      established, we cannot guarantee that we will continue to experience the
      same loss rates that we have in the past. Therefore, although we make
      every effort to ensure the accuracy of forecasts of future product demand,
      including the impact of planned future product launches, any significant
      unanticipated changes in demand or technological developments could have a
      significant impact on the value of our inventory and our reported
      operating results.
 
 ·
              Impairment of
      Long-Lived Assets.Intangible and other
      long lived-assets are reviewed for impairment whenever events such as
      product discontinuance, plant closures, product dispositions or other
      changes in circumstances indicate that the carrying amount may not be
      recoverable. Certain factors which may occur and indicate that an
      impairment exists include, but are not limited to the following:
      significant underperformance relative to expected historical or projected
      future operating results; significant changes in the manner of the
      Company’s use of the underlying assets; and significant adverse industry
      or market economic trends. In reviewing for impairment, we compare the
      carrying value of such assets to the estimated undiscounted future net
      cash flows expected from the use of the assets and their eventual
      disposition. In the event that the carrying value of assets is determined
      to be unrecoverable, we would estimate the fair value of the assets and
      record an impairment charge for the excess of the carrying value over the
      fair value. The estimate of fair value requires management to make a
      number of assumptions and projections, which could include, but would not
      be limited to, future revenues, earnings and the probability of certain
      outcomes and scenarios. Our policy is consistent with current accounting
      guidance as prescribed by ASC 360-10-35 (formerly SFAS No. 144,Accounting
      for the Impairment or Disposal of Long-Lived Assets.)
  53





·
              Goodwill.Goodwill, which has
      an indefinite life, is not amortized, but instead is subject to periodic
      testing for impairment. Intangible assets determined to have definite
      lives are amortized over their remaining useful lives. Goodwill is tested
      for impairment on an annual basis or between annual tests if an event
      occurs or circumstances change that would reduce the fair value of a
      reporting unit below its carrying amount. Certain factors which may occur
      and indicate that an impairment exists include, but are not limited to the
      following: significant underperformance relative to expected historical or
      projected future operating results; significant changes in the manner of
      our use of the underlying assets; and significant adverse industry or
      market economic trends. In the event that the carrying value of assets is
      determined to be unrecoverable, we would estimate the fair value of the
      reporting unit and record an impairment charge for the excess of the
      carrying value over the fair value. The estimate of fair value requires
      management to make a number of assumptions and projections, which could
      include, but would not be limited to, future revenues, earnings and the
      probability of certain outcomes and scenarios, including the use of
      experts.  Our policy is consistent with current accounting
      guidance as prescribed by ASC 350-20-35 (formerly SFAS No. 142,Goodwill and
      Intangible Assets.
      During the fourth quarter of fiscal 2009, we performed our annual
      impairment test and determined that our goodwill was not impaired. As of
      January 1, 2010, the carrying value of goodwill was $7.9
      million.  On March 2, 2010, we completed the sale of all of our
      interests in Domilens and included in the net assets disposed was the
      Domilens goodwill balance of approximately $6.3
      million.
 
 ·
              Definite-Lived
      Intangible Assets.We also have other
      intangible assets mainly consisting of patents and licenses, developed
      technologies and customer relationships, with a gross book value of $13.5
      million and accumulated amortization of $9.3 million as of January 1,
      2010. We capitalize the cost of acquiring patents and
      licenses.  We acquired certain customer relationships and
      developed technologies in the acquisition of our STAAR Japan subsidiary
      which was completed on December 29, 2007. Amortization is computed on the
      straight-line basis over the estimated useful lives of the assets, since
      the pattern in which the economic benefits realized cannot be reasonably
      determined, which are based on legal, contractual and other provisions,
      and range from 10 to 21 years for patents and licenses, 10 years for
      customer relationships and 3 to 10 years for developed
      technology.   We review intangible assets for impairment in
      the assessment discussed above regardingImpairment of
      Long-Lived Assets.Based on this assessment we determined that certain of our patents had
      shorter useful lives than had been originally estimated, and therefore,
      the carrying value of these patents was overstated by $0.6
      million.  We recorded this $0.6 million charge during the fourth
      quarter of fiscal year ended 2009 to adjust the net book value and have
      included it in other operating
      expenses (recovery),
net
 
 ·
              Employee
      Defined Benefit Plans.We have maintained a passive
      pension plan (the “Swiss Plan”) covering employees of its Swiss
      subsidiary.  The Company concluded that the features of the
      Swiss Plan conform to the features of a defined benefit
      plan.  As a result, we adopted the recognition and disclosure
      requirements of ASC 715-20-65 Transition Guidance (formerly Statement of
      Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting
      for Defined Benefit Pension and Other Postretirement Plans,” an amendment
      of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”) on October 1,
      2007).
  54
  In
connection with our acquisition of the remaining interest in STAAR Japan, Inc.,
we assumed the net pension liability under STAAR Japan’s noncontributory defined
benefit pension plan substantially covering all of the employees of STAAR
Japan.  STAAR Japan adopted the recognition and disclosure
requirements of ASC 715-30 on December 29, 2007, the date of the
acquisition.
 
 ASC
715-30 requires recognition of the funded status, or difference between the fair
value of plan assets and the projected benefit obligations of the pension plan
on the statement of financial position with a corresponding adjustment to
accumulated other comprehensive income. If the projected benefit obligation
exceeds the fair value of plan assets, then that difference or unfunded status
represents the pension liability. We record a net periodic pension cost in the
consolidated statement of operations. The liabilities and annual income or
expense of both plans are determined using methodologies that involve several
actuarial assumptions, the most significant of which are the discount rate, and
the expected long-term rate of asset return (based on the market-related value
of assets).  The fair values of plan assets are determined based on
prevailing market prices.  The amounts recorded in the financial
statements pertaining to our employee defined benefit plans could vary
significantly if we were to use different assumptions.
 
 In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements” (“SFAS No. 157”), now accounted for under ASC 820-10-35, which
clarifies the definition of fair value, establishes a framework for measuring
fair value and expands the disclosures about fair value measurements. ASC
820-10-35 is effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years.  The Company adopted
ASC 820-10-35 on December 29, 2007 for the measurement of the plan assets’ fair
value and disclosures relevant to our defined benefit plans which we have made
pursuant to ASC 820-10-35.
 
 ·
                Redeemable,
      Convertible Preferred Stock: Under our Certificate of
      Incorporation we had 10,000,000 shares of “blank check” preferred stock,
      which our Board of Directors is authorized to issue with such rights,
      preferences and privileges as the Board may determine.  On
      October 22, 2007, our Board approved the designation of 1,700,000 shares
      of the preferred stock as Series A Redeemable Convertible Preferred Stock
      (“Preferred Stock”) to be issued in connection with the acquisition of the
      50% interest in Canon Staar Co., Inc. which was consummated on December
      29, 2007.  On December 29, 2007, we issued the 1,700,000
      shares of Preferred Stock to the Canon companies as partial consideration
      for their shares of Canon Staar Co., Inc. at an estimated fair value of
      $4.00 per share, or $6.8 million in the
  aggregate.
 
 The fair
value of the Preferred Stock was determined on the issuance date by us with the
assistance of a valuation specialist using the Binomial Tree option valuation
model.  This model considers the Preferred Stock to be a derivative
asset of our common stock where the preferred stockholder has options to choose
certain payoffs that maximize returns and therefore maximize the value of the
preferred stock.  The payoff available to the preferred stockholder is
contingent on the future market value of our common stock.  Therefore
the model, based on certain significant management assumptions, analyzes various
payoff patterns for different possible paths that might be followed by the
common stock price over the life of the Preferred Stock until the automatic
conversion on the fifth anniversary of the issuance date.  The amounts
recorded in the consolidated financial statements for our Preferred Stock could
vary significantly if we were to use different assumptions.
 
 Because
after the third anniversary of issuance the Preferred Stock is redeemable at the
option of the holders, which is not within our control, we have presented the
Preferred Stock in the mezzanine section of the consolidated balance sheet in
accordance with the provisions of ASC 210-10-S99 (formerly EITF Abstracts, Topic
No. D-98 (“Topic D-98”), “Classification and Measurement of Redeemable
Securities”).  Because the Preferred Stock fair value recorded on the
issuance date approximates the redemption price, no further significant
accretion will be required by us to redemption value and no subsequent
revaluation will be necessary so long as the Preferred Stock is still considered
a temporary equity instrument.
  55
 
 Foreign
Exchange
  Management
does not believe that the fluctuation in the value of the dollar in relation to
the currencies of its suppliers or customers in the last three fiscal years had
adversely affected our ability to purchase or sell products at agreed upon
prices. No assurance can be given, however, that adverse currency exchange rate
fluctuations will not occur in the future, which could significantly affect our
operating results. We do not engage in hedging transactions to offset changes in
currency or fluctuations in foreign currencies.
  Inflation
  Management
believes inflation has not had a significant impact on our operations during the
past three years.
  Recent
Accounting Pronouncements
  In June
2009, the FASB issued FASB Accounting Standards Update (“ASU”) 2009-01 “Topic
105 – Generally accepted Accounting Principles amendments based on the Statement
of Financial Accounting Standards No. 168 - The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles.” ASU
2009-01 establishes the FASB Accounting Standards Codification as the single
source of authoritative nongovernmental U.S. generally accepted accounting
principles. The Company adopted ASU 2009-01 during the quarter ended October 2,
2009.
  In
October 2009, the FASB issued an update to ASC 605 regarding revenue
recognition. This ASU No. 2009-13 (ASU 2009-13), provides guidance on
whether multiple deliverables in a revenue arrangement exist, how the
arrangement should be separated, and the consideration allocated.  ASU
2009-13 eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. ASU 2009-13 is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15,
2010 or STAAR’s fiscal year 2011. Early adoption is permitted if the Company
elects to adopt ASU No. 2009-14 concurrently.  The Company does not
expect the adoption of ASU 2009-13 will be material to its consolidated
financial statements.
  In
October 2009, the FASB issued an update to ASC 985-605. This ASU 2009-14,
amends the scope of the software revenue guidance in ASC 985-605 to exclude
tangible products containing software components and non-software components
that function together to deliver the tangible product’s essential
functionality. ASU 2009-14 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010 or STAAR’s fiscal year 2011. Early adoption is permitted if
the Company elects to adopt ASU 2009-13 concurrently. The Company does not
expect the adoption of ASU 2009-14 will be material to its consolidated
financial statements.
 
 In
January 2010, the FASB issued an update to ASC 820.  This ASU 2010-06,
Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements  requires entities to disclose separately the
significant transfers in and out of Levels 1 and 2 fair value measurements and
describe the reasons for the transfers.  It also requires
reconciliation of activity in Level 3 fair value measurements between beginning
and ending balances, such as purchases, sales, issuances, and settlements on a
gross basis instead of a net number.  Finally, it clarifies existing
disclosures for levels of disaggregation, that is to provide fair value
measurement disclosures for each class of asset and liability and to provide
disclosures around the inputs used and valuation techniques to measure fair
value for both recurring and non recurring fair value measurements that fall
within Levels 2 or 3, which also applies to defined benefit plans and related
disclosures in plan assets.  This ASU 2010-06 is effective for interim
and annual reporting periods beginning after December 15, 2009 (fiscal year
2010), except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15,
2010 (fiscal year 2011), and for interim periods within those fiscal
years.  The Company believes the adoption of this ASU 2010-06 will not
have a material impact to its consolidated financial
statements.
  56
  In
February 2010, the FASB issued an update to ASC 855.  This ASU
2010-09, Subsequent
Events, states that an entity that is a SEC filer is required to evaluate
subsequent events through the date that the financial statements are issued
however is not required to disclose that date.  ASU 2010-09 is
effective upon issuance and the Company has conformed its disclosure to this ASU
in the accompanying financial statements.
  Item 7A.  Quantitative
and Qualitative Disclosures About Market Risk
  In the
normal course of business, our operations are exposed to risks associated with
fluctuations in interest rates and foreign currency exchange rates. The Company
manages its risks based on management’s judgment of the appropriate trade-off
between risk, opportunity and costs and does not generally enter into interest
rate or foreign exchange rate hedge instruments.
  Interest rate risk.
  As of January 1, 2010, STAAR had 200 million Yen of foreign debt
that bears an interest rate that is equal to at an interest rate equal to the
Tokyo short-term prime interest rate (approximately 1.475% as of January 1,
2010) plus 1.125% and thus, our interest expense would fluctuate with any change
in the prime interest rate.  If the Tokyo prime rate were to increase
or decrease by 1% for the year, our annual interest expense would increase or
decrease by approximately 2,000,000 Japanese yen or approximately $22,000 based
on the exchange rate in effect at January 1, 2010.  STAAR’s $5 million
principal amount of U.S. indebtedness under the Broadwood note bears a fixed
interest rate of 20% and may be prepaid without penalty which is the maximum
that can be charged under the terms of the note.
  Foreign currency risk.
  Fluctuations in the rate of exchange between the U.S. dollar and
foreign currencies in which we transact business could adversely affect our
financial results.  Approximately 53% and 54% of our net sales were
denominated in foreign currencies in 2009 and 2008,
respectively.  Cost of goods sold and selling, general, and
administrative expenses that correspond with these sales are largely denominated
in the same currency, thereby limiting our transaction risk
exposure.  For the year ended January 1, 2010, our German subsidiary
reported 17.5 million Euro in net sales.  A 10% increase in the
foreign currency exchange rate between the U.S. dollar and the Euro would, as a
result of a weakened dollar, result in an approximate $2.5 million translation
gain.   A 10% decrease in the foreign currency exchange rate
between the U.S. dollar and the Euro would, as a result of a stronger dollar,
result in an approximate $2.5 million translation loss.  If we price
our products in U.S. dollars and competitors price their products in local
currency, an increase in the relative strength of the U.S. dollar could result
in our price not being competitive in a market where business is transacted in
local currency.
  Our
international subsidiaries operate in and are net recipients of currencies other
than the U.S. dollar and, as a result, our sales benefit from a weaker dollar
and are reduced by a stronger dollar relative to major currencies worldwide
(primarily, the Euro, Japanese Yen, Swiss Franc and Australian dollar). Of our
net sales denominated in foreign currencies in 2009 and 2008, approximately 60%
and 63%, respectively, were denominated in the Euro and approximately 35% and
32%, respectively, were denominated in the Japanese Yen.  Accordingly,
changes in exchange rates, and particularly the strengthening of the U.S.
Dollar, may negatively affect our consolidated sales and gross profit as
expressed in U.S. dollars.  Fluctuations during any given reporting
period result in the re-measurement of our foreign currency denominated cash,
receivables, and payables, generating currency transaction gains or losses and
are reported in total other expenses in our consolidated statements of
operations.  We recorded $0 and $696,000 of foreign currency
transaction losses in 2009 and 2008, respectively.  As a result of the
divestiture of our German subsidiary on March 2, 2010, we have significantly
reduced our foreign currency risk related to the Euro.  The Company
does not hedge its foreign currency exposure.  In the normal course of
business, we also face risks that are either non-financial or non-quantifiable.
Such risks include those set forth in “Item 1A. — Risk
Factors.”
  Item 8.  Financial Statements and
Supplementary Data
  Financial
Statements and the Report of Independent Registered Public Accounting Firm are
filed with this Annual Report on Form 10-K in a separate section following Part
IV, as shown on the index under Item 15 of this Annual Report.
  Item 9.  Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
  Not
applicable.
  57
  Item 9A.  Controls
and Procedures
  Attached
as exhibits to this Annual Report on Form 10-K are certifications of STAAR’s
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are
required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). This “Controls and Procedures” section includes
information concerning the controls and controls evaluation referred to in the
certifications. Page F-3 of this Annual Report on Form 10-K sets forth the
report of BDO Seidman, LLP, our independent registered public accounting firm,
regarding its audit of STAAR’s internal control over financial reporting. This
section should be read in conjunction with the certifications and the BDO
Seidman, LLP report for a more complete understanding of the topics
presented.
  Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our CEO
and CFO, of the effectiveness of the design and operation of the disclosure
controls and procedures of STAAR Surgical Company and its subsidiaries (the
“Company”).  Based on that evaluation, our CEO and CFO concluded, as
of the end of the period covered by our Form 10-K for the fiscal year ended
January 1, 2010, that our disclosure controls and procedures were
effective.  For purposes of this statement, the term “disclosure
controls and procedures” means controls and other procedures of the Company that
are designed to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act (15
U.S.C. 78a et seq) is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
  Management
Report on Internal Control over Financial Reporting
  The
Company’s management, including our Chief Executive Officer and Chief Financial
Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Exchange Act Rule
13a-15(f) and 15d-15(f)) for STAAR Surgical Company and its subsidiaries (the
“Company”). The Company’s internal control system was designed to provide
reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America.
  Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changing conditions, effectiveness of
internal control over financial reporting may vary over time. The Company’s
processes contain self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
  Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of January 1, 2010, based on the criteria for effective internal
control described in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
its assessment, management concluded that the Company’s internal control over
financial reporting was effective as of January 1, 2010.
  BDO
Seidman LLP, the independent registered public accounting firm that audited and
reported on the consolidated financial statements of the Company contained in
this report on Form 10-K, was engaged to attest to and report on the
effectiveness of the Company’s internal control over financial reporting. Its
report is included herein.
  Changes
in Internal Control over Financial Reporting
  There was
no change during the fiscal quarter ended January 1, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
  58
  Item 9B.  Other
Information
  Not
applicable.
  PART III
  Item 10.  Directors
and Executive Officers of the Registrant
  The
information in Item 10 is incorporated herein by reference to the section
entitled “Proposal One — Election of Directors” contained in the proxy
statement (the “Proxy Statement”) for the 2010 annual meeting of stockholders to
be filed with the Securities and Exchange Commission within 120 days of the
close of the fiscal year ended January 1, 2010.
  Item 11.  Executive
Compensation
  The
information in Item 11 is incorporated herein by reference to the section
entitled “Proposal One — Election of Directors” contained in the Proxy
Statement.
  Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  The
information in Item 12 is incorporated herein by reference to the section
entitled “General Information — Security Ownership of Certain
Beneficial Owners and Management” and “Proposal One — Election of
Directors” contained in the Proxy Statement.
  Item 13.  Certain
Relationships and Related Transactions
  The
information in Item 13 is incorporated herein by reference to the section
entitled “Proposal One — Election of Directors” contained in the Proxy
Statement.
  Item 14.  Principal
Accountant Fees and Services
  The
information in Item 14 is incorporated herein by reference to the section
entitled “Proposal Two — Ratification of the Appointment of
Independent Registered Public Accounting Firm” contained in the Proxy
Statement.
  59
  PART IV
  Item 15.  Exhibits
and Financial Statement Schedules
 
 Page(1)
                                  Financial
      statements required by Item 15 of this form are filed as a separate
      part of this report following Part IV:Report
      of Independent Registered Public Accounting Firm
                                  
                                  F-2Report
      of Independent Registered Public Accounting Firm
                                  
                                  F-3Consolidated
      Balance Sheets at January 1, 2010 and at January 2, 2009
                                  
                                  F-4Consolidated
      Statements of Operations for the years ended January 1, 2010, January 2,
      2009, and December 28, 2007
                                  
                                  F-5Consolidated
      Statements of Changes in Stockholders’ Equity and Comprehensive Loss for
      the years ended January 1, 2010, January 2, 2009, and December 28,
      2007
                                  
                                  F-6Consolidated
      Statements of Cash Flows for the years ended January 1, 2010, January 2,
      2009, and December 28, 2007
                                  
                                  F-7Notes
      to Consolidated Financial Statements
                                  
                                  F-8(2)
                                  Schedules
      required by Regulation S-X are filed as an exhibit to this
      report:I.
      Independent Registered Public Accounting Firm Report on
      Schedule
                                  
                                  F-45II.
      Schedule II — Valuation and Qualifying Accounts and
      Reserves
                                  
                                  F-46
 
 Schedules
not listed above have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements and the
notes thereto.
  (3)  Exhibits
  3.1
                  
                  Certificate
      of Incorporation, as amended to date(1)3.2
                  
                  By-laws,
      as amended to date(2)4.1
                  
                  Certificate
      of Designation of Series A Convertible Preferred Stock
  (1)†4.2
                  
                  1991
      Stock Option Plan of STAAR Surgical Company(3)†4.3
                  
                  1998
      STAAR Surgical Company Stock Plan, adopted April 17,
      1998(4)4.4
                  
                  Form
      of Certificate for Common Stock, par value $0.01 per
      share(5)†4.5
                  
                  2003
      Omnibus Equity Incentive Plan, as Amended, and form of Option
      Grant and Stock Option Agreement(6)10.3
                  
                  Indenture
      of Lease dated September 1, 1993, by and between the Company and FKT
      Associates and First through Third Additions Thereto(7)10.4
                  
                  Second
      Amendment to Indenture of Lease dated September 21, 1998, between the
      Company and FKT Associates(7)10.5
                  
                  Third
      Amendment to Indenture of Lease dated October 13, 2003, by and
      between the Company and FKT Associates(8)10.6
                  
                  Fourth
      Amendment to Indenture of Lease dated September 30, 2006, by and between
      the Company and FKT Associates(1)10.7
                  
                  Indenture
      of Lease dated October 20, 1983, between the Company and Dale E.
      Turner and Francis R. Turner and First through Fifth Additions
      Thereto(9)10.8
                  
                  Sixth
      Lease Addition to Indenture of Lease dated October 13, 2003, by and
      between the Company and Turner Trust UTD Dale E. Turner March 28,
      1984(8)10.9
                  
                  Seventh
      Lease Addition to Indenture of Lease dated September 30, 2006, by and
      between the Company and Turner Trust UTD Dale E. Turner March 28,
      1984(1)10.10
                  
                  Amendment
      No. 1 to Standard Industrial/Commercial Multi-Tenant Lease dated
      January 3, 2003, by and between the Company and California Rosen
      LLC(8)10.11
                  
                  Lease
      Agreement dated July 12, 1994, between STAAR Surgical AG and
      Calderari and Schwab AG/SA(10)10.12
                  
                  Supplement #1
      dated July 10, 1995, to the Lease Agreement of July 12, 1994,
      between STAAR Surgical AG and Calderari and Schwab
    AG/SA(10)10.13
                  
                  Supplement #2
      dated August 2, 1999, to the Lease Agreement of July 12, 1994,
      between STAAR Surgical AG and Calderari and Schwab
    AG/SA(10)10.14
                  
                  Commercial
      Lease Agreement dated November 29, 2000, between Domilens GmbH and
      DePfa Deutsche Pfandbriefbank
AG(10)
  60
 10.15
                
                Patent
      License Agreement, dated May 24, 1995, with Eye Microsurgery
      Intersectoral Research and Technology Complex(11)10.16
                
                Patent
      License Agreement, dated January 1, 1996, with Eye Microsurgery
      Intersectoral Research and Technology Complex(12)†10.23
                
                Stock
      Option Plan and Agreement for Chief Executive Officer dated
      November 13, 2001, between the Company and David
      Bailey(13)†10.24
                
                Stock
      Option Certificate dated August 9, 2001, between the Company and
      David Bailey(10)†10.25
                
                Stock
      Option Certificate dated January 2, 2002, between the Company and
      David Bailey(10)†10.27
                
                Amended
      and Restated Stock Option Certificate dated February 13, 2003,
      between the Company and David Bailey(10)†10.42
                
                Form
      of Indemnification Agreement between the Company and certain officers and
      directors(10)†10.47
                
                Employment
      Agreement dated May 5, 2004, between the ConceptVision Australia Pty
      Limited CAN 006 391 928 and Philip Butler Stoney(11)†10.48
                
                Employment
      Agreement dated May 5, 2004, between the ConceptVision Australia Pty
      Limited CAN 006 391 928 and Robert William Mitchell(11)10.58
                
                Loan
      Agreement between Deutsche Postbank AG and Domilens GmbH dated
      August 30, 2005(12)10.59
                
                Standard
      Industrial/Commercial Multi Tenant Lease — Gross dated
      October 6, 2005, entered into between the Company and Z & M
      LLC(12)10.61
                
                Addendum
      No. 1 to Commercial Leases between Domilens GmbH and DePfa Deutsche
      Pfandbriefbank AG related to Domilens headquarters facilities, dated as of
      December 13, 2005. (13)10.63
                
                Promissory
      Note between STAAR Surgical Company and Broadwood Partners, L.P., dated
      March 21, 2007. (14)10.64
                
                Warrant
      Agreement between STAAR Surgical Company and Broadwood Partners, L.P.,
      dated March 21, 2007. (14)10.65
                
                Share
      Purchase Agreement dated October 25, 2007 by and between Canon Marketing
      Japan Inc. and Canon Inc. as Sellers and STAAR Surgical Company as Buyer.
      (15)†10.66
                
                Executive
      Employment Agreement by and between the Company and Barry G. Caldwell,
      dated as of November 27, 2007. (16)†10.67
                
                Executive
      Employment Agreement by and between the Company and David Bailey, dated as
      of November 27, 2007.(16)10.68
                
                Senior
      Promissory Note between STAAR Surgical Company and Broadwood Partners,
      L.P., dated December 14, 2007. (17)10.69
                
                Warrant
      Agreement between STAAR Surgical Company and Broadwood Partners, L.P.,
      dated December 14, 2007.(17)†10.70
                
                Amended
      and Restated Executive Employment Agreement by and between the Company and
      Barry G. Caldwell, dated December 31, 2008.(6)10.71
                
                Temporary
      Waiver Agreement, dated April 2, 2009, by and between Broadwood Partners,
      L.P. and the Company.(18)10.72
                
                Amended
      and Restated Senior Secured Promissory Note between the Company and
      Broadwood Partners, L.P., dated April 13, 2009.(19)10.73
                
                Security
      Agreement by and between the Company and Broadwood Partners, L.P., dated
      April 13, 2009.(20)10.74
                
                Stock
      Purchase Agreement.(20)10.75
                
                Amendment
      Agreement between the Company and Broadwood Partners L.P., dated June 24,
      2009.(20)†10.76
                
                Employment
      Agreement effective November 22, 2002 by and between the Company and
      Deborah Andrews.(21)†10.77
                
                Letter
      of the Company dated April 11, 2007 to Deborah Andrews, Vice President and
      Chief Financial Officer, regarding compensation.(21)†10.78
                
                Service
      Agreement, dated October 4, 2007, by and between the Company and Dr.
      Reinhard Pichl.(21)†10.79
                
                Employment
      Agreement, dated December 16, 2004, by and between the Company and Hans
      Blickensdoerfer.(21)10.80
                
                Credit
      Agreement between STAAR Japan Inc. with Mizuho Bank Inc., dated October
      31, 2007.(21)10.81
                
                Amended
      Credit Agreement between STAAR  Japan, Inc. and Mizuho Bank
      Ltd., dated June 30, 2009.(21)10.82
                
                Basic
      Agreement on Unsterilized Intraocular Lens Sales Transactions between
      Canon Staar Co., Inc. and Nidek Co., Ltd., dated May 23,
      2005.*10.83
                
                Basic
      Agreement on Injector Product Sales Transactions between Canon Staar Co.,
      Inc. and Nidek Co., Ltd., dated May 23, 2005.*10.84
                
                Memorandum
      of Understanding Concerning Basic Agreements for Purchase and Sale between
      STAAR Japan Inc. and Nidek Co., Ltd., dated December 25,
      2008.*10.85
                
                Acrylic
      Preset Supply Warranty Agreement between STAAR Japan Inc. and Nidek Co.,
      Ltd., dated December 25, 2008.*14.1
                
                Code
      of Ethics(10)21.1
                
                List
      of Significant Subsidiaries*23.1
                
                Consent
      of BDO Seidman, LLP*31.1
                
                Certification
      Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
      Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*31.2
                
                Certification
      Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
      Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*32.1
                
                Certification
      Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002*
 
 *
                  
                  Filed
      herewith†
                  
                  Management
      contract or compensatory plan or arrangement#
                  
                  All
      schedules and or exhibits have been omitted. Any omitted schedule or
      exhibit will be furnished supplementally to the Securities and Exchange
      Commission upon
request.
  61
  (1)
                
                Incorporated
      by reference to the Company’s Annual Report on Form 10-K, for
      the year ended December 28, 2007, as filed on March 12,
    2008.(2)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K, as filed on May
      23, 2006.(3)
                
                Incorporated
      by reference to the Company’s Registration Statement on Form S-8,
      File No. 033-76404, as filed on March 11,
  1994.(4)
                
                Incorporated
      by reference to the Company’s Proxy Statement for its Annual Meeting of
      Stockholders held on May 29, 1998, filed on May 1,
      1998.(5)
                
                Incorporated
      by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s
      Registration Statement on Form 8-A/A, as filed on April 18,
      2003.(6)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on January
      8, 2009.(7)
                
                Incorporated
      by reference to the Company’s Annual Report on Form 10-K, for the year
      ended December 29, 2000, as filed on March 29, 2001.(8)
                
                Incorporated
      by reference to the Company’s Annual Report on Form 10-K, for the year
      ended January 2, 2004, as filed on March 17,
    2004.(9)
                
                Incorporated
      by reference to the Company’s Annual Report on Form 10-K, for the
      year ended January 2, 1998, as filed on April 1,
  1998.(10)
                
                Incorporated
      by reference to the Company’s Annual Report on Form 10-K, for the
      year ended December 31, 2004, as filed on March 30,
      2005.(11)
                
                Incorporated
      by reference to the Company’s Quarterly Report, for the period ended
      April 2, 2004, as filed on May 12, 2004.(12)
                
                Incorporated
      by reference to the Company’s Quarterly Report for the period ended
      September 30, 2005, as filed on November 9,
  2005.(13)
                
                Incorporated
      by reference to the Company’s Quarterly Report for the period ended
      March 31, 2006, as filed on May 10, 2006.(14)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on
      March 21, 2007.(15)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on
      October 31, 2007.(16)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on
      December 4, 2007.(17)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on
      December 19, 2007.(18)
                
                Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the
      fiscal year ended January 2, 2009, as filed on April 2,
      2009.(19)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on April
      17, 2009.(20)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on June 25,
      2009.(21)
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on October
      1, 2009.
  62
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
  STAAR
      SURGICAL COMPANYDate:  April
      1, 2010
              By:
              /s/
      Barry
      G. CaldwellBarry
      G. CaldwellPresident
      and Chief Executive Officer(principal
      executive officer)
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  Name
              
              Title
              
              Date/s/ Barry G.
      Caldwell
                
                Barry G.
      Caldwell
              
              President,
      Chief Executive Officer and Director (principal executive
      officer)
              
              April
      1, 2010/s/ Deborah
      Andrews
                
                Deborah
      Andrews
              
              Chief
      Financial Officer (principal accounting and financial
    officer)
              
              April
      1, 2010/s/ Don
      Bailey
                
                Don
      Bailey
              
              Chairman
      of the Board, Director
              
              April
      1, 2010/s/ David
      Bailey
                
                David
      Bailey
              
              Director,
      President, International Operations
              
              April
      1, 2010/s/ Donald
      Duffy
                
                Donald
      Duffy
              
              Director
              
              April
      1, 2010/s/ John
      C. Moore
                
                John
      C. Moore
              
              Director
              
              April
      1, 2010/s/ David
      Morrison
                
                David
      Morrison
              
              Director
              
              April
      1, 2010/s/ Richard
      (Randy) A. Meier
                
                Richard
      (Randy) A. Meier
              
              Director
              
              April
      1, 2010
 63
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
FINANCIAL STATEMENTS
 Years
Ended January 1, 2010,
 January
2, 2009 and December 28, 2007
 
 TABLE
OF CONTENTS
 
 Report
      of Independent Registered Public Accounting Firm
                                
                                
                                F-2Report
      of Independent Registered Public Accounting Firm
                                
                                
                                F-3Consolidated
      Balance Sheets at January 1, 2010 and at January 2, 2009
                                
                                
                                F-4Consolidated
      Statements of Operations for the years ended January 1, 2010, January 2,
      2009, and December 28, 2007
                                
                                
                                F-5Consolidated
      Statements of Changes in Stockholders’ Equity and Comprehensive Loss for
      the years ended January 1, 2010, January 2, 2009, and
      December 28, 2007
                                
                                
                                F-6Consolidated
      Statements of Cash Flows for the years ended January 1, 2010,
      January 2, 2009, and December 28, 2007
                                
                                
                                F-7Notes
      to Consolidated Financial Statements
                                
                                
                                F-8Report
      on Schedule II – Valuation and Qualifying Accounts and
      Reserves
                                
                                
                                F-46
  F-1
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of
Directors and Stockholders
 STAAR
Surgical Company
 Monrovia,
CA
  We have
audited the accompanying consolidated balance sheets of STAAR Surgical Company
and Subsidiaries (“the Company”) as of January 1, 2010 and January 2, 2009, and
the related consolidated statements of operations, changes in stockholders’
equity and comprehensive loss, and cash flows for each of the three years in the
period ended January 1, 2010. These financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of STAAR Surgical Company and
Subsidiaries as of January 1, 2010 and January 2, 2009, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2010, in conformity with accounting principles
generally accepted in the United States of America.
 
 As more
fully disclosed in Note 1 to the consolidated financial statements, effective
December 30, 2006, the Company adopted  the provisions of Financial
Accounting Standards Board Accounting Standards Codification 715-20-65
Compensation – Retirement Benefits, Defined Benefit Plans – General, Transition
(formerly Statement of  Financial Accounting Standards No. 158 Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — An Amendment of FASB
Statements No. 87, 88, 106, and 132(R)).
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), STAAR Surgical Company and Subsidiaries’
internal control over financial reporting as of January 1, 2010, based on
criteria established in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated April 1, 2010 expressed an
unqualified opinion thereon.
  /s/ BDO Seidman,
LLP
 
 Los
Angeles, California
 April 1,
2010
  F-2
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of
Directors and Stockholders
 STAAR
Surgical Company
 Monrovia,
CA
  We have
audited STAAR Surgical Company and Subsidiaries’ internal control over financial
reporting as of January 1, 2010, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). STAAR Surgical Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our
audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In our
opinion, STAAR Surgical Company and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of January 1,
2010, based on the COSO criteria.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of STAAR
Surgical Company as of January 1, 2010 and January 2, 2009, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
loss, and cash flows for each of the three years in the period ended January 1,
2010 and our report dated April 1, 2010 expressed an unqualified
opinion.
  /s/ BDO Seidman,
LLP
 
 Los
Angeles, California
 April 1,
2010
  F-3
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 January 1,
2010 and January 2, 2009
 
 2009
                      
                      
                      2008(In thousands, exceptpar value amounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      6,330
                      
                      
                      $
                      4,992Restricted
      cash and short-term investments
                      
                      
                      7,396
                      
                      
                      
                      179Accounts
      receivable trade, net
                      
                      
                      9,269
                      
                      
                      
                      8,422Inventories,
      net
                      
                      
                      14,820
                      
                      
                      
                      16,668Prepaids,
      deposits and other current assets
                      
                      
                      2,591
                      
                      
                      
                      2,009Total
      current assets
                      
                      
                      40,406
                      
                      
                      
                      32,270Property,
      plant and equipment, net
                      
                      
                      5,005
                      
                      
                      
                      5,974Intangible
      assets, net
                      
                      
                      4,148
                      
                      
                      
                      5,611Goodwill
                      
                      
                      7,879
                      
                      
                      
                      7,538Deferred
      income taxes
                      
                      
                      104
                      
                      
                      
                      —Other
      assets
                      
                      
                      1,139
                      
                      
                      
                      1,189Total
      assets
                      
                      $
                      58,681
                      
                      
                      $
                      52,582LIABILITIES,
      REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                        STOCKHOLDERS’
      EQUITYCurrent
      liabilities:Line
      of credit
                      
                      $
                      2,160
                      
                      
                      $
                      2,200Accounts
      payable
                      
                      
                      7,416
                      
                      
                      
                      6,626Deferred
      income taxes
                      
                      
                      360
                      
                      
                      
                      282Obligations
      under capital leases
                      
                      
                      795
                      
                      
                      
                      989Accrued
      legal judgments
                      
                      
                      4,000
                      
                      
                      
                      4,900Note
      payable, net of discount
                      
                      
                      4,503
                      
                      
                      
                      —Other
      current liabilities
                      
                      
                      7,706
                      
                      
                      
                      6,466Total
      current liabilities
                      
                      
                      26,940
                      
                      
                      
                      21,463Note
      payable, net of discount
                      
                      
                      —
                      
                      
                      
                      4,414Obligations
      under capital leases
                      
                      
                      1,098
                      
                      
                      
                      1,335Deferred
      income taxes
                      
                      
                      653
                      
                      
                      
                      897Other
      long-term liabilities
                      
                      
                      2,136
                      
                      
                      
                      1,678Total
      liabilities
                      
                      
                      30,827
                      
                      
                      
                      29,787Commitments,
      contingencies and subsequent events (Notes 9, 14 and
      19)Series
      A  redeemable convertible preferred stock $0.01 par value;
      10,000 shares authorized; 1,700 shares issued and outstanding at both
      January 1, 2010 and January 2, 2009. Liquidation value
    $6,800.
                      
                      
                      6,784
                      
                      
                      
                      6,768Stockholders’
      equity:Common
      stock, $0.01 par value; 60,000 shares authorized; issued and
      outstanding 34,747 and 29,503 shares at January 1, 2010 and January
      2, 2009, respectively
                      
                      
                      348
                      
                      
                      
                      295Additional
      paid-in capital
                      
                      
                      149,559
                      
                      
                      
                      138,811Accumulated
      other comprehensive income
                      
                      
                      3,254
                      
                      
                      
                      2,812Accumulated
      deficit
                      
                      
                      (132,091
                      )
                      
                      
                      (125,891
                      )Total
      stockholders’ equity
                      
                      
                      21,070
                      
                      
                      
                      16,027Total
      liabilities, redeemable convertible preferred stock and stockholders’
      equity
                      
                      $
                      58,681
                      
                      
                      $
                      52,582
 
 See
accompanying summary of accounting policies and notes to consolidated financial
statements.
  F-4


STAAR
SURGICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Years
Ended January 1, 2010, January 2, 2009 and December 28,
2007
 
 2009
                    
                    
                    2008
                    
                    
                    2007(In
      thousands,except
      per share amounts)Net
      sales
                    
                    $
                    75,345
                    
                    
                    $
                    74,894
                    
                    
                    $
                    59,363Cost
      of sales
                    
                    
                    33,452
                    
                    
                    
                    34,787
                    
                    
                    
                    30,097Gross
      profit
                    
                    
                    41,893
                    
                    
                    
                    40,107
                    
                    
                    
                    29,266Selling,
      general and administrative expenses:General
      and administrative
                    
                    
                    15,710
                    
                    
                    
                    15,730
                    
                    
                    
                    12,951Marketing
      and selling
                    
                    
                    24,257
                    
                    
                    
                    27,053
                    
                    
                    
                    23,723Research
      and development
                    
                    
                    5,893
                    
                    
                    
                    7,938
                    
                    
                    
                    6,711Other
      operating
      expenses (recovery), net (Notes 7, 14 and 19)
                    
                    
                    (238
                    )
                    
                    
                    9,773
                    
                    
                    
                    —Total
      selling, general and administrative expenses
                    
                    
                    45,622
                    
                    
                    
                    60,494
                    
                    
                    
                    43,385Operating
      loss
                    
                    
                    (3,729
                    )
                    
                    
                    (20,387
                    )
                    
                    
                    (14,119
                    )Other
      (expense) income:Equity
      in operations of joint venture
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (280
                    )Interest
      income
                    
                    
                    60
                    
                    
                    
                    160
                    
                    
                    
                    336Interest
      expense
                    
                    
                    (1,329
                    )
                    
                    
                    (901
                    )
                    
                    
                    (486
                    )Loss
      on foreign currency transactions
                    
                    
                    —
                    
                    
                    
                    (696
                    )
                    
                    
                    (295
                    )Other
      (expense) income, net
                    
                    
                    290
                    
                    
                    
                    152
                    
                    
                    
                    (312
                    )Total
      other expenses
                    
                    
                    (979
                    )
                    
                    
                    (1,285
                    )
                    
                    
                    (1,037
                    )Loss
      before provision for income taxes
                    
                    
                    (4,708
                    )
                    
                    
                    (21,672
                    )
                    
                    
                    (15,156
                    )Provision
      for income taxes
                    
                    
                    1,492
                    
                    
                    
                    1,523
                    
                    
                    
                    843Net
      loss
                    
                    $
                    (6,200
                    )
                    
                    $
                    (23,195
                    )
                    
                    $
                    (15,999
                    )Loss
      per share:Basic
      and diluted
                    
                    $
                    (0.19
                    )
                    
                    $
                    (0.79
                    )
                    
                    $
                    (0.57
                    )Weighted
      average shares outstandingBasic
      and diluted
                    
                    
                    32,498
                    
                    
                    
                    29,474
                    
                    
                    
                    28,121
 
 See
accompanying summary of accounting policies and notes to consolidated financial
statements.
  F-5
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 AND
COMPREHENSIVE LOSS
 Years
Ended January 1, 2010, January 2, 2009, and December 28,
2007
  Common
                        Stock
                        Shares
                      
                      
                      Common
                        Stock
      Par
                        Value
                      
                      
                      Additional
                        Paid-In
                        Capital
                      
                      
                      Accumulated
                        Other
                        Comprehensive
                        Income
                      
                      
                      Accumulated
                        Deficit
                      
                      
                      TotalBalance,
      at December 29, 2006
                      
                      
                      25,618
                      
                      
                      $
                      256
                      
                      
                      $
                      117,312
                      
                      
                      $
                      889
                      
                      
                      $
                      (86,697
                      )
                      
                      $
                      31,760Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (15,999
                      )
                      
                      
                      (15,999
                      )Foreign
      currency translation adjustment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,033
                      
                      
                      
                      —
                      
                      
                      
                      1,033Adoption
      of ASC 715-20-65
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (371
                      )
                      
                      
                      —
                      
                      
                      
                      (371
                      )Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (15,337
                      )Common
      stock issued upon exercise of options
                      
                      
                      163
                      
                      
                      
                      2
                      
                      
                      
                      582
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      584Restricted
      stock cancelled
                      
                      
                      (9
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Issuance
      of warrant - Broadwood
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      842
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      842Common
      stock issued as payment for services
                      
                      
                      47
                      
                      
                      
                      —
                      
                      
                      
                      125
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      125Net
      proceeds from public offering
                      
                      
                      3,600
                      
                      
                      
                      36
                      
                      
                      
                      16,577
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      16,613Stock-based
      compensation
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,637
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,637Restricted
      stock grants
                      
                      
                      69
                      
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1Balance,
      at December 28, 2007
                      
                      
                      29,488
                      
                      
                      
                      295
                      
                      
                      
                      137,075
                      
                      
                      
                      1,551
                      
                      
                      
                      (102,696
                      )
                      
                      
                      36,225Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (23,195
                      )
                      
                      
                      (23,195
                      )Foreign
      currency translation adjustment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,303
                      
                      
                      
                      —
                      
                      
                      
                      1,303Pension
      liability adjustment, net of tax
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (42
                      )
                      
                      
                      —
                      
                      
                      
                      (42
                      )Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (21,934
                      )Common
      stock issued upon exercise of options
                      
                      
                      10
                      
                      
                      
                      —
                      
                      
                      
                      39
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      39Stock-based
      compensation
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,712
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,712Restricted
      stock cancelled
                      
                      
                      (2
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Preferred
      stock accretion
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (16
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (16
                      )Unvested
      restricted stock
                      
                      
                      (17
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Restricted
      stock grants
                      
                      
                      24
                      
                      
                      
                      —
                      
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1Balance,
      at January 2, 2009
                      
                      
                      29,503
                      
                      
                      
                      295
                      
                      
                      
                      138,811
                      
                      
                      
                      2,812
                      
                      
                      
                      (125,891
                      )
                      
                      
                      16,027Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (6,200
                      )
                      
                      
                      (6,200
                      )Foreign
      currency translation adjustment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      578
                      
                      
                      
                      —
                      
                      
                      
                      578Pension
      liability adjustment, net of tax
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (136
                      )
                      
                      
                      —
                      
                      
                      
                      (136
                      )Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (5,758
                      )Common
      stock issued upon exercise of options
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1Net
      proceeds from public offering
                      
                      
                      4,555
                      
                      
                      
                      46
                      
                      
                      
                      8,456
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      8,502Stock-based
      compensation
                      
                      
                      312
                      
                      
                      
                      3
                      
                      
                      
                      1,572
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,575Stock
      issued in lieu of vacation
                      
                      
                      6
                      
                      
                      
                      1
                      
                      
                      
                      23
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      24Preferred
      stock accretion
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (16
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (16
                      )Warrants
      issued to Broadwood
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      290
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      290Common
      stock issued as payment for services
                      
                      
                      247
                      
                      
                      
                      2
                      
                      
                      
                      422
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      424Vested
      restricted stock grants
                      
                      
                      124
                      
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1Balance,
      at January 1, 2010
                      
                      
                      34,747
                      
                      
                      $
                      348
                      
                      
                      $
                      149,559
                      
                      
                      $
                      3,254
                      
                      
                      $
                      (132,091
                      )
                      
                      $
                      21,070
 
 See
accompanying summary of accounting policies and notes to consolidated financial
statements.
  F-6
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
Ended January 1, 2010, January 2, 2009 and December 28,
2007
  2009
                          
                          
                          2008
                          
                          
                          2007(In
      thousands)Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (6,200
                          )
                          
                          $
                          (23,195
                          )
                          
                          $
                          (15,999
                          )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      of property and equipment
                          
                          
                          2,341
                          
                          
                          
                          2,797
                          
                          
                          
                          2,001Amortization
      of intangibles
                          
                          
                          1,402
                          
                          
                          
                          843
                          
                          
                          
                          481Impairment
      loss on patents
                          
                          
                          —
                          
                          
                          
                          1,023
                          
                          
                          
                          —Amortization
      of discount
                          
                          
                          379
                          
                          
                          
                          248
                          
                          
                          
                          26Deferred
      income taxes
                          
                          
                          246
                          
                          
                          
                          238
                          
                          
                          
                          493Loss
      on extinguishment of debt
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          215Fair
      value adjustment of warrant
                          
                          
                          40
                          
                          
                          
                          (7
                          )
                          
                          
                          (182
                          )Change
      in net pension liability
                          
                          
                          206
                          
                          
                          
                          72
                          
                          
                          
                          179Loss
      on disposal of property and equipment
                          
                          
                          174
                          
                          
                          
                          48
                          
                          
                          
                          307Equity
      in operations of joint venture
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          280Stock-based
      compensation expense
                          
                          
                          1,457
                          
                          
                          
                          1,513
                          
                          
                          
                          1,456Common
      stock issued for services
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          125Loss
      on settlement of pre-existing distribution arrangement
                          
                          
                          —
                          
                          
                          
                          3,850
                          
                          
                          
                          —Other
                          
                          
                          191
                          
                          
                          
                          151
                          
                          
                          
                          32Changes
      in working capital, net of business acquisition:Accounts
      receivable, net
                          
                          
                          (944
                          )
                          
                          
                          (891
                          )
                          
                          
                          (210
                          )Inventories
                          
                          
                          1,587
                          
                          
                          
                          1,125
                          
                          
                          
                          861Prepaids,
      deposits and other current assets
                          
                          
                          (97
                          )
                          
                          
                          708
                          
                          
                          
                          330Accounts
      payable
                          
                          
                          1,116
                          
                          
                          
                          (1,870
                          )
                          
                          
                          (637
                          )Other
      current liabilities
                          
                          
                          (471
                          )
                          
                          
                          5,119
                          
                          
                          
                          (942
                          )Net
      cash provided by (used in) operating activities
                          
                          
                          1,427
                          
                          
                          
                          (8,228
                          )
                          
                          
                          (11,184
                          )Cash
      flows from investing activities:Acquisition
      of property and equipment
                          
                          
                          (586
                          )
                          
                          
                          (1,092
                          )
                          
                          
                          (691
                          )Advance
      payment on acquisition of Canon Staar Joint Venture
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (4,000
                          )Deferred
      acquisition costs of Canon Staar
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (197
                          )Cash
      acquired in acquisition of Canon Staar, net of acquisition
      costs
                          
                          
                          —
                          
                          
                          
                          2,215
                          
                          
                          
                          —Proceeds
      from the sale of property and equipment
                          
                          
                          205
                          
                          
                          
                          167
                          
                          
                          
                          72Dividends
      received from joint venture
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          117Net
      change in other assets
                          
                          
                          (10
                          )
                          
                          
                          43
                          
                          
                          
                          24Purchase
      of short-term investments
                          
                          
                          (24
                          )
                          
                          
                          (212
                          )
                          
                          
                          —Sale
      of short-term investments
                          
                          
                          198
                          
                          
                          
                          —
                          
                          
                          
                          —Restricted
      cash, including reinvested interest
                          
                          
                          (7,396
                          )
                          
                          
                          —
                          
                          
                          
                          —Net
      cash provided by (used in) investing activities
                          
                          
                          (7,613
                          )
                          
                          
                          1,121
                          
                          
                          
                          (4,675
                          )Cash
      flows from financing activities:Borrowings
      under notes payable
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          9,000Repayment
      of notes payable
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (4,000
                          )Repayment
      of note issued in connection with purchase of minority interest in
      subsidiary
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (972
                          )Borrowings
      under lines of credit
                          
                          
                          642
                          
                          
                          
                          3,880
                          
                          
                          
                          1,812Repayment
      of lines of credit
                          
                          
                          (642
                          )
                          
                          
                          (1,940
                          )
                          
                          
                          (3,610
                          )Repayment
      of capital lease lines of credit
                          
                          
                          (1,147
                          )
                          
                          
                          (983
                          )
                          
                          
                          (692
                          )Proceeds
      from the exercise of stock options
                          
                          
                          1
                          
                          
                          
                          40
                          
                          
                          
                          584Net
      proceeds from public and private sale of equity securities
                          
                          
                          8,502
                          
                          
                          
                          —
                          
                          
                          
                          16,613Net
      cash provided by financing activities
                          
                          
                          7,356
                          
                          
                          
                          997
                          
                          
                          
                          18,735Effect
      of exchange rate changes on cash and cash equivalents
                          
                          
                          168
                          
                          
                          
                          207
                          
                          
                          
                          261Increase
      (decrease) in cash and cash equivalents
                          
                          
                          1,338
                          
                          
                          
                          (5,903
                          )
                          
                          
                          3,137Cash
      and cash equivalents, at beginning of year
                          
                          
                          4,992
                          
                          
                          
                          10,895
                          
                          
                          
                          7,758Cash
      and cash equivalents, at end of year
                          
                          $
                          6,330
                          
                          
                          $
                          4,992
                          
                          
                          $
                          10,895
 
 See
accompanying summary of accounting policies and notes to consolidated financial
statements.
  F-7
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended January 1, 2010 and January 2, 2009
  Note 1 —
Significant Accounting Policies
  Organization
and Description of Business
  STAAR
Surgical Company and subsidiaries (the “Company”), a Delaware corporation, was
incorporated in 1982 for the purpose of its developing, producing, and marketing
intraocular lenses (“IOLs”) and other products for minimally invasive ophthalmic
surgery. Principal products are IOLs and ICLs.  IOLs are prosthetic
intraocular lenses used to restore vision that has been adversely affected by
cataracts, and include the Company’s lines of silicone and Collamer IOLs and the
Preloaded Injector (a silicone or acrylic IOL preloaded into a single-use
disposable injector).  ICLs, consisting of the Company’s Visian ICL
and TICL, are intraocular lenses used to correct refractive conditions such as
myopia (near-sightedness), hyperopia (far-sightedness) and
astigmatism.  The Company also sells other instruments, devices and
equipment that are manufactured either by the Company or by others in the
ophthalmic products industry.
  As of
January 1, 2010, the Company’s significant subsidiaries consisted of STAAR
Surgical AG, a wholly owned subsidiary formed in Switzerland to develop,
manufacture and distribute certain of the Company’s products worldwide including
the ICL; Domilens GmbH (“Domilens”), an indirect wholly owned subsidiary, which
distributes both STAAR products and products from other ophthalmic manufacturers
in Germany (sold on March 2, 2010 as discussed in Note 19); STAAR Japan, a
wholly owned subsidiary acquired in fiscal year 2008, that designs, manufactures
and sells IOLs and injector systems which are sold as integrated preloaded
Injectors (See Note 2).
  Basis
of Presentation
  The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries.  All significant
intercompany balances and transactions have been eliminated in
consolidation.
  F-8
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Fiscal
Year and Interim Reporting Periods
  The
Company’s fiscal year ends on the Friday nearest December 31 and each of the
Company’s quarterly reporting periods generally consists of 13
weeks.  The fiscal 2009 financial statements are based on a 52-week
period.
  Foreign
Currency
  The
functional currency of the Company and its subsidiaries is the local currency,
except for the Company’s Swiss subsidiary which uses the U.S. dollar. In
accordance with ASC 830-20 and 830-30, “Foreign Currency Matters – “Foreign
Currency Transactions” and “Translation of Financial Statements” (formerly SFAS
No. 52, Foreign Currency
Translation), assets and liabilities of foreign subsidiaries are
translated at rates of exchange in effect at the close of the period. Sales and
expenses are translated at the weighted average of exchange rates in effect
during the period. The resulting translation gains and losses are deferred and
are shown as a separate component of stockholders’ equity as accumulated other
comprehensive income.  During 2009, 2008 and 2007, the net foreign
translation gains were $578,000, $1,303,000 and $1,033,000 respectively; during
2009 net foreign currency transaction gains were inconsequential; during 2008
and 2007, net foreign currency transaction losses, included in the consolidated
statements of operations under other (expense) income were ($696,000) and
($295,000) respectively.
  Revenue
Recognition
  The
Company recognizes revenue when realized or realizable and earned, which is when
the following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred; the sale price is fixed and determinable; and
collectability is reasonably assured in accordance with ASC 605-10-S99, “Revenue
Recognition” (formerly under Staff Accounting Bulletin No. 104 “Revenue
Recognition” (“SAB 104”).  The Company records revenue from
non-consignment product sales when title and risk of ownership has been
transferred, which is typically at shipping point, except for the STAAR Japan
subsidiary, which is typically recognized when the product is received by the
customer.  STAAR Japan does not have significant deferred revenues as
of year ended January 1, 2010 as delivery to the customer is generally made
within the same or the next date of shipment.
  The
Company’s products are marketed to ophthalmic surgeons, hospitals, ambulatory
surgery centers or vision centers, and distributors. IOLs may be offered to
surgeons and hospitals on a consignment basis.  The Company maintains
title and risk of loss of consigned inventory.  In accordance with ASC
605-10-S99, the Company recognizes revenue for consignment inventory when the
Company is notified that the IOL has been implanted and not upon shipment to the
surgeon.
  ICLs are
sold only to certified surgeons who have completed requisite training or for use
in scheduled training surgeries. As a result, STAAR substantively reduces the
risk that the revenue it recognizes on shipment of ICLs would need to be
reversed because of a surgeon’s failure to qualify for its use.
  For all
sales, the Company is considered the Principal in the transaction in accordance
with ASC 605-10 and ASC 605-45-45, “Principal Agent Considerations” (formerly
Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue
Gross as a Principal versus Net as an Agent”) as the Company, among other
factors, bears general inventory risk, credit risk, has latitude in establishing
the sales price and bears authorized sales returns inventory risk and therefore,
sales are recognized gross with a corresponding cost of sales in the statement
of operations instead of a single, net amount.  Cost of sales includes
cost of production, freight and distribution, royalties, and inventory
provisions, net of any purchase discounts.
  F-9
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  The
Company presents sales tax it collects from its customers on a net basis
(excluded from revenues), a presentation which is prescribed as one of two
methods available under ASC 605-45-50 (formerly EITF Issue No. 06-03, “How
Sales Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That Is, Gross Versus Net
Presentation).”
 
 The
Company has ongoing programs that, under specified conditions, allow customers
to return products and, in accordance with ASC 605-15-25 (formerly SFAS No. 48,
Revenue Recognition
When Right of Return
Exists), the Company records an allowance for estimated returns at the
time revenue is recognized. The Company’s allowance for estimated returns
considers historical trends and experience, the impact of new product launches,
the entry of a competitor, availability of timely and pertinent information and
the various terms and arrangements offered, including sales with extended credit
terms.  Sales are reported net of estimated returns.  If the
actual sales returns are higher or lower than estimated by management,
additional reduction or increase in sales may occur.
  The
Company performs ongoing credit evaluations of its customers and adjusts credit
limits based on customer payment history and credit worthiness, as determined by
the Company’s review of its customers’ current credit
information.  The Company continuously monitors collections and
payments from customers and maintains a provision for estimated credit losses
and uncollectible accounts based upon its historical experience and any specific
customer collection issues that have been identified.  Amounts
determined to be uncollectible are written off against the allowance for
doubtful accounts.
  Use
of Estimates
  The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and, as
such, include amounts based on informed estimates and judgments of management
with consideration given to materiality. For example, estimates are used in
determining valuation allowances for uncollectible trade receivables, obsolete
and excess inventory, deferred income taxes and tax reserves. Estimates are also
used in the evaluation of asset impairment, in determining the useful life of
depreciable and definite-lived intangible assets, and in the variables used to
calculate stock-based compensation. Actual results could differ materially from
those estimates.
  Segment
Reporting
  The
Company reports segment information in accordance with ASC 280-10, “Segment
Reporting” (formerly SFAS No. 131, “Disclosures about Segments of an Enterprise
and Related Information” (“SFAS 131”). Under ASC 280-10 all publicly traded
companies are required to report certain information about the operating
segments, products, services and geographical areas in which they operate and
their major customers. The Company’s principal products, which are IOLs, ICLs
and other surgical products, all fall within the ophthalmic surgery market and,
accordingly, the Company operates as one business segment (see Note
18).
  Cash
and Cash Equivalents
  The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The Company maintains cash deposits
with major banks which from time to time may exceed federally insured limits.
The Company periodically assesses the financial condition of the institutions
and believes that the risk of any loss is minimal.
  Restricted
Cash and Short-Term Investments
 
 On June
22, 2009, the Company posted a $7.3 million deposit (150% of the Parallax judgment amount)
with the Superior Court of California, County of Orange (the “Court”) (see Notes
14 and 19).  The Court maintains full control of, and access to the
deposit, including the ultimate disbursement of any and all amounts, plus
interest.  The Company has no access to these funds and limited
information as to their investment status.  The Court will pay
approximately 1% interest per annum on the deposit, which will be reinvested
into the deposit account by the Court and is subject to the same restrictions as
the principal amount.  The Company has classified this restricted cash
deposit as a current asset commensurate with the Parallax judgment being
included in current liabilities.  As fully discussed in Note 19, on
March 30, 2010 the Company settled both the Parallax and Moody outstanding
lawsuits.  In exchange for complete mutual releases, the settlement
provides for payment by STAAR of $4.0 million from the restricted deposit as its
contribution to the global settlement.  The approximate $3.4 million
balance, including interest, will be returned to STAAR. The Company
considers this deposit to be akin to a purchase of a temporary investment with
the Court and any activity in this account from its inception to liquidation
will be included as investing cash outflows and inflows in the Company’s
consolidated statements of cash flows.
  F-10
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Short-term
investments at January 2, 2009 consisted of an original maturity four-month
Certificate of Deposit at 7.5% held by our subsidiary in Australia, which
matured in February 2009.
  Concentration
of Credit Risk
  Financial
instruments that potentially subject the Company to credit risk principally
consist of trade receivables. This risk is limited due to the large number of
customers comprising the Company’s customer base, and their geographic
dispersion. One foreign customer accounted for approximately 16% of the
Company’s consolidated trade receivables balance as of January 1,
2010.  Two foreign customers, in the aggregate, accounted for just
over 10% of consolidated net sales in fiscal year 2009.  Ongoing
credit evaluations of customers’ financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management’s expectations.
  Fair
Value of Financial Instruments
  The
carrying values reflected in the consolidated balance sheets for cash and cash
equivalents, short-term investments, trade accounts receivable and accounts
payable approximate their fair values because of the short maturity of these
instruments.
  Inventories,
Net
  Inventories,
net are valued at the lower of cost, determined on a first-in, first-out basis,
or market. Inventories include the costs of raw material, labor, and
manufacturing overhead, work in process and finished goods. The Company provides
estimated inventory allowances for excess, expiring, slow moving and obsolete
inventory as well as inventory whose carrying value is in excess of net
realizable value to properly reflect inventory at the lower of cost or
market.
  Property,
Plant and Equipment
  Property,
plant and equipment are recorded at cost. Depreciation on property, plant, and
equipment is computed using the straight-line method over the estimated useful
lives of the assets as noted below. Leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the related lease
term. Major improvements are capitalized and minor replacements, maintenance and
repairs are charged to expense as incurred.
  Depreciation
is generally computed using the straight-line method over the estimated useful
lives of the assets:
 
 Machinery
      and equipment
              
              
              10
      yearsFurniture
      and equipment
              
              
              7
      yearsComputer
      and peripherals
              
              
              3 – 5
      yearsLeasehold
      improvements
              
              
              (a)
 
 (a)
              Leasehold
      improvements are depreciated over the shorter of the useful life of the
      asset or the term of the associated
leases.
  F-11




STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Goodwill
and Other Intangible Assets
  Goodwill
represents the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases. The
Company accounts for goodwill in accordance with ASC 805-30-25, “Business
Combinations, Goodwill Recognition” (formerly Statement of Financial Accounting
Standards (“SFAS”) No. 141, “Business Combinations,”) and ASC 350-20,
“Intangibles – Goodwill” (formerly No. 142, “Goodwill and Other Intangible
Assets.”)
  Goodwill,
which has an indefinite life, is not amortized but instead is subject to
periodic testing for impairment. Intangible assets determined to have definite
lives are amortized over their remaining useful lives. Goodwill is tested for
impairment on an annual basis or between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may be impaired.
Impairment testing for goodwill is done at the reporting unit level. Reporting
units are one level below the business segment level, but can be combined when
reporting units within the same segment have similar economic characteristics.
Under the criteria set forth by ASC 350-20-35, the Company has determined that
its reporting units have similar economic characteristics and therefore, can be
combined into one reporting unit for the purposes of goodwill impairment
testing.
  Factors
whose occurrence may indicate that an impairment exists include, but are not
limited to the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of the Company’s use of the underlying assets; and significant adverse
industry or market economic trends. In the event that the carrying value of
assets is determined to be unrecoverable, the Company would estimate the fair
value of the reporting unit and record an impairment charge for the excess of
the carrying value over the fair value. The estimate of fair value requires
management to make a number of assumptions and projections, which could include,
but would not be limited to, future revenues, earnings and the probability of
certain outcomes and scenarios.
  During
the fourth quarter of fiscal 2009, the Company performed its annual impairment
test using the methodology prescribed by ASC 350-20-35 and determined that its
goodwill was not impaired.  As of January 1, 2010, the carrying value
of goodwill was $7.9 million.  The change in the carrying value of
goodwill as of January 1, 2010 compared to the balance in the prior year is due
to the effect of foreign currency translation As fully discussed in Note 19 the
Company sold all of its interests in Domilens on March 2, 2010 which included
approximately $6.3 million of goodwill as part of the net assets
sold.
  The
Company also has other intangible assets consisting of various patents and
licenses, customer relationships and developed technologies. Amortization is
computed on a straight-line basis over the estimated useful lives, since the
pattern in which the economic benefits realized cannot be reasonably determined,
which are based on legal and contractual provisions. During the Company’s
overall impairment review of intangible assets, it was determined that certain
patents had shorter useful lives than originally estimated (see Note 7). In
fiscal year 2008, certain patents were deemed to be impaired and the Company
recorded an impairment loss of $1,023,000 for the fourth quarter and year ended
January 2, 2009 included in other
operating expenses (recovery), net.
  Impairment
of Long-Lived Assets
  In
accordance with ASC 360-10-35 (formerly SFAS No. 144, “Accounting for the
Impairment of Long-Lived Assets”), intangible and other long lived-assets are
reviewed for impairment whenever events such as product discontinuance, plant
closures, product dispositions or other changes in circumstances indicate that
the carrying amount may not be recoverable. In reviewing for impairment, the
Company compares the carrying value of such assets to the estimated undiscounted
future cash flows expected from the use of the assets and their eventual
disposition. When the estimated undiscounted future cash flows are less than
their carrying amount, an impairment loss is recognized equal to the difference
between the assets’ fair value and their carrying value. A review of long-lived
assets was conducted as of January 1, 2010 and no impairment was
identified.
  F-12
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Research
and Development Costs
  Expenditures
for research activities relating to product development and improvement are
charged to expense as incurred.
  Income
Taxes
  The
Company recognizes deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of the Company’s assets
and liabilities along with net operating loss and credit carryforwards in
accordance with ASC 740-10 (formerly SFAS No. 109 “Accounting for Income
Taxes”). A valuation allowance is recognized if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax asset may not be realized. The impact on deferred taxes of changes
in tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled and reflected in the financial statements
in the period of enactment.
  Effective
December 30, 2006, the Company adopted ASC 740-10-25-6 (formerly Financial
Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” an interpretation of Statement of Financial
Accounting Standards No. 109).  There was no impact to the financial
statements upon adoption.  This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. The Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Company
classifies any interest and penalties related to income taxes assessed by a
jurisdiction as part of income tax expense.  The Company did not incur
significant interest and penalties during 2009.
  Basic
and Diluted Loss Per Share
  The
consolidated financial statements include “basic” and “diluted” per share
information. Basic per share information is calculated by dividing net loss by
the weighted average number of shares outstanding. Diluted per share information
is calculated by also considering the impact of potential common stock on both
net income and the weighted number of shares outstanding. As the Company was in
a net loss position, potential common shares of 6.7 million, 6.0 million, and
3.6 million for the fiscal years ended January 1, 2010, January 2, 2009, and
December 28, 2007, respectively, were excluded from the computation as the
shares would have had an anti-dilutive effect.
  Employee
Defined Benefit Plans
  The
Company maintains a passive pension plan (the “Swiss Plan”) covering employees
of its Swiss subsidiary.  The Swiss Plan conforms to the features of a
defined benefit plan.  The Company adopted the recognition and
disclosure requirements of ASC 715-20-65 (formerly Statement of Financial
Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans,” an amendment of SFAS Nos. 87,
88, 106 and 132R (“SFAS 158”) on October 1, 2007.
 
 In
connection with the Company’s acquisition of the remaining interest in STAAR
Japan, Inc., STAAR assumed the net pension liability under STAAR Japan’s
noncontributory defined benefit pension plan substantially covering all of the
employees of STAAR Japan.  STAAR Japan adopted the recognition and
disclosure requirements of ASC 715-30 on December 29, 2007.
 
 ASC
715-30 requires recognition of the funded status, or difference between the fair
value of plan assets and the projected benefit obligations of the pension plan
on the statement of financial position, with a corresponding adjustment to
accumulated other comprehensive income. If the projected benefit obligation
exceeds the fair value of plan assets, then that difference or unfunded status
represents the pension liability. The Company records a net periodic pension
cost in the consolidated statement of operations. The liabilities and annual
income or expense of both plans are determined using methodologies that involve
several actuarial assumptions, the most significant of which are the discount
rate and the expected long-term rate of asset return (for Swiss Plan only)
(based on the market-related value of assets). The fair values of plan assets
are determined based on prevailing market prices (see Note 12).
  F-13
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Stock
Based Compensation
  The
Company has adopted ASC 718-10, “Stock Compensation” (previously accounted for
under SFAS No. 123 (revised) “Share Based Payment”, (“SFAS 123R”) effective
December 31, 2005). Stock-based compensation expense for all stock-based
compensation awards granted is based on the grant-date fair value estimated in
accordance with the provisions of ASC 718.  The Company recognizes
these compensation costs on a straight-line basis over the requisite service
period of the award, which is generally the option vesting term of three to four
years.  In March 2005, the Securities and Exchange Commission (the
“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s
interpretation of ASC 718 and the valuation of share-based payments for public
companies. The Company has applied the provisions of SAB No. 107 in its adoption
of ASC 718 (see Note 13).
  The
Company also issues Restricted Stock, which are unvested shares issued at fair
market value on the date of grant. They typically vest over a service period
ranging between one and four years, and are subject to forfeiture until vested
or the service period is achieved and the restriction is lapsed or
terminated.  The stock compensation expense is generally recognized by
the Company as the stock vests, based on the fair value of the stock on the
vesting date and the vested number of shares less any amounts paid for the stock
which is typically the par value of the shares.
  The
Company accounts for options granted to persons other than employees and
directors under 718-10-S99 (formerly EITF No. 98-16, Accounting for Equity Investments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods and
Services.) As such, the fair value of such options is periodically
remeasured using the Black-Scholes option-pricing model and income or expense is
recognized over the vesting period.
  Accounting
for Warrants
  The
Company accounts for the issuance of Company derivative equity instruments in
accordance with ASC 815-40 (formerly Emerging Issues Task Force Issue No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.”  The Company has agreed to use its
best efforts to register and maintain registration of the common shares
underlying certain warrants (the “Warrant Shares”) that were issued by the
Company with debt instruments, so that the warrant holder may freely sell the
Warrant Shares if the warrant is exercised, and the Company agreed that in any
event it would secure and maintain effective registration within four months of
issuance.  In addition, while the relevant warrant agreement does not
require cash settlement if the Company fails to register and maintain
registration of the Warrant Shares, it does not specifically preclude cash
settlement. As a result ASC 815-40 requires the Company to assume that in the
absence of continuous effective registration it may be required to settle the
these warrants for cash when they are exercised.  Accordingly, the
Company’s agreement to register and maintain registration of the Warrant Shares
without express terms for settlement in the absence of continuous effective
registration is presumed to create a liability to settle these warrants in cash,
requiring liability classification. Included in other long-term liabilities with
a fair value of $101,000 and $61,000 as of January 1, 2010 and January 2, 2009,
respectively, are 70,000 warrants issued in March 2007 to Broadwood in
connection with a loan which has since been repaid.  The Company has
issued other warrants under an agreement that expressly provides that if the
Company fails to satisfy continuous registration requirements the Company will
be obligated only to issue additional common stock as the holder’s sole remedy,
with no possibility of settlement in cash. The Company accounts for those
warrants as equity because additional shares are the only form of settlement
available to the holder. The Company uses the Black-Scholes option pricing model
as the valuation model to estimate the fair value of those
warrants.  The Company evaluates the balance sheet classification of
the warrants during each reporting period.  Expected volatilities are
based on historical volatility of the Company’s stock. The expected life of the
warrant is determined by the amount of time remaining on the original six year
term of the relevant warrant agreement. The risk-free rate of return for periods
within the contractual life of the warrant is based on the U.S. Treasury yield
curve in effect at each reporting period. Any gains or losses resulting from the
changes in fair value of the warrants classified as a liability from period to
period are included as an increase or decrease of other income (expense). The
warrants that are accounted for as equity are only valued on the issuance date
and not subsequently revalued.
  F-14
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  liability
from period to period are included as an increase or decrease of other income
(expense). The warrants that are accounted for as equity are only valued on the
issuance date and not subsequently revalued.
 
 Comprehensive
Loss
  The
Company presents comprehensive losses in its Consolidated Statement of Changes
in Stockholders’ Equity in accordance with ASC 220-10 (formerly SFAS No. 130,
“Reporting Comprehensive Income” (“SFAS 130”). Total comprehensive loss
includes, in addition to net loss, changes in equity that are excluded from the
consolidated statements of operations and are recorded directly into a separate
section of stockholders’ equity on the consolidated balance sheets.
  
 Recent
Accounting Pronouncements
  In June
2009, the FASB issued FASB Accounting Standards Update (“ASU”) 2009-01 “Topic
105 – Generally accepted Accounting Principles amendments based on the Statement
of Financial Accounting Standards No. 168 - The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles.” ASU
2009-01 establishes the FASB Accounting Standards Codification as the single
source of authoritative nongovernmental U.S. generally accepted accounting
principles. The Company adopted ASU 2009-01 during the quarter ended October 2,
2009.
  In
October 2009, the FASB issued an update to ASC 605 regarding revenue
recognition. This ASU No. 2009-13 (ASU 2009-13), provides guidance on
whether multiple deliverables in a revenue arrangement exist, how the
arrangement should be separated, and the consideration allocated.  ASU
2009-13 eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. ASU 2009-13 is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15,
2010 or STAAR’s fiscal year 2011. Early adoption is permitted if the Company
elects to adopt ASU No. 2009-14 concurrently.  The Company does not
expect the adoption of ASU 2009-13 will be material to its consolidated
financial statements.
  In
October 2009, the FASB issued an update to ASC 985-605. This update, ASU
2009-14, amends the scope of the software revenue guidance in ASC 985-605 to
exclude tangible products containing software components and non-software
components that function together to deliver the tangible product’s essential
functionality. ASU 2009-14 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010 or STAAR’s fiscal year 2011. Early adoption is permitted if
the Company elects to adopt ASU 2009-13 concurrently. The Company believes the
adoption of ASU 2009-14 will not be material to its consolidated financial
statements.
 
 In
January 2010, the FASB issued an update to ASC 820.  This ASU 2010-06,
Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements requires entities to disclose separately the
significant transfers in and out of Levels 1 and 2 fair value measurements and
describe the reasons for the transfers.  It also requires
reconciliation of activity in Level 3 fair value measurements between beginning
and ending balances, such as purchases, sales, issuances, and settlements on a
gross basis instead of a net number.  Finally, it clarifies existing
disclosures for levels of disaggregation, that is to provide fair value
measurement disclosures for each class of asset and liability and to provide
disclosures around the inputs used and valuation techniques to measure fair
value for both recurring and non-recurring fair value measurements that fall
within Levels 2 or 3, which also applies to defined benefit plans and related
disclosures in plan assets.  This ASU 2010-06 is effective for interim
and annual reporting periods beginning after December 15, 2009 (fiscal year
2010), except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15,
2010 (fiscal year 2011), and for interim periods within those fiscal
years.  The Company believes the adoption of this ASU 2010-06 will not
have a material impact to its consolidated financial statements.
  F-15
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 In
February 2010, the FASB issued an update to ASC 855.  This update, ASU
2010-09, Subsequent
Events, requires an entity that is a SEC filer to evaluate subsequent
events through the date that the financial statements are issued however is not
required to disclose that date.  ASU 2010-09 is effective upon
issuance and the Company has conformed it’s disclosure to this ASU 2010-09 in
the accompanying financial statements.
 
 Prior
Year Reclassifications
 
 Certain
reclassifications have been made to the prior financial statement information to
conform with current presentation.
 
 Note 2 —
Acquisition of STAAR Japan
 
 On
December 29, 2007 (the “Closing Date”), during STAAR’s 2008 fiscal year, STAAR
acquired the remaining 50% of the shares of Canon Staar Co., Inc. (“Canon
Staar”) that had been owned previously by Canon Inc. and Canon Marketing Japan
Inc. (“Canon Marketing” and, collectively with Canon Inc., the “Canon
companies”).  In the transaction (the “Acquisition”), STAAR obtained
100% ownership of Canon Staar, which was renamed STAAR Japan, Inc. (“STAAR
Japan”) as of the acquisition date.  Prior to the Acquisition, Canon
Staar was a joint venture owned 50% by STAAR and 50% by the Canon companies and
operating under a Joint Venture Agreement since 1988. STAAR accounted for its
investment in Canon Staar as an equity method investor.  As of the
closing date of the Acquisition, STAAR Japan became a wholly owned subsidiary of
STAAR, and its financial information was included in STAAR’s consolidated
financial statements as of that date.  The functional currency of
STAAR Japan is the local currency, the Japanese yen.  In accordance with
ASC 830-10, for purposes of consolidation with the Company, assets and
liabilities of STAAR Japan have been translated at rates of exchange in effect
at the end of the period, except for the acquisition date translation of the
assets acquired and liabilities assumed, which were translated using the
exchange rate in effect at the closing date of the Acquisition.  Sales and
expenses of STAAR Japan were translated at the weighted average of exchange
rates in effect during the year ended January 1, 2010.  The resulting
translation gains and losses are included in accumulated other comprehensive
income on the consolidated balance sheets as of January 1, 2010.
 
 STAAR
Japan’s business consists of designing, manufacturing and selling IOLs and
injector systems, all of which are sold as integrated Preloaded
Injectors.  Following its approval by the Japanese Ministry of Health,
Labor and Welfare on February 2, 2010, STAAR Japan also began marketing and
distributing the Visian ICL in Japan.
  The
aggregate consideration paid for the acquisition to the Canon companies was as
follows (in thousands):
 
 Fair
      value of redeemable, convertible preferred stock issued by STAAR as
      consideration for Canon Staar common shares purchased (see Note
      10)
                        
                        $
                        6,800Cash
      consideration for Canon Staar common shares purchased
                        
                        
                        4,000Transaction
      costs
                        
                        
                        1,000Total
      acquisition consideration
                        
                        $
                        11,800
 
 STAAR
paid approximately 60% of the total consideration by issuing 1.7 million shares
of redeemable, convertible preferred stock on the Closing Date.  The
fair value of the convertible preferred stock was determined by a valuation of
the instrument with the assistance of an appraiser (see Note 10).  In
addition, STAAR paid the remaining 40% of the total consideration in cash, which
was placed on deposit with the Canon companies just prior to the Closing Date
and included in STAAR’s non-current assets on its consolidated balance sheet as
of fiscal year ended December 28, 2007.  Application of the $4.0
million deposit to the purchase price was subject to numerous closing conditions
and the deposit was to be fully refunded by the Canon companies if those
conditions were not met.  Upon completion of the Acquisition on the
Closing Date, the deposited funds were credited to the Canon companies as part
of the total consideration paid by STAAR.  STAAR also incurred and
paid approximately $1 million in direct transaction and related
costs.
  F-16
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 The
Acquisition was accounted for as a “step-acquisition” under ASC 805-10-65-1
(formerly EITF Abstracts, Topic No. D-84, “Accounting for Subsequent Investments
in an Investee After Suspension of Equity Method Loss Recognition When an
Investor Increases Its Ownership Interest from Significant Influence to Control
through a Market Purchase of Voting Securities” (Topic No. D-84) and the
provisions of 805-10 (formerly SFAS No. 141, “Business
Combinations”).  The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed on December 29, 2007 (in
thousands):
 
 
 December
                            29, 2007
                          
                          
                          Useful
                            Lives
                            (years)Cash
                          
                          $
                          3,018Accounts
      receivable
                          
                          
                          500Inventories
                          
                          
                          4,252Prepaid
      expenses and other current assets
                          
                          
                          464Property,
      plant and equipment
                          
                          
                          728Intangible
      assets:Customer
      relationships
                          
                          
                          1,389
                          
                          
                          
                          10Developed
      technology
                          
                          
                          882
                          
                          
                          
                          3 –
      10Patents
                          
                          
                          601
                          
                          
                          
                          17
      – 21Total
      intangible assets
                          
                          
                          2,872Deposits
      and other long-term assets
                          
                          
                          715Total
      assets acquired
                          
                          
                          12,549Current
      liabilities
                          
                          
                          (3,504
                          )Net
      pension liability
                          
                          
                          (771
                          )Deferred
      income taxes
                          
                          
                          (245
                          )Other
      long-term liabilities
                          
                          
                          (79
                          )Total
      liabilities assumed
                          
                          
                          (4,599
                          )Net
      assets acquired
                          
                          
                          7,950Loss
      on settlement of pre-existing distribution arrangement
                          
                          
                          3,850Total
      acquisition consideration
                          
                          $
                          11,800
 
 Among the
assets of Canon Staar acquired in the Acquisition was cash in the amount of
approximately $3 million, which was reduced by $803,000 in transaction costs
paid during fiscal 2009. The remaining $2.2 million of net cash obtained in the
acquisition is included in STAAR’s consolidated statements of cash flows under
investing activities for the year ended January 2, 2009.
 
 In
determining the final purchase price allocation, STAAR considered, among other
factors, its intentions for the use of the acquired assets, historical demand
for STAAR Japan’s products, estimates of future demand for those products,
current selling prices of inventories (less estimated costs of completion,
disposal and normal profit), developed technologies incorporated in its
products, customer relationships, the revenue generating potential of patents
and lives of patents.  The fair value of intangible assets was primarily
based on the income approach.  The rate used to discount the net cash flows
to their present values was a 10.5% weighted average cost of capital for the
business as a whole, and from 12.5% to 14.0% for the individual intangible
assets depending on the risk associated with the assets’ potential to generate
revenue and its projected remaining useful economic life.  The weighted
average cost of capital was determined after consideration of market rates of
return on debt and equity capital of comparable companies, the weighted average
return on invested capital and the risk associated with achieving forecast sales
related to technology and assets acquired from STAAR Japan.  Property,
plant and equipment net book value was evaluated at approximate fair value on
the acquisition date due to the nature and relative age of the assets
acquired.  The intangible assets and property, plant and equipment are
being amortized and depreciated based on the pattern in which the economic
benefits of these assets are being utilized, using the straight-line
method.  There was no goodwill recorded in the Acquisition because the fair
value of the net assets acquired exceeded the price paid in the Acquisition by
approximately $4 million, net of deferred income taxes.  This excess amount
was allocated on a pro rata basis to offset against the initially determined
fair value of intangible assets and property, plant and
equipment.
  F-17
 
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 In
connection with the Acquisition, STAAR also assumed the net pension liability
under STAAR Japan’s noncontributory defined benefit pension plan covering
substantially all of the permanent, full-time employees of STAAR Japan (see Note
12).  Other liabilities assumed by STAAR in the Acquisition mainly
consisted of current trade payables and accrued liabilities and estimated
deferred tax liabilities, representing the differences between the assigned
values and the tax bases of the assets and liabilities recognized in the
Acquisition (see Note 11).
 
 In
connection with the Acquisition, the material terms of the Joint Venture
Agreement and other documents governing the joint venture were
terminated.  This included the termination of the pre-existing
distribution arrangement of Canon Staar under which Canon Marketing had the
exclusive right to distribute Canon Staar’s products in Japan prior to the
Acquisition.  Under the provisions of EITF Abstracts Issue No. 04-1
(EITF 04-1), “Accounting for Preexisting Relationships between the Parties to a
Business Combination,” (previously nullified by ASC 805) in a business
combination between two parties that had a pre-existing relationship, that
relationship should be evaluated to determine whether a settlement of that
relationship exists.  Any such settlement requires accounting separate
from the business combination.  As a result of such an assessment
under ASC 805, STAAR Japan recorded an approximate $3.9 million loss at the
close of the Acquisition, which is included in operating loss of STAAR’s
consolidated statements of operations for the year ended January 2,
2009.  This loss represents the portion of the consideration paid by
STAAR for the Acquisition that was deemed to represent the settlement amount of
the pre-existing relationship between Canon Staar and the Canon companies, in
particular for the termination of the distribution arrangement that, when
compared to a comparable at-market arrangement as of the closing date, was
deemed unfavorable to STAAR.  The amount of the loss was determined
using the discounted incremental cash flows income method from the distribution
arrangement and a discount rate of 12%.
 
 Because
the Acquisition was completed on the first day of STAAR’s fiscal year 2008, the
results of STAAR Japan are included in the consolidated financial statements of
STAAR beginning in the first quarter of the fiscal year.  The
following table summarizes unaudited pro forma financial information assuming
the Acquisition had occurred on December 30, 2006, in the corresponding period
of the fiscal year immediately preceding the Acquisition, that is, as if the
Acquisition was completed on STAAR’s first day of fiscal year
2007.  This unaudited pro forma financial information does not
necessarily represent what would have occurred if the transaction had taken
place on December 30, 2006, and should not be taken as representative of STAAR’s
future consolidated results of operations or financial position.
 
 (In thousands, except per share amount)
                    
                    Year
                      Ended
                      December
                      28, 2007Net
      sales
                    
                    $
                    65,194Net
      loss
                    
                    $
                    (18,368
                    )Loss
      per share – basic and diluted
                    
                    $
                    (0.65
                    )
  F-18


STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  At the
close of the Acquisition, the Canon companies and STAAR entered into a Current
Employees Secondment Agreement under which Canon Marketing agreed for a term of
two years to lease certain employees who had served as officers of Canon Staar
to STAAR Japan to serve in the same capacities after the
acquisition.  STAAR Japan is required to make monthly payments to
Canon Marketing for the services provided by the seconded employees in an amount
equal to the costs of the employees’ salaries and benefits (“fee”) as calculated
by Canon Marketing, however, the fee may not exceed, as amended, 52 million
Japanese Yen (approximately $572,000 based on the rate of exchange on January 2,
2009) per annum in the aggregate. Similarly, Canon Marketing and STAAR entered
into a New Employees Secondment Agreement under which Canon Marketing agreed for
a term of one year to lease to STAAR Japan certain employees who previously
conducted the IOL distribution business of Canon Marketing. STAAR Japan was
required to make monthly payments to the Canon companies for the services
provided by the seconded employees in an amount equal to the costs of the
employees’ salaries and benefits as calculated by Canon
Marketing.  The fees paid to the Canon companies were approximately
$1.8 million based on the average rate of exchange during the year ended January
2, 2009.  As of December 31, 2008 this Secondment Agreement expired
and the sales staff covered under this agreement returned back to Canon
Marketing.
  Note 3 —
Accounts Receivable — Trade, Net
  Accounts
receivable – trade, net consisted of the following at January 1, 2010 and
January 2, 2009 (in thousands):
  2009
              
              
              2008Domestic
              
              $
              1,680
              
              
              $
              1,702Foreign
              
              
              8,921
              
              
              
              7,56610,601
              
              
              
              9,268Less
      allowance for doubtful accounts and sales returns
              
              
              1,332
              
              
              
              846$
              9,269
              
              
              $
              8,422
 
 Note 4 —
Inventories, Net
  Inventories,
net consisted of the following at January 1, 2010 and January 2, 2009
(in thousands):
  2009
              
              
              2008Raw
      materials and purchased parts
              
              $
              1,846
              
              
              $
              1,531Work
      in process
              
              
              2,480
              
              
              
              3,066Finished
      goods
              
              
              11,736
              
              
              
              13,51016,062
              
              
              
              18,107Inventory
      reserves
              
              
              (1,242
              )
              
              
              (1,439
              )$
              14,820
              
              
              $
              16,668
 
 Note 5 —
Prepaids, Deposits, and Other Current Assets
  Prepaids,
deposits, and other current assets consisted of the following at January 1,
2010 and January 2, 2009 (in thousands):
 
 2009
              
              
              2008Prepaids
      and deposits
              
              $
              1,169
              
              
              $
              1,703Insurance
      receivable
              
              
              438
              
              
              
              —Other
      current assets*
              
              
              984
              
              
              
              306$
              2,591
              
              
              $
              2,009
  * No item
in “other current assets” above exceeds 5% of total current assets.
  F-19
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 The
insurance receivable is for partial reimbursement of legal fees and expenses
that the Company’s general liability insurer has agreed to pay in connection
with the defense of the Moody matter.
  Note 6 —
Property, Plant and Equipment
  Property,
plant and equipment consisted of the following at January 1, 2010 and
January 2, 2009 (in thousands):
 
 2009
              
              
              2008Machinery
      and equipment
              
              $
              15,515
              
              
              $
              15,078Furniture
      and fixtures
              
              
              8,490
              
              
              
              8,358Leasehold
      improvements
              
              
              5,525
              
              
              
              5,41929,530
              
              
              
              28,855Less
      accumulated depreciation
              
              
              24,525
              
              
              
              22,881$
              5,005
              
              
              $
              5,974
 
 Depreciation
expense for the years ended January 1, 2010, January 2, 2009, and
December 28, 2007 was approximately $2.3 million, $2.8 million, and
$2.0 million respectively.
 
 Note 7
– Intangible Assets, Net
 
 Intangible
assets, net, consisted of the following (in thousands):
 
 January
      1, 2010
                  
                  
                  January
      2, 2009Gross
      Carrying Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  Net
                  
                  
                  Gross
      Carrying Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  NetAmortized
      intangible assets:Patents
      and licenses
                  
                  $
                  10,725
                  
                  
                  $
                  (8,619
                  )
                  
                  $
                  2,106
                  
                  
                  $
                  10,739
                  
                  
                  $
                  (7,578
                  )
                  
                  $
                  3,161Customer
      relationships
                  
                  
                  1,694
                  
                  
                  
                  (339
                  )
                  
                  
                  1,355
                  
                  
                  
                  1,725
                  
                  
                  
                  (172
                  )
                  
                  
                  1,553Developed
      technology
                  
                  
                  1,077
                  
                  
                  
                  (390
                  )
                  
                  
                  687
                  
                  
                  
                  1,096
                  
                  
                  
                  (199
                  )
                  
                  
                  897Total
                  
                  $
                  13,496
                  
                  
                  $
                  (9,348
                  )
                  
                  $
                  4,148
                  
                  
                  $
                  13,560
                  
                  
                  $
                  (7,949
                  )
                  
                  $
                  5,611
 
 During
2008, the Company acquired intangible assets through the acquisition of the
remaining interest in STAAR Japan, Inc. (See Note 2). As of January 1, 2010 the
gross carrying amount of the intangible assets acquired through the acquisition
had decreased by $64,000 as a result of changes in the exchange rate of the
Japanese Yen.
  Amortization
is computed on the straight-line basis over the estimated useful lives of the
assets, because the pattern in which it will realize the assets’ economic
benefits,  which benefits arise from legal and contractual provisions,
and range from 3 to 21 years for patents and licenses, 10 years for customer
relationships and 3 to 10 years for developed technology.  Aggregate
amortization expense for amortized intangible assets was $1,402,000, $843,000
and $481,000 for the years ended January 1, 2010, January 2, 2009 and December
28, 2007, respectively.
  In
performing the review of intangible assets in accordance with ASC 360-10-35
(formerly “SFAS No. 144”), the Company determined that certain patents had
shorter legal useful lives than originally estimated.  The remaining
useful lives were adjusted as of January 1, 2010 and the cumulative impact to
prior periods in the amount of $590,000 was recorded in other operating
expenses (recovery),net as part of total 2009 operating losses in the
consolidated statements of operations.
  In the
fourth quarter of 2008, the Company determined that the value and utility of
certain of its patents had significantly diminished mainly due to the Company’s
decision to discontinue marketing and selling certain products underlying these
patents.  Therefore, due to this decision, the Company believes that
the fair value of these patents is minimal and the $1,023,000 net carrying value
of the respective patents were considered to be impaired as of fiscal year ended
January 2, 2009.  As such, the Company recorded a $1,023,000 impairment
loss for the fourth quarter and fiscal year ended 2008 which was included in
other operating
expenses (recovery), in the consolidated statements of operations. The
fair value of these patents was determined by management using a discounted net
cash flows method.  The impairment adjustment also impacted the gross
carrying value of the impaired patents of $1,496,000 and accumulated
amortization of $473,000.
  F-20
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  The
following table shows estimated amortization expense for intangible assets for
each of the next five succeeding years (in thousands):
  Fiscal Year2010
              
              $
              7932011
              
              
              7422012
              
              
              6092013
              
              
              4552014
              
              
              407Thereafter
              
              
              1,142Total
              
              $
              4,148
 
 Note 8 —
Other Current Liabilities
  Other
current liabilities consisted of the following at January 1, 2010 and
January 2, 2009 (in thousands):
  2009
              
              
              2008Accrued
      salaries and wages
              
              $
              2,652
              
              
              $
              2,467Commissions
      due to outside sales representatives
              
              
              230
              
              
              
              395Accrued
      audit expenses
              
              
              460
              
              
              
              413Customer
      credit balances
              
              
              589
              
              
              
              546Accrued
      income taxes
              
              
              905
              
              
              
              486Accrued
      legal
              
              
              273
              
              
              
              383Accrued
      insurance
              
              
              386
              
              
              
              380Accrued
      interest on Broadwood Note
              
              
              499
              
              
              
              —Accrued
      bonuses
              
              
              530
              
              
              
              —Other*
              
              
              1,182
              
              
              
              1,396$
              7,706
              
              
              $
              6,466
 
 *No item
in “Other” above exceeds 5% of total other current liabilities.
  Note 9 —
Notes Payable
  Broadwood
Promissory Note
  On
December 14, 2007, the Company borrowed $5 million from Broadwood Partners, L.P.
(“Broadwood”), a stockholder in the Company, pursuant to a Senior Promissory
Note between the Company and Broadwood, with a scheduled maturity of December
14, 2010.  Among the events of default under the Senior Promissory Note is
any judgment against the Company in excess of $500,000 that “shall remain
unpaid.”  On April 2, 2009, after preliminary judgment was entered in
the Parallax case,
Broadwood and STAAR entered into a Temporary Waiver Agreement with respect to
any event of default that may occur, or may be deemed to have occurred, under
the Note as a result of the judgment.  In consideration of the Temporary
Waiver Agreement, STAAR agreed to amend the Senior Promissory Note to grant
to Broadwood a security interest in substantially all of STAAR’s assets to
secure STAAR’s obligations under the original Senior Promissory Note.  To
effectuate this grant of a security interest, as of April 13, 2009, the Company
and Broadwood entered into an Amended and Restated Senior Secured Promissory
Note (the “Note”) and Security Agreement.  All other key terms of the Note
remained unchanged.  The Temporary Waiver Agreement provided that if the
Company secured a stay of enforcement of judgment prior to June 23, 2009 (the
expiration date of a temporary stay granted by the Court), no default was deemed
to have occurred with respect to the judgment.  On June 24, 2009, following
the timely posting of the deposit and satisfaction of the provisions of the
Temporary Waiver, Broadwood and STAAR again amended the Note by replacing the
Temporary Waiver with a provision stating that because the Company secured a
stay of enforcement of judgment until the completion of the appeal by posting
the required deposit with the Court, any default resulting from the Parallax judgment is deemed
to be cured.
  Broadwood was
entitled to receive interest at the rate of 20% per annum beginning on June 23,
2009, as would have been applicable in the event a default had occurred under
the original terms of the Note.  However, the terms
of the Note also provided that if the Company fully satisfies the judgments and
finally resolves all material litigation, which occurred on March 30, 2010, the
interest rate shall be reduced to 7% per annual from the date of such final
resolution
  F-21
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  For
purposes of disclosure requirements under ASC 825-10-50-10, “Financial
Instruments – Disclosure,” the Company performed a valuation of the Broadwood
Note as of January 1, 2010, with the assistance of a valuation specialist using
the discounted cash flows method.  Under this method, the Company used
the expected future cash flows, consisting wholly of principal and interest
payments contractually to be made to Broadwood under the terms of the Note, and
discounted each of those cash flows to present value using an appropriate
discount rate (the assumption requiring the highest level of management judgment
discussed below).
  Since the
Company’s debt is not publicly traded on an exchange and the Company’s credit
rating is not available or is unknown, an appropriate discount rate was
determined by management by considering various factors, principally the
Company’s assumed or implied credit rating, the corresponding corporate bond
yield to be utilized and other risk factors relevant to the Company, such as
risk of default on the Note and other financial risks.  The Company
used credit ratings as published by Standard and Poor (S&P), a reputable
credit rating agency, and corporate bond yields as published by Reuter’s
Corporate Bonds Spreads (“Reuter’s”) for this valuation.  Based on
these factors and the Company’s business, economic and financial conditions, the
Company determined that its credit rating would likely fall between “B” and
“CCC-“, as defined by S&P.  S&P ratings between “B” through
“CCC” are obligations regarded as “having significant speculative
characteristics, with “C” having the highest degree of speculation; a “B” rating
is defined, in part, as “an obligation that is more vulnerable to nonpayment but
the obligor currently has the capacity to meet its financial commitment on the
obligation”; a “CCC” rating is defined, in part, as “an obligation that is
vulnerable to nonpayment, and is dependent upon favorable business, financial
and economic conditions for the obligor to meet its financial commitment on the
obligation.”  Based on the Company’s conditions, risk of default,
including comparable company ratings and ratios such as net debt to earnings
before interest, taxes, depreciation and amortization (“EBITDA”), and EBITDA
margins relative to the Company, a mid-point credit rating or “CCC+” was
determined to be most appropriate for the Company to use in determining which
corporate bond yield to utilize in deriving the discount rate.  Then,
in order to determine the appropriate corporate bond yield to use, which is a
published yield based on the U.S. Treasury yield and maturity, plus a risk
premium depending on the credit rating of a company (published for credit
ratings between “AAA” through “CCC+”), the Company’s bond yield was determined
using its assumed CCC+ rating for corporate bonds in the industrials industry
from Reuter’s Corporate Bond Spread Tables.  For example, a CCC+ rated
bond that matures in 2 years has a 9.50% corporate bond yield as of January 1,
2010, as published by Reuter’s.  Finally, in order to determine the
appropriate discount rate to apply based on the timing of the expected cash
flows, a linear regression analysis on 1- through 3- year maturity spreads was
performed to calculate the implied bond yield-spread (based on estimated
interest due date of June 30, 2010, and final maturity of principal and interest
due on December 14, 2010; or weighted average maturity of 0.95 years for the
Note as of January 1, 2010).  Using these assumptions and methodology,
the weighted average discount rate was estimated to be 8.9% and the fair value
of the Broadwood Note approximated $5.5 million as of January 1, 2010, as shown
below:
  Fair
      Value (million)
                
                
                Face
      Value (million)
                
                
                Carrying
      Value
                  (million)Broadwood
      Note
                
                $
                5.5
                
                
                $
                5.0
                
                
                $
                4.5
  F-22
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  The
sensitivity of a change in the discount rate of +/- 2% would affect the fair
value of the Note by approximately -/+ $100,000.
  As
additional consideration for the loan, on December 14, 2007, the Company also
entered into a Warrant Agreement with Broadwood (the “December 2007 Warrant
Agreement”) granting the right to purchase up to 700,000 shares of Common Stock
at an exercise price of $4.00 per share, exercisable for a period of six years.
The December 2007 Note also provides that if any indebtedness remained
outstanding under the Note on June 1, 2009, the Company would issue additional
warrants on the same terms as set forth in the December 2007 Warrant Agreement
in a number equal to 700,000 times the percentage of the original $5 million
principal that remains outstanding.  On June 1, 2009, as the Note
remained outstanding, the Company issued an additional 700,000 warrants to
Broadwood, which was valued at approximately $290,000 and included as additional
paid–in capital in the consolidated balance sheet upon issuance.  The
December 2007 Warrant Agreement also provides that the Company will register the
shares issuable upon exercise of the warrants with the Securities Exchange
Commission.  The Company filed and secured effectiveness of a
registration statement covering resale of the shares.  If the Company
fails to keep the registration statement effective and the lapse exceeds
permitted suspensions, as the holder’s sole remedy, the Company will be
obligated to issue an additional 30,000 warrants for each month that the Company
does not meet this effectiveness requirement through the term of the warrants
(“Penalty Warrants”) (a maximum of approximately 1,950,000 warrants issuable as
of January 1, 2010 under an assumed noncompliance as of that
date).  The Company does not consider the issuance of Penalty Warrants
likely.  The December 2007 Warrant Agreement has been accounted for as
an equity instrument in accordance with the provisions of ASC 815-40, “Contracts
in Entity’s Own Equity” (previously accounted for under EITF
00-19).  Additionally, in accordance with ASC 470-20-25, “Debt with
Conversion and Other Options”, (previously accounted for under Accounting
Principles Board (“APB”) Opinion No. 14, “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants,”) the total $5 million proceeds were
allocated to the December 2007 Warrant and Note based on their relative fair
values, approximating $842,000 and $4.2 million on the issuance date,
respectively.  The fair value of the warrants is treated as an
additional discount on the loan and is being amortized using the effective
interest method over the life of the loan (which approximates an effective
interest rate of 32% per annum, assuming the 20% cash interest rate is
maintained throughout the life of the Note).  During the years ended
January 1, 2010 and January 2, 2009, approximately $379,000 and $248,000 of the
discount was amortized and included in interest expense.
  The fair
value of the warrants was estimated on the December 14, 2007 and the June 1,
2009 issuance dates using a Black-Scholes option valuation model applying the
assumptions noted in the following table:
  As
      of
                  December
      14, 2007
                
                
                As
      of
                  June
      1, 2009Common
      stock price per share
                
                $
                2.63
                
                
                $
                1.01Number
      of warrants
                
                
                700,000
                
                
                
                700,000Expected
      dividends
                
                
                0
                %
                
                
                0
                %Expected
      volatility
                
                
                67.3
                %
                
                
                74.4
                %Risk-free
      rate
                
                
                3.88
                %
                
                
                3.28
                %Remaining
      life (in years)
                
                
                6.0
                
                
                
                6.0
  The
Company adopted ASC 820-10-35 (formerly SFAS No. 157, Fair Value Measurements, on
January 3, 2009.  ASC 820-10-35 defines fair value, establishes a
three-level valuation hierarchy for disclosures of fair value measurement and
enhances disclosure requirements for fair value measures.  The three
levels are defined as follows:
  F-23
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 ·
              Level
      1 – Inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 ·
              Level
      2 – Inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 ·
              Level
      3 – Inputs to the valuation methodology are unobservable; that reflect
      management’s own assumptions about the assumptions market participants
      would make and significant to the fair
value.
 
 The
Warrants issued on June 1, 2009 were valued using Level 2 inputs.
 
 The
Broadwood Note was valued as of January 1, 2010 based on Level 3
inputs.
  Capital
Lease Agreements
  The
Company’s lease agreement with Farnam Street Financial, Inc. (“Farnam”), as
amended on October 9, 2006, provided for purchases of up to $1,500,000 of
property, plant and equipment. In accordance with the requirements of ASC
840-10-25, “Leases” (previously accounted for under SFAS No. 13 “Accounting for
Leases”), purchases under this facility are accounted for as capital leases and
generally have a thirty-month to three-year term. Under the agreement, the
Company has the option to purchase any item of the leased property at the end of
that item’s lease term, at a mutually agreed-upon fair value.  If the
Company does not choose to purchase the assets under lease, it may rent the
assets on a month-to-month basis or return them to Farnam.  The
Company must provide a 120-day notice prior to termination of its intent to
purchase or return the equipment.  On April 1, 2007, the Company
signed an additional leasing schedule with Farnam, which provided for additional
purchases of $800,000 during 2008. The terms of this new schedule conform to the
amended agreement dated October 9, 2006.  There are no borrowings
available under the agreement.
  Lines
of Credit
  The
Company’s former German subsidiary, Domilens, entered into a credit agreement on
May 4, 2009 with Postbank.  The credit agreement provided for
borrowings of up to 500,000 EUR (approximately $718,000 at the rate of exchange
on January 1, 2010), at a rate of 7.25% per annum. The credit agreement provided
for automatic renewal on an annual basis based on the same terms.  The
credit agreement could be terminated by the lender in accordance with its
general terms and conditions.  The credit facility was not
collateralized and contained certain restrictions regarding payment of dividends
or providing loans to the Company or other consolidated
subsidiaries.  There were no borrowings outstanding as of January 1,
2010 and January 2, 2009.  As fully discussed in Note 19, the Company
sold all of its interests in Domilens on March 2, 2010.
  The
Company’s Japanese subsidiary, STAAR Japan, has an agreement, as amended on June
30, 2009, with Mizuho Bank which provides for borrowings of up to 300,000,000
Yen (approximately $3.2 million based on the rate of exchange on January 1,
2010), at an interest rate equal to the Tokyo short-term prime interest rate
(approximately 1.475% as of January 1, 2010) plus 1.125% and terminates on April
20, 2010, but may be renewed annually.  The credit facility is not
collateralized.  The Company had 200,000,000 Yen outstanding on the
line of credit as of January 1, 2010 and January 2, 2009, (approximately $2.2
million based on the foreign exchange rates on January 1, 2010 and January 2,
2009, respectively) and approximates fair value due to the short-term maturity
and market interest rates of the line of credit.  In case of default,
the interest rate will be increased to 14% per annum.
  Covenant
Compliance
 
 The
Company believes it is in compliance with the covenants of its credit facilities
as of the date of this filing.
 F-24
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Note
10 — Redeemable, Convertible Preferred Stock
 
 Under its Certificate of
Incorporation the Company has had 10,000,000 shares of “blank check” preferred
stock, which the Board of Directors is authorized to issue with such rights,
preferences and privileges as the Board may determine.  On October 22,
2007, the Board approved the designation of 1,700,000 shares of the preferred
stock as Series A Redeemable Convertible Preferred Stock (“Preferred Stock”) to
be issued in connection with the acquisition of the 50% interest in Canon Staar
Co., Inc. which was consummated on December 29, 2007 (see Note 2).  On
December 29, 2007, the Company issued the 1,700,000 shares of Preferred
Stock to the Canon companies as partial consideration for their shares of Canon
Staar Co., Inc. at an estimated fair value of $4.00 per share, or $6.8 million
in the aggregate.
 
 The
Preferred Stock is redeemable by the Company at any time on or after the first
anniversary of the issuance date at a price of $4.00 per share plus any accrued
or declared but unpaid dividends (“Redemption Price”).  The holders of
the Preferred Stock have a right, exercisable at any time on or after the third
anniversary (December 29, 2010) of the issuance date by a majority vote of the
Preferred Stock holders with at least 30 days’ written notice, to require the
Company to redeem the Preferred Stock at the Redemption Price.
 
 The
Preferred Stock is convertible into shares of the Company’s common stock at any
time after the issuance date at a one-to-one conversion ratio that is adjustable
only for stock splits, combinations, subdivisions, dividends or
recapitalizations (“Conversion Ratio”).  On the fifth anniversary of
the issuance date, the Preferred Stock expires and each share of Preferred Stock
will be automatically converted to common stock of the Company at the Conversion
Ratio.
 
 The fair
value of the Preferred Stock was determined on the issuance date by the Company
with the assistance of a valuation specialist using the Binomial Tree option
valuation model.  This model considers the Preferred Stock to be a
derivative asset of the Company’s common stock where the preferred stockholder
has options to choose certain payoffs that maximize returns and therefore
maximize the value of the preferred stock.  The payoff available to
the preferred stockholder is contingent on the future market value of the
Company’s common stock.  Therefore the model, based on certain
significant management assumptions, analyzes various payoff patterns for
different possible paths that might be followed by the common stock price over
the life of the Preferred Stock until the automatic conversion on the fifth
anniversary of the issuance date.
 
 The
significant assumptions used in the valuation were as follows:
 
 Average
      common stock price*
                
                $
                3.12Expected
      volatility
                
                
                67.4
                %Expected
      dividend yield
                
                
                0
                %Risk-free
      interest rate
                
                
                3.43
                %Issuer’s
      call price per share
                
                $
                4.00Redemption
      price per share
                
                $
                4.00
  * Average
common stock price used in the valuation represents the average closing market
price per share of the Company’s common stock a few days before and after the
announcement date of the Canon Staar acquisition.
  F-25
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 The
Company filed and secured effectiveness of a registration statement with the SEC
for the public resale of the common stock issuable upon conversion of the
Preferred Stock and must maintain effectiveness for the remainder of the
two-year period following issuance, which expired on December 29,
2009.  Other than such permitted suspensions, if the Company fails to
keep the registration statement effective for the two-year period, as the
holders’ sole remedy the Company will be obligated to issue an additional 30,000
shares of common stock to the holders for each calendar month that the Company
does not meet this effectiveness requirement (“Penalty Shares”).  The
Company does not consider the issuance of any Penalty Shares to be
likely.
 
 The
rights, preferences and privileges of the Preferred Stock are specified in a
Certificate of Designation that the Company filed with the Delaware Secretary of
State on December 24, 2007.  The Preferred Stock does not have
voting rights in the election of directors or any other matter, except as may be
required under the Delaware General Corporation.  However, the Company
cannot, without the consent of at least two-thirds of the holders of the
Preferred Stock, authorize or issue any other equity security senior to or at
parity with the Preferred Stock as to dividend, conversion or redemption rights
or liquidation preferences.
 
 The
Preferred Stock has the right to participate equally, on an as-converted basis,
in any dividend or distribution paid to the common stockholders.
 
 On or
prior to the effective date of certain change in control or liquidation events
of the Company specified in the Certificate of Designation, the Preferred Stock
is redeemable at the option of the holder at the Redemption Price; however, the
holder will continue to have the right to convert the Preferred Stock into
common stock of the Company until the close of the second business day prior to
the effective date of such an event.
 
 In the
event of a liquidation of the Company, as defined in the Certificate of
Designation, the Preferred Stockholders have a right to receive a distribution
equal to the Redemption Price prior to the distribution of any funds to the
common stockholders.  After payment of the Redemption Price the
Preferred Stockholders do not participate in the distribution of the remaining
proceeds of the liquidation, which will be distributed to the common
stockholders.  However, until the effective date of any such
liquidation, each Preferred Stockholder may convert its shares to common stock
of the Company and participate in the proceeds of the liquidation to be paid to
common stockholders in lieu of the Redemption Price.
 
 On
a liquidation or change in control of the Company, if a Preferred Stockholder
does not make a timely election to either receive the Redemption Price or
convert the Preferred shares to common stock, the Certificate of Designation
provides that the Preferred Stockholder will be deemed to have elected the
higher in value of the two alternatives, to be calculated as provided in the
Certificate of Designation.
 
 Because
after the third anniversary of issuance the Preferred Stock is redeemable at the
option of the holders, which is not within the control of the Company, the
Company has presented the Preferred Stock in the mezzanine section of the
consolidated balance sheet in accordance with the provisions of ASC 210-10-S99,
“Distinguishing Liabilities from Equity”, SEC Materials in ASC) (previously
accounted for under EITF Abstracts, Topic No. D-98, “Classification and
Measurement of Redeemable Securities”).  Because the Preferred Stock
fair value recorded on the issuance date approximates the redemption price, no
further accretion will be required by the Company to redemption value and no
subsequent revaluation will be necessary so long as the Preferred Stock is still
considered a temporary equity instrument.  However, issuance and
registration costs of approximately $48,000 were incurred related to the
Preferred Stock which were offset against the fair value of the Preferred Stock
on the issuance date and will be accreted to the redemption value using the
interest method with a corresponding charge to Additional Paid-In Capital over a
three-year period.
  F-26
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 Note 11 —
Income Taxes
  The
provision for income taxes consists of the following (in
thousands):
  2009
                
                
                2008
                
                
                2007Current
      tax provision:U.S. federal
                
                $
                —
                
                
                $
                —
                
                
                $
                —State
                
                
                15
                
                
                
                8
                
                
                
                6Foreign
                
                
                1,679
                
                
                
                1,277
                
                
                
                344Total
      current provision
                
                
                1,694
                
                
                
                1,285
                
                
                
                350Deferred
      tax provision:U.S. federal
      and state
                
                
                —
                
                
                
                —
                
                
                
                —Foreign
                
                
                (202
                )
                
                
                238
                
                
                
                493Total
      deferred provision
                
                
                (202
                )
                
                
                238
                
                
                
                493Provision
      for income taxes
                
                $
                1,492
                
                
                $
                1,523
                
                
                $
                843
  As of
January 1, 2010, the Company had $120.9 million of U.S. federal net operating
loss carryforwards available to reduce future income taxes. The net operating
loss carryforwards expire in varying amounts between 2020 and
2029.
  The
Company had accrued income taxes payable of $905,000 and $486,000 at January 1,
2010 and January 2, 2009, respectively primarily due to taxes payable for
foreign jurisdictions.  Included in the Company’s 2006 foreign tax
provision is approximately $700,000 in additional taxes that was assessed by the
German Ministry of Finance pursuant to the Domilens Investigation of which
$465,000 was reversed in 2007 following a final assessment.
  The
provision (benefit) for income before taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes as follows
(amounts in thousands):
  2009
                            
                            
                            2008
                            
                            
                            2007Computed
      provision for taxes based on income at statutory rate
                            
                            
                            34.0
                            %
                            
                            $
                            (1,601
                            )
                            
                            
                            34.0
                            %
                            
                            $
                            (7,368
                            )
                            
                            
                            34.0
                            %
                            
                            $
                            (5,153
                            )Increase
      (decrease) in taxes resulting from:Permanent
      differences
                            
                            
                            (0.5
                            )
                            
                            
                            23
                            
                            
                            
                            (0.2
                            )
                            
                            
                            37
                            
                            
                            
                            (0.3
                            )
                            
                            
                            46State
      minimum taxes, net of federal income tax benefit
                            
                            
                            (0.2
                            )
                            
                            
                            10
                            
                            
                            
                            —
                            
                            
                            
                            5
                            
                            
                            
                            —
                            
                            
                            
                            4State
      tax benefit
                            
                            
                            16.7
                            
                            
                            
                            (786
                            )
                            
                            
                            7.3
                            
                            
                            
                            (1,583
                            )
                            
                            
                            2.5
                            
                            
                            
                            (374
                            )Tax
      rate difference due to foreign statutory rate
                            
                            
                            3.8
                            
                            
                            
                            (179
                            )
                            
                            
                            (7.6
                            )
                            
                            
                            1,645
                            
                            
                            
                            3.3
                            
                            
                            
                            (502
                            )Foreign
      tax benefit
                            
                            
                            5.8
                            
                            
                            
                            (273
                            )
                            
                            
                            3.3
                            
                            
                            
                            (717
                            )
                            
                            
                            —
                            
                            
                            
                            —Previous
      write-down of investment in foreign subsidiary
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (2.4
                            )
                            
                            
                            515
                            
                            
                            
                            —
                            
                            
                            
                            —Foreign
      earnings not permanently reinvested
                            
                            
                            (21.3
                            )
                            
                            
                            1,001
                            
                            
                            
                            (28.4
                            )
                            
                            
                            6,163
                            
                            
                            
                            (12.4
                            )
                            
                            
                            1,883Foreign
      dividend withholding
                            
                            
                            (3.8
                            )
                            
                            
                            179
                            
                            
                            
                            (2.7
                            )
                            
                            
                            591
                            
                            
                            
                            (3.8
                            )
                            
                            
                            570Return
      to provision adjustment
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (0.6
                            )
                            
                            
                            143
                            
                            
                            
                            4.6
                            
                            
                            
                            (705
                            )Other
                            
                            
                            (0.5
                            )
                            
                            
                            25
                            
                            
                            
                            —
                            
                            
                            
                            (2
                            )
                            
                            
                            (0.5
                            )
                            
                            
                            67Valuation
      allowance
                            
                            
                            (65.7
                            )
                            
                            
                            3,093
                            
                            
                            
                            (9.7
                            )
                            
                            
                            2,094
                            
                            
                            
                            (33.0
                            )
                            
                            
                            5,007Effective
      tax provision (benefit) rate
                            
                            
                            (31.7
                            )%
                            
                            $
                            1,492
                            
                            
                            
                            (7.0
                            )%
                            
                            $
                            1,523
                            
                            
                            
                            (5.6
                            )%
                            
                            $
                            843
  Included
in the state tax provision is an increase to the state deferred tax asset and
corresponding increase to the valuation allowance of $786,000, $1,583,000 and
$374,000 for 2009, 2008 and 2007, respectively. This results in a total state
tax provision of $15,000, $8,000 and $6,000 for fiscal years ended 2009, 2008
and 2007, respectively.
  During
the year ended December 28, 2007, the Company adopted a plan to repatriate a
portion of its earnings from certain foreign subsidiaries to commence during the
2008 fiscal year.  These repatriated earnings were not expected to
exceed $11.4 million at that time.  As of January 2, 2009, all
earnings from its subsidiaries were no longer considered to be permanently
reinvested.  Accordingly, the Company provides withholding and U.S.
taxes on all unremitted foreign earnings.  During 2009, the Company
paid $422,000 in withholding taxes to the Swiss government due to the
repatriation of approximately $8.4 million of earnings from its Swiss
subsidiary, STAAR Surgical AG.
  F-27


STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets (liabilities) as of January 1, 2010 and January 2,
2009 are as follows (in thousands):
 
 2009
                    
                    
                    2008Current
      deferred tax assets (liabilities):Allowance
      for doubtful accounts and sales returns
                    
                    $
                    212
                    
                    
                    $
                    125Inventories
                    
                    
                    427
                    
                    
                    
                    600Accrued
      vacation
                    
                    
                    277
                    
                    
                    
                    316Other
                    
                    
                    (131
                    )
                    
                    
                    (90
                    )State
      taxes
                    
                    
                    3
                    
                    
                    
                    3Accrued
      legal judgment and other accrued expenses
                    
                    
                    1,783
                    
                    
                    
                    2,091Valuation
      allowance
                    
                    
                    (2,931
                    )
                    
                    
                    (3,327
                    )Total
      current deferred tax liabilities
                    
                    $
                    (360
                    )
                    
                    $
                    (282
                    )Non-current
      deferred tax assets (liabilities):Net
      operating loss carryforwards
                    
                    
                    50,922
                    
                    
                    
                    49,669Stock-based
      payments
                    
                    
                    1,918
                    
                    
                    
                    1,574Business,
      foreign and AMT credit carryforwards
                    
                    
                    906
                    
                    
                    
                    1,293Capitalized
      R&D
                    
                    
                    589
                    
                    
                    
                    639Contributions
                    
                    
                    179
                    
                    
                    
                    162Pensions
                    
                    
                    737
                    
                    
                    
                    523Depreciation
      and amortization
                    
                    
                    11
                    
                    
                    
                    (357
                    )Foreign
      tax withholding
                    
                    
                    (887
                    )
                    
                    
                    (1,251
                    )Foreign
      earnings not permanently reinvested
                    
                    
                    (7,116
                    )
                    
                    
                    (8,663
                    )Other
                    
                    
                    62
                    
                    
                    
                    (105
                    )Valuation
      allowance
                    
                    
                    (47,870
                    )
                    
                    
                    (44,381
                    )Total
      non-current deferred tax liabilities
                    
                    $
                    (549
                    )
                    
                    $
                    (897
                    )
 
 ASC 740
requires that a valuation allowance be established when it is more likely than
not that all or a portion of a deferred tax asset may not be realized.
Cumulative losses weigh heavily in the assessment of the need for a valuation
allowance.  Due to the Company’s recent history of losses, the
valuation allowance fully offsets the value of U.S. deferred tax assets on the
Company’s balance sheet as of January 1, 2010. Further, under Federal Tax Law
Internal Revenue Code Section 382, significant changes in ownership may restrict
the future utilization of these tax loss carry forwards.
  Included
in deferred tax assets and liabilities are net non-current deferred tax assets
of $104,000 and $15,000 for 2009 and 2008, respectively, for STAAR Surgical
AG.  Due to STAAR Surgical AG’s history of profits, the deferred tax assets
are considered fully realizable.
  During
the year ended January 2, 2009, STAAR Japan incurred losses resulting in
additional net operating loss carryforwards available to offset against future
taxable income of this subsidiary.  At January 2, 2009, STAAR Japan’s
deferred tax assets amounted to $5.4 million, gross, primarily comprised of net
operating loss carryfowards.  As discussed in Note 2, at the time of
the Acquisition, a net deferred tax liability was recorded representing the
difference between the assigned values and the tax bases of the assets and
liabilities recognized in the Acquisition, mainly due to the newly recognized
intangible assets and the step-up in the inventory value, both recognized for
book but not for tax.  As a result of the significant losses generated
by STAAR Japan in 2008 which generated a deferred tax asset significantly in
excess of the net deferred tax liability remaining from the Acquisition, STAAR
Japan recorded a current tax benefit of $268,000 in 2008 to the extent of that
net deferred tax liability.  STAAR Japan generated additional net
operating losses in 2009 and therefore due to the history of losses, net
deferred tax assets were offset with a full valuation allowance.
  F-28
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  The
following tax years remain subject to examination:
  Significant Jurisdictions
                
                Open
                  YearsU.S.
      Federal
                
                
                2006
      – 2008California
                
                
                2005
      – 2008Germany*
                
                
                2005
      – 2008Switzerland
                
                2008Japan
                
                
                2006
      – 2008
  *See Note
19 regarding the disposal of Domilens on March 2, 2010.
  Loss
before provision for income taxes is as follows (in thousands):
 
 2009
              
              
              2008
              
              
              2007Domestic
              
              $
              (9,052
              )
              
              $
              (19,552
              )
              
              $
              (17,418
              )Foreign
              
              
              4,344
              
              
              
              (2,120
              )
              
              
              2,262$
              (4,708
              )
              
              $
              (21,672
              )
              
              $
              (15,156
              )
 
 Note
12 – Employee Benefit Plans
  The
Company maintains a passive pension plan (the “Swiss Plan”) covering employees
of its Swiss subsidiary, which is accounted for as a defined benefit plan under
the provisions of ASC 715-30, “Defined Benefit Plans – Pension” (previously
accounted for under Statement of Financial Accounting Standards (“SFAS”) No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans”).
  Defined
Benefit Plan-Switzerland
  In
Switzerland employers are required to provide a minimum pension plan for their
staff.  The Swiss Plan is financed by contributions of both the
employees and employer. The amount of the contributions is defined by the plan
regulations and cannot be decreased without amending the plan regulations. It is
required that the employer contribute an amount equal to or greater than the
employee contribution.
  The
funded status of the Swiss benefit plan at January 1, 2010 and January 2, 2009
is as follows:
  2009
                
                
                2008Change
      in Projected Benefit Obligation:Projected
      benefit obligation, beginning of period
                
                $
                3,021
                
                
                $
                2,960Service
      cost
                
                
                307
                
                
                
                265Interest
      cost
                
                
                108
                
                
                
                114Participant
      contributions
                
                
                240
                
                
                
                232Benefits
      (paid) deposited
                
                
                89
                
                
                
                (359
                )Actuarial
      (gain) / loss on obligation
                
                
                71
                
                
                
                (191
                )Projected
      benefit obligation, end of period
                
                $
                3,836
                
                
                $
                3,021Changes
      in Plan Assets:Plan
      assets at fair value, beginning of period
                
                $
                2,325
                
                
                $
                2,410Actual
      return on plan assets (including foreign currency impact)
                
                
                (171
                )
                
                
                (190
                )Employer
      contributions
                
                
                238
                
                
                
                232Participant
      contributions
                
                
                240
                
                
                
                232Benefits
      (paid) deposited
                
                
                89
                
                
                
                (359
                )Plan
      assets at fair value, end of period
                
                $
                2,721
                
                
                $
                2,325Net
      Amount Recognized in Consolidated Balance SheetsUnderfunded,
      end of year
                
                $
                (1,115
                )
                
                $
                (696
                )Other
      long term liabilities
                
                $
                (1,115
                )
                
                $
                (696
                )Amount  Recognized
      in Accumulated Other Comprehensive Loss, Net of TaxActuarial
      loss on plan assets
                
                $
                (787
                )
                
                $
                (582
                )Actuarial
      gain on benefit obligation
                
                
                20
                
                
                
                75Actuarial
      gain recognized in current year
                
                
                45
                
                
                
                19Accumulated  other
      comprehensive loss
                
                $
                (722
                )
                
                $
                (488
                )Accumulated
      benefit obligation at end of year
                
                $
                (3,521
                )
                
                $
                (2,743
                )
  F-29
 STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 The
underfunded balance of $1,115,000 and $696,000 was included in other long-term
liabilities on the consolidated balance sheets as of January 1, 2010 and January
2, 2009, respectively.
  Net
periodic pension cost associated with the Swiss Plan in the years ended January
1, 2010, January 2, 2009 and December 28, 2007 include the following components
(in thousands):
  2009
              
              
              2008
              
              
              2007Service
      Cost
              
              $
              307
              
              
              $
              265
              
              
              $
              60Interest
      Cost
              
              
              108
              
              
              
              114
              
              
              
              26Expected
      return on plan assets
              
              
              (91
              )
              
              
              (111
              )
              
              
              (31
              )Actuarial
      loss recognized in current year
              
              
              33
              
              
              
              24
              
              
              
              —Net
      periodic pension cost
              
              $
              357
              
              
              $
              292
              
              
              $
              55
  Changes
in other comprehensive loss (net of tax) associated with the Swiss Plan in the
year ended January 1, 2010 and January 2, 2009 include the following components
(in thousands):
 
 2009
              
              
              2008Actuarial
      loss of current year
              
              $
              (260
              )
              
              $
              (136
              )Actuarial
      loss recorded in current year
              
              
              26
              
              
              
              19Change
      in other comprehensive loss
              
              $
              (234
              )
              
              $
              (117
              )
  The
amount in accumulated other comprehensive loss as of January 1, 2010 that is
expected to be recognized as a component of the net periodic pension costs in
the subsequent year is $55,000.
  Net
periodic pension cost and projected and accumulated pension obligation for the
Company’s Swiss Plan were calculated on January 1, 2010 and January 2, 2009
using the following assumptions:
  2009
              
              
              2008Discount
      rate
              
              
              3.10
              %
              
              
              3.25
              %Salary
      increases
              
              
              2.00
              %
              
              
              2.00
              %Expected
      return on plan assets
              
              
              3.35
              %
              
              
              3.50
              %Expected
      average remaining working lives in years
              
              
              9.90
              
              
              
              9.90
  The
discount rates of 3.10% and 3.25%  for the period ending January 1,
2010 and January 2, 2009 respectively, are based on an assumed pension benefit
maturity of 10 to 15 years. The rate was estimated using the rate of return for
high quality Swiss corporate bonds that mature in eight years. This maturity was
used as there are significant numbers of high quality Swiss bonds, but very few
bonds issued with maturities with longer lives. As of January 1, 2010 and
January 2, 2009, the average rate for high quality Swiss corporate bonds was
3.13% ,and 3.17% respectively. In order to determine an appropriate discount
rate, the eight year rate of return was then extrapolated along the yield curve
of Swiss government bonds.
  The
salary increase rate of 2% was based on the Company’s best estimate of future
increases over time.
  The
expected long-term rate of return on plan assets is based on the expected asset
allocation and assumptions concerning long-term interest rates, inflation rates,
and risk premiums for equities above the risk-free rates of return. These
assumptions take into consideration historical long-term rates of return for
relevant asset categories.
  Plan
assets categories in the Swiss Plan are comprised of the following (in
thousands):
  2009
              
              
              2008Bonds
      and loans
              
              $
              1,877
              
              
              $
              1,628Real
      estate (including real estate funds)
              
              
              735
              
              
              
              581Equity
      securities
              
              
              82
              
              
              
              70Liquid
      assets
              
              
              27
              
              
              
              46$
              2,721
              
              
              $
              2,325
 
 F-30
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  In
accordance with ASC 820-10-35 the assets above are measured at fair value and
are categorized into three different class levels.  Level 1 assets are
those whose value is based on quoted prices in active markets.  Level
2 assets are those whose values are based on direct or indirect observable
markets for similar assets.  Level 3 assets are those whose values are
unobservable.  As of January 1, 2010, Level 1 assets in the Swiss Plan
include bonds (62%), equity (3%) and liquid assets (1%).  Level 2
assets are comprised of mortgages (12%), real estate assets (15%) and loans
(7%).  As real estate assets have periodic valuations and those
valuations are based on observable inputs for similar assets, the Swiss Plan
re-categorized those assets to Level 2 as of January 1, 2010 from Level 3 as of
January 2, 2009.  Therefore, as of January 1, 2010, the Swiss Plan did
not have any Level 3 assets.    As of January 2,
2009,  Level 1 assets in the Swiss Plan include bonds (61%), equity
(3%) and liquid assets (2%).  Level 2 assets are comprised of real
estate (14%), mortgages (11%) and loans (9%).
  The
Company has contracted with the Allianz Suisse Life Insurance Company’s BVG
Collective Foundation to manage the Swiss Plan.  The investment
strategy is determined by the Swiss insurance company and applies to all members
of the collective foundation.
  In fiscal
2010, the Company expects to make cash contributions totaling approximately
$272,000 to the Swiss Plan.
  The
estimated future benefit payments for the Swiss Plan are as follows (in
thousands):
  Fiscal Year2010
              
              $
              472011
              
              
              562012
              
              
              662013
              
              
              752014
              
              
              852015
      - 2019
              
              
              595
  Defined
Benefit Plan-Japan
  In
connection with the Company’s acquisition of the remaining interest in STAAR
Japan, Inc., STAAR assumed the net pension liability under STAAR Japan’s
noncontributory defined benefit pension plan (“Japan Plan”) substantially
covering all of the employees of STAAR Japan.  STAAR Japan accounts
for the Japan Plan under the requirements of ASC 715-30 (previously accounted
for under SFAS No. 158). Benefits under the Japan plan are earned, vested and
accumulated based on a point-system, primarily based on the combination of years
of service, actual and expected future grades (management or non-management) and
actual and future zone (performance) levels of the employees.  Each
point earned is worth a fixed monetary value, 1,000 Yen per point, regardless of
the level, grade or zone of the employee.  Gross benefits are
calculated based on the cumulative number of points earned over the service
period multiplied by 1,000 Yen.  The mandatory retirement age limit is
60 years old.
 
 Effective
September 30, 2009 (the “Distribution Date”), STAAR Japan management and the
participants of the Japan Plan approved the distribution of the pension plan
assets to its participants (the “Distribution”).  All other terms and
provisions of the Japan Plan remained unchanged except as described
below.  Prior to the Distribution Date, the plan assets were being
held, invested and administered by Dai-ichi Mutual Life Insurance Company, the
plan Custodian, and as of the Distribution Date, all the risks associated with
the plan assets and its distribution to the participants of the plan were
irrevocably accepted by and legally transferred to the Custodian.  The
Company accounted for this distribution as a partial settlement on the
Distribution Date in accordance with ASC 715-30-35, Defined Benefit Plans –
Pension.  On September 30, 2009, the fair value of the Japan
Plan assets were approximately 58 million Yen (approximately $643,000 at the
exchange rate in effect on that date), which were distributed to the
participants based on their pro rata vested balances in October
2009.  The Company recorded in earnings a $26,000 gain on partial
settlement of the Japan Plan calculated on a pro rata portion of the amount
equal to the percentage reduction in the projected benefit obligation by the
distribution amount.
  F-31
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 Beginning
October 1, 2009, STAAR Japan will maintain and administer the plan (the “Amended
Plan”) and fund the obligations of the Amended Plan from STAAR Japan’s
operations.  STAAR Japan will no longer maintain and engage a
Custodian or Trustee to invest and administer the assets of the Amended
Plan.  Furthermore, STAAR Japan is not required, and does not intend
to provide any future contributions to the Amended Plan to meet benefit
obligations and will therefore not have any plan assets.  The Amended
Plan will retain all other provisions of the Japan Plan that existed prior to
the distribution, except for two amendments made to the Amended
Plan.  First, since the Distribution was a taxable event to the
participants, STAAR Japan agreed to increase future pension benefits to the
participants to reimburse them for any additional taxes due from the
Distribution when those benefits are paid (see Amendment 1 in the table
below).  Second, the Amended Plan changed the benefit payment method
to a lump-sum distribution only, whereas the Japan Plan prior to the amendment,
provided a choice of distribution of benefits either in lump-sum or an annuity
(Amendment 2 shown below).
  The
funded status of the benefit plan at January 1, 2010 and January 2, 2009
is  as follows:
  2009
                
                
                2008Change
      in Projected Benefit Obligation:Projected
      benefit obligation, beginning of period
                
                $
                1,500
                
                
                $
                1,247Service
      cost
                
                
                238
                
                
                
                156Interest
      cost
                
                
                27
                
                
                
                27Actuarial
      gain
                
                
                (111
                )
                
                
                (76
                )Benefits
      paid
                
                
                (59
                )
                
                
                (151
                )Distribution
      of plan assets
                
                
                (643
                )
                
                
                —Amendment
      1
                
                
                53
                
                
                
                —Amendment
      2
                
                
                (83
                )
                
                
                —Foreign
      exchange adjustment
                
                
                (2
                )
                
                
                297Projected
      benefit obligation, end of period
                
                $
                920
                
                
                $
                1,500Changes
      in Plan Assets:Plan
      assets at fair value, beginning of period
                
                $
                578
                
                
                $
                476Actual
      return on plan assets
                
                
                (13
                )
                
                
                1Employer
      contributions
                
                
                76
                
                
                
                69Benefits
      paid
                
                
                (11
                )
                
                
                (82
                )Distribution
      of plan assets
                
                
                (643
                )
                
                
                —Foreign
      exchange adjustment
                
                
                13
                
                
                
                114Plan
      assets at fair value, end of period
                
                $
                —
                
                
                $
                578Net
      Amount Recognized in Consolidated Balance SheetsUnderfunded,
      end of period
                
                $
                (920
                )
                
                $
                (922
                )Other
      long term liabilities
                
                $
                (920
                )
                
                $
                (922
                )Amount  Recognized
      in Accumulated Other Comprehensive IncomeTransition
      obligation
                
                $
                46
                
                
                $
                24Actuarial
      gain
                
                
                123
                
                
                
                51Gain
      on partial settlement on the Distribution
                
                
                (26
                )Amendment
      1
                
                
                (53
                )
                
                
                —Amendment
      2
                
                
                83
                
                
                
                —Accumulated  other
      comprehensive income
                
                $
                173
                
                
                $
                75Accumulated
      benefit obligation at end of year
                
                $
                (578
                )
                
                $
                (1,035
                )
 
 The
underfunded balance of $920,000 and $922,000 was included in other long-term
liabilities on the consolidated balance sheets as of January 1, 2010 and January
2, 2009.
  Net
periodic pension cost associated with the Japan Plan for the years ended January
1, 2010 and January 2, 2009 include the following components (in
thousands):
  F-32
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  2009
              
              
              2008Service
      cost
              
              $
              238
              
              
              $
              156Interest
      cost
              
              
              27
              
              
              
              27Expected
      return on plan assets
              
              
              (8
              )
              
              
              (11
              )Gain
      on partial settlement
              
              
              (26
              )
              
              
              —Net
      amortization of transition obligation
              
              
              6
              
              
              
              10$
              237
              
              
              $
              182
 
 Changes
in other comprehensive income associated with the Japan Plan for the years ended
January 1, 2010 and January 2, 2009 include the following components (in
thousands):
 
 2009
              
              
              2008Amortization
      of  transitional obligation
              
              $
              22
              
              
              $
              24Net
      actuarial gain of current year
              
              
              88
              
              
              
              65Gain
      on partial settlement
              
              
              (26
              )
              
              
              —Amendment
      1
              
              
              (53
              )
              
              
              —Amendment
      2
              
              
              83
              
              
              
              —Actuarial
      gain recorded in current year
              
              
              (16
              )
              
              
              (14
              )Change
      in other comprehensive income
              
              $
              98
              
              
              $
              75
 
 The
amount in accumulated other comprehensive income as of January 1, 2010 that is
expected to be recognized as a component of the net periodic pension cost in the
subsequent year is approximately $10,000.
  Net
periodic pension cost and projected and accumulated pension obligation for the
Company’s Japan Plan were calculated on January 1, 2010 and January 2, 2009
using the following assumptions:
  2009
              
              
              2008Discount
      rate
              
              
              1.30
              %
              
              
              2.00
              %Salary
      increases
              
              
              2.00
              %
              
              
              2.00
              %Expected
      return on plan assets
              
              
              N/A
              
              
              
              2.00
              %Expected
      average remaining working lives in years
              
              
              20.00
              
              
              
              20.26
  The
discount rate of 1.30% and 2.00% for the period ending January 1, 2010 and
January 2, 2009 is based on the approximate Japanese government bond rate with a
term of 10 to 20 years.
  The
salary increase average rate of 2% was based on the Company’s best estimate of
future increases over time.
  For
fiscal year ended January 2, 2009, the expected long-term rate of return on plan
assets was based on the defined yields related to the life insurance general
account, which made up the major part of the plan asset
categories.  These assumptions took into consideration historical
long-term rates of return for relevant asset categories.
  Plan
assets’ categories in the Japan Plan as of January 2, 2009 are comprised of the
following (in thousands):
  2008Equity
              
              
              110Debt
      instruments
              
              
              318Loans
      receivable
              
              
              92Real
      Estate
              
              
              23Other
              
              
              35578
  In
accordance with ASC 820-10-35 the assets as of January 2, 2009 are measured at
fair value and are categorized into three different class
levels.  Level 1 assets are comprised of equity (19%) and debt
instruments (55%).  Level 2 assets are comprised mainly of real estate
assets (4%).  Level 3 assets are loan receivables (16%) and other
assets (6%).  On September 30, 2009, all assets of the Japan Plan were
liquidated as part of the Distribution.
  F-33
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  In fiscal
2010, the Company does not expect to make any cash contributions to the Japan
Plan.
  The
estimated future benefit payments for the Japan Plan are as follows (in
thousands):
  Fiscal Year2010
              
              $
              202011
              
              
              272012
              
              
              342013
              
              
              412014
              
              
              462015
      - 2019
              
              
              487
  Defined
Contribution Plan
  The
Company maintains a 401(k) profit sharing plan (“401(k) Plan”) for the benefit
of qualified employees in North America. During the fiscal year ended January 1,
2010, employees who participate may elect to make salary deferral contributions
to the 401(k) Plan up to the $16,500 of the employees’ eligible payroll subject
to annual Internal Revenue Code maximum limitations. The Company makes a
contribution of 50% of the employee’s contribution up to the first 2% of the
employee’s compensation, and 25% of the next 4% of compensation. In addition,
STAAR may make a discretionary contribution to qualified employees, in
accordance with the 401(k) Plan.  During the years ended January 1,
2010, January 2, 2009 and December 28, 2007, the Company made contributions, net
of forfeitures, of $94,000, $125,000 and $132,000, respectively, to the 401(k)
Plan.
  Note 13 —
Stockholders’ Equity
  Common
Stock
  On June
17, 2009, the Company completed a Common Stock Offering (the “Offering”) by
issuing 4,555,319 shares of Company stock to institutional investors at the
previous day’s closing market price of $1.88 per share, raising $8.5 million in
aggregate, net of approximately $62,000 issuance costs.  No warrants
or other financial instruments were issued in the Offering.  The
Offering resulted in an increase in the par value of Common Stock of $46,000,
with the remainder of the proceeds being recorded as additional paid-in capital
on the issuance date.  The primary purpose of the Offering was to
raise the funds necessary to post a deposit with the Superior Court of
California, County of Orange, in connection with the Company’s Parallax judgment while the
case is on appeal (see Notes 1 and 14).
 
 On
February 20, 2009, the Company issued 246,764 shares of Company common stock to
certain of its attorneys at the closing market price of $1.72 per share, or
approximately $424,000, in lieu of cash for previously incurred legal services
related to the Parallax
case.
  During
fiscal year 2008, the Company issued 137,821 shares of restricted stock to an
executive and two board members in consideration for services rendered to the
Company.  As of January 1, 2010, all of the restricted shares were
vested.
  During
2007, the Company completed a public offering with institutional investors of
3,600,000 shares of the Company’s common stock, for net proceeds of $16.6
million. Also during fiscal 2007, the Company issued 69,151 shares of restricted
stock to certain employees and a director and 47,000 shares of common stock to
an employee in consideration for services rendered to the Company. Stock
compensation expense of $125,000 was recorded during fiscal 2007 as a result of
the issuance of common stock. As of January 1, 2010, 67,484 of the restricted
shares were vested.
  Restricted
shares are issued at fair market value on the date of grant, vest over a period
of one to four years, and are subject to forfeiture until vested or the service
period is achieved and the restriction is lapsed or
terminated.    As the restriction lapses and the stock
vests, the expense is included in stock-based compensation.
  F-34
  STAAR
SURGICAL COMPANY AND SUBSIDIARIES
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
  Share-Based
Payments
  The
Company has adopted ASC 718, “Stock Compensation” (previously accounted for
under SFAS No. 123 (revised) “Share Based Payment” (“SFAS 123R”), effective
December 31, 2005).
  As of
January 1, 2010, the Company has multiple share-based compensation plans, which
are described below. The Company issues new shares upon option exercise once the
optionee remits payment for the exercise price. The compensation cost that has
been charged against income for the 2003 Omnibus Plan and the 1998 Stock Option
Plan is set forth below (in thousands):
 
 Fiscal Year EndedJanuary 1,2010
              
              
              January 2,2009
              
              
              December 28,2007Stock
      based compensation expense
              
              $
              941
              
              
              $
              1,198
              
              
              $
              1,350Restricted
      stock expense
              
              
              198
              
              
              
              256
              
              
              
              92Common
      stock issued to employees
              
              
              296
              
              
              
              —
              
              
              
              125Consultant
      compensation
              
              
              22
              
              
              
              59
              
              
              
              14Total
              
              $
              1,457
              
              
              $
              1,513
              
              
              $
              1,581
  There was
no net income tax benefit recognized in the consolidated statements of
operations for share-based compensation arrangements as the Company fully
offsets net deferred tax assets with a valuation allowance (see Note
11).  In addition, the Company capitalized $118,000, $199,000 and
$181,000 of stock based compensation to inventory for the fiscal years ended
January 1, 2010, January 2, 2009 and December 28, 2007, respectively, and
recognizes those amounts as expense in Cost of Sales as the inventory is
sold.
  Stock
Option Plans
  In fiscal
year 2003, the Board of Directors approved the 2003 Omnibus Equity Incentive
Plan (the “2003 Plan”) authorizing awards of equity compensation, including
options to purchase common stock and restricted shares of common stock. The 2003
Plan amends, restates and replaces the 1991 Stock Option Plan, the 1995
Consultant Stock Plan, the 1996 Non-Qualified Stock Plan and the 1998 Stock
Option Plan (the “Restated Plans”). Under provisions of the 2003 Plan, all of
the unissued shares in the Restated Plans are reserved for issuance in the 2003
Plan. Each year the number of shares reserved for issuance under the 2003 Plan
has been increased as necessary to provide that 2% of the total shares of common
stock outstanding on the immediately preceding December 31 would be reserved for
issuance, up to a maximum of 1,586,371 additional shares, and a maximum total of
6,500,000 shares issuable under the 2003 Plan and all of the Restated Plans
incorporated in it. The 6,500,000 maximum shares were reached on January 1,
2007, and no additional shares will be available for issuance as incentives to
employees without stockholder approval. Shares subject to grants under the 2003
Omnibus Plan and Restated Plans that lapse or terminate in accordance with their
terms become available for new grants under the 2003 Omnibus Plan. As of January
1, 2010, approximately 475,000 shares were authorized and available for grants
under the 2003 Omnibus Plan. The 2003 Plan provides for various forms of
stock-based incentives. To date, of the available forms of awards under the 2003
Plan, the Company has granted only stock options and restricted stock. Options
under the plan are granted at fair market value on the date of grant, become
exercisable generally over a three- or four-year service period, or as
determined by the Board of Directors, and expire over periods not exceeding 10
years from the date of grant. Certain option and share awards provide for
accelerated vesting if there is a change in control (as defined in the 2003
Plan). Restricted stock grants under the 2003 Plan generally vest over a period
of one, three or four years. Pursuant to the plan, options for 2,700,335 shares
were outstanding at January 1, 2010 with exercise prices ranging between $0.95
and $8.80 per share. There were 6,917 shares of restricted stock outstanding at
January 1, 2010.
  In fiscal
year 2000, the Board of Directors approved the Stock Option Plan and Agreement
for the Company’s former Chief Executive Officer (now President of International
Operations) authorizing the granting of options to purchase common stock or
awards of common stock. The options under the plan were granted at fair market
value on the date of grant, vested over a three-year period from the date of
grant, and expire 10 years from the date of grant.  Pursuant to this
plan, options for 500,000 were outstanding at January 1, 2010, with an exercise
price of $11.13 per share.
  F-35


STAAR SURGICAL COMPANY AND
SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




In fiscal
year 1998, the Board of Directors approved the 1998 Stock Option Plan,
authorizing the granting of options to purchase common stock or awards of common
stock. Under the provisions of the plan, 1.0 million shares were reserved for
issuance; however, the maximum number of shares authorized may be increased
provided such action is in compliance with Article IV of the plan. During fiscal
year 2001, pursuant to Article IV of the plan, the stockholders of the Company
authorized an additional 1.5 million shares. Generally, options under the plan
are granted at fair market value at the date of the grant, become exercisable
over a three-year period, or as determined by the Board of Directors, and expire
over periods not exceeding 10 years from the date of grant. Pursuant to the
plan, options for 472,300 were outstanding at January 1, 2010 with exercise
prices ranging between $3.35 and $13.625 per share.  No further awards
may be made under this plan.




In fiscal
year 1995, the Company adopted the 1995 Consultant Stock Plan, authorizing the
granting of options to purchase common stock or awards of common stock.
Generally, options under the plan were granted at fair market value at the date
of the grant, become exercisable on the date of grant and expire 10 years from
the date of grant. Pursuant to this plan, options for 45,000 shares were
outstanding at January 1, 2010 with an exercise price of $1.70 per
share.  No further awards may be made under this plan.




Under
provisions of the Company’s 1991 Stock Option Plan, 2.0 million shares were
reserved for issuance. Generally, options under this plan were granted at fair
market value at the date of the grant, become exercisable over a three-year
period, or as determined by the Board of Directors, and expire over periods not
exceeding 10 years from the date of grant. Pursuant to this plan, options for
10,000 shares were outstanding at January 1, 2010 with an exercise price of
$9.56 per share.  No further awards may be made under this
plan.




During
fiscal years 1999 and 2000, the Company issued non-qualified options to purchase
shares of its Common Stock to employees and consultants. Pursuant to these
agreements, options for 15,000 shares were outstanding at January 1, 2010 with
exercise price of $10.19.




During
the fiscal year ended January 1, 2010, there was one inconsequential stock
option exercise.  During the fiscal year ended January 2, 2009, an
outside consultant exercised 10,000 options from the 2003 Plan at an exercise
price of $3.95 per option resulting in net cash proceeds to the Company totaling
$39,500.




During
the fiscal year ended December 28, 2007, officers, employees and others
exercised 163,000 options from the 1995, 1996, 1998, non-qualified and 2003
stock option plans at prices ranging from $2.96 to $4.88 resulting in net cash
proceeds to the Company totaling $584,000.




Assumptions




The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model applying the assumptions noted in the
following table. Expected volatilities are based on historical volatility of the
Company’s stock. The Company uses historical data to estimate option exercise
and employee termination behavior. The expected term of options granted is
derived from the historical exercise activity over the past 15 years, and
represents the period of time that options granted are expected to be
outstanding.  The Company has calculated a 10% estimated forfeiture
rate used in the model for fiscal year 2009 option grants based on historical
forfeiture experience.  The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.





Fiscal
      Year EndedJanuary 1,
                            2010
                          
                          
                          January 2,
                            2009
                          
                          
                          December 28,
                            2007Expected
      dividend yield
                          
                          
                          0
                          %
                          
                          
                          0
                          %
                          
                          
                          0
                          %Expected
      volatility
                          
                          
                          74
                          %
                          
                          
                          62
                          %
                          
                          
                          69
                          %Risk-free
      interest rate
                          
                          
                          1.92
                          %
                          
                          
                          2.87
                          %
                          
                          
                          4.52
                          %Expected
      term (in years)
                          
                          
                          5.5
                          
                          
                          
                          5.5
                          
                          
                          5.41&5.5




F-36




STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




A summary
of option activity under the Plans as of January 1, 2010 is presented
below:





Options
                                          
                                          Shares
                                            (000’s)
                                          
                                          
                                          Weighted-
                                            Average
                                            Exercise
                                            Price
                                          
                                          
                                          Weighted-
                                            Average
                                            Remaining
                                            Contractual
                                            Term
                                          
                                          
                                          Aggregate
                                            Intrinsic
                                            Value
                                            (000’s)Outstanding
      at January 2, 2009
                                          
                                          
                                          3,854
                                          
                                          
                                          $
                                          5.80Granted
                                          
                                          
                                          225
                                          
                                          
                                          
                                          1.78Exercised
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Forfeited
      or expired
                                          
                                          
                                          (336
                                          )
                                          
                                          
                                          8.03Outstanding
      at January 1, 2010
                                          
                                          
                                          3,743
                                          
                                          
                                          $
                                          5.36
                                          
                                          
                                          
                                          5.11
                                          
                                          
                                          $
                                          794Exercisable
      at January  1, 2010
                                          
                                          
                                          2,984
                                          
                                          
                                          $
                                          5.99
                                          
                                          
                                          
                                          4.30
                                          
                                          
                                          $
                                          229





The
weighted-average grant-date fair value of options granted during the fiscal
years ended January 1, 2010, January 2, 2009, and December 28, 2007 was $0.96,
$1.45 and $2.94 per option respectively.  The total fair value of
options vested during fiscal years ended January 1, 2010, January 2, 2009 and
December 28, 2007 was $1,194,000, $1,716,000 and $1,606,000, respectively. The
total intrinsic value of options exercised during the fiscal years ended January
1, 2010, January 2, 2009 and December 28, 2007 was $1,000, $13,000 and $296,000,
respectively.




A summary
of the Company’s non-vested shares as of January 1, 2010 and changes during
the period is presented below:





Nonvested
      Shares
                                  
                                  Shares
                                    (000’s)
                                  
                                  
                                  Weighted-
                                    Average
                                    Grant
                                    Date
                                    Fair
                                    ValueNonvested
      at January 2, 2009
                                  
                                  
                                  1,092
                                  
                                  
                                  $
                                  2.25Granted
                                  
                                  
                                  225
                                  
                                  
                                  
                                  0.96Vested
                                  
                                  
                                  (515
                                  )
                                  
                                  
                                  2.32Forfeited
                                  
                                  
                                  (43
                                  )
                                  
                                  
                                  1.91Nonvested
      at January 1, 2010
                                  
                                  
                                  759
                                  
                                  
                                  $
                                  1.84





As of
January 1, 2010, there was $622,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Plans. That cost is expected to be recognized over a weighted-average period of
1.07 years.




The
following table summarizes information about stock options outstanding and
exercisable at January 1, 2010 (in thousands, except per share
data):





Range of
                                                  Exercise Prices
                                                
                                                Number
                                                  Outstanding
                                                  at
                                                  January 1,
                                                  2010
                                                
                                                Options
                                                  Outstanding
                                                  Weighted-Average
                                                  Remaining
                                                  Contractual Life
                                                
                                                Weighted-
                                                  Average
                                                  Exercise
                                                  Price
                                                
                                                
                                                Number
                                                  Exercisable
                                                  at
                                                  January 1,
                                                  2010
                                                
                                                
                                                Weighted-
                                                  Average
                                                  Exercise
                                                  Price$0.95
      to $1.43
                                                
                                                
                                                95
                                                
                                                9.2 years
                                                
                                                $
                                                0.95
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                N/A$1.56
      to $2.30
                                                
                                                
                                                558
                                                
                                                7.8 years
                                                
                                                $
                                                2.14
                                                
                                                
                                                
                                                188
                                                
                                                
                                                $
                                                2.10$2.45
      to $3.67
                                                
                                                
                                                522
                                                
                                                5.2 years
                                                
                                                $
                                                3.24
                                                
                                                
                                                
                                                425
                                                
                                                
                                                $
                                                3.27$3.75
      to $5.39
                                                
                                                
                                                1,354
                                                
                                                5.6 years
                                                
                                                $
                                                4.32
                                                
                                                
                                                
                                                1,189
                                                
                                                
                                                $
                                                4.25$5.62
      to $8.12
                                                
                                                
                                                589
                                                
                                                5.1 years
                                                
                                                $
                                                7.26
                                                
                                                
                                                
                                                557
                                                
                                                
                                                $
                                                7.28$8.80
      to $11.13
                                                
                                                
                                                575
                                                
                                                0.9
      years
                                                
                                                $
                                                10.93
                                                
                                                
                                                
                                                575
                                                
                                                
                                                $
                                                10.93$13.63
                                                
                                                
                                                50
                                                
                                                0.4
      years
                                                
                                                $
                                                13.63
                                                
                                                
                                                
                                                50
                                                
                                                
                                                $
                                                13.633,743
                                                
                                                5.1
      years
                                                
                                                $
                                                5.36
                                                
                                                
                                                
                                                2,984
                                                
                                                
                                                $
                                                5.99





A summary
of warrants to purchase Company stock issued to Broadwood as discussed under
Note 9 as of January 1, 2010 is presented below:





Warrants
                                
                                Shares
                                  (000’s)
                                
                                
                                Weighted-
                                  Average
                                  Exercise
                                  Price
                                
                                
                                Weighted-
                                  Average
                                  Remaining
                                  Contractual
                                  Term
                                
                                
                                Aggregate
                                  Intrinsic
                                  Value
                                  (000’s)Outstanding
      at January 2, 2009
                                
                                
                                770
                                
                                
                                $
                                4.18Granted
                                
                                
                                700
                                
                                
                                
                                4.00Exercised
                                
                                
                                —
                                
                                
                                
                                —Forfeited
      or expired
                                
                                
                                —
                                
                                
                                
                                —Outstanding
      at January 1, 2010
                                
                                
                                1,470
                                
                                
                                $
                                4.10
                                
                                
                                
                                4.62
                                
                                
                                $
                                —
                                *Exercisable
      at January  1, 2010
                                
                                
                                1,470
                                
                                
                                $
                                4.10
                                
                                
                                
                                4.62
                                
                                
                                $
                                —
                                *





*The
exercise price per share for all the warrants issued and outstanding exceeded
the Company’s Common Stock price per share of $3.10 per share (closing price on
December 31, 2009 as markets were closed on January 1, 2010.)


F-37




STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




Note 14 —
Commitments and Contingencies




Lease
Obligations




The
Company leases certain property, plant and equipment under capital and operating
lease agreements. These leases vary in duration and many contain renewal options
and/or escalation clauses.  Current and long-term obligations under
capital leases are included in total current liabilities and total long-term
liabilities in the Company’s Consolidated Balance Sheets.




Estimated
future minimum lease payments under leases having initial or remaining
non-cancelable lease terms in excess of one year as of January 1, 2010 were
approximately as follows (in thousands):





Fiscal Year
                                  
                                  Operating
                                    Leases
                                  
                                  
                                  Capital
                                    Leases2010
                                  
                                  $
                                  2,575
                                  
                                  
                                  $
                                  9712011
                                  
                                  
                                  1,880
                                  
                                  
                                  
                                  4842012
                                  
                                  
                                  1,619
                                  
                                  
                                  
                                  3492013
                                  
                                  
                                  1,596
                                  
                                  
                                  
                                  1672014
                                  
                                  
                                  1,612
                                  
                                  
                                  
                                  12Thereafter
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
      minimum lease payments
                                  
                                  $
                                  9,282
                                  
                                  
                                  $
                                  1,983Less
      amounts representing interest
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (90
                                  )$
                                  9,282
                                  
                                  
                                  $
                                  1,893




Rent
expense was approximately $2.6 million, $2.5 million and $1.4 million for
the years ended January 1, 2010, January 2, 2009 and December 28,
2007, respectively.




The
Company had the following assets under capital lease at January 1, 2010 and
January 2, 2009 (in thousands):





2009
                                
                                
                                2008Machinery
      and equipment
                                
                                $
                                2,342
                                
                                
                                $
                                1,952Furniture
      and fixtures
                                
                                
                                1,524
                                
                                
                                
                                1,510Leasehold
      improvements
                                
                                
                                103
                                
                                
                                
                                1033,969
                                
                                
                                
                                3,565Less
      accumulated depreciation
                                
                                
                                2,367
                                
                                
                                
                                1,328$
                                1,602
                                
                                
                                $
                                2,237




Depreciation
expense for assets under capital lease for each of the years ended
January 1, 2010, January 2, 2009, and December 28, 2007 was
approximately $1,055,000, $856,000 and $569,000, respectively.




Indemnification
Agreements




The
Company has entered into indemnification agreements with its directors and
officers that may require the Company: (a) to indemnify them against liabilities
that may arise by reason of their status or service as directors or officers,
except as prohibited by applicable law; (b) to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified; and (c) to make a good faith determination whether or not it is
practicable for the Company to obtain directors’ and officers’ insurance. The
Company currently has directors’ and officers’ liability insurance through a
third party carrier.


F-38




STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




Tax
Filings




The
Company’s tax filings are subject to audit by taxing authorities in
jurisdictions where it conducts business. These audits may result in assessments
of additional taxes that are subsequently resolved with the authorities or
potentially through the courts. Management believes the Company has adequately
provided for any ultimate amounts that are likely to result from these audits;
however, final assessments, if any, could be significantly different than the
amounts recorded in the consolidated financial statements.




Employment
Agreements




The
Company’s Chief Executive Officer and certain other officers have as provisions
of their employment agreements certain rights, including continuance of cash
compensation and benefits, upon a “change in control,” which may include an
acquisition of substantially all of its assets, or termination “without cause or
for good reason” as defined in the employment agreements.




Litigation
and Claims




Two
lawsuits against STAAR, Parallax Medical Systems v. STAAR
Surgical Company(California Superior Court, County of Orange, Case No.
07CC10136) and Moody v. STAAR
Surgical Company;(California Superior Court, County of Orange, Case No.
07CC10132) were settled on March 30, 2010.  On that date STAAR and all
other parties to the matters entered into a Stipulation for Settlement that
globally resolves all pending disputes among them.  This settlement
satisfies in full the $4.9 million judgment against STAAR in the Parallax matter
and the $6.5 million judgment against STAAR in the Moody matter.  In
exchange for complete mutual releases, the Stipulation provides for payment by
STAAR of $4 million as its contribution to the global
settlement.  STAAR’s contribution will be paid from the $7.4 million
restricted deposit that STAAR placed with the Court on June 22,
2009.  The balance of those funds, approximately $3.4 million, will be
returned to STAAR.  In connection with the settlement, STAAR will
voluntarily dismiss its appeals in both cases.  The cases are
described in greater detail below.





The
Parallax Case.





The
California Superior Court, County of Orange, rendered final judgment in Parallax case on May 11,
2009, in accordance with a March 2, 2009 jury verdict finding that STAAR was
liable for approximately $2.2 million in actual damages and $2.7 million in
punitive damages to Parallax Medical Systems, Inc. for intentional and negligent
interference with prospective business advantage. Parallax is a former
independent regional manufacturer’s representative (“RMR”) of STAAR. Parallax
promoted sales of STAAR products in the southeastern region of the U.S. under a
contract that expired on July 31, 2007.  The jury found that STAAR had
interfered with Parallax’s prospective economic advantage when it informed a
regional IOL distributor that Parallax had a covenant restricting the sale of
competing products.  On July 14, 2009, the Court in part granted
STAAR’s motion to strike or reduce Parallax’s claim for approximately $109,000
in trial-related costs, of which approximately $56,000 was awarded to Parallax.
On August 18, 2009, the Court amended its final judgment to include these costs
and approximately $20,000 in pre-judgment interest, for a total judgment of
$4,966,000.





On
October 22, 2009, STAAR’s general liability insurer agreed to pay a portion of
the legal fees incurred by STAAR after July 1, 2009 for the appeal in the Parallax case. The insurer’s
agreement to defend was subject to a full reservation of its rights and
defenses.





STAAR
filed notice of appeal of the Parallax judgment, and on
June 22, 2009, deposited $7.3 million into a restricted account with the Court
to assure payment of the judgment, thereby staying any enforcement of the
judgment pending the appeal.  The deposit account bears interest, and
as of the date of this Report the account balance is approximately $7.4
million.  STAAR filed its appellate Opening Brief on January 22,
2010.  Pursuant to the March 30, 2010 global settlement of the Parallax and Moody matters STAAR will
voluntarily dismiss its appeal of the Parallax
judgment;  $4 million of the funds deposited with the Court will be
disbursed as directed by counsel for the Parallax and Moody
plaintiffs.  The balance of approximately $3.4 million will be
refunded to STAAR.





The
Moody Case





The
California Superior Court, County of Orange, rendered judgment in the Moody case against STAAR on
December 8, 2009 in accordance with a December 1, 2009 jury verdict finding
that STAAR was liable for $4 million in actual damages and $2.5 million in
punitive damages to Scott C. Moody, Inc. (“SMI”) for intentional and negligent
interference with prospective business advantage.  SMI, also a former
RMR of STAAR, filed a complaint against STAAR on the same day that Parallax filed its
complaint.  Moody promoted sales of STAAR products in the southwestern
region of the U.S., under a contract that, like Parallax’s, expired on July 31,
2007.  The jury found that STAAR had interfered with SMI’s prospective
economic advantage when it informed a regional IOL distributor that SMI had a
covenant restricting the sale of competing products. Notice of judgment on
post-trial motions in the case was served on February 8,
2010.  In post-trial motions the court granted the plaintiff’s motions
for costs of $24,842 and for approximately $130,000 in legal fees and other
assessments that STAAR has already paid separately from the funds to be
contributed to the March 30, 2010 global settlement.





On
October 14, 2009, STAAR’s general liability insurer agreed to pay a portion of
the legal fees incurred by STAAR after July 1, 2009 for its defense of the Moody case.  The
insurer’s agreement to defend was subject to a full reservation of its rights
and defenses.




On
January 29, 2010, attorneys representing STAAR and SMI signed a stipulation
extending the date for potential enforcement and execution of the $6.5 million
Moody judgment to April
30, 2010.   The purpose of the extension was to allow the parties
involved, including certain insurers, to attempt to negotiate a global
settlement, along with the Parallax matter, in a
mediation that took place on March 29-30, 2010, and to avoid the necessity of
STAAR posting an appeal bond during the term of the stipulation.





STAAR
filed notice of its appeal of the Moody judgment on
March 8, 2010.  Pursuant to the March 30, 2010 global
settlement of the Parallax and Moody matters STAAR will
voluntarily dismiss its appeal of the Moody
judgment.


F-39




STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




Note 15 —
Related Party Transactions




The
Company has related party transactions as discussed in Notes 9 and
13.




In
addition to senior notes (see Note 9), the Company has made various advances to
certain employees.   Amounts due from employees included in
prepaids, deposits, and other current assets at January 1, 2010 and January 2,
2009 were $15,000.





Note 16 —
Supplemental Disclosure of Cash Flow Information




Interest
paid was $432,000, $609,000 and $249,000 for the years ended January 1, 2010,
January 2, 2009, and December 28, 2007, respectively. Income taxes paid amounted
to approximately $1,141,000, $598,000 and $795,000 for the years ended January
1, 2010, January 2, 2009, and December 28, 2007, respectively.




The
Company’s non-cash investing and financing activities were as follows (in
thousands):





2009
                    
                    
                    2008
                    
                    
                    2007Non-cash
      investing activities and financing activities:Acquisition
      of Canon Staar
                    
                    $
                    —
                    
                    
                    $
                    7,147
                    
                    
                    $
                    —Applied
      2007 advance payment on acquisition of Canon Staar
                    
                    
                    —
                    
                    
                    
                    (4,000
                    )
                    
                    
                    —Applied
      2007 deferred acquisition costs
                    
                    
                    —
                    
                    
                    
                    (197
                    )
                    
                    
                    —Purchase
      of property and equipment on terms
                    
                    
                    690
                    
                    
                    
                    1,014
                    
                    
                    
                    1,210Issuance
      of preferred stock
                    
                    
                    —
                    
                    
                    
                    6,800
                    
                    
                    
                    —Issuance
      and  registration costs of preferred stock included in accounts
      payable and accrued liabilities
                    
                    
                    —
                    
                    
                    
                    (17
                    )
                    
                    
                    —Deferred
      acquisition costs included in accounts payable
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    187Common
      stock issued for services
                    
                    
                    424
                    
                    
                    
                    —
                    
                    
                    
                    —Common
      stock issued in lieu of vacation
                    
                    
                    24
                    
                    
                    
                    —
                    
                    
                    
                    —Warrants
      issued to Broadwood
                    
                    
                    290
                    
                    
                    
                    —
                    
                    
                    
                    842




F-40




STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





Note 17 —
Net Loss Per Share




The
following is a reconciliation of the weighted average number of shares used to
compute basic and diluted loss per share (in thousands):





2009
                            
                            
                            2008
                            
                            
                            2007Basic
      weighted average shares outstanding
                            
                            
                            32,498
                            
                            
                            
                            29,474
                            
                            
                            
                            28,121Diluted
      effect of stock options and warrants
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Diluted
      weighted average shares outstanding
                            
                            
                            32,498
                            
                            
                            
                            29,474
                            
                            
                            
                            28,121




Potential
common shares of 6.7 million (consisting of 3.8 million stock options, 1.7
million potential common shares convertible by holders of Preferred Stock and
1.2 million potential common weighted average shares upon exercise of the
Broadwood Warrants), 6.0 million, and 3.6 million for the fiscal years ended
January 1, 2010, January 2, 2009, and December 28, 2007, respectively, were
excluded from the computation as the shares would have had an anti-dilutive
effect.




Note 18 —
Geographic and Product Data




The
Company markets and sells its products in approximately 50 countries and has
manufacturing sites in the United States, Switzerland and Japan (see Note 2).
Other than the United States, Germany, Japan and Korea, the Company does not
conduct business in any country in which its sales in that country exceed 5% of
consolidated sales. Sales are attributed to countries based on location of
customers. The composition of the Company’s sales to unaffiliated customers
between those in the United States, Germany (sold on March 2, 2010, see Note
19), Japan, Korea and other locations for each year, is set forth below (in
thousands):





2009
                            
                            
                            2008
                            
                            
                            2007Net
      sales to unaffiliated customersU.S.
                            
                            $
                            16,088
                            
                            
                            $
                            18,927
                            
                            
                            $
                            19,721Germany
                            
                            
                            24,286
                            
                            
                            
                            25,124
                            
                            
                            
                            23,731Japan
                            
                            
                            14,711
                            
                            
                            
                            13,485
                            
                            
                            
                            423Korea
                            
                            
                            5,366
                            
                            
                            
                            3,471
                            
                            
                            
                            2,627Others*
                            
                            
                            14,894
                            
                            
                            
                            13,887
                            
                            
                            
                            12,861Total
                            
                            $
                            75,345
                            
                            
                            $
                            74,894
                            
                            
                            $
                            59,363





*No other
location individually exceeds 5% of total sales.





100% of
the Company’s sales are generated from the ophthalmic surgical product segment
and, therefore, the Company operates as one operating segment for financial
reporting purposes. The Company’s principal products are IOLs used in cataract
surgery, ICLs used in refractive surgery and other surgical products used
primarily in cataract surgery. During 2008, the Company reclassified the
components of the segment from products used in cataract, refractive, and
glaucoma surgery to IOLs, ICLs and other surgical products as the Company
believes this classification provides more meaningful
information.  The composition of the Company’s net sales by product
line is as follows (in thousands):




Net
Sales by Product Line





2009
                            
                            
                            2008
                            
                            
                            2007IOLs
                            
                            $
                            33,861
                            
                            
                            $
                            32,867
                            
                            
                            $
                            23,379ICLs
                            
                            
                            21,973
                            
                            
                            
                            19,069
                            
                            
                            
                            15,368Other
      Surgical Products
                            
                            
                            19,511
                            
                            
                            
                            22,958
                            
                            
                            
                            20,616Total
                            
                            $
                            75,345
                            
                            
                            $
                            74,894
                            
                            
                            $
                            59,363




F-41




STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




The
composition of the Company’s long-lived assets, consisting of property and
equipment, between those in the United States, Germany (sold on March 2, 2010,
see Note 19), Switzerland, Japan and Australia is set forth below (in
thousands):





2009
                            
                            
                            2008Long-lived
      assetsU.S.
                            
                            $
                            1,507
                            
                            
                            $
                            2,838Germany
                            
                            
                            1,171
                            
                            
                            
                            1,139Switzerland
                            
                            
                            806
                            
                            
                            
                            757Japan
                            
                            
                            1,435
                            
                            
                            
                            1,120Australia
                            
                            
                            86
                            
                            
                            
                            120Total
                            
                            $
                            5,005
                            
                            
                            $
                            5,974





The
Company sells its products internationally, which subjects the Company to
several potential risks, including fluctuating exchange rates (to the extent the
Company’s transactions are not in U.S. dollars), regulation of fund transfers by
foreign governments, United States and foreign export and import duties and
tariffs, and political instability.





Note 19 —
Subsequent Events




Divestiture
of Domilens




On
March 2, 2010 (the “Closing Date”), STAAR Surgical Company completed the
divestiture (the “Transaction”) of all of its interest in its German
distribution subsidiary, Domilens GmbH (“Domilens”) through a management buyout
led by funds managed by Hamburg-based Small Cap Buyout Specialist BPE
Unternehmensbeteiligungen GmbH (“BPE”).  To effectuate the Transaction
STAAR Surgical AG (“STAAR AG”), STAAR’s Swiss subsidiary and holder of 100% of
the shares of Domilens, signed a Stock Purchase Agreement (the “Agreement”) with
Domilens Akquisitions GmbH (“Domilens Akquisitions”) on February 24,
2010.  Domilens Akquisitions is a newly formed entity 74% owned by BPE
and 26% owned by senior management of Domilens.




The
Agreement provides for a gross Purchase Price of €10.5 million (approximately
$14.3 million based on the foreign currency exchange rate on the Closing
Date).  After adjusting for €0.8 million (approximately $1.1 million)
in cash dividends received by STAAR from Domilens in December 2009 and January
2010, and the exclusion of certain expenses related to compliance with the
Sarbanes-Oxley Act of 2002, at closing on March 2, 2010, Domilens
Akquisitions paid a cash Net Purchase Price of €9.7 million (approximately $13.2
million).  €100,000 (approximately $136,000) of the Net Purchase Price
was paid into an escrow account, to be held against payment of any unaccrued
taxes assessed for periods prior to December 31, 2009.  Funds
remaining after the resolution of such potential liabilities, if any, will be
distributed to STAAR from the escrow account, no later than December
31, 2011.





After
expenses of €358,000 (approximately $485,000) related to investment banking
fees, and excluding the escrowed funds and any earn-out payments, STAAR received
net cash proceeds of approximately €9.2 million from the Transaction
(approximately $12.5 million at the Closing Date foreign exchange
rate).  The Company will pay a $64,000 marketing allowance in 2010 for
Domilens to market STAAR’s products post the Transaction.  Taxes
related to the disposition of Domilens were estimated to be
insignificant.




Based on
the performance of Domilens in fiscal years 2010, 2011 and 2012, STAAR may earn
up to an additional €675,000 (approximately $920,000 at currently prevailing
exchange rates).  These additional “earn-out” payments will be paid on
achievement of specified earnings before income tax (“EBIT”) as set forth
below.  If a target is missed in any year, but in the following year
Domilens achieves the target and also makes up for the earlier shortfall, the
payments for both years will be earned and paid.




Fiscal
      Year
                    
                    Domilens
      EBIT
                    
                    Earn-Out
      Payment2010
                    
                    €2,500,000
      (~ $3.4 million)
                    
                    €200,000
      (~$273,000)2011
                    
                    €2,900,000
      (~ $3.9 million)
                    
                    €225,000
      (~$307,000)2012
                    
                    €3,500,000
      (~ $4.7 million)
                    
                    €250,000
      (~$340,000)




F-42


STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




In
connection with the Stock Purchase Agreement, STAAR on February 24, 2010 also
entered into a Distribution Agreement with Domilens providing for the continued
sale of certain STAAR products following the transfer of
ownership.  The Distribution Agreement has a term of five
years.  During the first three years of the term, Domilens will be the
exclusive distributor of covered products in Germany and Austria, subject to
Domilens achieving minimum purchase levels.  After the initial
three-year period, Domilens will have non-exclusive distribution rights for
these STAAR products, unless the parties agree to an extension of the
exclusivity. The following STAAR products are covered by the Distribution
Agreement:  preloaded silicone and acrylic IOL injectors; the Visian
ICL, Visian Toric ICL and Visian Hyperopic ICL.





The
Company considers Domilens to be a component of an entity as defined by ASC
205-20-20, since Domilens is the lowest level at which the operations and cash
flows can be clearly distinguished, operationally and for financial reporting
purposes.  As of the year ended January 1, 2010, Domilens was not
considered to be a held for sale entity under the criteria established by ASC
360-10-45-9 because management on or before that date did not have the authority
to approve the transaction.  Such authority was granted by the Board
of Directors on February 11, 2010, after exhausting all other financing
alternatives available to the Company, in order to provide sufficient cash to
fund a bond in order to appeal the December 2009 Moody verdict, should that
become necessary.





The
Transaction was accounted for as a divestiture as of the closing date, March 2,
2010, and  Domilens will be deconsolidated as of that
date.  The gain on sale of Domilens is approximately $4.2 million,
calculated and recorded as of the closing date, as the difference in the fair
value of consideration received of approximately $12.5 million in cash (net of
direct transaction expenses) and the $8.3 million carrying value of Domilens’
net assets (assets less liabilities) pursuant to ASC
810-10-40.  Included in the net assets disposed of was goodwill of
approximately $6.3 million resulting from the acquisition of Domilens which was
completed in stages during a five year period between 1998 and
2003.





The
disposal will be accounted for and reported as a discontinued operations
beginning in the first quarter of 2010 under the provisions of ASC 205-20,
“Discontinued Operations.”





The
following table summarizes certain unaudited financial information of Domilens
for the fiscal years ended January 1, 2010, January 2, 2009 and December 28,
2007 included in the consolidated results and financial position of the Company
for those years (based on foreign exchange rates that were in effect as of those
dates).  The financial data in the table below has certain
assumptions, the most important of which is the elimination of all significant
intercompany transactions and balances with Domilens for the periods
presented.  Therefore, the financial data does not necessarily
represent what the operations or financial position of Domilens would have been
if Domilens had been a stand-alone, unaffiliated entity.





(in
      thousands)
                          
                          2009
                          
                          
                          2008
                          
                          
                          2007Net
      sales
                          
                          $
                          24,286
                          
                          
                          $
                          25,124
                          
                          
                          $
                          23,731Net
      income
                          
                          
                          1,145
                          
                          
                          
                          1,689
                          
                          
                          
                          1,353Total
      assets
                          
                          $
                          14,910
                          
                          
                          $
                          14,633
                          
                          
                          $
                          15,385




Legal settlement




As fully
discussed in Note 14, on March 30, 2010, two outstanding lawsuits against STAAR,
ParallaxandMoody, were settled. 
On March 30, 2010, STAAR and all other parties to the matters entered into a
Stipulation for Settlement that globally resolves all pending disputes among
them.  This settlement satisfies in full the $4.9 million judgment against
STAAR in the Parallax
matter and the $6.5 million judgment against STAAR in the Moody matter.  In
exchange for complete mutual releases, the Stipulation provides for payment by
STAAR of $4 million as its contribution to the global settlement.  STAAR’s
contribution will be paid from the $7.4 million restricted deposit that STAAR
placed with the Court on June 22, 2009.  The balance of those funds,
approximately $3.4 million, will be returned to STAAR.  In connection with
the settlement, STAAR will voluntarily dismiss its appeals in both
cases.  Pursuant to this settlement, during the fourth quarter of
2009, the Company recognized a gain on settlement of approximately $0.8 million;
wrote off approximately $409,000 of previously incurred legal expenses; and
reversed interest expenses totaling $472,000 that it had previously accrued in
connection with the lawsuits (see Note 20).


F-43




STAAR
SURGICAL COMPANY AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




Note 20 —
Quarterly Financial Data (Unaudited)




Summary
unaudited quarterly financial data from continuing operations for fiscal 2009,
2008 and 2007 is as follows (in thousands except per share data):




January
      1, 2010
                      
                      1st Qtr.
                      
                      
                      2nd Qtr.
                      
                      
                      3rd Qtr.
                      
                      
                      4th Qtr.Sales
                      
                      $
                      18,283
                      
                      
                      $
                      19,117
                      
                      
                      $
                      18,113
                      
                      
                      $
                      19,832Gross
      profit
                      
                      
                      10,339
                      
                      
                      
                      10,664
                      
                      
                      
                      9,835
                      
                      
                      
                      11,055Net
      loss
                      
                      
                      (1,662
                      )
                      
                      
                      (1,088
                      )
                      
                      
                      (1,967
                      )
                      
                      
                      (1,483
                      )Basic
      and diluted loss per share
                      
                      
                      (0.06
                      )
                      
                      
                      (0.04
                      )
                      
                      
                      (0.06
                      )
                      
                      
                      (0.04
                      )




January
      2, 2009
                      
                      1st Qtr.
                      
                      
                      2nd Qtr.
                      
                      
                      3rd Qtr.
                      
                      
                      4th Qtr.Sales
                      
                      $
                      17,960
                      
                      
                      $
                      20,665
                      
                      
                      $
                      18,112
                      
                      
                      $
                      18,157Gross
      profit
                      
                      
                      7,755
                      
                      
                      
                      11,534
                      
                      
                      
                      10,458
                      
                      
                      
                      10,360Net
      loss
                      
                      
                      (8,940
                      )
                      
                      
                      (2,545
                      )
                      
                      
                      (2,250
                      )
                      
                      
                      (9,460
                      )Basic
      and diluted loss per share
                      
                      
                      (0.30
                      )
                      
                      
                      (0.09
                      )
                      
                      
                      (0.08
                      )
                      
                      
                      (0.32
                      )





December 28,
      2007
                      
                      1st Qtr.
                      
                      
                      2nd Qtr.
                      
                      
                      3rd Qtr.
                      
                      
                      4th Qtr.Sales
                      
                      $
                      14,917
                      
                      
                      $
                      14,932
                      
                      
                      $
                      13,629
                      
                      
                      $
                      15,885Gross
      profit
                      
                      
                      7,295
                      
                      
                      
                      7,237
                      
                      
                      
                      6,770
                      
                      
                      
                      7,964Net
      loss
                      
                      
                      (3,521
                      )
                      
                      
                      (4,357
                      )
                      
                      
                      (3,830
                      )
                      
                      
                      (4,291
                      )Basic
      and diluted loss per share
                      
                      
                      (0.14
                      )
                      
                      
                      (0.16
                      )
                      
                      
                      (0.13
                      )
                      
                      
                      (0.15
                      )





Quarterly
and year-to-date computations of loss per share amounts are made independently.
Therefore, the sum of the per share amounts for the quarters may not agree with
the per share amounts for the year.




Significant
Fourth Quarter Adjustments




During
the fourth quarter of 2009, the Company recorded four significant
adjustments.  The first three adjustments were to reverse
approximately $0.8 million in accrued legal judgments, included in
other operating
expenses (recovery), net $0.4 million in accrued legal fees, included in
general and administrative expenses, and $0.5 million of accrued interest
expense, included in interest expense, pursuant to the settlement of all
outstanding litigation as more fully discussed in Notes 14 and
19.  The fourth adjustment, which partially offset the first, was to
record, in other operating
expenses (recovery), net the cumulative impact to prior periods in the
amount of $0.6 million related to certain patents which had shorter legal useful
lives than originally estimated (see Note 7).




During
the fourth quarter of 2008, the Company recorded two significant
adjustments.  First, the Company recorded an impairment loss of
$1,023,000 related to certain patents that the Company determined were impaired
pursuant to its review of long-lived assets under the provisions of ASC
360-10-35 (see Note 7).  Second, the Company recorded expense of
$4,900,000 related to the March 2, 2009 Parallax verdict as discussed in Note
14.  Both fourth quarter adjustments are included in other operating
expenses (recovery), net on the consolidated statements of operations for
the fiscal year ended 2008.


F-44





INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM




REPORT
ON SCHEDULE




To the
Board of Directors


STAAR
Surgical Company


Monrovia,
CA




The
audits referred to in our report dated April 1, 2010 relating to the
consolidated financial statements of STAAR Surgical Company and Subsidiaries,
which is contained in Item 8 of this Form 10-K also included the audit of the
financial statement schedule contained in Item 15.  This financial
statement schedule is the responsibility of the Company's
management.  Our responsibility is to express an opinion on the
financial statement schedule based on our audits.




In our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.




/s/ BDO
      Seidman, LLPLos
      Angeles, CaliforniaApril
      1, 2010




F-45





STAAR
SURGICAL COMPANY AND SUBSIDIARIES




SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES




Column
      A
                                                      
                                                      Column
      B
                                                      
                                                      
                                                      Column
                                                        C
                                                      
                                                      
                                                      Column
      D
                                                      
                                                      
                                                      Column
                                                        EDescription
                                                      
                                                      Balance
                                                        at
                                                        Beginning
                                                        of
      Year
                                                      
                                                      
                                                      Additions
                                                      
                                                      
                                                      Deductions
                                                      
                                                      
                                                      Balance
                                                        at
                                                        End
      of
                                                        Year(In
      thousands)2009Allowance
      for doubtful accounts and sales returns deducted from accounts receivable
      in balance sheet
                                                      
                                                      $
                                                      846
                                                      
                                                      
                                                      $
                                                      612
                                                      
                                                      
                                                      $
                                                      126
                                                      
                                                      
                                                      $
                                                      1,332Deferred
      tax asset valuation allowance
                                                      
                                                      
                                                      47,708
                                                      
                                                      
                                                      
                                                      3,093
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      50,801$
                                                      48,554
                                                      
                                                      
                                                      $
                                                      3,705
                                                      
                                                      
                                                      $
                                                      126
                                                      
                                                      
                                                      $
                                                      52,1332008Allowance
      for doubtful accounts and sales returns deducted from accounts receivable
      in balance sheet
                                                      
                                                      $
                                                      684
                                                      
                                                      
                                                      $
                                                      335
                                                      
                                                      
                                                      $
                                                      173
                                                      
                                                      
                                                      $
                                                      846Deferred
      tax asset valuation allowance
                                                      
                                                      
                                                      45,419
                                                      
                                                      
                                                      
                                                      2,289
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      47,708$
                                                      46,103
                                                      
                                                      
                                                      $
                                                      2,624
                                                      
                                                      
                                                      $
                                                      173
                                                      
                                                      
                                                      $
                                                      48,5542007Allowance
      for doubtful accounts and sales returns deducted from accounts receivable
      in balance sheet
                                                      
                                                      $
                                                      690
                                                      
                                                      
                                                      $
                                                      132
                                                      
                                                      
                                                      $
                                                      138
                                                      
                                                      
                                                      $
                                                      684Deferred
      tax asset valuation allowance
                                                      
                                                      
                                                      40,436
                                                      
                                                      
                                                      
                                                      4,983
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      45,419$
                                                      41,126
                                                      
                                                      
                                                      $
                                                      5,115
                                                      
                                                      
                                                      $
                                                      138
                                                      
                                                      
                                                      $
                                                      46,103




F-46