-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dibfu6y6GoS8TiWpei9wcXseb4kO16iAYNgm+E+cn8zofqXCf6eDn5PMuFGND42F h8PF4nbM7uPg7CMO1HC9fg== 0000898430-97-001373.txt : 19970404 0000898430-97-001373.hdr.sgml : 19970404 ACCESSION NUMBER: 0000898430-97-001373 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19970103 FILED AS OF DATE: 19970402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAAR SURGICAL COMPANY CENTRAL INDEX KEY: 0000718937 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 953797439 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11634 FILM NUMBER: 97573851 BUSINESS ADDRESS: STREET 1: 1911 WALKER AVE CITY: MONROVIA STATE: CA ZIP: 91016 BUSINESS PHONE: 8183037902 MAIL ADDRESS: STREET 1: 1911 WALKER AVE CITY: MONROVIA STATE: CA ZIP: 91016 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED JANUARY 3, 1997 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended January 3, 1997 --------------- [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] 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 (I.R.S. Employer incorporation or organization) Identification No.) 1911 Walker Avenue Monrovia, California 91016 91016 -------------------------------------- -------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): (818) 303-7902 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value --------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 26, 1997 was approximately $118,100,000 based upon the closing price per share of the Common Stock of $10.875 on that date. The number of shares outstanding of the issuer's classes of Common Stock as of March 26, 1997: Common Stock, $.01 Par Value 13,075,646 shares ----------------------------------------------- 1 DOCUMENTS INCORPORATED BY REFERENCE Information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders. ADVISEMENT CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K, PARTICULARLY UNDER ITEMS 1 THROUGH 8, CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE REFORM ACT). SUCH FORWARD- LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS INCLUDING, WITHOUT LIMITATION, THOSE UNCERTAINTIES AND RISK FACTORS DESCRIBED IN ITEM 7 -- MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- UNCERTAINTIES AND RISK FACTORS, WHICH UNCERTAINTIES, RISKS AND OTHER FACTORS MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENT EXPRESSED OR IMPLIED BY SUCH FORWARD- LOOKING STATEMENTS. PART I ------ ITEM 1. BUSINESS (a) GENERAL ------- OVERVIEW STAAR Surgical Company (STAAR or the Company) is a publicly traded (NASDAQ symbol STAA) developer, manufacturer and global distributor of medical devices used in minimally invasive ophthalmic surgery. The Company's products are designed to improve the quality of patient outcomes, minimize patient risk and discomfort, and simplify ophthalmic surgical procedures for surgeons and patients. The Company's primary products are its foldable intraocular lenses ("IOLs"), its "wick" style glaucoma implant (the "Glaucoma Wick"), its implantable contact lens ("ICL"), and its STAARVISC(TM) viscoelastic solution. The Company's foldable IOLs are used as replacements for the natural lens after its removal in cataract surgery. The ophthalmic surgeon can implant the foldable IOL through an incision significantly smaller than that used to insert "hard" IOLs. This provides numerous patient benefits including reduced risk of infection, decreased post-operative pain and discomfort, and shorter hospitalization and recovery time. The Glaucoma Wick is an innovative ocular device developed to provide a more effective and longer-term solution for glaucoma, a leading cause of blindness worldwide. The ICL is an ocular implant designed to correct refractive disorders, such as myopia (near-sightedness) and hyperopia (far-sightedness). STAARVISC(TM) is a viscoelastic solution used during IOL and ICL surgery. The Company markets its IOLs, which accounted for 94% of its revenues in 1996, both domestically and in numerous foreign countries. The Company markets the Glaucoma Wick, which the Company introduced in late 1995, and its ICLs and STAARVISC(TM) viscoelastic solution, which the Company introduced in late 1996, on a 2 limited basis in selected foreign countries. DEVELOPMENT OF BUSINESS OVER PAST FIVE YEARS AND RELEVANT PRIOR EVENTS The Company was incorporated in California in 1982 as a successor to a partnership for the purpose of developing, producing, and marketing IOLs and other products for minimally invasive ophthalmic surgery. The Company was reincorporated in Delaware in April 1986. In 1982 and 1983 the Company's operations consisted mainly of research and development and preliminary marketing and capital raising activities. In 1982 the Company commenced the development of foldable IOLs in association with Dr. Thomas R. Mazzocco, M.D., who patented the concept of folding or otherwise deforming an IOL or ICL for use in minimally invasive surgery. The Company acquired Dr. Mazzoccos patent, and began production and sale of foldable IOLs in 1986 for implantation in connection with clinical studies for such products. In September 1991, the Company received United States Food and Drug Administration ("FDA") pre-market approval for its foldable IOLs, which has been the Companys principal product line to date. See "Intellectual Property Rights" and "Products" in Item 1. In May 1995, Intersectoral Research and Technology Complex Eye Microsurgery ("IRTC") granted an exclusive royalty bearing license to STAAR Surgical AG, a wholly owned subsidiary of the Company, to manufacture, use and sell the glaucoma devices in the United States, Europe, Latin America, Africa, Asia and Japan, and non-exclusive rights with respect to the countries in the Commonwealth of Independent States (or former Union of Soviet Socialists Republics) and China. In January 1996, IRTC granted an exclusive royalty bearing license to STAAR Surgical AG to manufacture, use and sell ICLs using its biocompatible materials in the United States, Europe, Latin America, Africa, Asia and Japan, and non-exclusive rights with respect to the Commonwealth of Independent States. The Company has since adopted IRTC's biocompatible material and glaucoma device design for the Company's Glaucoma Wick, and has incorporated IRTC's biocompatible materials for use with the Company's proprietary ICL design. See "Licenses and Distribution Rights" and "Products" in Item 1. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS --------------------------------------------- Through 1996 the Company operated primarily within the cataract medical device segment of the overall ophthalmic market. Information relating to the Company's financial condition for the fiscal years ended January 3, 1997, December 29, 1995 and December 30, 1994 is set forth below in "Item 8 - Financial Statements and Supplementary Data". In late 1995 the Company introduced the Glaucoma Wick, and in late 1996 the Company introduced the ICL and STAARVISC(TM) viscoelastic solution, for sale in selected foreign countries. (c) NARRATIVE DESCRIPTION OF BUSINESS --------------------------------- BACKGROUND The human eye is a specialized sensory organ capable of light reception and able to receive visual images that are transmitted to the visual center in the brain. The main parts of the eye are the cornea, the iris, the lens, the retina, and the trabecular meshwork. The cornea is typically a spherically shaped window in the front of the eye through which light passes. 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 which changes shape to better focus the light to the retina, located in the back of 3 the eye. 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 anterior chamber of the eye, located in front of the iris, is filled with a watery fluid called the aqueous humour, while the portion of the eye behind the iris is filled with a jelly-like material called the vitreous humour. The trabecular meshwork, a drainage channel located between the cornea and the surrounding white portion of the eye, maintains a low pressure in the anterior chamber of the eye by draining excess aqueous humour. There are a number of ocular diseases including cataracts and glaucoma and common visual refractive disorders such as myopia, hyperopia and astigmatism. Cataracts are an irreversible and progressive ophthalmic condition wherein the eye's natural lens loses its usual transparency and becomes opaque. Glaucoma results from the build-up of excessive intraocular pressure, primarily due to poor drainage of the aqueous humor. The increase in pressure slowly and progressively damages the optic disc, resulting in a gradual loss of vision. Myopia and hyperopia are caused by an anatomical imbalance between the shape of the eye and the resulting distance between the cornea and the retina. Astigmatism is caused by irregularities in the smoothness and curvature of the cornea, causing improper focusing of the incoming light on the retina and consequential blurring of vision. MARKETS The market for ophthalmic products is a large and dynamic segment of the healthcare industry. The major factors influencing this market are the aging worldwide population, significant technological medical advancements which have created cost effective treatments and therapies, the evolution toward managed care and the growing importance of international markets. The Company's products serve the following segments of the ophthalmic market: CATARACT LENSES. Cataracts occur in varying degrees in approximately one-half of Americans between the ages of 65 and 75, and approximately 70% of those over the age of 75. Approximately 20% to 25% of cataract patients have pre-existing astigmatism. Industry sources estimate that approximately 1.7 million iols were implanted in the United States in 1996, generating approximately $224 million in sales. The Company believes approximately 2.5 million IOLs were implanted outside the United States during 1996 (not including China and Russia, for which no reliable data exists), generating an additional $400 million of sales. The Company believes that approximately 50% of the domestic market for IOLs in 1996 was held by foldable IOLs, compared to approximately 15% in 1992, and that approximately 15% to 25% of the international market share is presently held by foldable IOLs. The Company believes the share of the worldwide market held by foldable IOLs will continue to increase by virtue of the benefits of foldable IOLs over hard IOLs. GLAUCOMA TREATMENTS. This market encompasses drug therapies as well as traditional and laser surgical procedures for use in mitigating the effects of glaucoma. There is no known cure for glaucoma; the most commonly prescribed glaucoma drugs either inhibit the build-up of intraocular fluid or promote increased drainage, in either case reducing intraocular pressure and eye damage. Traditional surgical procedures for glaucoma (i.e., trabeculectomies) and laser surgical procedures for glaucoma (i.e., trabeculoplasties) remove a portion of the trabecular meshwork to create a channel for fluid to drain from the eye. The selection of drug treatment over a trabeculectomy or trabeculoplasty is, in part, dependent upon the stage of the disease and the prevailing glaucoma treatment used in the country in which the treatment is given. The Company believes that glaucoma currently afflicts approximately three million persons in the United States, and that the number of international cases exceeds that of the United States. The worldwide market for glaucoma drugs is approximately $850 million, including approximately $450 million from the sale of a single glaucoma drug. It is estimated that 100,000 trabeculectomies and 300,000 laser trabeculoplasties were performed in the United States alone in 1994, representing total expenditures of approximately $400 million. The Company 4 believes glaucoma surgery is more prevalent than glaucoma drug therapy in certain foreign countries due to cost and other considerations. REFRACTIVE VISION CORRECTION. The refractive vision correction market includes corrective eyewear such as eyeglasses and external contact lenses and traditional and laser surgical procedures. Approximately 50% of the world's population is afflicted with common refractive vision disorders such as myopia, hyperopia and astigmatism, and approximately 150 million people within the United States currently use some form of eyewear to correct for these disorders. in 1996, the vision correction market in the United States was approximately $15 billion. This market includes corrective eyeglasses, external contact lenses and various surgical procedures such as radial keratotomy (RK), a conventional surgical technique, and photorefractive keratectomy (PRK), a surgical technique performed with the use of a laser. it is estimated that over one million RK procedures have been performed in the united states, most of which have occurred since 1989. in 1995, 350,000 rk procedures were performed, at an average cost of $1,000-$3,000 per procedure. Surgeons have used PRK, a more recently developed refractive surgery technique, in an estimated 600,000 procedures to date worldwide, with a limited number occurring in the United States, where the procedure was approved in 1996. PRK is expected to gain market share from RK. Industry sources estimate that the number of PRK procedures in the United States could reach 500,000 in 1997, representing a potential market of $750 million. approximately seven million people in the united states are afflicted with severe cases of myopia and hyperopia of greater than seven diopters which are not currently addressed by existing conventional or laser surgical procedures and frequently can be only partially corrected with eyeglasses and external contact lenses. VISCOELASTIC SOLUTION PRODUCTS. The Viscoelastic solution market relates to gel-like substances used during IOL surgeries to maintain the space and shape of the eye, to act as a buffer against cell damage and to otherwise act as a lubricant for minimally invasive eye surgery. Industry studies indicate that approximately 2.4 million units of viscoelastic solution were sold within the United states in 1996, generating approximately $129 million in sales. Management believes the international market for viscoelastic solution is at least the size of the domestic market for this product. STRATEGY The Company's strategy is to increase its share of the worldwide market for ophthalmic products through the development and marketing of innovative next generation products and technologies which utilize minimally invasive surgical procedures. The key elements of this strategy are to: (i) develop products that deliver distinct clinical and economic benefits to patients and surgeons; (ii) maintain a leading technological role in the industry; and (iii) expand markets worldwide. PRODUCTS The Company develops, manufactures and globally distributes medical devices used in minimally invasive ophthalmic surgery. The Company's products are designed to (i) improve patient outcomes, (ii) minimize patient risk and discomfort, and (iii) simplify ophthalmic procedures for the surgeon and patient. The Company's principal customers are ophthalmologists, surgical centers, hospitals, managed care providers, health maintenance organizations and group purchasing organizations. INTRAOCULAR LENSES (IOLS) AND RELATED CATARACT PRODUCTS. The Company's principal products are its foldable iols for use in minimally invasive cataract surgical procedures. The Company's IOLs can be folded or otherwise deformed, and therefore can be implanted into the eye through an incision (less than 3 mm) significantly smaller than the incision needed to insert hard iols (approximately 5 mm to 10 mm). Once inserted, the Company's IOL 5 unfolds naturally into the capsular bag which previously held the cataractous lens. The primary advantages of using minimally invasive surgical procedures are: . Fewer Surgical Complications. A smaller incision minimizes eye trauma and the potential for infection. In addition, the Company's foldable IOL can typically be implanted under topical anesthesia, thereby avoiding complications associated with the administration of local anesthesia. . Reduced Level of Surgically Induced Astigmatism. The ability to eliminate sutures as a result of the smaller incision leads to a reduction in the incidence of surgically induced astigmatism caused by uneven healing of the surgical wound. . Faster Recovery of Vision. Patients can typically recover their best vision the same day the procedure is performed, as opposed to thirty to forty-five days following surgery in the case of hard IOLs. . Enhanced Benefits to Surgeons. The use of foldable IOLs enables ophthalmologists to more quickly perform surgical procedures at lower cost, and with greater ease and consistently higher quality outcomes. The Company's foldable IOLs come in two differently configured styles, the advanced single-piece ELASTIC(TM) model, and the ELASTIMIDE(TM) model based upon the tradit ional three-piece design. The selection of one model over the other is primarily based upon the preference of the ophthalmologist, although the Company believes more experienced ophthalmologists prefer the single-piece ELASTIC(TM) model. Sales of foldable IOLs accounted for approximately 97% of the Company's total revenues for each of its 1993 through 1995 fiscal years and 94% of total revenues for its 1996 fiscal year. The Company believes the unique features of its foldable IOLs afford a number of competitive advantages compared to other foldable IOLs such as ease of implantation, better patient outcomes, and minimization of cell growth and resulting capsular haze. The Company has developed, and currently markets in certain foreign countries, a toric version of its ELASTIC(TM) IOL, which is specifically designed for patients with pre-existing astigmatism. The Company is the only foldable IOL manufacturer to offer a product for astigmatism. The Company has implanted a limited number of its toric IOLs in patients within the United States for clinical study purposes pursuant to an Investigational Device Exemption ("IDE") granted by the FDA in November 1992. The Company has completed Phase III clinical studies for the toric IOL, and anticipates it will apply for FDA pre- market approval to market this product in the United States in mid-1997. No assurance can be given that this time schedule can be met, or that FDA pre- market approval for this product will be obtained. As part of its approach to providing a complete line of complementary products for use in minimally invasive cataract surgery, the Company also markets several styles of lens injectors and sterile cartridges used to insert IOLs, a phacoemulsification machine used to remove the cataractous lens, and several styles of disposable and reusable surgical packs and ultrasonic cutting tips used with the Company's phacoemulsification machine. GLAUCOMA WICK AND GLAUCOMA SHUNT. The Glaucoma Wick is a medical device surgically implanted into the eye to reduce intraocular pressure ("IOP"). It is made of biocompatible material which, through its porosity and hydrophilic properties, promotes drainage of excess eye fluid. The Glaucoma Wick is specifically designed for patients suffering from open-angled glaucoma, which is the most prevalent type of glaucoma. In contrast to trabeculectomies and trabeculoplasties, implantation of the Glaucoma Wick does not require penetration of the anterior chamber of the eye. Instead, a small flap of the outer eye tissue is folded back, the Glaucoma Wick is placed above the trabecular meshwork and the outer flap is refolded into place. The Glaucoma Wick swells to 6 approximately five to ten times its original size and is absorbed within one to six months after implantation, creating a new drainage pathway. The twenty- to forty-minute surgical procedure to implant the Glaucoma Wick is performed under local or topical anesthesia, typically on an outpatient basis. Management believes the hydrophilic properties of the Glaucoma Wick and the minimally invasive nature of the surgery offer several advantages over existing surgical procedures including (i) greater efficacy, (ii) a longer-term solution, (iii) reduced risk of surgical complications, and (iv) cost effectiveness. The Company believes the Glaucoma Wick is an attractive product for (i) managed care and health maintenance organizations and group purchasing organizations who desire to control their costs and at the same time provide their customers with a higher standard of health care, (ii) less developed countries which lack the resources and infrastructure to provide continuous treatments, and (iii) ophthalmic surgeons who have traditionally referred their patients to glaucoma specialists. Adoption by ophthalmic surgeons, however, will be dependent upon the rate at which they learn the advanced surgical skills necessary to perform the implant or at which instrumentation is developed to simplify the procedure. The Company will promote this product by educating surgeons through its highly trained technical sales force. See "Uncertainties and Risk Factors - Risks Relating to Commercialization of New Products." in Item 7." The Company introduced the Glaucoma Wick in late 1995 for commercial sale on a limited basis in South Africa and selected countries in Europe and South America. The Company intends to apply to the FDA in mid-1997 for an IDE leading to a 510(k) clearance to commercially market this product within the United States. No assurance can be given as to when or if FDA 510(k) clearance for this product will be obtained. See "Uncertainties and Risk Factors - Government Regulation and Uncertainty of Product Approval" in Item 7. Since 1987 the Company has marketed its MOLTENO(TM) style Glaucoma Shunt, a medical device implanted at the latest stages of glaucoma, after conventional treatments have been performed and failed and vision is effectively lost. The Glaucoma Shunt is designed to relieve pain and prevent the removal of the eye. The Company will continue to supply this product for patients in the last stages of glaucoma. IMPLANTABLE CONTACT LENSES (ICLS). ICLs are medical devices implanted in the eye to permanently correct common refractive vision disorders including myopia, hyperopia and potentially astigmatism. The ICL is initially targeted to persons afflicted with severe hyperopia and myopia (defined as more than seven diopters) which are not currently being addressed through current traditional or laser surgical procedures and frequently can be only partially corrected with eyeglasses or external contact lenses. These individuals, who suffer significant vision impairment, are the most likely to seek surgical alternatives. The Company also believes the ICL will be an attractive alternative for individuals afflicted with moderate cases of myopia and hyperopia. The Company's ICL is folded and implanted into the eye behind the iris and in front of the normal lens using minimally invasive surgical techniques similar to implanting an IOL during cataract surgery, except that the human lens is not removed. The five- to twenty-minute surgical procedure to implant the ICL is typically performed with topical anesthesia on an outpatient basis. Management believes the use of an ICL affords a number of advantages over existing refractive surgical procedures, such as RK and PRK, including the following: (i) potentially corrects all levels of myopia and hyperopia, (ii) may provide superior predictability of results, (iii) in most cases allows for reversibility, which is precluded by existing surgical procedures, (iv) enables faster recovery of vision and rehabilitation, and (v) produces potentially superior refractive results. The Company commenced commercial sales of ICLs in late 1996 on a limited basis in South Africa, China, and selected countries in Europe and South America. In February, 1997, the FDA granted the Company an IDE to 7 commence clinical studies consisting of three distinct phases within the United States. The first phase of the IDE permits the Company to implant ten ICLs for myopia and ten ICLs for hyperopia. No assurance can be given as to when or if the FDA will grant approval to expand the study to the second or third phase or as to when or if the FDA will grant pre-market approval for the ICL. See "Uncertainties and Risk Factors - Government Regulation and Uncertainty of Product Approval" in Item 7. VISCOELASTIC SOLUTION PRODUCTS. Viscoelastic solution is a gel-like substance which can be used during IOL and ICL surgery to assist the ophthalmic surgeon in establishing and maintaining the space and shape of the anterior and posterior chambers of the eye. It also acts as a resilient buffer to protect against inadvertent damage to the vital endothelial cells in the eye. Viscoelastic solution is also effective as a lubricant for injection of foldable IOLs and ICLs using minimally invasive surgical procedures. The Company believes it can effectively market its STAARVISC(TM) hyaluronic acid-based viscoelastic solution in conjunction with its foldable IOL and ICL products. The Company introduced its STAARVISC(TM) viscoelastic solution in late 1996 for commercial sale on a limited basis in Canada and selected countries in Europe and South America. The only significant pending action necessary to obtain FDA pre-market approval to commercially market STAARVISC(TM) within the United States is satisfaction of FDA regulations pertaining to Good Manufacturing Practices. The Company intends to arrange an FDA inspection of its STAARVISC(TM) manufacturing facilities in mid-1997 in order to satisfy this final requirement. See "Uncertainties and Risk Factors - Government Regulation and Uncertainty of Product Approval" in Item 7. RESEARCH AND DEVELOPMENT The Company is focused on furthering technological advancements in the ophthalmic products industry through continuous development and innovation of ophthalmic products and materials, and related surgical techniques to promote these products. See "Business - Strategy" above. The Company maintains an active internal research and development program comprised of over 25 employees. Over the past year, research and development efforts have been primarily focused on: (i) developing the Company's ICLs, Glaucoma Wick and toric IOL, (ii) improving insertion and delivery systems for the Company's foldable IOLs, and (iii) generally improving the manufacturing systems and procedures for all products to reduce manufacturing costs. Research and development expenses amounted to approximately $4,085,000, $3,254,000 and $2,718,000 for the Company's 1996, 1995 and 1994 fiscal years, respectively. MARKETING, SELLING AND DISTRIBUTION The Company maintains a highly trained sales force that works closely with its customers (primarily surgeons and other health care providers) to educate them on the benefits of its IOLs as well as the skills and techniques needed to perform minimally invasive surgical procedures. The Company supplements its direct sales efforts through advertising in medical and trade journals and by sponsoring surgical procedure courses, seminars and technical presentations chaired by leading ophthalmologists. The Company's products are sold domestically through a network of independent regional manufacturers representatives and their territorial representatives. International sales are primarily conducted through the Company's subsidiaries that sell through independent sales representatives engaged on a basis similar to that of sales representatives within the United States. In countries where the Company's subsidiaries do not have a direct presence, sales are conducted through country or area medical distributors. 8 COMPETITION Competition in the medical device field 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 the Company's products obsolete or less competitive. The Company will be required to devote continued efforts and significant financial resources to enhance its existing products and/or develop new products for the ophthalmic industry. See "Uncertainties and Risk Factors - Highly Competitive Industry; Rapid Technological Change" in Item 7. The Company believes its primary competition for foldable IOLs includes Allergan Medical Optics ("AMO"), a subsidiary of Allergan, Inc. ("Allergan"), Chiron Vision Corporation ("Chiron"), a subsidiary of Chiron Corporation, and Alcon Surgical, Inc. ("Alcon"), a subsidiary of Alcon Laboratories, Inc., all of whom are licensees of the Company's foldable technology. Significant competitors in the hard IOL market are believed to include Chiron, AMO, Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn"), Alcon, Storz Ophthalmics, Inc. ("Storz"), a subsidiary of American Home Products, and Mentor Corporation. The Company's primary competition for glaucoma products is from pharmaceutical companies. The Company believes Merck & Company, Inc., Alcon, Allergan, and Storz are the largest providers of glaucoma drugs within the United States, and CIBA Vision Corporation, a subsidiary of CIBA-GEIGY Corporation, Pharmacia & Upjohn and Lederle Laboratories, a subsidiary of American Home Products, are the largest internationally. The portion of this market held by glaucoma devices is insignificant at present. The Company will face significant competition for its ICLs generally from manufacturers and distributors of corrective eyeglasses and external contact lenses, and particularly from providers of conventional and laser surgical procedures. The Company believes its primary competitors for laser surgical procedures are Summit Technology, Inc. ("Summit"), VISX, Incorporated ("VISX"), Escalon Medical, Inc., Sunrise Medical, Chiron and Nidek Co., Ltd. Summit's and VISX's excimer lasers for PRK are the only products which have received pre- market approval from the FDA for sale within the United States. KeraVision, Inc. is developing the corneal ring. Pharmacia & Upjohn, which distributes and manufactures a hyaluronic-based viscoelastic solution known as Healon(TM), is the primary competitor for this product. Other companies such as AMO, Chiron, Alcon and Storz also sell viscoelastic type products. MANUFACTURING AND SUPPLIERS The Company principally manufactures its IOLs at its facilities located in California, and its Glaucoma Wick, ICLs and STAARVISC(TM) viscoelastic solution at its facilities located in Switzerland. Many components of the Company's products are purchased to its specifications from suppliers or subcontractors. Most of these components are standard parts available from multiple sources at competitive prices. The Company presently has one supplier of silicone, the principal raw material for its lenses, although it can purchase this raw material from several distributors. Similarly, certain items used by the Company in its disposable surgical packs are provided by a single supplier. The Company's PHACO XL(TM) phacoemulsification machine is being manufactured for the Company by unaffiliated third parties. If any of these supply sources becomes unavailable, the Company believes that it would be able to secure alternate supply sources within a short period of time and with minimal or no disruption. 9 LICENSES AND DISTRIBUTION RIGHTS The Company has granted licenses to certain of its patents, products, trade secrets and technology, including its foldable technology, to other companies in the IOL industry. The licenses under the patents extend for the life of the patents. The licensees include Optical Radiation Corporation ("ORC"), Chiron, AMO, Alcon and Canon STAAR, a joint venture owned equally by the Company and Canon, Inc. and Canon Sales Co., Inc. Included in some of the licenses granted are licenses to certain of the Company's foldable patents which were granted on an exclusive basis to Canon STAAR (for Japan only), on a non-exclusive basis to Alcon, ORC, Chiron and Canon STAAR (with respect to the world other than Japan), and on a co-exclusive basis to AMO. At the time these licenses were granted, the Company received substantial pre-payments of royalties on all but one of the licenses. The pre-payment period on many of these licenses have since lapsed or will lapse in the near future. The Company's business strategy is not dependent upon realizing royalties from these licenses in the future. In view of the number of licenses granted to its competitors, the Company is often subject to disputes regarding the requirements of the licenses. The Company and its licensee, Allergan, are currently in litigation with Pharmacia & Upjohn for infringement of the Mazzocco Patent. The Company is also in litigation with Chiron on the basis of a dispute regarding an indemnification clause set forth in an agreement between the Company and Chiron and the payment of royalties. The impact of an adverse decision in either case is unknown at this time. See "Pending Legal Proceedings" in Item 3 below. In May 1995, IRTC granted an exclusive royalty bearing license to STAAR Surgical AG to manufacture, use and sell the glaucoma devices in the United States, Europe, Latin America, Africa, Asia and Japan, and non-exclusive rights with respect to the countries in the Commonwealth of Independent States (or former Union of Soviet Socialists Republics) and China. In January 1996, IRTC granted an exclusive royalty bearing license to STAAR Surgical AG to manufacture, use and sell ICLs using its biocompatible materials in the United States, Europe, Latin America, Africa, Asia and Japan, and non-exclusive rights with respect to the Commonwealth of Independent States. The terms of these licenses extend for the life of the patents. In connection with these licenses, IRTC also assigned its patent for its biocompatible material for IOLs and ICLs to the Company. The Company has since adopted IRTC's biocompatible material and glaucoma device design for the Company's Glaucoma Wick, and has incorporated IRTC's biocompatible materials for use with the Company's proprietary ICL design. SUBSIDIARIES The Company's principal operating subsidiary is STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland to develop, manufacture and distribute worldwide certain of the Company's products, including its Glaucoma Wick and ICLs. The Company and STAAR Surgical AG have also formed six other direct or indirect wholly owned operating subsidiaries for the purpose of distributing and marketing the Company's products internationally, including STAAR Surgical - Canada, Ltd. and STAAR Surgical Australasia Pty., Ltd., formed by the Company in 1994, and STAAR Surgical France - SARL, STAAR Surgical - South Africa Pty., Ltd., STAAR Surgical Austria, GmbH; and STAAR Surgical Germany, GmbH, formed by STAAR Surgical AG in 1993 through 1995. The Company also owns a 50% interest in Canon STAAR, a joint venture between the Company and Canon, Inc. and Canon Sales Co., Inc. for the manufacture, marketing and distribution of IOLs in Japan. The Company also owns an interest in a number of subsidiaries which are not presently conducting business, including STAAR International, Inc., Lynell Medical Technologies, Inc., STAAR of Connecticut, Inc., and 10 STAAR Surgical - Singapore Pty. Ltd. The Company also owns a 50% interest in each of Newlensco and Softlensco, inactive corporations formed in connection with certain licensing transactions for the sole purpose of holding title to certain filings with the FDA and pre-market approvals of the licensed products and technologies. FACILITIES The Company's executive offices and its principal manufacturing and warehouse facilities, consisting of approximately 76,000 square feet, are located in Monrovia, California. The Company also maintains complete laboratory facilities at this location. STAAR Surgical AG has approximately 11,000 square feet of manufacturing, distribution and research and development facilities located in Switzerland. STAAR Surgical France - SARL, STAAR Australasia, Pty., Ltd., STAAR Surgical South Africa, Pty., Ltd., and STAAR Surgical Austria, GmbH, each also have distribution facilities. Canon STAAR Co., Inc. has an approved manufacturing facility in Japan. The Company believes that its existing facilities have been adequate for its needs, and will continue to be adequate for existing levels of operations. The Company expects no difficulties in renewing leases, or replacing or making additions to its existing facilities or in establishing new facilities. EMPLOYEES AND LABOR RELATIONS The Company and its subsidiaries had a total of 255 employees as of January 3, 1997, including 49 in administration, 40 in marketing and sales, 25 in research and development and technical services and 141 in manufacturing, quality control and shipping. The Company and its subsidiaries are non-unionized. The Company believes that its relations with its employees are good. INTELLECTUAL PROPERTY RIGHTS The Company and/or its licensors have pending patent applications and issued patents in various countries relating specifically to the Company's products or various aspects thereof, including the Company's core patent (the "Mazzocco Patent") relating to methods of folding or deforming a foldable IOL or ICL for use in minimally invasive surgery. The Mazzocco Patent was granted by the United States Patent Office in March 1986 to Dr. Thomas Mazzocco, M.D., a practicing ophthalmologist and a co-founder of the Company. The Company has since obtained patent protection for the Mazzocco Patent or made application for such protection in certain foreign countries. The Company has also received an assignment from IRTC of its patents for glaucoma devices and biocompatible material for IOLs. The Company has obtained a registered trademark on the mark STAAR and associated logo. The Company also has common law trademark rights to a number of other marks and has also applied for registration for a number of these marks. An adverse decision from a Court of competent jurisdiction affecting the validity or enforceability of the Company's patents (principally the Company's core Mazzocco Patent) or proprietary rights owned by or licensed to the Company could have, depending generally on the economic importance of the country or countries to which such patents or proprietary rights relate, an adverse effect on the Company and on its business prospects. Legal costs relating to prosecuting or defending patent infringement litigation may be substantial. Costs of litigation related to successful prosecution of patent litigation are capitalized and amortized over the estimated useful life of the relevant patent. There can be no assurance that the Company will be able to successfully defend 11 its patents and proprietary rights in the future. See "Uncertainties and Risk Factors - Patents and Proprietary Right." in Item 7. REGULATORY REQUIREMENTS The Company's products are subject to regulatory approval or clearance in both the United States and in foreign countries. The following discussion outlines the various kinds of reviews to which the Company's products or facilities may be subject. CLINICAL REGULATORY REQUIREMENTS WITHIN THE UNITED STATES. Most of the Company's products are subject to regulation as medical devices by the FDA, requiring FDA approval or clearance before they can be sold within the United States, and mandating continuous compliance of the Company's manufacturing facilities and distribution procedures with FDA regulations, including "Good Manufacturing Practices." Initial approval or clearance of medical devices for sale is subject to differing levels or types of FDA review and evaluation depending on the classification of the device under the Food, Drug and Cosmetic Act ("FD&C Act") and whether the use of the medical device can be demonstrated to be substantially equivalent to a directly related medical device in commerce prior to May 1976 (the month and year of enactment of the FD&C Act). Pursuant to the FD&C Act, medical devices are classified as either Class I, Class II or Class III devices. If classified as a Class I device, the medical device will be subject only to general controls which are applicable to all devices. Such controls include regulations regarding FDA inspections of facilities, "Good Manufacturing Practices," labeling, maintenance of records and filings with the FDA. If classified as a Class II device, the medical device must also meet general PERFORMANCE standards established by the FDA. If classified as a Class III device, the applicant must present sufficient data derived through clinical studies demonstrating the product's safety, reliability and effectiveness. FDA approval for a Class III device such as an IOL or ICL implant begins with the submission of an application for an Investigational Device Exemption or IDE which, if granted, will permit the implantation of a limited number of IOLs or ICLs (typically less than 100) on a clinical study basis. Based upon the results from the initial core population, the FDA will then allow an additional core study to be performed, typically 500 to 700 implants. The complete clinical results will then be reviewed by an FDA advisory panel of outside experts. If the advisory panel approves the product based upon the results, the FDA will then generally grant pre-market approval assuming satisfaction of its other requirements. The grant of an IDE, the performance of clinical studies, the submission of an application for pre-market approval, and advisory panel approval, may take three to ten years depending, in part, upon the complexity of the medical device. A medical device that is substantially equivalent to a directly related medical device previously in commerce may be eligible for abbreviated FDA pre-market notification "510(k) review" process. The review period and FDA determination as to substantial equivalence should be made within 90 days of submission of a 510(k) application, unless additional material, information or clarification is requested or required by the FDA. As a practical matter, the review process and FDA determination often take significantly longer than 90 days depending, in part, upon the complexity of the medical device. FDA 510(k) clearance is a "grandfather" process. As such, FDA clearance 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 commercially-related medical device. The Company's IOLs, ICLs, lens injectors, Glaucoma Wick, Glaucoma Shunt, and STAARVISC(TM) viscoelastic solution are Class III devices, and its phacoemulsification equipment, ultrasonic cutting tips and surgical packs are 12 Class II devices. The Company has received FDA pre-market approval for its IOLs (other than its toric version), and FDA 510(k) clearance for its Glaucoma Shunt, phacoemulsification equipment, lens injectors, ultrasonic cutting tips and surgical packs. The Company is presently conducting clinical studies under an IDE for its Toric IOL. The Company has received an IDE to commence limited clinical studies for its ICLs. The only significant pending requirement for the Company to obtain pre-market approval of its STAARVISC(TM) viscoelastic solution is the inspection and approval by the FDA of the Company's manufacturing facilities for Good Manufacturing Practices. The Company intends to apply to the FDA in mid-1997 for 510(k) clearance for its Glaucoma Wick. The Company is also subject to mandatory Medical Device Reporting ("MDR") regulations which obligate the Company to provide information to the FDA on injuries alleged to have been associated with the use of a product or in connection with certain product failures which could cause injury CLINICAL REGULATORY REQUIREMENTS IN FOREIGN COUNTRIES. There is a wide variation in the approval or clearance requirements necessary to market products in foreign countries. The requirements range from virtually no requirements to a level comparable to or even greater than those of the FDA. For example, many countries in South America have minimal regulatory requirements, while many developed countries, such as Japan and Germany, have conditions at least as stringent as those of the FDA. FDA acceptance is not always a substitute for foreign government approval or clearance. The member countries of the European Economic Union (the "Union") currently permit, and by 1998 will require, all medical products sold within their borders to carry a "CE" marking. The CE marking denotes that the applicable medical device has been found to be in compliance with guidelines concerning manufacturing and quality control, technical specifications and biological/chemical and clinical safety. The CE marking supersedes all current medical device regulatory requirements for Union countries. The Company has an ongoing program in place to ensure compliance with the applicable requirements. The Company has obtained the CE mark for its IOLs (other than its toric IOL) and lens injectors, and anticipates obtaining the CE marking for its Glaucoma Wick, ICLs and STAARVISC(TM) viscoelastic solution by 1998. OTHER REGULATORY REQUIREMENTS. Sales of the Company's products may be affected by health care reimbursement practices. For example, in January 1994, the Health Care Financing Administration ("HCFA") adopted rules that limit medicare reimbursement for IOLs implanted in ambulatory surgical centers to a flat fee of $150. HCFA's medicare reimbursement rate for IOLs implanted in hospitals was set at $150 plus 50% of cost. The Company is also subject to various federal, state and local laws applicable to its operations including, among other things, working conditions, laboratory and manufacturing practices, and the use and disposal of hazardous or potentially hazardous substances used in connection with research work. The extent of government regulation which might result from future legislation or administrative action and their potential adverse impact on the Company cannot be accurately predicted. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT ---------------------------------------------------------------------- SALES ----- Approximately $29,592,000, $26,561,000 and $23,091,000 in the Company's overall revenues were generated in the United States for its 1996, 1995 and 1994 fiscal years, respectively, constituting approximately 70%, 77% and 84% of its overall revenues for such fiscal years, respectively. Sales to Europe, which is the Company's principal foreign market, generated approximately $7,576,000, $4,841,000 and $3,361,000 in revenues for the Company's 1996, 1995 and 1994 fiscal years, respectively, constituting approximately 20%, 14% and 12% of the Company's overall revenues for such respective fiscal years. The balance of the Company's foreign sales were distributed amongst the Asian/Pacific, Middle Eastern, South African and South American geographic areas. Substantially 13 all products sold in 1996 were manufactured in the United States. ITEM 2. PROPERTIES The Company's executive offices and its principal manufacturing and warehouse facilities are in Monrovia, California, in leased industrial buildings of approximately 76,000 square feet. The leases expire between 1998 and 2002, and currently require aggregate payments of $31,008 per month. The Company also maintains complete laboratory facilities in these buildings. Certain of the Company's subsidiaries lease facilities dedicated to manufacturing, distribution and research and development activities. Canon STAAR Co., Inc. has an approved manufacturing facility in Japan. See "Narrative Description of Business - Facilities," in Item 1 above. ITEM 3. PENDING LEGAL PROCEEDINGS CHIRON VISION CORPORATION VS. STAAR SURGICAL COMPANY, AND RELATED CROSS- COMPLAINT; LOS ANGELES SUPERIOR COURT CASE NO. BC 149557 On May 7, 1996, Chiron Vision Corporation ("Chiron") filed a complaint for damages against the Company for specific performance, contractual indemnity, declaratory relief, accounting, and breach of contract arising from a business agreement dated March 8, 1990 between the parties. This agreement (the "Master Terms Agreement") governs a number of associated business agreements relating to research, development, licensing, manufacture and sale of patented and proprietary IOLs and related products, processes, surgical instruments and developments related thereto. The Company filed its answer to Chiron's complaint on September 5, 1996. and filed a Cross-Complaint for specific performance, contractual indemnity, declaratory relief, accounting and breach of contract. On February 19, 1997, Chiron filed its Amended Complaint for specific performance, contractual indemnity, declaratory relief, accounting, breach of contract, intentional misrepresentation and negligent misrepresentation. A response to the Amended Complaint is due on or before March 19, 1997. The principal claims and cross-claims generally relate to whether the Company is obligated to indemnify Chiron under the Master Terms Agreement and related license agreements with respect to certain third-party litigation, and whether Chiron has, among other things, breached its obligation to pay certain royalties under these agreements as well as certain obligations pertaining to the sale or transfer of licensed technology and patents. The lawsuit is currently in the initial stage of discovery. The Company believes that it will prevail in this suit. Nevertheless, the outcome of the litigation is uncertain, and the effect of an unfavorable outcome is unknown at this time. ALLERGAN SALES, INC. AND STAAR SURGICAL COMPANY VS. PHARMACIA & UPJOHN, INC., AND RELATED COUNTERCLAIMS; CIVIL ACTION NO. 96-1430 H (JFS); UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF CALIFORNIA In August 1996, Allergan Sales, Inc. ("Allergan Sales"), a licensee of the Company's Mazzocco Patent, filed suit against Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn") for infringement of the Mazzocco Patent. In a First Amended Complaint filed on September 6, 1996, the Company joined as a co- plaintiff with respect to the infringement action. On November 11, 1996, Pharmacia & Upjohn filed an Answer to the First Amended Complaint, and filed a Cross-Complaint for declaratory judgment of non-infringement, invalidity, unenforceability and anti-trust violation. Allergan Sales and the Company filed a Second Amended Complaint for patent infringement on January 16, 1997, which was answered by Pharmacia & Upjohn pursuant to Stipulation the same date. In related proceedings the District Court granted a temporary injunction on September 14 17, 1996, and a preliminary injunction on October 22, 1996, against Pharmacia & Upjohn. On November 7, 1996, Pharmacia & Upjohn filed a Notice of Appeal of the order granting the preliminary injunction and, in connection therewith, an Emergency Motion for Stay. The Court of Appeals issued the Emergency Stay pending further determination by the District Court. The lawsuit is currently in the initial stage of discovery. The Company believes that it will prevail in this suit. Nevertheless, the outcome of the litigation is uncertain, and the effect of an unfavorable outcome is unknown at this time. 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 3, 1997. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock is quoted on the National Association of Securities Dealers Automatic Quotation ("NASDAQ") National Market under the symbol "STAA." The following table sets forth the reported high and low sale prices and volume of trading of the Common Stock as reported by NASDAQ for the calendar periods indicated:
PERIOD HIGH LOW ------ ---- --- 1996: Fourth Quarter..................... $14.375 $10.375 Third Quarter...................... 16.500 11.875 Second Quarter..................... 17.875 12.375 First Quarter...................... 14.750 9.875 1995: Fourth Quarter..................... $12.675 $ 9.875 Third Quarter...................... 12.750 8.250 Second Quarter..................... 11.375 7.500 First Quarter...................... 13.125 7.875 1994: Fourth Quarter..................... $ 7.250 $ 4.500 Third Quarter...................... 6.125 4.125 Second Quarter..................... 7.000 3.625 First Quarter...................... 5.250 3.325
The last reported sale price for the Company's Common Stock on the NASDAQ National Market on March 26, 1997 was $10.875 per share. As of March 26, 1997, there were approximately 1,347 record holders of the Common Stock. The Company has not paid any cash dividends on its Common Stock since its inception. The Company currently anticipates that all income will be retained to develop further the Company's business and that no cash dividends on the Common Stock will be declared in the foreseeable future. 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company with respect to the Company's five most recent fiscal years ended January 3, 1997, December 29, 1995, December 30, 1994, December 31, 1993 and January 1, 1993. The selected consolidated statement of operations data set forth below for each of the three fiscal years in the period ended January 3, 1997, and the selected consolidated balance sheet data set forth below at January 3, 1997 and December 29, 1995, are derived from the Consolidated Financial Statements of the Company which have been audited by BDO Seidman, LLP, independent certified public accountants, as indicated in their Report which is included elsewhere in this Report. The selected consolidated statement of operations data set forth below for each of the two fiscal years in the period ended December 31, 1993, and the consolidated balance sheet data set forth below at December 30, 1994, December 31, 1993 and January 1, 1993, are derived from the Company's audited consolidated financial statements not included elsewhere in this Report. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company, the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7, included elsewhere in this Report.
FISCAL YEAR ENDED ------------------------------------------------------------- JANUARY DECEMBER DECEMBER DECEMBER JANUARY 3, 29, 30, 31, 1, 1997 1995 1994 1993 1993 ------- ------- ------- ------- ------- (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Sales......................................................... $41,213 $34,180 $26,333 $19,603 $10,198 Royalty income................................................ 1,000 514 1,020 473 --- ------- ------- ------- ------- ------- Total revenues............................................. 42,213 34,694 27,353 20,076 10,198 Cost of sales................................................. 10,196 8,441 6,059 3,980 3,257 ------- ------- ------- ------- ------- Gross profit............................................... 32,017 26,253 21,294 16,096 6,941 Costs and expenses: General and administrative................................. 5,628 5,000 4,365 4,907 5,166 Marketing and selling...................................... 12,227 10,911 8,694 6,998 4,949 Research and development................................... 4,085 3,254 2,718 2,260 1,532 ------- ------- ------- ------- ------- Total costs and expenses................................ 21,940 19,165 15,777 14,165 11,647 Operating income (loss)....................................... 10,077 7,088 5,517 1,931 (4,706) Other income (expense)........................................ 153 303 625 685 (351) ------- ------- ------- ------- ------- Income (loss) before income taxes............................. 10,230 7,391 6,142 2,616 (5,057) Income tax provision (benefit)(1)............................. 3,339 (91) (2,184) 81 (19) ------- ------- ------- ------- ------- Net income (loss)............................................. $ 6,891 $ 7,482 $ 8,326 $ 2,535 $(5,076) ======= ======= ======= ======= ======= Fully diluted net income (loss) before income taxes per share................................ $0.74 $0.54 $0.45 $0.20 $(0.50) ======= ======= ======= ======= ======= Fully diluted net income (loss) per share..................... $0.50 $0.55 $0.62 $0.20 $(0.50) ======= ======= ======= ======= ======= Weighted average number of fully diluted shares............... 13,867 13,715 13,500 12,859 10,191 ======= ======= ======= ======= ======= BALANCE SHEET DATA: Working capital............................................... $15,485 $16,335 $14,166 $ 7,354 $ 4,239 Total assets.................................................. 51,119 38,803 28,888 18,776 12,826 Notes payable and current portion of long-term debt........... 8,193 4,029 1,792 1,634 638 Long-term debt................................................ 844 1,212 572 0 0 Stockholders' equity.......................................... $36,604 $28,678 $22,029 $11,986 $7,317
(1) Includes recognition of deferred tax asset of $2.4 million for 1994 and $900,000 for 1995. See Note 7 to the Company's Consolidated Financial Statements. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, manufactures and globally distributes medical devices used in minimally invasive ophthalmic surgery. The Company's primary products are its foldable IOLs, its Glaucoma Wick, its ICLs and its STAARVISC(TM) viscoelastic solution. The Company markets its IOLs, which accounted for 94% of its revenues in 1996, both domestically and in numerous foreign countries. The Company markets the Glaucoma Wick, which the Company introduced in late 1995, and its ICLs and STAARVISC(TM) viscoelastic solution, which the Company introduced in late 1996, on a limited basis in selected foreign countries. The Company has marketed its foldable IOLs internationally since 1986 and, in September 1991, following a lengthy period of clinical studies, received FDA pre-market approval to fully market the Company's ELASTIC(TM) and ELASTIMIDE(TM) foldable IOL models within the United States. Since that time, the Company's total revenues increased from $10.2 million in its 1992 fiscal year to $42.2 million in its 1996 fiscal year, representing a compound annual growth rate of 43%. The Company also receives royalty income with respect to certain of its licensed technologies, although it does not consider the royalty income to be material to its current or prospective financial condition. International revenues represented 30% of total revenues for the 1996 fiscal year, up from 10.7% for the 1992 fiscal year. The mix of the Company's revenues and profits, on both a product and geographic basis, will be affected by the continued introduction and acceptance of the Company's Glaucoma Wick, ICLs and STAARVISC(TM) viscoelastic solution in various markets worldwide, including the United States. Sales of the Company's Glaucoma Wick and ICLs will be limited to the international market until such products receive United States FDA approval. The Company's long-term objective is to increase international revenues to account for one-half of total revenue. The Company's principal customers are ophthalmologists, surgical centers, hospitals, managed care providers, health maintenance organizations and group purchasing organizations. The Company generally supplies a quantity of foldable IOLs with different specifications to domestic customers on a consignment basis and recognizes sales when an ophthalmic surgeon implants the consigned foldable IOL. However, sales to foreign distributors are recognized upon shipment. The Company typically does not have any backlog of orders, and has minimal product returns. Ophthalmic surgeons and other providers of foldable IOLs are generally eligible to receive reimbursements from government or private third-party payors, such as Medicare, subject to certain limitations and pricing pressures. The Company does not expect that ICLs will be eligible for, and there can be no assurance that the Glaucoma Wick will be eligible for, reimbursement by government or private third-party payors. RESULTS OF OPERATIONS The following table sets forth the percentage of total revenues represented by certain items reflected in the Company's income statement for the period indicated and the percentage increase or decrease in such items over the prior period. 17
PERCENTAGE OF TOTAL REVENUES PERCENTAGE CHANGE -------------------------------------------- ------------------- FISCAL FISCAL YEAR ENDED YEAR -------------------------------------------- ---------- 1996 1995 JANUARY 3, DECEMBER 29, DECEMBER 30, VS VS 1997 1995 1994 1995 1994 ----------- -------------- ------------- ---- ---- Total revenues................................... 100.0% 100.0% 100.0% 21.7% 26.8% Cost of sales.................................... 24.2 24.3 22.1 20.8 39.3 ----- ----- ----- Gross profit..................................... 75.8 75.7 77.9 22.0 23.3 Costs and expenses: General and administrative.................... 13.3 14.4 16.0 12.6 14.6 Marketing and selling......................... 29.0 31.5 31.8 12.1 25.5 Research and development...................... 9.7 9.4 9.9 25.5 19.7 ----- ----- ----- Total costs and expenses................... 52.0 55.3 57.7 14.5 21.5 Operating income................................. 23.9 20.4 20.2 42.2 28.5 Other income, net................................ 0.4 0.9 2.3 (49.5) (51.5) ----- ----- ----- Income before income taxes....................... 24.2 21.3 22.5 38.4 26.8 Income tax provision (benefit)................... 7.9 (0.3) (8.0) --- (95.8) ----- ----- ----- Net income....................................... 16.3% 21.6% 30.5% (7.9)% (10.1)% ===== ===== =====
FISCAL YEAR ENDED JANUARY 3, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 29, 1995 REVENUES. Revenues for the year ended January 3, 1997 were $42.2 million, representing a 21.7% increase over $34.7 million in revenues for the prior year ended December 29, 1995. The increase in revenues was principally attributable to the continued growth in unit sales of the Company's primary products, its foldable IOLs, in both the domestic and international markets, partially offset by certain domestic price decreases due to competitive pressures. Increases in unit volume are attributable, in significant part, to the continuing conversion of the cataract market to foldable IOLs (according to industry statistics, approximately 50% of all cataract surgeries performed in the United States in 1996 used foldable IOLs as compared to 37% in 1995). Revenues from international sales increased to 30% of total revenues for the year ended January 3, 1997, as compared to 24% for the prior fiscal year, reflecting the Company's increased efforts to develop international markets, as well as the conversion of these markets to foldable IOLs. Also included in revenues for the year ended January 3, 1997 are international sales of $625,000 resulting from the commercial introduction in selected foreign markets of the Company's Glaucoma Wick at the end of 1995 and its ICLs and STAARVISC(TM) viscoelastic solution at the end of 1996. Revenues from royalties also increased from $500,000 for 1995 to $1 million for 1996. COST OF SALES. Cost of sales as a percentage of revenues for the year ended January 3, 1997 declined slightly to 24.2% of revenues as compared 24.3% for the prior year. The principal reasons for this slight decline were increased operating efficiencies and economies of scale from increased sales volume. These savings were offset by price decreases resulting from competitive pressures and a product mix change due to an increased demand for the ELASTIMIDE(TM)IOL, which is relatively more expensive to manufacture. GENERAL AND ADMINISTRATIVE. General and administrative expense for the year ended January 3, 1997 was $5.6 million, or 13.3% of revenues, as compared to $5 million, or 14.4% of revenues, for the prior year. The decline in general and administrative expense as a percentage of revenues was attributable to the significant growth in overall revenues permitting greater absorption of general and administrative costs. The increase in general 18 and administrative expense in dollar terms was attributable to additional administrative infrastructure expenditures required to support the increase in revenues. MARKETING AND SELLING. Marketing and selling expense for the year ended January 3, 1997 was $12.2 million, or 29.0% of revenues, as compared to $10.9 million, or 31.5% of revenues, for the prior year. The decline in marketing and selling expense as a percentage of revenues was attributable to the significant growth in overall revenues permitting greater absorption of fixed marketing and selling (i.e., non-commission) costs. The increase in marketing and selling expense in dollar terms was principally attributable to greater commissions paid arising from increased sales revenues. RESEARCH AND DEVELOPMENT. Research and development expense for the year ended January 3, 1997 was $4.1 million, or 9.7% of revenues, as compared to $3.3 million, or 9.4% of revenues, for the prior year. This increase was attributable to the Company's continued investment in developing new products, manufacturing systems and distribution systems, cost reduction projects for manufacturing, and increased costs incurred conducting clinical studies in the United States. OTHER INCOME, NET. Other income for the year ended January 3, 1997 was $153,000, or 0.4% of revenues, as compared to $303,000, or 0.9% of revenues, for the prior year. The primary reasons for this decrease were increased interest expenses, losses in translating foreign currency, and a decline in deferred revenue arising from the sale of a license to the Canon STAAR joint venture. The deferred revenue reported in 1996 is the last portion of total deferred revenue realized with respect to the Canon STAAR license. INCOME TAX PROVISION (BENEFIT). Income taxes increased to a provision of $3.3 million for the year ended January 3, 1997 from a benefit of $100,000 for the year ended December 29, 1995. 1996 is the first year the Company has reported an income tax provision without having offsets related to net operating loss carryforwards. However, the Company will not pay any significant Federal income taxes until it fully utilizes the remaining $2.5 million of net operating loss carryforwards for tax purposes. The Company fully utilized its net operating loss carryforwards for state taxes in 1995. The Company has recorded a deferred tax asset of $1.3 million as of January 3, 1997. Management believes expected future income levels should result in full recognition of the deferred tax asset. See Note 7 to the Consolidated Financial Statements. FISCAL YEAR ENDED DECEMBER 29, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 30, 1994 REVENUES. Revenues for the year ended December 29, 1995 were $34.7 million, which was 26.8% greater than the $27.4 million in revenues for the prior year ended December 30, 1994. The increase in sales revenues was attributable to a combination of interrelated factors, including: (i) increased domestic demand for the Company's ELASTIMIDE(TM), and, to a lesser degree, ELASTIC(TM) foldable IOLs due to the introduction of ultraviolet versions of these products in April 1995; (ii) increased international demand for the Company's IOLs as a result of the Company's continued investment in its foreign distribution channels (international revenue increased to 24% of total Company revenue for 1995, as compared to 16% in 1994); and (iii) the continuing conversion of both the domestic and international markets from hard IOLs to foldable IOLs (according to industry statistics, 37% of the overall domestic IOL market at the end of 1995 was held by foldable IOLs, and, according to management estimates, 15% of the overall international IOL market at the end of 1995 was held by foldable IOLs). Gains in volume were partially offset by certain domestic price decreases resulting from pressures from managed care providers. Revenues from royalties were $500,000 in 1995 compared to $1.0 million in 1994. COST OF SALES. Cost of sales increased to 24.3% of revenues for the year ended December 29, 1995 compared to 22.1% of revenues for the year ended December 30, 1994. The principal reasons for this increase were: (i) lower 19 pricing from certain managed care contract sales; (ii) inefficiencies associated with the resumption of manufacturing of ultraviolet versions of the Company's ELASTIC(TM) and ELASTIMIDE(TM)IOLs following FDA pre-market approval in the second quarter of 1995; (iii) increased sales of the ELASTIMIDE(TM) IOL, which is more costly to manufacture because of its design; and (iv) increased costs associated with the start-up of manufacturing of new products in Switzerland. GENERAL AND ADMINISTRATIVE. General and administrative expense decreased to 14.4% of revenues ($5.0 million) for the year ended December 29, 1995 from 16.0% of revenues ($4.4 million) for the year ended December 30, 1994. This percentage decrease resulted from management's continued efforts to control general and administrative expenses, combined with the increase in revenues. The increase in actual general and administrative expense was attributable to the start-up of the Company's operations in Switzerland. MARKETING AND SELLING. Marketing and selling expense decreased to 31.5% of revenues ($10.9 million) for the year ended December 29, 1995 from 31.8% of revenues ($8.7 million) for the year ended December 30, 1994. The increase in actual marketing and selling expense was attributable to: (i) higher marketing and selling expenses associated with the build-up of direct distribution channels in Australia, South Africa, France and Switzerland (which translated into a significant portion of increased international revenues for 1995); and (ii) increased costs associated with the market introduction of the new Glaucoma Wick and preparation for the market introduction of the ICL in selected foreign countries. This increase in expenses was partially offset by reduced domestic commission expenses attributable to lower pricing. RESEARCH AND DEVELOPMENT. Research and development expense decreased to 9.4% of revenues ($3.3 million) for the year ended December 29, 1995 from 9.9% of revenues ($2.7 million) for the year ended December 30, 1994. The primary reason for the increase in actual expense was the continued investment in developing new products, manufacturing systems and distribution systems, and cost reduction projects for manufacturing. OTHER INCOME, NET. Other income decreased to 0.9% of revenues ($300,000) for the year ended December 29, 1995 from 2.3% of revenues ($600,000) for the year ended December 30, 1994. The primary reason for this decrease was reduced earnings reported by the Company's joint venture with Canon STAAR and increased interest expense attributable to money borrowed through STAAR Surgical AG to set-up the Company's Swiss manufacturing facility and increased borrowings by the Company under its line of credit. Subsequent to the 1995 year-end the Company refinanced and increased its domestic line of credit facility with a different lender. The Company obtained a lower interest rate under the refinancing, which should result in lower interest expense for comparable future borrowings. INCOME TAX PROVISION (BENEFIT). As a result of increased operating profits, the Company increased its deferred tax asset to $3.3 million as of December 29, 1995, up from $2.4 million as of December 30, 1994. This resulted in an income tax benefit of $100,000 ($800,000 income tax provision, exclusive of net operating loss benefit, offset by $900,000 recognition of deferred tax asset) in 1995, compared to $2.2 million ($200,000 income tax provision, exclusive of net operating loss benefit, offset by $2.4 million recognition of deferred tax asset) in 1994. As a result of the Company's positive operating results for each of the three years ended December 29, 1995, the Company determined that deferred tax assets of approximately $3.3 million and $2.4 million should be recognized as of December 29, 1995 and December 30, 1994, respectively. These amounts were based on a consideration of current and future anticipated earnings. Income levels in 1996 and 1997 similar to those of 1995 should result in full recognition of the deferred tax assets. The amount recorded as of December 29, 1995 includes the capitalization of the remaining balance of the Company's net operating loss carryforwards. Management believes it is more likely than not that the deferred tax assets will be realized in full. The Company will begin reporting an income tax provision in 1996 that will utilize the deferred tax assets and will result in decreased after-tax earnings and earnings per share. However, the Company will not pay any significant Federal income taxes until it fully utilizes the remaining $7.6 million of net operating loss carryforwards. The Company 20 fully utilized its net operating loss carryforwards for state taxes in 1995. See Note 7 to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its activities over the past several years principally from cash flow generated from operations, exercises of stock options and warrants, credit facilities provided by institutional domestic and foreign lenders and private placements of equity. The Company's domestic credit facility is a line of credit, entered into in February 1996, which allows the Company to borrow up to $5.0 million on a revolving basis, at a rate of interest not to exceed the prime interest rate. The loan agreement requires the Company to satisfy certain financial tests, limits the amount of indebtedness the Company may incur to others and restricts the payment of dividends. This line of credit expires in June 1997. Borrowings are collateralized by substantially all of the domestic assets of the Company. Borrowings outstanding as of January 3, 1997 were approximately $4.7 million. The Company's foreign credit facility consists of a separate revolving line of credit and a term loan extended in May 1994 by a Swiss bank to the Company's subsidiary, STAAR Surgical AG. The revolving line of credit facility provides for borrowings up to $828,000 (1.1 million Swiss Francs) at a 5.5% rate of interest as of January 3, 1997. A commission rate of 0.25% is payable each quarter. The line of credit does not have a termination date and is secured by a general assignment of claims. Borrowings outstanding as of January 3, 1997 under the line of credit were approximately $790,000. Under the term loan, STAAR Surgical AG obtained a $828,000 (1.1 million Swiss Francs) loan guaranteed partially by the Swiss government and partially by the Company. Interest on this loan is 6.25%, which the Company shares on an equal basis with the bank and the Swiss government. The principal amount of this loan is required to be repaid in four equal installments, beginning in December 1996. Borrowings by STAAR Surgical AG under this loan outstanding as of January 3, 1997 were approximately $619,000. As of January 3, 1997, the Company had net working capital of approximately $15.5 million compared to $16.3 million and $14.2 million as of December 29, 1995 and December 30, 1994, respectively. The decrease in net working capital for the fiscal year ended January 3, 1997 was primarily attributable to a $4.2 million increase in notes payable, $5.9 million investment in patents and licenses, and $4.3 million expended to acquire additional property and equipment, which used cash resources, offset by a $2.8 million increase in inventories and a $2.7 million increase in cash. The improvement in the Company's net working capital for the fiscal year ended December 29, 1995 was primarily attributable to increases in accounts receivable (approximately $2.2 million) and inventory (approximately $1.0 million) resulting from increased operating activities and a $900,000 increase in the recognition of deferred tax assets. As of January 3, 1997, the Company had cash and cash equivalents of approximately $6.5 million compared to $3.8 million and $3.2 million as of December 29, 1995 and December 30, 1994, respectively. The improvement in the Company's cash position for the year ended January 3, 1997 was primarily attributable to net cash provided by operating activities (approximately $8.5 million) and cash provided by financing activities (approximately $5.0 million), partially offset by cash used for the acquisition of property, plant and equipment to establish production facilities for new products and to improve operations for current products and reduce current manufacturing costs (approximately $4.3 million) and to acquire patents and licenses and to fund patent litigation (approximately $5.9 million). The improvement in the Company's cash position for the fiscal year ended December 29, 1995 was primarily attributable to net cash provided by operating activities ($5.0 million), cash received from the exercise of stock options and warrants ($434,000) and borrowings under the Company's credit facilities ($2.9 million). Cash proceeds for the fiscal year ended December 29, 1995 were principally used for working capital, for the 21 acquisition of property, plant and equipment ($3.5 million), primarily for STAAR Surgical AG's facility in Switzerland, and to acquire patents and licenses and fund patent litigation ($2.0 million). Cash flows from operating activities for the year ended January 3, 1997 were approximately $8.5 million, an improvement of approximately $3.5 million from the prior fiscal year. The increase in cash flow from operating activities was principally attributable to the utilization of deferred tax asset of $2.0 million and an increase in depreciation and amortization of $836,000, offset by a $271,000 decrease in operating working capital items. Cash flows from operating activities for the fiscal year ended December 29, 1995 were $5.0 million, representing an improvement of approximately $1.0 million relative to the fiscal year ended December 30, 1994, due to significantly improved results from operations. Cash used in investing activities for the year ended January 3, 1997 was $10.7 million, representing an increase of approximately $4.6 million relative to the year ended December 29, 1995. This increase was due primarily to an increase of $792,000 in expenditures for property and equipment and $4.0 million for patents and licenses. Cash used in investing activities for the fiscal year ended December 29, 1995 was $6.0 million, representing an increase of approximately $2.0 million relative to the fiscal year ended December 30, 1994. This increase was due to larger expenditures for property and equipment of $3.5 million, patents and licenses of $2.0 million, and other assets of $600,000. Cash flows from financing activities for the year ended January 3, 1997 were $5.0 million, representing an increase of approximately $3.4 million relative to the year ended December 29, 1995. This increase was principally attributable to increased net borrowings of approximately $1.4 million, increased exercises of stock options of $584,000, and decreased expenditures to repurchase Common Stock (approximately $315,000, as compared to $1.6 million for the prior fiscal year). Cash flows from financing activities for the fiscal year ended December 29, 1995 decreased by approximately $290,000 relative to the fiscal year ended December 30, 1994. This decrease was principally due to payments made by the Company in connection with the repurchase of its Common Stock of $1.6 million, and reduced issuance of Common Stock resulting in relatively lower proceeds in 1995 of $600,000, offset by an increase in borrowings of $2.1 million under the Company's credit facilities. As of January 3, 1997, the Company had $828,000 due with respect to an open- ended capital lease agreement wherein the Company leased $1.2 million in surgical equipment. The Company's obligations under this lease agreement are secured by a $600,000 letter of credit. The Company's capital expenditures for the fiscal years ended January 3, 1997 and December 29, 1995 were approximately $4.3 million and $3.5 million, respectively. All expenditures were used to upgrade existing production equipment, to set up new production facilities for new products, and to reduce current manufacturing costs. The Company's planned capital expenditures for 1997 are approximately $5.0 million, primarily to improve and expand the Company's foldable IOL, ICL and Glaucoma Wick manufacturing capacity and to reduce manufacturing costs. Capitalized additions for patents and licenses for the fiscal years ended January 3, 1997 and December 29, 1995 were approximately $5.9 million and $2.0 million, respectively. The Company capitalizes the costs of acquiring patents and licenses as well as the legal costs of defending its rights to these patents. The Company expects to spend approximately $2.0 million in 1997 for patents and licenses. Management believes that cash flow from operations and available credit facilities, together with its current cash balances, will provide adequate financial resources to finance an increase in the level of the Company's operations, including capital expenditures, acquisitions and research and development activities, for the foreseeable future. Should additional funding be needed, such as for significantly increased levels of operations, 22 the Company believes, so long as the financial position of the Company remains constant, that these funds could be obtained. 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 has adversely affected the Company's 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 would affect the Company's operating results. See "Uncertainties and Risk Factors - Risks Associated with International Transactions" below. INFLATION Management believes inflation has not had a significant impact on the Company's operations during the past three years. UNCERTAINTIES AND RISK FACTORS The Company may be subject to a number of significant uncertainties and risks including, without limitation and without purporting to be a complete or exhaustive list, those described below and those described elsewhere in this Report, which may ultimately affect the Company in a manner and to a degree which cannot be foreseen at this time. RISKS RELATING TO COMMERCIALIZATION OF NEW PRODUCTS The extent and pace of market acceptance of the Company's new products, including its Glaucoma Wick, ICL and STAARVISC(TM) viscoelastic solution, will be a function of many variables, as follows: the product's efficacy, performance and attributes; the ability of the Company to obtain necessary regulatory approvals; the effectiveness of marketing and sales efforts, including educating ophthalmologists and other potential customers as to the distinctive characteristics and benefits of these products; the rate at which ophthalmologists attain the necessary surgical skills to implant the new products; the ability of the Company to meet manufacturing and delivery schedules; and product pricing. The extent and pace of market acceptance will also depend upon general economic conditions affecting customers' purchasing patterns. As the Glaucoma Wick and ICL are new medical devices, there is a material risk that the marketplace may not accept or be receptive to the potential benefits of these products. Unless and until the Company's new product lines are accepted by the market and generating meaningful revenues and profits, the Company's financial condition and prospects will continue to be solely dependent upon its line of cataract products. See "Uncertainties and Risk Factors - Government Regulation and Uncertainty of Product Approval" and "Business - Products." HIGHLY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE Competition in the ophthalmic industry is intense and characterized by extensive research and development and rapid technological change. The Company has licensed certain of its patents and technologies relating to its cataract products to competitors. Many of the Company's current and prospective competitors have greater financial, technical and marketing resources and trade name recognition than the Company, which may enable them to successfully develop and/or market products based on technologies or approaches similar to those of the Company, or develop products based on other technologies or approaches, which are, or may be, competitive 23 with the Company's products. Development by competitors of new or improved products, processes or technologies may make the Company's products less competitive or obsolete. The Company will be required to devote significant financial and other resources to enhance its existing products and develop new products for the ophthalmic industry. Competitive pressures could lead to a decline in sales volumes of existing products, the inability to attain sufficient market penetration for new products, or price reductions, any or all of which could adversely affect the Company's operating and financial results. There can be no assurance that the Company will be able to compete successfully in the industry, particularly in view of rapid technological change. See "Business - Competition" in Item 1. GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVAL The manufacture and sale of the Company's products are subject to extensive international and domestic regulation. In order to sell these products within the United States, clearance or approval from the FDA is required. The FDA clearance or approval process is expensive and time consuming, and no assurance can be given that any of the Company's products which have not received FDA clearance or approval to date will obtain such FDA clearance or approval on a timely basis or at all, or without delays adversely affecting the marketing and sale of the Company's products. Foreign regulatory requirements differ from jurisdiction to jurisdiction and may, in some cases, be more stringent or difficult to obtain than FDA clearance or approval. In order to sell products in the countries comprising the European Economic Union (the "Union"), the Company must satisfy, by no later than 1998, certain Union-wide regulatory requirements, notwithstanding the Company's previous receipt of approvals from member countries. No assurance can be given that the Company will obtain such regulatory approvals on a timely basis or at all, or without delays adversely affecting the marketing and sale of the Company's products. In addition, clearances or approvals that have been or may be granted are subject to continual review, which could result in product labeling restrictions, withdrawal of products from the market or other adverse consequences. To date, the Company has conducted clinical studies in certain foreign countries on the feasibility of using the Glaucoma Wick for the treatment of glaucoma. There can be no assurance that the initial clinical trial results from these studies are necessarily indicative of future clinical trial results with respect to the Glaucoma Wick. There can be no assurance that long-term safety and efficacy data, when collected, will be consistent with the clinical results and will demonstrate that the Glaucoma Wick can be used safely and successfully to treat glaucoma in a broad segment of the patient population or on a long-term basis. Furthermore, no assurance can be given that there will be no serious complications or side effects, or that any such complications or side will not impair or delay the Company's obtaining regulatory approval for the Glaucoma Wick in the United States and other key markets. To date, the Company has only conducted preliminary studies in certain foreign countries on the feasibility of using the ICL for the treatment of myopia and hyperopia. The Company has not yet developed any long-term safety or efficacy data on the ICL. There can be no assurance that the preliminary feasibility results are necessarily indicative of any results of any future clinical trials. There can be no assurance that any long-term safety and efficacy data, when collected, will demonstrate that the ICL can be used safely and successfully to treat myopia or hyperopia on a long-term basis. Further, no assurance can be given that complications of ICL surgeries will not be serious or will not impair or delay the Company in obtaining regulatory approval for the ICL in the United States and other key markets. In addition to the review and approval process for its products, the Company is also subject to government regulation of its manufacturing facilities and procedures including "good manufacturing practice" regulations promulgated by the FDA. The Company believes it is in compliance with all applicable regulations. However, the FDA and comparable regulatory agencies in other countries have substantial discretion in the interpretation and enforcement of applicable regulations. There can be no assurance that future interpretations made by any 24 regulatory bodies, including the FDA, with possible retroactive effect, will not adversely affect the Company. Moreover, the Company could suffer a material adverse effect from a change in these regulations. The Company cannot predict the extent or impact of future federal, state, local or foreign legislation or regulation. See "Business - Regulatory Requirements" in Item 1. If as a result of FDA inspections, MDR reports or other information, the FDA believes that the Company is not in compliance with the law, the FDA can institute proceedings to detain or seize products, enjoin future violations, and/or assess civil or criminal penalties against the Company and its officers or employees. Although the Company and its products have not been the subject of any such FDA enforcement action, any such action by the FDA could result in a disruption of the Company's operations for an undetermined time. PATENTS AND PROPRIETARY RIGHTS The Company's ability to compete effectively is materially dependent upon the proprietary nature of the designs, processes, technologies and materials owned, used by or licensed to the Company. Although the Company attempts to protect its proprietary property, technologies and processes through a combination of patent law, trade secrets and non-disclosure agreements, there is no assurance that any or all of these measures will prove to be effective. For example, in the case of patents, there can be no assurance that existing patents granted to the Company or its licensors will not be invalidated, that patents currently or prospectively applied for by the Company or its licensors will be granted, or that patents will provide significant commercial benefits. Moreover, it is possible that competing companies may circumvent patents the Company or its licensors have received or applied for by developing products which closely emulate but do not infringe the Company's or its licensor's patents, and thereby market products that compete with the Company's products without obtaining a license from the Company. In addition to patented or potentially patentable designs, technologies, processes and materials, the Company also relies on proprietary designs, technologies, processes and know-how not eligible for patent protection, and there is no assurance that competitors may not independently develop the same or superior designs, technologies, processes and know-how. The Company believes that the international market for its products is as important as the domestic market, and therefore seeks patent protection for its products or those of its licensors in selected foreign countries. Because of the differences in foreign patent and other laws concerning proprietary rights, the Company's products may not receive the same degree of protection in certain foreign countries as they would in the United States. There can be no assurance that the Company will be able to successfully defend its patents and proprietary rights. The invalidation or circumvention of key patents (principally the Company's core patents for insertion of foldable or deformable IOLs through minimally invasive surgical techniques) or proprietary rights owned by or licensed to the Company could have an adverse effect on the Company and on its business prospects. There can be no assurance that the Company will not be required to defend against litigation involving the patents or proprietary rights of others, or that licenses under such rights will be available. Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial. See "Business - Intellectual Property Rights" in Item 1. THIRD-PARTY REIMBURSEMENT The Company's ability to sell its products is, in part, dependent upon policies of government or private third-party payors regarding reimbursement to ophthalmic surgeons with respect to their use of the Company's products. There can be no assurance that such third-party payors will continue to authorize or otherwise budget reimbursement for use of the Company's existing products (principally its IOLs) at current levels. For example, reimbursement rates for IOLs, such as that of Medicare, have declined in recent years. Changes in policies 25 regarding reimbursement for ophthalmic products or services could adversely affect the prospects for future sales of the Company's products. The Company does not expect that ICLs will be eligible for reimbursement, and there can be no assurance that any of the Company's other new products will be eligible for reimbursement by government or private third-party payors. RISKS ASSOCIATED WITH INTERNATIONAL TRANSACTIONS The Company sells its products internationally which subjects it to several potential risks, including fluctuating exchange rates and regulation of fund transfers by foreign governments, United States and foreign export and import duties and tariffs and political instability. There can be no assurance that any of the foregoing will not have a material adverse effect upon the business of the Company. The Company has not previously engaged in activities to mitigate the effects of foreign currency fluctuations, as the Company is generally paid in U.S. dollars with respect to its international operations. If earnings from international operations increase, the Company's exposure to fluctuations in foreign currencies may increase, and the Company may utilize forward exchange rate contracts or engage in other efforts to mitigate foreign currency risks. If entered into, there can be no assurance as to the effectiveness of such efforts in limiting any adverse effects of foreign currency fluctuations on the Company's international operations and on the Company's overall results of operations. See "Business" in Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Foreign Exchange" above. PRODUCT LIABILITY CLAIMS; INSUFFICIENCY OF PRODUCT LIABILITY INSURANCE COVERAGE; PRODUCT RECALL RISKS As a supplier of products used in medical treatments, the Company faces an inherent business risk of exposure to product liability claims in the event the end use of its products results in unanticipated adverse effects on patients, including serious personal injury or death. Certain of the Company's new products, such as its Glaucoma Wick and its ICL, are based upon unique designs and materials. Product liability risk is higher with respect to these products, as they have a limited history of testing, use and performance, and unknown defects associated with such products may only be identified through the passage of time. Potential negative publicity concerning the defective product could also affect the Company's other products. No assurance can be given that the Company will not experience product liability claims in the future with respect to its established or new products. Any product liability claim could have a material adverse effect on the Company. Any product liability claims will be subject to the uncertainties attendant to litigation. The Company currently maintains product liability insurance coverage. No assurance can be given that such insurance coverage is in an amount sufficient to cover all possible liabilities, or one or more large claims, or that the insurer will be solvent at the time of any covered loss. Also, no assurance can be given that adequate product liability insurance will continue to be available in the future or maintained at a reasonable cost to the Company. In the event of a successful product liability suit against the Company, lack or insufficiency of insurance coverage could have a material adverse effect on the Company. The Company may, in the event there are material deficiencies or defects in the design or manufacture of any of its products, be required to recall such defective products. In the event of a product recall, the cost to, and the potential liability of, the Company could be significant and could have a material adverse effect on the Company's business and operations, especially if such liability relates to the recall of a product generating significant revenues and earnings for the Company, such as its foldable IOLs. Potential negative publicity from a recall could also adversely affect sales and/or regulatory approvals of the Company's other products. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements and the Report of Independent Certified Public Accountants are filed with this Annual Report on Form 10-K in a separate section following Part IV, as shown on the index under Item 14(a) of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III -------- ITEMS 10., 11., 12. AND 13. Information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders. PART IV -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K Page (a)(1) Financial statements required by Item B of this form are filed as a separate part of this report following Part IV Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets at January 3, 1997 and December 29, 1995 F-3 Consolidated Statements of Income for the years ended January 3, 1997, December 29, 1995 and December 30, 1994 F-4 Consolidated Statements of Stockholders' Equity for the years ended January 3, 1997, December 29, 1995 and December 30, 1994 F-5 Consolidated Statements of Cash Flows for the years ended January 3, 1997, December 29, 1995 and December 30, 1994 F-6 Notes to Consolidated Financial Statements F-7 - F-23
27 (2) Schedules required by Regulation S-X are filed as an exhibit to this report: Independent Certified Public Accountants' Report on Schedules and Consent F-24 II. Valuation and Qualifying Accounts and Reserves F-25 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 notes thereto
(3) Exhibits -------- 3.1 Certificate of Incorporation, as amended/(1)/ 3.4 By-laws, as amended/(9)/ 4.1 1983 Incentive Stock Option Plan/(5)/ 4.2 1990 Stock Option Plan/((2)/ 4.3 1991 Stock Option Plan/((3)/ 4.4 1995 STAAR Surgical Company Consultant Stock Plan/(4)/ 4.5 1996 STAAR Surgical Company Non-Qualified Stock Plan/(10)/ 4.6 Stockholders' Rights Plan, dated effective April 20, 1995/(8)/ 10.1 Non-Exclusive License Agreement, dated March 13, 1986, between the Company and CooperVision, Inc/(7)/ 10.2 Technology License Agreement And Option To Purchase Equity Interest, dated March 13, 1986, between the Company and CooperVision, Inc/(7)/ 10.3 License Agreement, dated December 16, 1986, between the Company and Optical Radiation Corporation/(5)/ 10.4 Joint Venture Agreement, dated May 23, 1988, between the Company, Canon Sales Co, Inc. and Canon, Inc/(6)/ 10.5 License Agreement, dated March 9, 1990, between Chiron Ophthalmics, Inc. and the Company/(7)/ 10.6 License Agreement, dated March 9, 1990, between Chiron Ophthalmics, Inc. and the Company/(7)/ 10.7 Form of Formula Stock Option Agreements granted to certain executive officers and directors of Company commencing in August 1990 in connection with 1990 Stock Option Plan/(5)/
28 10.8 Promissory Note, dated February 28, 1991, from John R. Wolf to the Company/(11)/ 10.9 Stock Pledge/Security Agreement, dated February 28, 1991, between John R. Wolf, the Company and Pollet & Associates/((11)/ 10.10 Promissory Note, dated February 28, 1991, from William C. Huddleston to the Company/((11)/ 10.11 Stock Pledge/Security Agreement, dated February 28, 1991, between William C. Huddleston, the Company and Pollet & Associates/(11)/ 10.12 Amended and Restated Soft IOL License Agreement, restated as of January 31, 1992, between the Company, Softlensco, Inc., and Iolab Corporation/(11)/ 10.13 Promissory Note, dated May 26, 1992, from Andrew F. Pollet./(5)/ 10.14 Deed of Trust, dated September 21, 1992, by the Andrew F. Pollet and Sally M. Pollet Revocable Trust dated March 6, 1990/(5)/ 10.15 Promissory Note, dated July 3, 1992, from William C. Huddleston to the Company/(5)/ 10.16 Stock Pledge/Security Agreement, dated July 3, 1992, between William C. Huddleston the Company and Pollet & Associates/(5)/ 10.17 Lease, dated November 9, 1992, by and between Linda Lee Brown and Phyllis Ann Bailey and the Company regarding real property located at 1911 Walker Avenue, Monrovia, California/(5)/ 10.18 Lease Addition, dated November 9, 1992, by and between Turner Trust, Dale E. Turner & Francis R. Turner, as Trustees and the Company to that certain lease dated October 20, 1983 regarding real property located at 1911 Walker Avenue, Monrovia, California/(5)/ 10.19 Patent License Agreement, dated May 24, 1995, with Eye Microsurgery Intersectoral Research and Technology Complex/(9)/ 10.20 Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and Technology Complex/(10)/ 10.21 Promissory Note, dated March 18, 1993, from William C. Huddleston to the Company/(7)/ 10.22 Indenture of Lease, dated September 1, 1993, with FKT Associates regarding real property located at 1900 South Myrtle Avenue, Monrovia, California/(7)/
29 10.23 Business Loan Agreement, dated February 15, 1996, between STAAR Surgical Company and First Interstate Bank of California/(10)/ 10.24 Commercial Security Agreement, dated February 15, 1996, between STAAR Surgical Company/(10)/ 10.25 Revolving Line of Credit Note dated December 2, 1996, between STAAR Surgical Company and First Interstate Bank of California/(10)/ 10.26 Modification To Employment Agreement, dated December 20, 1994, between the Company and John R. Wolf/(7)/ 10.27 First Amendment To Sales Representative Agreement, dated December 20, 1994, between the Company and John R. Wolf/(7)/ 10.28 Employment Agreement, dated March 1, 1994, between the Company and Vladimir Feingold/(7)/ 10.29 Modification To Employment Agreement, dated May 6, 1996, between the Company and Vladimir Feingold/(10)/ 10.30 Employment Agreement, dated March 1, 1994, between the Company and William C. Huddleston/(7)/ 10.31 Modification To Employment Agreement, dated May 6, 1996, between the Company and William C. Huddleston/(10)/ 10.32 Employment Agreement, dated March 1, 1994, between the Company and Carl M. Manisco/(7)/ 10.33 Modification To Employment Agreement, dated May 6, 1996, between the Company and Carl M. Manisco/(10)/ 10.34 Employment Agreement, dated March 1, 1994, between the Company and Michael J. Lloyd/(7)/ 10.35 Modification To Employment Agreement, dated May 6, 1996, between the Company and Michael J. Lloyd/(10)/ 10.36 Employment Agreement, dated March 1, 1994, between the Company and Stephen L. Ziemba/(7)/ 10.37 Modification To Employment Agreement, dated May 6, 1996, between the Company and Stephen L. Ziemba/(10)/ 10.38 Employment Contract, dated May 26, 1996, between the Company and
30 Donald Ferguson/(10)/ 10.39 Amended IOL Supply Agreement, dated June 10, 1994, between the Company and Chiron Vision Corporation/(7)/ 10.40 Manufacturing Site Agreement, dated June 10, 1994, between the Company and Chiron Vision Corporation/(7)/ 10.41 Form of Non-Qualified Stock Option Agreements granted to Directors of Company in June and August 1994/(7)/ 10.42 Agreement For Purchase And Sale Of Assets, dated October 1, 1994, between STAAR Surgical Australasia Pty. Ltd. and Bionica Pty. Ltd./(7)/ 10.43 Agreement, dated October 10, 1995, with China Eye Joint Venture/(9)/ 10.44 Agreement, dated November 1994, between the Company and Norbrook Laboratories Limited/(7)/ 21 List of Significant Subsidiaries/(10)/ 24 Powers of Attorney 27 Financial Data Schedules - ------------
(Footnotes to Exhibits): (1) Incorporated by reference from the Company's Registration Statement on Form S-18, File No. 2-83434, as filed on April 29, 1983 (2) Incorporated by reference from the Company's Registration Statement on Form S-8, File No. 33-37248, as filed on October 11, 1990 (3) Incorporated by reference from the Company's Registration Statement on Form S-8, File No. 33-76404, as filed on March 11, 1994 (4) Incorporated by reference from the Company's Registration Statement on Form S-8, File No. 33-60241, as filed on June 15, 1995 (5) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end January 1, 1993, as filed on April 1, 1993 (6) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end December 31, 1993, as filed on March 31, 1994 (7) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end December 30, 1994, as filed on March 30, 1995 (8) Incorporated by reference from the Company's Proxy Statement for its Annual Meeting of
31 Stockholders held on June 6, 1995, as filed on May 12, 1995 (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end December 29, 1995, as filed on March 28, 1996 (10) Filed herewith (11) Refiled herewith pursuant to Reg. (S)201.24
32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 2, 1997. STAAR SURGICAL COMPANY By: /s/ John R. Wolf ----------------------------- John R. Wolf, President and Chief 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 on April 2, 1997 and in the capacities indicated. /s/ John R. Wolf President, Chief Executive Officer and Chairman - ---------------------------- John R. Wolf /s/ William C. Huddleston Vice President and Chief Financial Officer - ---------------------------- (principal accounting and financial officer) William C. Huddleston /s/ Peter J. Utrata, M.D.* Director - ---------------------------- Peter J. Utrata, M.D. /s/ Donald R. Sanders, M.D.* Director - ---------------------------- Donald R. Sanders /s/ Andrew F. Pollet* Director - ---------------------------- Andrew F. Pollet /s/ Michael R. Deitz, M.D.* Director - ----------------------------- Michael R. Deitz, M.D. * /s/ William C. Huddleston - ----------------------------- William C. Huddleston (Attorney in Fact) 33 STAAR SURGICAL COMPANY AND SUBSIDIARIES --------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994 --------------------------------------- F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders STAAR Surgical Company We have audited the accompanying consolidated balance sheets of STAAR Surgical Company and subsidiaries as of January 3, 1997 and December 29, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 3, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of STAAR Surgical Company and subsidiaries as of January 3, 1997 and December 29, 1995, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1997, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Los Angeles, California March 11, 1997 F-2 STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 3, 1997 AND DECEMBER 29, 1995 =====================================
ASSETS (Note 5) 1996 1995 ------ ------------ ------------ Current assets: Cash and cash equivalents $ 6,469,515 $ 3,767,011 Accounts receivable, less allowance for doubtful accounts of $111,525 and $119,490 (Note 1) 6,827,250 7,492,439 Inventories (Note 2) 12,365,867 9,591,898 Prepaid, deposits and other current assets 1,676,611 917,895 Deferred income tax (Note 7) 1,331,075 3,323,724 ----------- ----------- Total current assets 28,670,318 25,092,967 ----------- ----------- Investment in joint venture (Note 4) 2,464,140 2,121,492 Property, plant and equipment, net (Note 3) 8,920,989 6,362,696 Patents and licenses, net of accumulated amortization of $1,401,392 and $826,715 (Notes 8 and 9) 8,900,236 3,538,769 Other assets 2,163,336 1,687,066 ----------- ----------- $51,119,019 $38,802,990 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Notes payable (Note 5) $ 7,489,549 $ 3,548,686 Accounts payable 1,732,064 1,448,135 Current portion of long-term debt (Note 6) 703,260 480,151 Other current liabilities (Notes 11 and 12) 3,259,714 3,281,321 ----------- ----------- Total current liabilities 13,184,587 8,758,293 ----------- ----------- Long-term debt (Note 6) 844,050 1,212,178 Deferred gain on sale of license (Note 4) - 143,750 Other long-term liabilities 486,205 10,743 ----------- ----------- Total liabilities 14,514,842 10,124,964 ----------- ----------- Commitments and contingencies (Notes 10, 11 and 13) Stockholders' equity (Notes 10, 11 and 13): Common stock, $.01 par value, 30,000,000 shares authorized; issued and outstanding 13,070,705 and 12,784,148 130,707 127,841 Capital in excess of par value 41,518,049 40,325,287 Accumulated translation adjustment (160,573) - Accumulated deficit (2,557,991) (9,449,087) ----------- ----------- 38,930,192 31,004,041 Notes receivable (Note 10) (2,326,015) (2,326,015) ----------- ----------- Total stockholders' equity 36,604,177 28,678,026 ----------- ----------- $51,119,019 $38,802,990 =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-3 STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994 ================================================================================
1996 1995 1994 ------------ ------------ ------------ Sales $41,212,511 $34,180,420 $26,333,328 Royalty income (Note 9) 1,000,000 514,000 1,020,046 ----------- ----------- ----------- Total revenues 42,212,511 34,694,420 27,353,374 Cost of sales 10,195,396 8,441,099 6,058,717 ----------- ----------- ----------- Gross profit 32,017,115 26,253,321 21,294,657 ----------- ----------- ----------- Selling, general and administrative expenses: General and administrative (Note 13) 5,627,576 5,000,484 4,364,722 Marketing and selling 12,227,593 10,911,240 8,694,134 Research and development 4,084,991 3,253,536 2,718,451 ----------- ----------- ----------- Total selling, general and administrative expenses 21,940,160 19,165,260 15,777,307 ----------- ----------- ----------- Operating income 10,076,955 7,088,061 5,517,350 ----------- ----------- ----------- Other income (expense): Equity in earnings of joint venture (Note 4) 486,398 517,507 867,389 Interest expense - net (450,276) (265,645) (168,413) Other income (expense) 116,563 51,145 (74,012) ----------- ----------- ----------- Total other income 152,685 303,007 624,964 ----------- ----------- ----------- Income before income taxes 10,229,640 7,391,068 6,142,314 Income tax provision (benefit) (Note 7) 3,338,544 (90,652) (2,184,000) ----------- ----------- ----------- Net income $ 6,891,096 $ 7,481,720 $ 8,326,314 =========== =========== =========== Net income per share (Note 10): Primary $ 0.50 $ 0.55 $ 0.63 =========== =========== =========== Fully diluted $ 0.50 $ 0.55 $ 0.62 =========== =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-4 STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
==================================================================================================================================== Capital in Accumulated Notes Common Excess of Accumulated Translation and Other Stock Par Value Deficit Adjustment Receivables Total --------- ------------ ------------- ------------ ------------ ------------ Balance, at December 31, 1993 $125,632 $41,294,627 $(25,257,121) $ - $(4,177,365) $11,985,773 Common stock issued in private placement (Note 10) 31 9,963 - - - 9,994 Common stock issued upon exercise of options (Note 10) 1,865 692,574 - - (192,000) 502,439 Common stock issued upon exercise of warrants (Note 10) 1,657 329,219 - - - 330,876 Common stock issued as payment for services (Note 10) 759 369,741 - - - 370,500 Common stock returned in exchange for notes receivable (Notes 10 and 13) (3,599) (1,936,688) - - 1,940,287 - Common stock issued to purchase assets (Notes 10 and 13) 700 349,300 - - - 350,000 Stock options issued as payment for services (Notes 10 and 11) - 50,000 - - - 50,000 Payments on notes receivable (Note 10) - - - - 103,063 103,063 Net income - - 8,326,314 - - 8,326,314 -------- ----------- ------------ ----------- ----------- ----------- Balance, at December 30, 1994 127,045 41,158,736 (16,930,807) - (2,326,015) 22,028,959 Common stock issued upon exercise of options (Note 10) 872 399,902 - - - 400,774 Common stock issued upon exercise of warrants (Note 10) 277 32,987 - - - 33,264 Common stock issued as payment for services (Note 10) 511 432,302 - - - 432,813 Common stock repurchased and cancelled (1,750) (1,626,980) - - - (1,628,730) Cash paid on common stock issued for cashless exercise of 138,026 options and warrants 886 (71,660) - - - (70,774) Net income - - 7,481,720 - - 7,481,720 -------- ----------- ------------ ----------- ----------- ----------- Balance, at December 29, 1995 127,841 40,325,287 (9,449,087) - (2,326,015) 28,678,026 Common stock issued upon exercise of options (Note 10) 2,266 983,926 - - - 986,192 Common stock issued upon exercise of warrants (Note 10) 375 64,625 - - - 65,000 Common stock issued as payment for services (Note 10) 444 458,492 - - - 458,936 Common stock repurchased and cancelled (219) (314,281) - - - (314,500) Foreign currency translation adjustment - - - (160,573) - (160,573) Net income - - 6,891,096 - - 6,891,096 -------- ----------- ------------ ----------- ----------- ----------- Balance, at January 3, 1997 $130,707 $41,518,049 $ (2,557,991) $(160,573) $(2,326,015) $36,604,177 ======== =========== ============ =========== =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-5 STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994 ================================================================================ INCREASE IN CASH AND CASH EQUIVALENTS
1996 1995 1994 ------------- ------------ ------------ Cash flows from operating activities: Net income $ 6,891,096 $ 7,481,720 $ 8,326,314 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 1,720,379 1,159,610 996,068 Amortization of patents and licenses 574,677 299,171 257,075 Provision for allowance for doubtful accounts 111,525 111,512 121,435 Equity in earnings of joint venture (486,398) (517,507) (867,389) Utilization (recognition) of deferred tax asset 1,992,649 (923,724) (2,400,000) Common stock issued for services 458,936 432,813 370,500 Options issued for services - - 50,000 Change in operating working capital (Note 14) (2,716,699) (3,030,452) (2,888,728) ------------ ----------- ----------- Net cash provided by operating activities 8,546,165 5,013,143 3,965,275 ------------ ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (4,278,671) (3,486,744) (2,152,646) Issuance of notes receivable - - (192,000) Increase in patents and licenses (5,936,144) (1,980,211) (872,983) Increase in other assets (476,270) (583,505) (835,169) ------------ ----------- ----------- Net cash used in investing activities (10,691,085) (6,050,460) (4,052,798) ------------ ----------- ----------- Cash flows from financing activities: Increase in borrowings under notes payable and long-term debt 2,619,075 794,199 920,001 Payments on other notes payable and long-term debt (536,028) (11,128) - Net borrowings (payments) under line-of-credit 2,188,259 2,082,836 (168,373) Proceeds from the issuance of common stock 1,051,191 434,107 1,035,309 Cash paid in lieu of exercise of stock options and warrants - (70,774) - Proceeds from collections on notes receivable - - 103,063 Payments for repurchase of common stock (314,500) (1,628,799) - ------------ ----------- ----------- Net cash provided by financing activities 5,007,997 1,600,441 1,890,000 ------------ ----------- ----------- Effect of exchange rate changes on cash and cash equivalents (160,573) - - Increase in cash and cash equivalents 2,702,504 563,124 1,802,477 Cash and cash equivalents at beginning of year 3,767,011 3,203,887 1,401,410 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 6,469,515 $ 3,767,011 $ 3,203,887 ============ =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-6 STAAR SURGICAL COMPANY AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994 ======================================= ORGANIZATION AND DESCRIPTION OF BUSINESS STAAR Surgical Company (the "Company") is a developer, manufacturer and global distributor of medical devices used in minimally invasive ophthalmic surgery. The Company was incorporated in California in 1982 as a successor to a partnership for the purpose of developing, producing, and marketing intraocular lenses ("IOLs") and other products for minimally invasive ophthalmic surgery. The Company was reincorporated in Delaware in April 1986. In 1982 and 1983, the Company's operations consisted mainly of research and development and preliminary marketing and capital raising activities. In 1982, the Company commenced the development of foldable IOLs, which are used as replacements for the natural lens after its removal in cataract surgery, and began production and sale of foldable IOLs in 1986 for implantation in connection with clinical studies for such products. In September 1991, the Company received United States Food and Drug Administration ("FDA") pre-market approval for the Company's ELASTIC/TM/ and ELASTIMIDE/TM/ foldable IOL models, which the Company now markets worldwide. The Company's other primary products, developed more recently, are its "wick" style glaucoma implant (the "Glaucoma Wick"), an ocular device developed to provide a more effective and longer-term solution for glaucoma; its implantable refractive contact lens ("ICL"), an ocular implant designed to correct refractive disorders such as myopia (near- sightedness) and hyperopia (far-sightedness); and its STAARVISC/TM/ viscoelastic solution, used during IOL and ICL surgery. The Company markets the Glaucoma Wick, which the Company introduced in late 1995, and its ICLs and STAARVISC/TM/ viscoelastic solution, which the Company introduced in late 1996, on a limited basis in selected foreign countries. The Company's principal operating subsidiary is STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland to develop, manufacture and distribute worldwide certain of the Company's products, including its Glaucoma Wick and ICLs. The Company and STAAR Surgical AG have also formed six other wholly owned operating subsidiaries for the purpose of distributing and marketing the Company's products internationally, including STAAR Surgical - Canada, Ltd. and STAAR Surgical Australasia Pty., Ltd., formed by the Company in 1994, and STAAR Surgical France - SARL, STAAR Surgical - South Africa Pty., Ltd., STAAR Surgical Austria, GmbH; and STAAR Surgical Germany, GmbH, which were formed by STAAR Surgical AG in 1993 through 1995. BASIS OF PRESENTATION The accompanying financial statements consolidate the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Assets and liabilities of foreign subsidiaries are translated at rates of exchange in effect at the close of the period. Revenues and expenses are translated at the weighted average of exchange rates in effect during the year. The resulting gains and losses are deferred and are shown as a separate component of stockholders' equity. During 1995 and 1994, foreign currency translation and transaction gains and losses were not material. During 1996, the net foreign translation loss was $160,573 and net foreign currency transaction loss was $261,181. Investments in affiliates and joint ventures are accounted for using the equity method of accounting. The Company's fiscal year ends on the Friday nearest December 31. F-7 STAAR SURGICAL COMPANY AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES (CONTINUED) ======================================= REVENUE RECOGNITION The Company generally supplies a quantity of foldable IOLs with different specifications to domestic customers, generally ophthalmologists, surgical centers, hospitals and other health providers, on a consignment basis, and recognizes sales when an ophthalmic surgeon implants the consigned foldable IOL. However, sales to foreign distributors are recognized upon shipment. Revenue from license and technology agreements is recorded as income when the Company has satisfied the terms of such agreements and is notified of the amounts. EXPORT SALES During the fiscal years ended January 3, 1997, December 29, 1995 and December 30, 1994, the Company had export sales, primarily to Europe, South Africa, Australia, and Southeast Asia, of approximately $11,620,000, $8,133,000 and $4,284,000, respectively. Of these sales, approximately $7,576,000, $4,841,000 and $3,361,000 were to Europe, which has been the Company's principal foreign market for the last three fiscal years. The Company sells its products internationally, which subject 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. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market (net realizable value). PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives, which are generally not greater than ten years. Leasehold improvements are amortized over the life of the lease or estimated useful life, if shorter. PATENTS AND LICENSES The Company capitalizes the costs of acquiring patents and licenses as well as the legal costs of successfully defending its rights to these patents. Amortization is computed on the straight-line basis over the estimated useful lives, which range from 8 to 17 years. Capitalized patent costs are reviewed each year based on management's estimates of sales of the related products. Patent and license costs are expensed when determined not realizable. F-8 STAAR SURGICAL COMPANY AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES (CONTINUED) ======================================= PATENTS AND LICENSES (Continued) The Company's ability to compete effectively is materially dependent upon the proprietary nature of the designs, processes, technologies and materials owned, used by or licensed to the Company. The Company has been and will continue to be involved in litigation to protect its copyrights, patents and proprietary properties and technology. START-UP COSTS Included in other assets at January 3, 1997 and December 29, 1995 are start-up costs of $1,010,903 and $835,469 respectively. These expenditures are directly related to and incurred during the start-up phase of the production of two new products: the ICL and hyaluronic acid. The costs primarily consist of direct labor and overhead associated with the start-up. The start-up costs are being amortized on a straight-line basis over a period not to exceed three years. Recoverability of these costs are assessed on an on-going basis. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingent liabilities, revenues, and expenses at the date and for the periods that the financial statements are prepared. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash, cash equivalents, accounts receivable, accounts payable, and current notes payable approximate their fair values because of the short maturity of these instruments. With respect to long-term debt, based on the borrowing rates currently available to the Company for similar bank and equipment loans and capitalized leases, the amounts reported approximate the fair value of the respective financial instruments. NET INCOME PER SHARE Primary net income per share has been computed by dividing net income by the weighted average number of common shares and common stock equivalents (warrants and options) outstanding during each year. For each year noted below, the weighted average number of shares is computed using the treasury stock method, under which the number of common stock equivalent shares outstanding reflects an assumed use of the proceeds from the issuance of such shares and from the assumed exercise of such common stock options and warrants to repurchase shares of the Company's common stock at the current fair market values. F-9 STAAR SURGICAL COMPANY AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES (CONCLUDED) ======================================= NET INCOME PER SHARE (Continued) Common stock equivalents arising from the assumed exercise of warrants and options were converted using the year-end market price of the Company's common stock. The number of common and common equivalent shares used for computing primary and fully diluted net income per share were as follows:
1996 1995 1994 ---------- ---------- ---------- Primary 13,867,108 13,678,882 13,170,027 Fully diluted 13,867,108 13,715,097 13,500,363
STOCK-BASED COMPENSATION As of January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS 123, the Company has chosen to continue to account for stock-based compensation utilizing the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS 123, the Company has provided footnote disclosure with respect to stock-based employee compensation. The cost of stock-based employee compensation is measured at the grant date based on the value of the award and recognizes this cost over the service period. The value of the stock- based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. F-10 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994 ======================================= NOTE 1 - ACCOUNTS RECEIVABLE Accounts receivable are summarized as follows:
1996 1995 ----------- ----------- Domestic $ 4,718,142 $ 4,486,125 Export 2,220,633 2,611,804 Royalties - 514,000 ----------- ----------- 6,938,775 7,611,929 Less allowance for doubtful accounts 111,525 119,490 ----------- ----------- $ 6,827,250 $ 7,492,439 =========== ===========
NOTE 2 - INVENTORIES Inventories are summarized as follows:
1996 1995 ----------- ----------- Raw materials and purchased parts $ 1,518,819 $ 1,104,203 Work in process 1,644,234 1,143,119 Finished goods 9,202,814 7,344,576 ----------- ----------- $12,365,867 $ 9,591,898 =========== ===========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows:
1996 1995 ----------- ----------- Machinery and equipment $10,186,227 $ 7,693,617 Furniture and fixtures 4,460,082 3,073,911 Leasehold improvements 2,550,049 2,150,158 ----------- ----------- 17,196,358 12,917,686 Less accumulated depreciation and amortization 8,275,369 6,554,990 ----------- ----------- $ 8,920,989 $ 6,362,696 =========== ===========
F-11 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 4 - INVESTMENT IN JOINT VENTURE The Company owns a 50% equity interest in a joint venture, the CANON-STAAR Company, Inc. ("CSC"), with Canon Inc. ("Canon") and Canon Sales Co, Inc. ("Canon Sales"). The joint venture was formed to manufacture and sell the Company's IOL products to Canon Sales or other distributors in Japan. The Company sold CSC an exclusive license to manufacture and market its products in Japan. The Company recorded $1,500,000 of deferred revenue on the sale of the license, which was recognized over eight years through October 1996 on a straight-line basis. The Company uses the equity method of accounting for this investment. The financial statements of CSC include assets of approximately $6,640,000 and $5,454,000, and liabilities of approximately $1,381,000 and $654,000, as of January 3, 1997 and December 29, 1995, respectively. The Company's equity in earnings of the joint venture is calculated as follows:
1996 1995 1994 --------- --------- ----------- Joint venture net income $685,296 $660,014 $1,359,778 Equity interest 50% 50% 50% -------- -------- ---------- Equity in net income 342,648 330,007 679,889 Recognition of deferred gain on sale of license 143,750 187,500 187,500 -------- -------- ---------- Equity in earnings of joint venture $486,398 $517,507 $ 867,389 ======== ======== ==========
The Company recorded sales of certain IOL products to CSC of approximately $845,000, $171,000 and $262,000 in 1996, 1995 and 1994, respectively. NOTE 5 - NOTES PAYABLE In December 1993, the Company entered into a three year revolving credit facility which provided for borrowings up to $3,000,000, limited to 75% of eligible accounts receivable, at the prime interest rate (8.5% at December 29, 1995 and December 30, 1994) plus 2.75% at December 29, 1995 and 3.5% at December 30, 1994. The weighted average interest rate was 11.63% and 10.32% for fiscal 1995 and 1994. The loan was secured by substantially all of the assets of the Company and contained certain restrictive covenants including the maintenance of various financial ratios and a limitation of indebtedness to others and payment of dividends. The maximum borrowings outstanding under this facility during 1995 was approximately $2,800,000. Borrowings outstanding at December 29, 1995 was $2,512,000. During 1996, this credit facility was refinanced with another lender. In February 1996, the Company refinanced and increased its domestic line of credit, which now allows the Company to borrow up to $5 million on a revolving basis, at a rate of interest not to exceed the prime interest rate. The loan agreement requires the Company to satisfy certain financial tests and limits the amount of indebtedness the Company may have to others and the payment of dividends. The line of credit expires in June 1997. Borrowings are collateralized by substantially all of the assets of the Company. Borrowings outstanding as of January 3, 1997 were approximately $4,700,000. The Company was in compliance with the restrictive covenants as of January 3, 1997. F-12 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 5 - NOTES PAYABLE (Continued) In May 1994, the Company entered into a separate revolving credit facility with a Swiss bank which provides for borrowings up to $827,815 (1,125,000 Swiss Francs at the exchange rate at January 3, 1997) at the interest rate of 5.5%. A commission rate of 0.25% is payable each quarter. The loan does not have a termination date and is secured by a general assignment of claims. Borrowings outstanding under this facility as of January 3, 1997 and December 29, 1995 were $789,549 (1,072,997 Swiss Francs) and $1,036,945 (1,203,893 Swiss Francs), respectively. In 1996, the Company issued a note in the amount of $2,000,000 as partial consideration for the acquisition of a license. The note is due in equal quarterly installments through 1997. NOTE 6 - LONG-TERM DEBT Long-term debt consists of the following:
1996 1995 ---------- ---------- Note payable to bank, interest at 6.25%, payable in four equal annual installments plus interest beginning in December 1996, guaranteed by the Swiss federal government and the Canton of Bern $ 618,584 $ 991,703 Note payable to equipment vendor, interest at 13%, payable in monthly installments plus interest through December 1999, secured by equipment 101,118 124,379 Obligations under capitalized leases (see Note 11) 827,608 576,247 ---------- ---------- 1,547,310 1,692,329 Less current portion 703,260 480,151 ---------- ---------- Long-term debt due after one year $ 844,050 $1,212,178 ========== ==========
NOTE 7 - INCOME TAXES Effective January 2, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (the "Statement") which requires, among other things, a change from the deferred method to the asset and liability method of accounting for income taxes. As a result of the adoption of the Statement, the tax benefits of net operating loss carryforwards utilized in 1995 and 1994 are presented in the Consolidated Statement of Income as reductions of the provisions for income tax. F-13 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 7 - INCOME TAXES (Continued) The provision (benefit) for income taxes consist of the following:
1996 1995 1994 ---------- ---------- ------------ Domestic - current: Federal (net of $2,006,000, $2,513,000 and $1,608,000 tax benefit from operating loss carryforwards) $ 492,000 $ 149,000 $ 138,000 State (net of $-0-, $-0- and $441,000 tax benefit from operating loss carryforwards) 725,000 684,000 78,000 ---------- --------- ----------- 1,217,000 833,000 216,000 Foreign taxes 129,000 - - Change in deferred tax assets, net 1,993,000 (924,000) (2,400,000) ---------- --------- ----------- $3,339,000 $ (91,000) $(2,184,000) ========== ========= ===========
At January 3, 1997, the Company had net operating loss carryforwards of approximately $2.5 million for federal income tax purposes expiring at various dates between 1999 and 2006. The Company utilized all of its remaining tax loss carryforwards for state income tax purposes during 1995. Alternative minimum tax and research and experimentation tax credit carryforwards at January 3, 1997 were approximately $424,000 and $481,000, respectively, for tax purposes. The tax credits expire at various dates through 2004. The provision (benefit) based on income before taxes differs from the amount obtained by applying the statutory federal income tax rate to income before taxes as follows:
Liability Method ------------------------- 1996 1995 1994 ------ ------ ------- Computed provision for taxes based on income at statutory rate 34.0% 34.0% 34.0% Permanent differences 1.5 0.2 (2.2) State taxes, net of federal income tax benefit 6.1 7.7 5.7 Tax benefit of net operating loss carryforward - (28.2) (37.5) Tax effect attributed to foreign operations (10.1) - - Reduction of valuation allowance - (18.5) (39.1) Other 1.1 3.8 3.5 ----- ----- ------ Effective tax provision (benefit) rate 32.6% (1.0)% (35.6)% ===== ===== ======
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $3.2 million at January 3, 1997. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation. F-14 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 7 - INCOME TAXES (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 and liabilities as of January 3, 1997 and December 29, 1995 are as follows:
1996 1995 ----------- ----------- Deferred tax assets: Allowance for doubtful accounts $ 57,000 $ 44,000 Inventory reserves and uniform capitalization 307,000 262,000 Accrued vacation 114,000 117,600 Amortization of deferred gain - 57,600 Depreciation and amortization (937,000) (670,000) State taxes 153,000 153,000 Net operating loss carryforwards 732,075 2,578,524 Tax credits 905,000 781,000 ---------- ---------- Total deferred tax assets $1,331,075 $3,323,724 ========== ==========
As a result of the Company's positive operating results for each of the three years ended January 3, 1997, the Company determined that deferred tax assets of $1,331,075 and $3,323,724 should be recognized as of January 3, 1997 and December 29, 1995. This amount was based on a consideration of current and future anticipated earnings. Future income levels should result in full recognition of the deferred tax asset. The amount recorded as of January 3, 1997 includes the capitalization of the remaining balance of the Company's net operating loss carryforwards. Management believes it is more likely than not that the deferred tax assets will be realized in full. NOTE 8 - PATENTS During 1995, the Company acquired from the Intersectoral Research and Technology Complex Eye Microsurgery ("IRTC"), a Russian Federation located in Moscow, Russia, exclusive patent rights to use and sell glaucoma devices in the United States and certain foreign countries. During 1996, the Company acquired from IRTC exclusive rights to several domestic and foreign patents associated with the Company's implantable contact lenses (ICLs). The transactions involve a specified amount for the patent rights and payments of royalties over the life of the patents. In 1996, the Company acquired a license, as part of the settlement of litigation with Allergan Medical Optics, under U.S. Patent No. 4,681,102, relating to an apparatus for insertion of an intraocular lens. The acquisition cost has been included in patents in the accompanying balance sheet. NOTE 9 - LICENSING AGREEMENTS The Company has issued Allergan Medical Optics ("AMO"), Alcon Surgical, Inc. (Alcon), Chiron Vision Corporation (Chiron), IOLAB Corporation (now owned by Chiron) and Optical Radiation Corporation with licenses to utilize certain of its patents involving foldable technology in the United States and selected foreign countries. Each license has a certain amount of prepaid royalties (which were received by the Company when the license was issued) which will be utilized by that licensee as sales of the licensed products are made. The Company recorded $1,000,000, $514,000 and $1,020,046 of royalty income in 1996, 1995 and 1994, respectively, from these licenses. F-15 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 9 - LICENSING AGREEMENTS (Continued) The Company was involved with certain litigation with Alcon concerning the ownership and validity of the underlying patent and license agreement. During 1996, the Company reached a settlement with Alcon. The Company is involved with certain litigation with Chiron concerning the ownership and validity of the underlying patent and license agreement. The Company believes it will prevail in the litigation, however, the outcome is uncertain and the effects of an adverse outcome, if any, is unknown. NOTE 10 - STOCKHOLDERS' EQUITY COMMON STOCK In 1994, the Company issued 75,914 shares to consultants for services rendered to the Company. In September 1994, the Company issued 70,000 unregistered shares of its common stock to its subsidiary, STAAR Surgical Australasia Pty. Ltd., to purchase the assets of Bionica Inc., the Company's distributor in Australia. Also, in April 1994, 359,906 shares of the Company's common stock were returned to the Company by a former officer in exchange for his promissory notes to the Company totaling $1,940,287, which notes the officer in prior years had issued to the Company as consideration for the purchase of common stock. The shares were canceled by the Company. In 1995, the Company issued 51,111 shares to consultants for services rendered to the Company. Also during 1995, the Company repurchased and cancelled 175,000 shares and paid cash in lieu of exercise for 49,363 options and warrants which were then cancelled. Total consideration paid for the repurchased shares, options and warrants was $1,699,573. In 1996, the Company issued 44,384 shares to consultants for services rendered to the Company. Also during 1996, the Company repurchased and cancelled 21,879 shares. Total consideration paid for the repurchased shares was $314,500. NOTES RECEIVABLE As of January 3, 1997 and December 29, 1995, notes receivable from four officers and a director totalling $2,326,015 were outstanding. The notes were issued in connection with purchases of the Company's common stock. The notes bear interest at rates ranging between 6% and 8%, or at the lowest federal applicable rate allowed by the Internal Revenue Service. The notes are secured by stock pledge agreements and mature on various dates through May 1998. F-16 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 10 - STOCKHOLDERS' EQUITY (Continued) OPTIONS The table below summarizes the transactions in the Company's several stock option plans:
Weighted Average Number Exercise of Shares Price ---------- -------- Balance at December 31, 1993 970,637 $ 4.74 Options granted 636,500 $ 4.73 Options exercised (186,550) $ 3.74 Options forfeited (101,833) $ 5.23 --------- ------ Balance at December 30, 1994 1,318,754 $ 4.84 Options granted 35,000 $ 4.67 Options exercised (116,192) $ 4.08 Options forfeited (9,808) $ 9.22 --------- ------ Balance at December 29, 1995 1,227,754 $ 4.87 Options granted 574,000 $12.50 Options exercised (226,552) $ 4.26 --------- ------ Balance at January 3, 1997 1,575,202 $ 7.72 ========= ====== Options exercisable (vested) at January 3, 1997 851,868 $ 5.05 ========= ======
Included in the table above are outstanding options to purchase 717,701 shares of common stock at January 3, 1997, with exercise prices ranging from $2.50 to $9.25 per share, which options were granted pursuant to the Company's 1990 and 1991 Stock Option Plans. Generally, options under this plan are granted at fair market value at the date of the grant, become exercisable over a 3-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from date of grant. In 1996, the Board of Directors of the Company approved the 1996 Non-Qualified Stock Plan, authorizing the granting of options to purchase or awards of the Company's common stock. Under provisions of the Non-Qualified Stock Plan 600,000 shares were reserved for issuance. Generally, options under the plan are granted at fair market value at the date of the grant, become exercisable over a 3 year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from date of grant. Pursuant to this plan options for 570,000 shares were outstanding at January 3, 1997 with an exercise price of $12.50 per share. F-17 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 10 - STOCKHOLDERS' EQUITY (Continued) In 1994, the Company granted options to officers, directors and consultants to purchase 636,500 shares of the Company's common stock, at prices ranging from $4.00 to $5.00. Out of the above, 238,000 options were issued under the 1991 stock option plan and 398,500 options were issued as non-qualified stock options. In 1994, officers, employees and others exercised options to purchase 131,000 shares of common stock granted under the 1990, 1991, and non-qualified stock option plans, at prices from $2.50 to $5.875, resulting in cash proceeds of $505,064 and a promissory note of $192,000. The promissory note from an officer is included as a reduction to stockholders' equity as of January 3, 1997. The note bears interest at 8%, is payable in monthly installments, and is secured by a Stock Pledge Security Agreement. Principal and any unpaid interest are due on April 1, 1997. In 1995, officers, employees and others exercised options to purchase 91,192 shares of common stock granted under the 1990 and 1991 stock option plans, at prices from $2.50 to $6.00, in exchange for cash of $354,776. Also in 1995, the Company's former President exercised options to purchase 25,000 shares of common stock, at a price of $4.75, resulting in cash proceeds of $118,750. In 1996, the Company granted options to officers, directors and consultants to purchase 574,000 shares of the Company's common stock at a price of $12.50, the quoted market value at date of grant. Out of the above, 4,000 options were issued under the 1991 stock option plan and 570,000 options were issued as non- qualified stock options. In 1996, officers, employees, and others exercised 226,552 options from the 1990, 1991 and non-qualified stock option plans at prices from $2.50 to $5.875 resulting in cash and stock proceeds totaling $966,191. FASB Statement 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996: dividend yield of 0 percent; expected volatility of 11 percent; risk-free interest rate of 6.73 percent; and expected lives of 7 years. Compensation cost computed pursuant to FASB Statement 123 for options granted in 1995 was not material. Under the accounting provisions of FASB Statement 123, the Company's net income and earnings per share for 1996 would have been reduced to the pro forma amounts indicated below:
1996 ---------- Net income As reported $6,891,000 Pro forma $6,705,000 Primary and fully diluted earnings per share As reported $ .50 Pro forma $ .48
F-18 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 10 - STOCKHOLDERS' EQUITY (Continued) Due to the fact that the Company's stock option programs vest over many years and additional awards may be made each year, the above proforma numbers are not indicative of the financial impact had the disclosure provisions of FASB 123 been applicable to all years of previous option grants. The above numbers do not include the effect of options granted prior to 1995 that vested in 1995 and 1996. The following table summarizes information about stock options outstanding at January 3, 1997.
Options Outstanding Options Exercisable Weighted- ------------------- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 1/3/97 Life Price at 1/3/97 Price - -------------------------------------------------------------------------------------------------- $2.50 to 4.50 191,819 4.9 years $ 2.92 191,819 $2.92 $4.75 to 7.00 753,383 6.7 years $ 5.20 600,049 $5.31 $9.25 to 12.50 630,000 9.3 years $12.19 60,000 $9.25 - -------------- --------- --------- ------ ------- ----- $2.50 to 12.50 1,575,202 7.5 years $ 7.72 851,868 $5.05 - -------------- --------- --------- ------ ------- -----
WARRANTS The table below summarizes the transactions related to the Company's warrants to purchase common stock:
Weighted- Average Number Exercise of Shares Price --------- -------- Balance at December 31, 1993 1,215,525 $4.86 Warrants exercised (165,667) $2.00 Warrants expired (578,884) $7.97 --------- ----- Balance at December 30, 1994 470,974 $2.05 Warrants exercised (136,747) $2.17 Warrants expired (49,833) $2.63 --------- ----- Balance at December 29, 1995 284,394 $1.89 Warrants exercised (37,500) $1.73 --------- ----- Balance at January 3, 1997 246,894 $1.91 ========= =====
All warrants are exercisable as of January 3, 1997. F-19 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 10 - STOCKHOLDERS' EQUITY (Continued) WARRANTS (Continued) In 1994, warrants to purchases 165,667 shares of common stock were exercised at prices ranging from $1.20 to $4.62 per share, resulting in proceeds of $330,876. Also in 1994, warrants to purchase 578,884 shares of common stock expired unexercised. The majority of these warrants were issued in conjunction with past private placements. In 1995, warrants to purchase 136,747 shares of common stock were exercised at prices ranging from $0.60 to $4.24 per share resulting in cash and/or stock (at market price effective on the date of exercise) proceeds in the amount of $296,852. The stock paid to exercise the options was cancelled and shown as a reduction in common stock and additional paid in capital on the balance sheet. In 1996, warrants to purchase 37,500 shares of common stock were exercised at prices ranging from $1.20 to $2.00 per share, resulting in proceeds of $65,000. NOTE 11 - COMMITMENTS AND CONTINGENCIES LEASE OBLIGATIONS The Company leases certain property, plant and equipment under capital and operating lease agreements. In the later part of 1995, the Company entered into a capital lease agreement to finance surgical equipment that will be sent to China in consideration of a five year exclusive supply agreement with a hospital in Hangzhou, China. The Company committed a $600,000 letter of credit as further collateral for the lease. Annual future minimum lease payments under noncancellable capital and operating lease commitments as of January 3, 1997 are as follows:
Capital Operating Fiscal Year Leases Leases ----------- ------- --------- 1997 $509,840 $ 637,470 1998 387,884 500,702 1999 - 469,789 2000 - 469,789 2001 - 341,256 Thereafter - 284,381 ------- ---------- Total minimum lease payments 897,724 2,703,387 ========== Imputed interest 70,116 -------- Present value of net minimum lease payments $827,608 ========
Rent expense was approximately $700,000, $606,000 and $406,000 for the years ended January 3, 1997, December 29, 1995 and December 30, 1994, respectively. F-20 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued) LITIGATION AND CLAIMS In addition to litigation discussed in Note 9, the Company is involved in the following proceedings: In February 1990, a plaintiff filed a $10,000,000 product liability claim against a doctor and the Company arising from injuries purportedly suffered by the plaintiff as a result of the implant of a purportedly defective lens manufactured by Lynell, a subsidiary of the Company. The Company believes that any liability was discharged as part of Lynell's reorganization under the Federal Bankruptcy Code prior to the Company's acquisition of Lynell. In addition, Lynell is being defended by its liability carrier. These proceedings are presently administratively off the calendar as of August 1994. If the lawsuit is reactivated, the Company believes that any liability that may result will not be material to the consolidated financial position or results of operations. The Company is involved in other legal actions and claims arising in the ordinary course of business. It is the opinion of management (based on advice of legal counsel) that such litigation will be resolved without material effect on the Company's financial position. OTHER COMMITMENTS During 1993, the Company entered into consulting agreements with certain individuals to assist the Company in the development of new products and the promotion of its current products. Such agreements provide for payments of cash and the issuance of shares of the Company's common stock and options to purchase the Company's common stock, at $7 to $11 per share over a six year period. All common stock issued and options issued during 1996 were at fair market value. The aggregate commitment under these agreements at January 3, 1997 is approximately $666,000 in cash, $650,000 worth of common stock, 13,500 shares of common stock, and options to purchase 55,000 shares of common stock. Included in other current liabilities at January 3, 1997 and December 29, 1995 is approximately $411,000 and $505,000, respectively, due to these consultants payable in cash and shares of the Company's common stock. NOTE 12 - OTHER LIABILITIES Included in other current liabilities are approximately $1,573,000 and $1,567,000 of commissions due to outside sales representatives at January 3, 1997 and December 29, 1995, respectively. NOTE 13 - RELATED PARTY TRANSACTIONS The Company has had significant related party transactions as discussed in Notes 4, 10, and 11. Included in other current assets at December 29, 1995 is a $120,000 note receivable from one of the Company's officers. The note bears annual interest at 8%, and is payable in monthly installments, with the principal and any unpaid interest due on April 1, 1997. On February 29, 1996, the Company forgave the $120,000 note receivable in exchange for the officer's efforts in obtaining certain patents. F-21 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 13 - RELATED PARTY TRANSACTIONS (Continued) During 1996, 1995 and 1994, a law firm, of which a partner is director and stockholder of the Company, received approximately $322,000, $256,000 and $525,000 for fees in connection with legal services performed on behalf of the Company. The Company pays an override sales commission, based upon a percentage of the Company's sales, to an officer of the Company. This agreement relates back to 1983, when the officer initially became associated with the Company in a sales and marketing capacity. Commissions paid or accrued under this arrangement totaled approximately $412,000, $322,000 and $263,000 during 1996, 1995 and 1994, respectively. In October 1994, the Company's subsidiary, STAAR Surgical Australasia Pty., Ltd. purchased the assets of the Company's Australian distributor for approximately $500,000. An officer of the Company was a director of the distributor and owned over 50% of its common stock. In 1994, the Company entered into a four year non-compete agreement with a former officer and director of the Company. The Company paid the officer $358,092, and agreed to accept 359,906 shares of the Company's common stock in payment for $1,940,287 in promissory notes the individual owed the Company. The shares were returned and the promissory notes were canceled. Included in other assets at January 3, 1997 and December 29, 1995 were $128,718 and $239,048, respectively, related to the non-compete agreement. The cost of this agreement is being amortized on a straight line basis over its four year life. A total of $110,330, $110,330 and $91,941 was amortized during 1996, 1995 and 1994, respectively. NOTE 14 - STATEMENTS OF CASH FLOWS Net cash provided by operating activities includes interest paid of approximately $557,000, $419,000 and $206,000 for the years ended January 3, 1997, December 29, 1995 and December 30, 1994, respectively. Income taxes paid amounted to approximately $1,160,000, $947,000 and $14,800 for the years ended January 3, 1997, December 29, 1995 and December 30, 1994, respectively. During 1994, the Company received 359,906 shares of its common stock in exchange for settlement of notes receivable totaling $1,940,287 from a former officer of the Company. During 1994, the Company issued common stock with a value of $500,000 to purchase assets. Changes in operating working capital as shown in the consolidated statements of cash flows for the years ended January 3, 1997, December 29, 1995 and December 30, 1994 are comprised of:
1996 1995 1994 ------------ ------------ ------------ Decrease (increase) in: Accounts receivable $ 553,664 $(2,296,243) $(1,600,712) Inventories (2,773,969) (1,013,252) (596,314) Prepaids, deposits and other current assets (758,716) (308,272) (196,531) Increase (decrease) in: Accounts payable 283,929 338,771 (329,304) Other current liabilities (21,607) 248,544 (165,867) ----------- ----------- ----------- Change in operating working capital $(2,716,699) $(3,030,452) $(2,888,728) =========== =========== ===========
F-22 STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 15 - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1995, the Company recorded an adjustment in the amount of approximately $924,000 relating to the recognition of deferred tax assets. This adjustment increased net income by $924,000 or $.07 per share for that quarter. During the fourth quarter of 1994, the Company recorded aggregate adjustments in the amount of approximately $2,230,000 relating to the recognition of deferred tax assets of $2,400,000 and to the Company's equity in earnings of joint venture related to income taxes incurred by Canon-STAAR of $170,000. The adjustments increased net income by $2,230,000, or $.17 per share for that quarter. F-23 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON SCHEDULE AND CONSENT To the Board of Directors and Stockholders STAAR Surgical Company and Subsidiaries The audits referred to in our report dated March 11, 1997, included the related financial statement schedule as of January 3, 1997, and for each of the three years in the period ended January 3, 1997, included in the annual report on Form 10-K of STAAR Surgical Company and subsidiaries. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. We consent to incorporation by reference in the Registration Statement (No. 33- 37248) on Form S-8 of STAAR Surgical Company of our report dated March 11, 1997, relating to the consolidated balance sheets of STAAR Surgical Company and subsidiaries as of January 3, 1997 and December 29, 1995 and the related consolidated statements of income, stockholders' equity, and cash flows and related schedule for each of the three years in the period ended January 3, 1997, which report appears in the January 3, 1997 annual report on Form 10-K of STAAR Surgical Company and subsidiaries. BDO SEIDMAN, LLP Los Angeles, California March 11, 1997 F-24 STAAR SURGICAL COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ============================================
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Balance at Balance at beginning end of Description of year Additions Deductions year - ----------- ---------- --------- ---------- ---------- 1996 Allowance for doubtful accounts deducted from accounts receivable in balance sheet $119,000 $ - $ 7,000 $112,000 Reserve for obsolescence deducted from inven- tories in balance sheet 31,000 - 31,000 - -------- -------- -------- -------- $150,000 $ - $ 38,000 $112,000 ======== ======== ======== ======== 1995 Allowance for doubtful accounts deducted from accounts receivable in balance sheet $307,000 $112,000 $ 300,000 $119,000 Reserve for obsolescence deducted from inven- tories in balance sheet 105,000 - 74,000 31,000 -------- -------- -------- -------- $412,000 $112,000 $ 374,000 $150,000 ======== ======== ======== ======== 1994 Allowance for doubtful accounts deducted from accounts receivable in balance sheet $250,000 $121,000 $64,000/(2)/ $307,000 Reserve for obsolescence deducted from inven- tories in balance sheet 114,000 - 9,000/(3)/ 105,000 -------- -------- -------- -------- $364,000 $121,000 $ 73,000 $412,000 ======== ======== ======== ======== - ------------
/(1)/ Represents allowance for uncollectible receivables. /(2)/ Writeoffs. /(3)/ Obsolete inventory written down to zero value. F-25 EX-4.5 2 1996 STAAR SURGICAL NON-QUAL. STOCK OPTION PLAN EXHIBIT 4.5 1996 STAAR SURGICAL COMPANY NON-QUALIFIED STOCK PLAN STAAR Surgical Company, a corporation organized under the laws of the State of Delaware, hereby adopts this 1996 STAAR Surgical Company Non-Qualified Stock Plan. PURPOSE OF PLAN --------------- WHEREAS, the purpose of this 1996 STAAR Surgical Company Non-Qualified Stock Plan is to advance the interests of the STAAR Surgical Company by helping STAAR Surgical Company to obtain and retain the services of qualified individuals from whose judgment, initiative, efforts and services STAAR Surgical Company will benefit, by providing those persons with the opportunity to become owners of capital stock of STAAR Surgical Company. NOW, THEREFORE, the Board of Directors has adopted the terms and conditions of that certain 1996 Staar Surgical Company Executive Non-qualified Stock Option Plan, as follows: TERMS AND CONDITIONS OF PLAN ---------------------------- 1. DEFINITIONS. ----------- Set forth below are definitions of capitalized terms which are generally used throughout this Plan, or references to the provisions containing such definitions (Capitalized terms used only in a specific Section are defined in such Section): (a) AFFILIATE - The term "Affiliate" is defined as any person --------- controlling the Company, controlled by the Company, or under common control with the Company. (b) AWARD(S) - The term "Award(s)" is individually and collectively -------- defined as any Option(s) or Award Share(s) granted under this Plan. (c) AWARD SHARES - The term "Award Shares" is defined as shares of ------------ Common Stock granted by the Plan Committee in accordance with Section 6 of this --------- Plan. (d) BOARD - The term "Board" is defined as the Board of Directors of ----- the Company, as such body may be reconstituted from time to time. (e) COMMON STOCK - The term "Common Stock" is defined as the ------ ----- Company's common stock, par value $.001. (f) COMPANY - The term "Company" is defined as STAAR Surgical ------- Company, a Delaware corporation. (g) ELIGIBLE PERSON - The term "Eligible Person" means any Person --------------- who, at a particular 1 time, is an employee to the Company or an Affiliate who provides bona fide services to the Company or the Affiliate, provided, however, no Award hereunder -------- ------- may be granted to any Person in connection with the provision of any services incident to the raising of capital. (h) FAIR MARKET VALUE - The term "Fair Market Value" means the fair ----------------- market value as of the applicable valuation date, of the shares of Common stock which are awarded or are subject to the option, as the case may be, to be valued (the "Subject Shares"), determined in accordance with the following principles: ------- ------ (i) If the Common Stock is traded on a stock exchange on the date in question, then the Fair Market Value of the Subject Shares will be equal to the closing bid price of Common Stock on the principal exchange on which the Common Stock is then trading, or, if Common Stock is not traded on such date, then on the next preceding trading day during which a sale occurs; (ii) If the Common Stock is traded over-the-counter on the NASDAQ National Market System on such date, the Fair Market Value of the Subject Shares will equal (1) if the Common Stock is then listed as a National Market Issue under the NASDAQ National Market System, the last sales price; or (2) in all other cases, the mean between the closing representative bid and asked prices for the Common Stock on such date as reported by NASDAQ or such successor quotation system; (iii) If the Common Stock is traded over-the-counter on NASDAQ (other than on the NASDAQ National Market System) on the date in question, then the Fair Market Value of the Subject Shares will equal the mean between the closing representative bid and asked price for the Common Stock on such date as reported by NASDAQ; (iv) If the Common Stock is not publicly traded on an exchange and is not quoted on the NASDAQ or a successor quotation system, then the Fair Market Value shall be determined by the Board acting in good faith on such basis as it deems appropriate; (v) If the Subject Shares are unregistered securities (and thus are considered "restricted stock" within the meaning of Section 144 of the Securities Act), or if the Subject Shares are subject to conditions, risk of forfeiture, or repurchase rights or rights of first refusal which impair its value including, without limitation, those conditions more particularly described in Section 7, then the Fair Market Value of the Subject Shares --------- shall be subject to such discount to reflect such impairments to value as the Plan Committee may, in its sole discretion and without obligation to do so, determine to be appropriate; and (vi) Anything in Subsections (i) through (v) above to the --------------- --- contrary, under no circumstances shall the Fair Market Value of the Subject Shares be less than its par value. (i) ISSUED SHARES - The term "Issued Shares" is defined as shares of ------------- Common Stock issued pursuant to the terms of this Plan (i.e, Option Shares or Award Shares, including Option Shares or Award Shares that may also be deemed Restricted Shares). (j) OPTION - The term "Option" is defined as an option to purchase ------ Common Stock granted by the Plan Committee pursuant to the terms of the Plan and, in particular, the terms of Section 5 of the Plan. --------- (k) OPTION PRICE - The term "Option Price" is defined in Section 5(b) ------------ ------------ of this Plan. 2 (l) OPTION SHARES - The term "Option Shares" is defined as the shares ------------- of Common Stock which an Option entitles the holder thereof to purchase. (m) PERSON - The term "Person" is defined, in its broadest sense, as ------ any individual, entity or fiduciary such as, by way of example and not limitation, individual or natural persons, corporations, partnerships (limited or general), joint-ventures, associations, limited liability companies/partnerships, or fiduciary arrangements, such as trusts. (n) PLAN - The term "Plan" is defined as this 1996 STAAR Surgical ---- Company Non-Qualified Stock Plan. (o) PLAN COMMITTEE - The term "Plan Committee" is defined as that -------------- Committee appointed by the Board to administer and interpret this Plan as more particularly described in Section 3 of the Plan; provided, however, that the --------- -------- ------- term Plan Committee will refer to the Board during such times as no Plan Committee is appointed by the Board. (p) RESTRICTED SHARES - The term "Restricted Shares" is defined as ----------------- Option Shares or Award Shares, as the case may be, that are subject to restrictions as more particularly set forth in Section 7 of this Plan. --------- (q) RECIPIENT - The term "Recipient" is defined as any Eligible Person --------- who, at a particular time, receives the grant of an Award. (r) SECURITIES ACT - The term "Securities Act" is defined as the -------------- Securities Act of 1933, as amended (references herein to Sections of the Securities Act are intended to refer to Sections of the Securities Act as enacted at the time of the adoption of this Plan by the Board and as subsequently amended, or to any substantially similar successor provisions of the Securities Act resulting from recodification, renumbering or otherwise). (s) TRANSFER - The term "Transfer" is defined as any transfer or -------- alienation of an Award which would directly or indirectly change the legal or beneficial ownership thereof, whether voluntary or by operation of law, or with or without the payment or provision of consideration, including, by way of example and not limitation: (i) the sale, assignment, bequest or gift of the Award; (ii) any transaction that creates or grants an option, warrant, or right to obtain an interest in the Award; (iii) any transaction that creates a form of joint ownership in the Award between the Recipient and one or more other Persons(s); (iv) any Disposition of the Award to a creditor of the Recipient, including the hypothecation, encumbrance or pledge of the Award or any interest therein, or the attachment or imposition of a lien by a creditor of the Recipient on the Award or any interest therein which is not released within thirty (30) days after the imposition thereof; (v) any distribution by a Recipient which is an entity to its stockholders, partners, co-venturers or members, as the case may be; or (vi) any distribution by a Recipient which is a fiduciary, such as a trustee or custodian, to its settlors or beneficiaries. 2. TERM OF PLAN. ------------ This Plan shall be effective as of such time and date as this Plan is adopted by the Board, and this Plan shall terminate on the first business day prior to the tenth anniversary of the date this Plan became effective. No grants of Options shall be made under this Plan before the date this Plan becomes effective or after the date this Plan terminates; provided, however, -------- ------- that (i) all Awards granted pursuant to this Plan prior to the 3 effective date of this Plan shall not be affected by the termination of this Plan; and (ii) all other provisions of this Plan shall remain in effect until the terms of all outstanding Awards have been satisfied or terminated in accordance with this Plan and the terms of such Awards. 3. PLAN ADMINISTRATION. ------------------- (a) PLAN COMMITTEE. -------------- (i) The Plan shall be administered and interpreted by a committee consisting of two (2) or more members of the Board; provided, however, no -------- ------- member of the Board who may serve as a member of the Plan Committee if such person serves or served as a member of the Plan Committee with respect to any other plan of the Company or its Affiliates, which plan was or is established to comply with the provisions of Rule 16b-3(c)(2)(i) under the Securities and Exchange Act of 1934, as amended (i.e., pertaining to the establishment of so-called "Section 16b-3 Plans"), and, (b) by reason of such person's proposed service as a member of the Plan Committee, such person would not be considered a "disinterested" person within the meaning of said Rule with respect to such other plan. (ii) Members of the Plan Committee may resign at any time by delivering written notice to the Board. Vacancies on the Plan Committee shall be filled by the Board. The Plan Committee shall act by a majority of its members in office. The Plan Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the members of the Plan Committee. (iii) If the Board, in its discretion, does not appoint a Plan Committee, the Board itself will administer and interpret the Plan and take such other actions as the Plan Committee is authorized to take hereunder; provided that the Board may take such actions hereunder in the same manner as the Board may take other actions under the Certificate of Incorporation and bylaws of the Company generally. (b) ELIGIBILITY OF PLAN COMMITTEE MEMBERS TO RECEIVE AWARDS. While ------------------------------------------------------- serving on the Plan Committee, members of the Plan Committee shall not be eligible for selection as Eligible Persons to whom an Award may be granted under the Plan. (c) POWER TO MAKE AWARDS. Subject only to the Certificate of -------------------- Incorporation of the Company and the express terms and conditions of this Plan, the Plan Committee shall have the full and final authority, in its sole discretion, at any time and from time-to-time, do any of the following: (i) Designate the persons or classes of persons eligible to receive Awards from among the Eligible Persons; (ii) Grant Awards to such selected Eligible Persons or classes of Eligible Persons in such form and amount as the Plan Committee shall determine; (iii) Impose such limitations, restrictions and conditions upon any Award as the Plan Committee shall deem appropriate and necessary, including without limitation the term of Options and any vesting conditions applicable thereto, and any vesting and repurchase conditions described in Sections 5 or 7 placed upon grants of Option Shares or Award Shares; ---------- - 4 (iv) Interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other actions necessary or advisable for the implementation and administration of the Plan. In determining the recipient, form and amount of Awards, the Plan Committee shall consider any factors deemed relevant, including the various individuals' functions, responsibilities, value of services to the Company, and past and potential contributions to the Company's profitability and sound growth. (d) INTERPRETATION OF PLAN. The Plan Committee shall, in its sole and ---------------------- absolute discretion, interpret and determine the effect of all matters and questions relating to this Plan. The interpretations and determinations of the Plan Committee under the Plan (including without limitation determinations pertaining to the eligibility of Persons to receive Awards; the form, amount and timing of Awards; the methods of payment for Awards; the restrictions and conditions placed upon Awards; and all other terms and provisions of Awards and the certificates or agreements evidencing same) need not be uniform, and may be made by the Plan Committee selectively among Persons who are eligible to receive Awards under the Plan, whether or not such Persons are similarly situated. All actions taken and all interpretations and determinations made under this Plan in good faith by the Plan Committee shall be final and binding upon the Recipient, the Company, and all other interested Persons. No member of the Plan Committee shall be personally liable for any action taken or decision made in good faith relating to this Plan, and all members of the Plan Committee shall be fully protected and indemnified by the Company to the fullest extent permitted under applicable law with respect to any such action, determination, or interpretation. (e) COMPENSATION; ADVISORS. Members of the Plan Committee shall ---------------------- receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities incurred by members of the Plan Committee in connection with the administration of the Plan shall be borne by the Company. The Plan Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other Persons, at the cost of the Company. The Plan Committee, the Company and its directors shall be entitled to rely upon the advice, opinions, or valuations of any such Persons. 4. STOCK POOL. ---------- (a) MAXIMUM NUMBER OF SHARES AUTHORIZED UNDER PLAN. Shares of stock ---------------------------------------------- which may be issued or granted under the Plan shall be authorized and unissued or treasury shares of Common Stock. The aggregate maximum number of shares of Common Stock which may be issued in exercise of Options or as a grant of Award Shares (as the case may be) shall not exceed five hundred thousand (500,000) shares of Common Stock (the "Stock Pool"); provided, however, that the number of ----- ---- -------- ------- shares available in such stock pool shall be increased by the following: (i) Any shares of Common Stock tendered by a Recipient as payment for Option Shares or Award Shares; (ii) Any warrants, options or rights to shares of Common Stock surrendered by a Recipient as payment for Option Shares or Award Shares; (iii) Any shares of Common Stock previously subject to an Option, which Option for any reason is terminated unexercised or expires; and 5 (iv) Any Restricted Shares which are granted as Option Shares or Award Shares, and are subsequently forfeited by the holders thereof. (b) CALCULATING SHARES AVAILABLE FOR AWARDS. For purposes of --------------------------------------- calculating the maximum number of shares of Common Stock in the Stock Pool which are available may be issued under the Plan, the following rules shall apply: (i) When Options are exercised, and when cash is used as full payment for shares issued upon exercise of such Options, all the shares --- issued (including the shares, if any, withheld for tax withholding requirements) shall be counted; (ii) When Options are exercised, and when shares of Common Stock are used as full or partial payment for shares issued upon exercise of such Options, (if permitted by the Plan Committee), only the net shares issued --- (including the shares, if any, withheld for tax withholding requirements) shall be counted; and (iii) When Award Shares are granted and the Plan Committee elects to require payment with respect to such grant, and when shares of Common Stock are used as full or partial payment for the grant of such shares, only the net shares issued (including the shares, if any, withheld for tax --- withholding requirements) shall be counted. (c) DATE OF AWARD. The date an Award is granted shall mean the date ------------- selected by the Plan Committee as of which the Plan Committee allots a specific number of shares to a Recipient with respect to an Award pursuant to the Plan. 5. OPTIONS (TO PURCHASE OPTION SHARES). ----------------------------------- (a) GRANT. The Plan Committee may from time to time, and subject to ----- the provisions of the Plan and such other terms and conditions as the Plan Committee may prescribe, grant to any Eligible Person one or more options to purchase ("Options"), for cash or shares, the number of shares of Common Stock ------- allotted by the Plan Committee; provided, however, no Option shall be granted to -------- ------- any Eligible Person who is a member of the Plan Committee. The grant of an Option shall be evidenced by a written option certificate, executed by the Company and the Recipient, stating the number of shares of Common Stock subject to the Option, and stating all the terms and conditions of such Option. (b) OPTION PRICE. The purchase price per Option Share deliverable ------------ upon the exercise of an Option (the "Option Price") shall be the price as ------ ----- determined by the Plan Committee; provided, however, the Option Price may not be -------- ------- less than eighty five percent (85%) of Fair Market Value of the underlying Option Shares as of the date of the grant of the Option. (c) OPTION TERM; EXPIRATION. The term of each Option shall commence ----------------------- at the grant date for an Option, as determined by the Plan Committee, and shall expire on the first business day prior to the tenth anniversary of the date of grant thereof unless an earlier expiration date is expressly provided for in the separate option certificate or another Section of this Plan. (d) EXERCISE DATE. Each Option shall become exercisable on the date ------------- set forth in the separate option certificate. No Option shall be exercisable after the expiration of its applicable term. Subject to 6 the foregoing, each Option shall be exercisable in whole or in part during its applicable term unless expressly provided otherwise in the separate option certificate. (e) VESTING PROVISIONS. The Plan Committee may, in its sole ------------------ discretion, subject Options to be granted to Recipients to such vesting conditions as it deems appropriate, including but not limited to conditions pertaining to continued provision of services to the Company or any Affiliate, or to the attainment of goals; provided, however, in no case shall any Option -------- ------- provide for the vesting of Option Shares over a period of time which exceeds five (5) years from date of grant of the Option, or provide for vesting on a cumulative incremental percentage basis which is less than twenty percent (20%) per year. If no vesting is expressly provided in the separate option certificate, the Option shares shall be deemed fully vested upon the date of grant. (f) MANNER OF EXERCISE AND PAYMENT. An exercisable Option, or any ------------------------------ portion thereof, may be exercised solely by delivery of each and all of the following to the Secretary of the Company at his or her office at the principal executive offices of the Company, prior to the time when such Option (or such portion) becomes expired or is terminated under this Section 5: --------- (i) Notice in writing signed by the Recipient or other Person then entitled to exercise the Option (or portion thereof) stating that such Option or portion is exercised. Such notice shall comply with the procedures set forth in the separate option certificate which governs the exercise of the applicable Option, and any other applicable rules established by the Plan Committee. (ii) Full consideration for the shares with respect to which such Option or portion is being exercised, through one of (or any combination of) the following: (1) Immediately available funds, in U.S. dollars, in cash or by check; and/or (2) If expressly permitted in the separate option certificate, or if otherwise consented to by the Plan Committee in writing: (A) Shares of Common Stock previously owned by the Recipient, duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal to the aggregate Option Price of the Option Shares with respect to which the Option or portion is being exercised; (B) The surrender or relinquishment of rights to acquire Common Stock previously owned by the Recipient, with a Fair Market Value on the date of delivery equal to the aggregate Option Price of the Option Shares with respect to which the Option or portion is being exercised; or (C) A full recourse promissory note bearing interest at a rate not less than the rate which is required to preclude the imputation of interest under the Internal Revenue Code of 1986, as amended), and payable upon such terms as may be prescribed by the Plan Committee. The Plan Committee may also prescribe the form of such note, and any security to be given for such note. Notwithstanding the foregoing, no Option may be exercised by delivery of a promissory 7 note or by a loan from the Company if such loan or other extension of credit is prohibited by law at the time of exercise of this Option, or does not comply with the provisions of Regulation G promulgated by the Federal Reserve Board with respect to "Margin Stock," if the Company and the Recipient are then subject to such Regulation. (iii) Such documents, representations and undertakings as the Plan Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act, or any other federal or state securities laws or regulations. In addition, the Plan Committee may, in its absolute discretion, take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars. (iv) In the event that the Option or portion thereof shall be exercised by any Person(s) other than the Recipient, appropriate proof of the right of such person(s) to exercise the Option or portion thereof. (g) NON-ASSIGNABILITY. Except as expressly provided in the separate ----------------- option certificate, Options may not be Transferred by the Recipient, nor exercised by any Person other than the Recipient, without the prior written consent of the Company, which consent the Company may withhold in its sole and absolute discretion. Any Transfer of an Option or Award made in violation of the terms of this Plan shall be null and void ab initio and of no force and -- ------ effect. (h) NO STOCKHOLDER RIGHTS. The Recipient shall not be, nor have any --------------------- of the rights or privileges of, a stockholder of the Company with respect to the Option Shares unless and until all conditions for exercise of the Option and the issuance of certificates for the Option Shares have been satisfied from and after exercise of an Option in compliance with the terms of this Plan. From and after the exercise of an Option in compliance with the terms of this Plan and the applicable option certificate the Recipient shall be a stockholder of the Company with respect to the Option Shares, and shall thereafter be fully entitled to receive dividends as and when declared and paid, and to vote and to exercise all other rights of a stockholder with respect to the Option Shares. 6. AWARD SHARES. ------------ (a) GRANT. The Plan Committee may from time to time, and subject to ----- the provisions of the Plan and such other terms and conditions as the Plan Committee may prescribe, grant to any Eligible Person one or more shares of Common Stock ("Award Shares") allotted by the Plan Committee. The grant of ----- ------ Award Shares or grant of the right to receive Award Shares shall be evidenced by a separate written agreement confirming such grant, executed by the Company and the Recipient, stating the number of Award Shares granted, and stating all terms and conditions of the grant. (b) PURCHASE PRICE AND MANNER OF PAYMENT. The Plan Committee, in its ------------------------------------ sole discretion, may grant Award Shares in any of the following instances: (i) As a "bonus" or "reward" for services previously rendered and compensated, in which case the recipient of the Award Shares shall not be required to pay any consideration for such 8 Award Shares, and the value of such Award Shares shall be the Fair Market Value of such Award Shares on the date of grant; (ii) As "compensation" for the previous or future performance of services or attainment of goals, in which case the recipient of the Award Shares shall not be required to pay any consideration for such Award Shares (other than the performance of his services), and the value of such Award Shares received shall be the Fair Market Value of such Award Shares on the date of grant; or (iii) In consideration of the payment of a purchase price for such Award Shares in an amount established by the Plan Committee, which amount may not be less than eighty-five percent (85%) of the Fair Market Value of such Award Shares as of the date of grant. 7. RESTRICTED SHARES. ----------------- (a) VESTING CONDITIONS; FORFEITURE OF UNVESTED SHARES. The Plan ------------------------------------------------- Committee may subject or condition the grant of Issued Shares (hereinafter referred to as "Restricted Shares") to such vesting conditions, including but ---------- ------ not limited to the continued provision of services or attainment of goals subsequent to the date of such grant as the Plan Committee, in its sole discretion, may deem appropriate. In the event the Recipient does not satisfy such vesting conditions, the Company may require the Recipient, subject to the payment terms of Section 7(b), to forfeit such unvested Restricted Shares. All ------------ vesting conditions imposed on the grant of Restricted Shares, including payment terms complying with Section 7(b), shall be set forth in a separate written ------------ restricted stock agreement, executed by the Company and the Recipient on or before the time of the grant of such Restricted Shares, stating the number of Restricted Shares subject to such conditions, and further specifying the vesting conditions. If no vesting conditions are expressly provided in a separate restricted stock agreement, the Issued Shares shall not be deemed to be Restricted Shares, and will not be required to be forfeited. Any grant of Restricted Shares shall be subject to the following limitations: (i) In no case shall the vesting conditions require continued provision of services, subsequent to the grant of Restricted Shares for a period of time in excess of five (5) years from the date of grant, or provide for cumulative percentage vesting which is less than twenty percent (20%) per year; (ii) In no case shall the Recipient be required to forfeit any previously vested Restricted Shares; and (iii) In the event of a forfeiture of any unvested Restricted Shares, the Company shall pay to the Recipient with respect to all of such unvested Restricted Shares an amount equal to the original purchase price, if any, previously paid by the Recipient for such unvested Restricted Shares. (b) REPURCHASE PRICE FOR FORFEITED RESTRICTED SHARES. If (i) a ------------------------------------------------ Recipient does not satisfy vesting conditions placed upon Restricted Shares, and (ii) the Company exercises its right to require the Recipient to forfeit such unvested Restricted Shares, then the Company shall be required to pay the Recipient an amount not less than: (i) The higher of the original purchase price for such Restricted Shares or the Fair Market Value of such Restricted Shares on the date of -- the event triggering such repurchase rights; or 9 (ii) The original purchase price for such vested Restricted Shares; provided, however, that the right to repurchase in favor of the -------- ------- Company must lapse at the rate of at least twenty percent (20%) per year over five (5) years from the date of grant of the Restricted Shares. The payments to be made by the Company to a Recipient for forfeited Restricted Shares pursuant to Subsection (ii) may only be in the form of cash or --------------- cancellation of purchase money indebtedness previously incurred for the purchase of said Restricted Shares (if any), and must be paid no later than ninety (90) days after the date of forfeiture. (c) RESTRICTIVE LEGEND. Until such time as all conditions placed upon ------------------ Restricted Shares lapse, the Plan Committee may place a restrictive legend on the share certificate representing such Restricted Shares which evidences said restrictions, in such form and subject to such stop instructions as the Plan Committee shall deem appropriate. The conditions shall apply to any new, additional or different securities the Recipient may become entitled to receive with respect to such Restricted Shares, whether by virtue of a stock split or stock dividend, or any other change in the corporate or capital structure of the Company. The Plan Committee shall also have the right, should it elect to do so, to require the Recipient to deposit the share certificate(s) for the Restricted Shares with the Company or its agent, endorsed in blank or accompanied by a duly executed irrevocable stock power or other instrument of transfer, until such time as the conditions are met or lapse. The Company shall remove the legend with respect to any Restricted Shares which become vested. (d) STOCKHOLDER RIGHTS. Notwithstanding the terms of this Section 7, ------------------ --------- the Recipient of Restricted Shares shall have all rights or privileges of a stockholder of the Company with respect to the Restricted Shares (with the exception of Subsections (c) and (e) hereof) and, shall be fully entitled to ----------------------- receive dividends as and when declared and paid, (if any are declared and paid), and to vote and to exercise all other rights of a stockholder with respect to the Restricted Shares. (e) NON-ASSIGNABILITY. Except as expressly provided in the restricted ----------------- stock agreement, unvested Restricted Shares may not be Transferred by the Recipient without the prior written consent of the Company, which consent the Company may withhold in its sole and absolute discretion. Any putative Transfer in violation of the terms of this Plan shall be null and void ab initio and of -- ------ no force and effect. 8. REGISTRATION OF ISSUED SHARES. ------------------------------ (a) REGISTRATION OR EXEMPTION FROM REGISTRATION. Unless expressly -------------------------------------------- stipulated in the separate option certificate or agreement, the Company shall not be required at any time to register the Issued Shares under the Securities Act (including without limitation any primary or secondary offering, or pursuant to Form S-8), or to register or qualify the Issued Shares under the securities laws of any state or territory (including without limitation as to Section 25110 of the California Securities Act). In the event the Company is not required to register or qualify the Issued Shares, the Issued Shares shall be issued in reliance upon such exemptions from registration or qualification under federal and state securities laws, as the case may be, as the Company and its legal counsel, in their reasonable discretion, shall determine, including without limitation: (i) In the case of federal securities laws, any of the following, if available: Section 3(b) of the Securities Act for limited offerings, and Rules 504 and/or 505 of Regulation D promulgated thereto; and/or Section 4(2) of the Securities Act for private offerings and Rule 506 of Regulation D 10 promulgated thereunder; and (ii) In the case of California securities laws, Section 25102(f) of the California Securities Act of 1968, as amended; or, if the Recipient is then a resident of and/or domiciled within another state, the requirements of any applicable exemptions from registration or qualification afforded by the securities laws of such state. If requested by the Company, the Recipient shall provide such further representations or documents as the Company or its legal counsel, in their reasonable discretion, deem necessary or advisable in order to effect compliance with the conditions of any of the aforesaid exemptions from federal or state registration or qualification upon which it has elected to rely, or with all applicable rules and regulations of any applicable securities exchanges. If required by the Company, the Recipient shall provide a letter from a purchaser representative with credentials reasonably acceptable to the Company to the effect that such purchaser representative has reviewed the Recipient's proposed investment in the Issued Shares and has determined that an investment in the Issued Shares: (A) is appropriate in light of the Recipient's financial circumstances; (B) that the purchaser representative and, if applicable, the Recipient, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of an investment in the Issued Shares; and (C) that the purchaser representative (and, if applicable, the Recipient), have such business or financial experience that they can be reasonably assumed to have the capacity to protect the Recipient's interests in connection with the purchase of the Issued Shares. In the event the Company is unable to obtain, without undue burden or expense, such consents or approvals as may be required from any applicable regulatory authority, or which may be deemed reasonably necessary or advisable by legal counsel for the Company with respect to the applicable exemptions from federal or state registration or qualification, the Company shall have no obligation under this Agreement to issue or sell the Issued Shares until such time as such consents or approvals may be reasonably obtained without undue burden or expense. The Company shall be have no liability with respect to its ability or inability to obtain compliance with the requirements of any exemption, registration or qualification under either federal or state securities law, issue or sell the Issued Shares. (b) LEGEND. In the event the Company delivers shares pursuant to one ------ or more exemptions under applicable securities laws, the Company reserves the right to place the following legend (or such other legend as its deems necessary) on the share or option certificate(s) to comply with any federal, state and/or territory securities laws, or to comply with any exemption from registration or qualification thereunder which is being relied upon by the Company. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN (1) REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION AFFORDED BY SUCH ACT, OR (2) REGISTERED OR QUALIFIED, AS THE CASE MAY BE, UNDER THE SECURITIES LAWS OF THE UNITED STATES OR ANY STATE OR TERRITORY OF THE UNITED STATES WHICH MAY BE APPLICABLE INCLUDING, WITHOUT LIMITATION, THE CALIFORNIA SECURITIES ACT OF 1968, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION OR QUALIFICATION, AFFORDED BY SUCH STATE OR TERRITORIAL SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR THE HOLDER'S OWN ACCOUNT FOR INVESTMENT PURPOSES AND NOT WITH A VIEW FOR RESALE OR 11 DISTRIBUTION. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS (A) THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS WELL AS UNDER THE SECURITIES LAWS OF ANY STATE OR TERRITORY OF THE UNITED STATES AS MAY THEN BE APPLICABLE, OR (B) THE TRANSFER AGENT (OR THE COMPANY IF THEN ACTING AS ITS TRANSFER AGENT) IS PRESENTED WITH EITHER A WRITTEN OPINION SATISFACTORY TO COUNSEL FOR THE COMPANY OR A NO- ACTION OR INTERPRETIVE LETTER FROM THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND ANY APPLICABLE STATE OR TERRITORIAL SECURITIES REGULATORY AGENCY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION, AS THE CASE MAY BE, IS NOT REQUIRED UNDER THE CIRCUMSTANCES OF SUCH SALE OR TRANSFER. 9. ADJUSTMENTS. ----------- (a) SUBDIVISION OR STOCK DIVIDEND. If outstanding shares of Common ----------------------------- Stock shall be subdivided into a greater number of shares by reason of recapitalization or reclassification the, (i) the number of shares of Common Stock, if any, available for issuance in the Stock Pool shall be proportionately increased, and (ii) the Option Price of any outstanding Options in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately decreased. Conversely, if the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of shares of Common Stock, if any, available for issuance in the Stock Pool to be purchased shall be proportionately reduced; (iii) and the Option Price of any outstanding Option in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately decreased. (b) ADJUSTMENT TO OPTION PRICE. When any adjustment is required to be -------------------------- made in the Option Price, the number of shares purchasable upon the exercise of any outstanding Option shall be adjusted to that number of shares determined by: (i) multiplying an amount equal to the number of shares to be purchased upon the exercise of the Option immediately prior to such adjustment, by the Option Price in effect immediately prior to such adjustment, and then (ii) dividing that product by the Option Price in effect immediately after such adjustment. Notwithstanding the foregoing, no fractional shares shall be issued, and any fractional shares resulting from computations pursuant to this Section 10 shall ---------- be eliminated from the Option. (c) CAPITAL REORGANIZATION OR RECLASSIFICATION; CONSOLIDATION OR ------------------------------------------------------------ MERGER. In case of any capital reorganization or any reclassification of Common - ------ Stock (other than a recapitalization described in Section 10(a); or the ------------- consolidation, merger, combination or exchange of shares with another entity; or the divisive reorganization of the Company, the Recipient shall thereafter be entitled upon exercise of the Option to purchase the kind and number of shares of stock or other securities or property of the Company (or its successor(s)) which such Option would entitle the Recipient to purchase from the Company immediately prior to such event. In every such case, the Company may appropriately adjust the number of shares of Common Stock in the Stock Pool which may be issued under the Plan, the number of shares of Common Stock subject to Options previously granted under the Plan, the Option Price of Options previously granted under the Plan, and any and all other matters deemed appropriate by the Plan Committee. (d) ADJUSTMENTS DETERMINED IN SOLE DISCRETION OF BOARD. To the extent -------------------------------------------------- that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Plan Committee, whose determination in that respect shall be final, binding and conclusive. (e) NO OTHER RIGHTS TO RECIPIENT. Except as expressly provided in ---------------------------- this Section 10: (i) the Recipient shall have no rights by reason of any ---------- subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class; and (ii) the dissolution, 12 liquidation, merger, consolidation or divisive reorganization or sale of assets or stock to another corporation, or any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of, or the Option Price for, the shares. The grant of an Award pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of in capital or business structure; or to merge, consolidate, dissolve or liquidate; or to sell or transfer all or any part of its business or assets. 10. PERFORMANCE ON BUSINESS DAY. --------------------------- In the event the date on which a party to this Plan is required to take any action under the terms of this Plan is not a business day, the action shall, unless otherwise provided herein, be deemed to be required to be taken on the next succeeding business day. 11. EMPLOYMENT STATUS. ----------------- In no event shall the granting of an Award be construed as granting a continued right of employment to any Recipient or to affect any right which the Company may have to terminate the employment of such Person, at any time, with or without cause, subject to the terms of a written agreement executed by such Person and the Company. 12. NON-LIABILITY FOR DEBTS. ----------------------- No Options granted hereunder, or unvested Restricted Shares granted hereunder, or any part thereof, shall be subject to the debts, contracts, or liabilities of a Recipient or such Recipient's successors in interest; or shall be subject to disposition by Transfer, alienation, or any other means whether such disposition be voluntary or involuntary or by operation of law, by judgment, levy, attachment, garnishment, or any other legal or equitable proceeding (including bankruptcy), and any such attempted disposition thereof shall be null and void ab initio and of no further force and effect. -- ------ 13. AMENDMENT AND DISCONTINUATION OF PLAN; MODIFICATION OF AWARDS. ------------------------------------------------------------- (a) AMENDMENT, MODIFICATION OR TERMINATION OF PLAN. The Board may ---------------------------------------------- amend the Plan or suspend or discontinue the Plan at any time or from time-to- time; provided, however no such action may adversely alter or impair any Award -------- ------- previously granted under this Plan without the written consent of each Recipient affected thereby. (b) MODIFICATION OF TERMS OF OUTSTANDING OPTIONS. Subject to the -------------------------------------------- terms and conditions of this Plan, the Plan Committee may modify, extend or renew outstanding Options granted under this Plan, (including vesting conditions), or accept the surrender of outstanding Options (to the extent not exercised), and authorize the granting of new Options in substitution therefor. Notwithstanding the foregoing, no modification of any outstanding Option may, without the written consent of the Recipient affected thereby, adversely alter or impair such Recipient's rights under such Option. (c) MODIFICATION OF RESTRICTED SHARE VESTING CONDITIONS. Subject to --------------------------------------------------- the terms and conditions of this Plan, including vesting conditions, the Plan Committee may modify the conditions placed upon the grant of any Restricted Shares; provided, however, no modification of any conditions placed upon -------- ------- Restricted Shares may, without the written consent of the Recipient thereof, adversely alter or impair such Recipient's rights with respect to such Restricted Shares. (d) COMPLIANCE WITH LAWS. The Plan Committee may at any time or from -------------------- time-to-time, without receiving further consideration from any Person who may become entitled to receive or who has received the grant of an Award hereunder, modify or amend Awards granted under this Plan as required to: (i) comport with changes in securities, tax or other laws or rules, regulations or regulatory interpretations applicable to this Plan or to Awards hereunder, or to comply with stock exchange rules or requirements, and/or (ii) ensure that this Plan is and remains exempt from the application of any participation, vesting, benefit accrual, funding, fiduciary, reporting, disclosure, administration or enforcement requirement of either the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the corresponding provisions of the 13 Internal Revenue Code of 1986, as amended (Subchapter D of Title A, Chapter 1 of the Code, encompassing Sections 400 to 420 of the Code). Notwithstanding the ------------ --- foregoing, no such modification may, without the consent of the holder thereof, adversely alter or impair a Person's rights with respect to such Awards. 1. WITHHOLDING TAXES. ----------------- As a condition of the grant of any Award and/or the exercise of any Option, the Company shall have the right to require the Recipient to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements incident to such grant or exercise. Notwithstanding the foregoing, whenever the Company is delivering any shares of Common Stock the Company may, in its sole discretion, but without obligation to do so, deliver such shares of Common Stock net of the number of shares sufficient to satisfy any withholding tax requirements incident to such issuance. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred by the Company. * * * * * The undersigned hereby certifies that the foregoing 1996 STAAR Surgical Company Non-Qualified Stock Plan was duly adopted effective as of the sixth day of May, 1996, by the Board of Directors of STAAR Surgical Company. /s/ William C. Huddleston ------------------------------------ William C. Huddleston, Secretary 14 EX-10.8 3 PROMISSORY NOTE OF JOHN WOLF, DATED 2/28/91 STAAR 1.4 EXHIBIT 10.8 PROMISSORY NOTE --------------- (SECURED BY STOCK PLEDGE/SECURITY AGREEMENT) ------------------------------------------- $1,301,745.00 FEBRUARY 28, 1991 MONROVIA, CALIFORNIA FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby acknowledged, JOHN R. WOLF, A MARRIED MAN (hereinafter "Maker"), hereby promises ----- to pay to STAAR SURGICAL COMPANY, A DELAWARE CORPORATION, or order (hereinafter "Holder"), at the address hereinbelow designated on the signature page of this ------ Note, or such other place as Holder may designate by written notice to Maker, the principal sum hereinbelow described (hereinafter the "Principal Amount"), --------- ------ together with interest thereon, in the manner and at the times hereinbelow provided and subject to the terms and conditions hereinbelow described. 1. PRINCIPAL AMOUNT. ---------------- The Principal Amount means the sum of One Million Three Hundred One Thousand Seven Hundred Forty Five and No/100 Dollars ($1,301,745.00). 2. INTEREST. -------- Interest on the Principal Amount from time-to-time remaining unpaid shall accrue from the date of this Note at the lesser of eight percent (8%) or that fixed rate of interest (as of the date of this Note) which equals the minimum applicable rate of simple interest (as of the date of this Note) which will avoid the imputation of income to Maker. Interest shall be computed on the basis of a three hundred sixty (360) day year and a thirty (30) day month. 3. PAYMENT OF PRINCIPAL AND INTEREST. --------------------------------- Subject to Paragraph 7, the Principal Amount and accrued and unpaid interest on the Principal Amount and all other indebtedness under this Note shall be paid on February 28, 1994. Until such date, all interest on this Note shall accrue. 4. PREPAYMENTS. ----------- Maker shall have the right to prepay any portion of the Principal Amount without prepayment penalty or premium or discount. 5. MANNER OF PAYMENTS/CREDITING OF PAYMENTS. ---------------------------------------- Payments of any amount required hereunder shall be made solely in lawful money of the United States, without deduction or offset, and shall be credited first against accrued but unpaid interest, if any, and thereafter against the unpaid balance of the Principal Amount. 6. Security. --------- The payment of this Note is secured by a Stock Pledge/Security Agreement (hereinafter the "Security Agreement") executed by Maker in favor of ------------------ Holder of even date herewith with respect to certain common stock of Holder owned by Maker. The Security Agreement contains provisions for acceleration of the maturity of this Note on the occurrence of certain described events. 7. Acceleration Upon Default. -------------------------- At the option of Holder, all or any part of the indebtedness of Maker hereunder shall immediately become due and payable, irrespective of any agreed maturity, upon the happening of any of the following events of default ("Event ----- of Default"): - ---------- (a) Upon the occurrence of any event of default described under the Security Agreement; (c) If any of the following events constituting default occurs, provided, however, that if any such event of default is reasonably susceptible of being cured, Maker shall be entitled to a grace period of thirty (30) days following written notice of such event of default to cure it, and further provided, that if such event of default is of such character as to reasonably require more than thirty (30) days to cure, Maker has promptly commenced to cure said events of default within the thirty (30) day period and uses reasonable diligence thereafter in curing such events of default, the thirty (30) day period shall be reasonably extended (but not to exceed one hundred twenty days (120)): (i) If Maker shall breach any non-monetary condition or obligation imposed on Maker pursuant to the terms of this Note; (ii) If Maker shall make an assignment for the benefit of creditors; (iii) If a custodian, trustee, receiver, or agent is appointed or takes possession of substantially all of the property of Maker; (iv) If Maker becomes insolvent as that terms is defined in Section 101(26) of Title 11 of the United States Code; (v) If Maker shall (A) file a petition with the Bankruptcy Court under the Bankruptcy Code, or (B) otherwise file any petition or apply to any tribunal for appointment of a custodian, trustee, receiver, or agent of Maker, or commence any proceeding related to Maker under any bankruptcy or reorganization statute, or under any arrangement, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect; (vi) If any petition is filed against Maker under the Bankruptcy Code and either (A) the Bankruptcy Code orders relief against Maker under the chapter of Bankruptcy Code under which the petition was filed, or (B) such petition is not dismissed by the Bankruptcy Court within thirty (30) days of the date of filing; (vii) If any petition or application of the type described in Subparagraph (v)(A) above is filed against Maker, or any proceeding of the type described in Subparagraphs (v)(A) or (v)(B) above is commenced, and either (1) Maker, by any act, indicates his approval thereof, consent thereto, or acquiescence therein, or (2) an order is entered appointing any such custodian, trustee, receiver, or agent, adjudicating Maker bankrupt or insolvent, or approving such petition or application in any such proceeding, and any such order remains in effect for more than thirty (30) days; (viii) If any attachment, execution, or other writ is levied on substantially all of the assets of Maker and remains in effect for more than fifteen (15) days. 8. Collection Costs and Attorneys' Fees. ------------------------------------ (a) Maker agrees to pay Holder all costs and expenses, including actual attorneys' fees, paid or incurred by Holder in connection with the collection or enforcement of the Note or any instrument securing payment of this Note, including defending the priority of such instrument or as a result of foreclosure against, or conducting a trustee sale thereunder. (b) In the event any party institutes or should the parties otherwise become a party to any action or proceeding in connection with the enforcement or interpretation or collection of this Note or any instrument securing payment of this Note, or for damages by reason of any alleged breach of this Note or any provision hereof or any alleged breach of any instrument securing payment of this Note or any provision thereof, or for a declaration of rights in connection with this Note or any instrument securing payment of this Note, or for any other relief, including equitable relief, in connection with this Note or any instrument securing payment of this Note, the prevailing party in any such action or proceeding shall be entitled to receive from the non- prevailing party all costs and expenses including, without limitation, actual attorneys' and other fees incurred by the prevailing party in connection with such action or proceeding. 9. Notice. ------ Any notice to Maker provided for in this Note shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, addressed to Maker at the address set forth below where this Note is executed, or to such other address as Maker may designate by written notice to Holder. Any notice to Holder shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, to Holder at the address set forth below where this Note is executed, or at such other address as may have been designated by written notice to Maker. Mailed notices shall be deemed delivered and received three (3) days after deposit in accordance with this provision in the United States mail. 10. Usury Compliance. ---------------- All agreements between Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the consideration given with respect to this Note, the acceleration of maturity of the unpaid Principal Amount and interest thereon, or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance, or detention of the indebtedness which is the subject of this Note exceed the highest lawful rate permissible under the applicable usury laws. If, under any circumstances whatsoever, fulfillment of any provision of this Note or any agreement securing payment of this Note or executed in connection with this Note after timely performance of such provision is due, shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction deems applicable, then the obligations to be fulfilled shall be reduced to the limit of such validity, and if, under any circumstances whatsoever, Holder shall ever receive as interest an amount that exceeds the highest lawful rate, the amount that would be excessive interest shall be applied to the reduction of the unpaid Principal Amount and/or late charges under this Note and not to the payment of interest, or, if such excessive interest exceeds the unpaid balance of the Principal Amount and/or late charges under this Note, such excess shall be refunded to Maker. 11. General. ------- (a) No delay or omission on the part of Holder in exercising any rights under this Note or under any instrument given to secure this Note, on default by Maker, including, without limitation, Holder's right to accelerate, nor reinstatement of this Note by Holder after such exercise, shall operate as a waiver of Maker's right to exercise such right or of any other right under this Note or the instruments given to secure this Note, for the same default or any other default. (b) Except for the provision of written notice hereinabove set forth, Maker hereby waives presentment for payment, demand, protest, notice of protest and notice of dishonor, and all other notices to which Maker might otherwise be entitled, and further waives the right to require Holder to proceed against any security for this Note before proceeding against Maker, and further waives all defenses based on release of security or extension of time or other indulgence given in respect to payment of this Note. (c) Holder shall have the right to sell, assign, or otherwise transfer, either in part or in its entirety, this Note, and any instrument evidencing or securing the indebtedness of this Note (provided such instrument is transferred as security for the portion of the Note which is conveyed), without the consent of Maker. The assignment of this Note by Holder shall be ineffective until actual notice of same is received by Maker. Maker shall have no right to delegate its duties under this Note or any instrument securing this Note without the written consent of Holder, which consent Holder shall not unreasonably withhold, provided, however, no delegation of such duties or obligations shall release Maker from any duty or obligation under this Note or instrument securing payment of this Note. (d) Subject to the foregoing Subparagraph (c), this Note and all of the covenants, promises, and agreements contained in it shall be binding on and inure to the benefit of the respective legal and personal representatives, devises, heirs, successors, and assigns of Maker and Holder. (e) This writing is intended by the parties to be an integrated and final expression of this Note and also is intended to be a complete and exclusive statement of the terms of that agreement. No course of prior dealing between the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Note except as specifically provided herein. (f) If any provision of this Note, or the application of it to any party or circumstance, is held to be invalid, the remainder of this Note, and the application of such provision to other parties or circumstances, shall not be affected thereby, the provisions of this Note being severable in any such instance. (g) This Note shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of California applicable to contracts entered into in the State of California, by residents of the State of California, and intended to be performed entirely within the State of California. Any action to enforce payment of this Note shall be filed and heard solely in the Municipal or Superior Court of Los Angeles County, California. (h) Time is of the essence for each and every obligation under this Note. MAKER: /s/ John R. Wolf -------------------------- John R. Wolf MAKER'S ADDRESS: Mr. John R. Wolf c/o Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 HOLDER'S ADDRESS: Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 DO NOT DESTROY THIS NOTE; WHEN PAID, THIS NOTE MUST BE SURRENDERED TO MAKER FOR CANCELLATION EX-10.9 4 STOCK PLEDGE/SECURITY AGREEMENT OF JOHN WOLF STAAR 1.1 EXHIBIT 10.9 STOCK PLEDGE/SECURITY AGREEMENT ------------------------------- This STOCK PLEDGE/SECURITY AGREEMENT (hereinafter "Agreement") is made and entered into this 28th day of February, 1991, by and between John R. Wolf, a married man ("Pledgor"), Pollet & Associates, a California corporation ("Pledgeholder"), and Staar Surgical Company, a Delaware corporation ("Pledgee") with reference to the following facts: RECITALS -------- WHEREAS, Pledgor has borrowed the sum of One Million Three Hundred One Thousand Seven Hundred Forty Five Dollars ($1,301,745.00) from Pledgee pursuant to the terms of a Promissory Note attached hereto as Exhibit "1" and incorporated herein by this reference ("Note"), and WHEREAS, Pledgor desires to pledge his interest in certain common stock, pursuant to the terms of this Agreement, for the purpose of securing Pledgor's indebtedness to Pledgee for the unpaid balance of the Note. NOW, THEREFORE, in consideration of mutual covenants and promises contained herein, and for valuable consideration, the receipt and sufficiency which are hereby mutually acknowledged and confessed, the parties to this Agreement (hereinafter collectively "parties" and individually "party") agree as follows: AGREEMENT --------- 1. PLEDGE OF STOCK AND PROCEEDS. ---------------------------- (a) Pledge. As collateral security for the payment and/or performance ------ of all of Pledgor's presently existing or hereinafter arising obligations and liabilities to Pledgee under the Note, Pledgor agrees to deliver, pledge and grant to Pledgeholder, concurrently with the execution of this Agreement, a continuing security interest in the following: (i) the shares of common stock which are set forth on Exhibit "2" to this Agreement ("Stock"). (ii) the proceeds of the Stock including, without limitation, any and all dividends, cash, instruments and other property from time-to-time received, receivable, or otherwise distributed in respect of or in exchange for any of the Stock ("Proceeds"). The Stock and the Proceeds shall hereinafter be collectively referred to as the "Collateral"). (b) Delivery of Stock to Pledgeholder. Pledgor agrees to deliver to --------------------------------- 1 Pledgeholder, upon execution of this Agreement, the certificate(s) representing the Stock. Upon execution of this Agreement, Pledgor shall deliver to Pledgeholder an Assignment of Corporate Shares in the form of Exhibit "3" attached hereto and incorporated herein by this reference ("Stock Assignment"), signed by Pledgor, in blank, such Stock Assignment to be used by Pledgeholder in accordance with the terms of this Agreement. (c) Notification of Payments Under Note. Pledgee agrees to notify ----------------------------------- Pledgeholder of all amounts collected in accordance with the terms and conditions of the Note, including final satisfaction of the Note, at which time Pledgee shall direct Pledgeholder to return the Collateral to Pledgor. (c) Pledgeholder's Acceptance of Collateral and Appointment as ---------------------------------------------------------- Pledgor's Attorney-In-Fact. Pledgeholder hereby agrees to accept the Collateral - -------------------------- and to hold and dispose of the Collateral in accordance with and subject only to the terms of this Agreement and the legal and equitable rights of the parties to it. Pledgor hereby irrevocably appoints Pledgeholder as Pledgor's attorney-in- fact to arrange for the transfer of the Collateral and to do and perform all other actions that are requisite and necessary to be lawfully done in order to affect the terms of this Agreement. (d) Release of Collateral. The Collateral shall be released from this --------------------- Agreement and returned to Pledgor upon receipt by Pledgeholder of written notice from Pledgee that all of Pledgor's obligations under the Note have been satisfied in full. 2. MATTERS PERTAINING TO THE COLLATERAL. ------------------------------------ (a) Voting and Consensual Rights. Pledgor retains the right to vote ---------------------------- the Stock and to exercise any other consensual rights pertaining to the Stock, provided, however, so long as Pledgor is in "Default" as defined in Paragraph 3 of this Agreement, Pledgeholder shall vote the Stock and shall exercise any consensual rights pertaining to the Stock as directed by Pledgee. (b) Rights to Dividends and Distributions. Pledgor shall be entitled ------------------------------------- to receive and retain any dividends or other payments or distributions with respect to the Stock made to or due Pledgor as a shareholder, provided, however, that: (i) any and all dividends and distributions paid or payable other than in cash in respect of the Stock, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, the Stock; and/or (ii) any and all dividends and distributions paid or payable with respect to the Stock in connection with a partial or total liquidation or dissolution of the issuing corporation or in connection with a reduction of capital, capital surplus or paid-in surplus of the issuing corporation; and/or 2 (iii) any or all dividends or distributions paid with respect to, payable or otherwise distributed in redemption of, or in exchange for, the Stock; shall be delivered to Pledgeholder to be added to and become a part of the Collateral. Further provided, however, to the extent the foregoing dividends and distributions exceed the amount of Pledgor's obligations and liabilities under the Note and/or this Agreement, Pledgor shall be entitled to receive these excess dividends and distributions. Notwithstanding the foregoing, in the event and for so long as Pledgor is in Default, Pledgeholder shall be paid any dividends or other payments or distributions with respect to the Stock to be added to and become part of the Collateral; provided, however, to the extent any amounts are due and payable to Pledgee (whether by acceleration, maturity or otherwise) Pledgeholder shall apply such payments against the outstanding balance of the Note. (c) Stock Adjustments. In the event that, during the term of this ----------------- Agreement, any stock dividend, reclassification, readjustment, or other change is declared or made in the capital structure of the issuing corporation, all new substituted and additional shares or other securities issued with respect to the Stock by reason of any such change shall be delivered to Pledgeholder and held by Pledgeholder under the terms of this Agreement in the same manner as the Stock. (d) Subscription Rights or Warrants. In the event that, during the term ------------------------------- of this Agreement, subscription warrants or any other rights or options shall be issued in connection with the Stock, such warrants, rights, and options shall be immediately assigned by Pledgeholder to Pledgor, and if exercised by Pledgor, all new shares or other securities so acquired by Pledgor shall be considered as part of the Stock and shall be immediately assigned to Pledgeholder to be held under the terms of this Agreement in the same manner as the Stock. 3. Default. ------- At the option of Pledgee, and without necessity of presentment for payment, demand, protest, notice of protest or notice of dishonor or any other notice except as specifically provided herein, Pledgeholder may exercise any remedy under this Agreement upon the happening of any of the following events of default ("Default"): (a) Default Under The Note. If any act or event of "default" on the ---------------------- part of Pledgor occurs under the Note without cure as specifically provided therein; or (b) Default Under This Agreement. If Pledgor defaults in the due ---------------------------- performance or observance of any representation or obligation under this Agreement; provided, however, that if such obligation is monetary, Pledgor shall be entitled to a grace period of ten (10) days following notice of such default to cure said default, and further provided that if such obligation is nonmonetary and is reasonably susceptible of being cured, Pledgor shall be entitled to a grace 3 period of thirty (30) days following written notice of default to cure said default, and further provided that if such nonmonetary default is of such character as to reasonably require more than thirty (30) days to cure, Pledgor shall not be in default if Pledgor has diligently commenced to cure the default within the thirty (30) day period and uses reasonable diligence thereafter in curing the default. Notwithstanding the foregoing, if the event of default is one under both Subparagraphs (a) and (b), the provisions of Subparagraph (a) shall control in determining when and if the default is cured. 4. Remedies. -------- Subject to Paragraph 3 of this Agreement, in the event Pledgor is in Default without cure as hereinabove provided, Pledgee shall have the following rights and remedies: (a) Retention of Collateral by Pledgee. Choose to accept the ---------------------------------- Collateral (but only to the extent of unpaid obligations and liabilities under the Note and/or this Agreement) after directing Pledgeholder to give notice of such proposal to Pledgor and to any other person with a security interest in the Collateral, as provided in Section 9505 of the California Commercial Code, and -------------------------- such acceptance shall fully discharge the obligation of Pledgor providing neither Pledgor, nor any other person with a security interest in the Collateral, objects in writing to such proposal within twenty-one (21) days from receipt of such notice. (b) Sale of Collateral. Choose to sell the Collateral at a public or ------------------ private sale, in one or more sales or lots, at such price as Pledgeholder or Pledgee may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, and the purchaser of any or all of the Collateral so sold shall thereafter hold the same absolutely free from any claim, encumbrance or right of any kind whatsoever. Provided, however, Pledgee shall first direct Pledgeholder to give any notice or notification to Pledgor as required by Section 9504 of the California Commercial Code by mailing such -------------------------- notice, postage prepaid, to Pledgor's address as it appears within this Agreement. Any other requirement of notice, demand or advertisement for sale is, to the extent permitted by law, waived. Any sale hereunder may be conducted by any auctioneer or any officer or agent of Pledgee. Any sale of the Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies or other financial institutions disposing of property similar to the Collateral shall be deemed to be commercially reasonable. The proceeds of any such sale shall be applied in the following order: (i) Reasonable expenses of retaking, holding, preparing for sale, selling, and the like and, to the extent provided for in this Agreement and not prohibited by law, the reasonable attorneys' fees and legal expenses incurred by Pledgeholder and/or Pledgee. (ii) Satisfaction of the balance of unpaid principal and accrued but unpaid interest and other amounts due under the Note. 4 (iii) Satisfaction of any indebtedness secured by any subordinate security interest in the Collateral if written notice and demand therefore is received prior to distribution of the proceeds provided, however, reasonable proof of such interest or interests is reasonably furnished to Pledgeholder. (c) Pledgee's Right to Purchase Collateral. Pledgeholder may, on behalf -------------------------------------- of Pledgee, buy the Collateral at a public sale or private sale described above in Subparagraph (b) pursuant to the conditions specified in Section 9504(3) of the California Commercial Code. -------------------------- (d) Pledgeholder's Right to Execute Documents. Pledgeholder shall have ----------------------------------------- the right to execute any document or form, in its name or in the name of Pledgor, which may be necessary or desirable in connection with the retention of the Collateral as provided above in Subparagraph (a) or in the sale of the Collateral as provided above in Subparagraph (b). (e) Private Placement. In view of the fact that federal and state ----------------- securities laws may impose certain restrictions on the method by which a sale of the Collateral may be effected after an event of Default, and also upon the persons or entities who may qualify or be eligible to purchase the Collateral, Pledgor hereby agrees that upon the occurrence of an event of Default, Pledgeholder, on behalf of Pledgee, may from time to time, if the Collateral is not publicly traded on a nationally recognized stock exchange and/or is considered a "restricted" security, attempt to sell all or any part of the Collateral by a private placement, for cash, restricting the bidders and prospective purchasers to a limited number who will represent and agree that they are purchasing for investment for their own accounts only and not for distribution, and who will otherwise meet state or federal securities law requirements, including those pertaining to sales made pursuant to exemptions from registration under the Securities Act of 1933 and/or registration or qualification under other state or federal securities laws. The solicitation of offers from four (4) or more investors, with the acceptance of the highest offer therefrom by Pledgeholder, shall be deemed to be a commercially reasonable method of disposition of the Collateral in this case. 5. No Impairment of Other Security. ------------------------------- The execution and delivery of this Agreement shall in no manner impair or affect any other security for the payment or performance of the Note and no security taken hereafter as security for payment of any part or all of the Note shall impair in any manner or affect this Agreement; all such present and future additional security is to be considered as cumulative security. Any future assignment or attempted assignment or transfer of the interest of Pledgor in and to any of the Collateral shall not deprive Pledgeholder of the right to sell or otherwise dispose of or utilize all of the Collateral as hereinabove provided or necessitate the sale or disposition thereof. 5 6. Pledgor's Representations, Warranties and Covenants. --------------------------------------------------- (a) Pledgor represents and warrants to Pledgee as follows: (i) the Stock is validly authorized, fully paid and nonassessable; (ii) the Stock was issued without violation of any statutory or contractual preemptive rights, or any rights of first refusal or other agreements; (iii) the Stock was issued to Pledgor in compliance with federal and applicable state securities laws; (iv) upon delivery to Pledgeholder as contemplated hereby, the Stock will be free of any security interests, liens, pledges or encumbrances created by Pledgor (except for the security interest created hereby), or any claims of third parties of any nature whatsoever, charges, escrows, options, rights of first refusal, or other agreements, arrangements, commitments or obligations, written or oral, created by Pledgor or any other restrictions created by Pledgor affecting the rights and other incidents of record or beneficial ownership of the Stock. (b) Pledgor represents and covenants that the terms and provisions of this Agreement shall prevail over any agreement that Pledgor may have made restricting in any manner the transferability of the Stock. Pledgor shall not make any agreements restricting in any manner the transferability of the Collateral, or otherwise affecting the Collateral. (c) Pledgor represents and covenants that upon occurrence of an event of Default hereunder, any sale of the Collateral made pursuant to the power of sale contained herein shall, at the option of Pledgeholder, terminate any agreement restricting sale or transferability of the Collateral, and the purchaser at any such sale shall take the Collateral free and clear of any such agreement . (d) Pledgor shall do, make, procure, execute and deliver, at no expense to Pledgee, all acts, things, writings and assurances as Pledgee may at any time request to protect, assure or enforce his interests, rights and remedies created by, provided in or emanating from this Agreement and any other agreement made in connection herewith. (e) Pledgor shall, at Pledgor's expense, take any steps necessary to preserve Pledgee's rights in the Collateral against any claims of third parties (except claims arising from any act or failure of act of Pledgeholder). (f) Pledgor has made his own arrangements for keeping informed of changes or potential changes affecting the Collateral (including, without limitation, rights to convert, rights to subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights), and Pledgor hereby agrees that Pledgeholder and Pledgee shall have no responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto. (g) This Agreement, and the delivery to Pledgeholder of the Stock creates a valid, perfected, and first priority security interest in the Collateral in favor of Pledgeholder on behalf of 6 Pledgee, and all actions necessary or desirable to such perfection have been duly taken. 7. Matters Pertaining to Pledgeholder. ---------------------------------- (a) Pledgeholder shall not be personally liable for any act it may do or omit to do under the Agreement while acting in good faith and in the exercise of its best judgment, and any act done or omitted by Pledgeholder pursuant to the advice of Pledgeholder's attorney shall be conclusive evidence of such good faith. Except as expressly provided herein, Pledgeholder is expressly authorized and directed to disregard any and all notices or warnings given by any of the parties, or by any other person or corporation, excepting only orders or process of court, and is hereby expressly authorized to comply with and obey any and all orders, judgments or decrees of any court. If Pledgeholder obeys or complies with any such order, judgment or decree of any court, it shall not be liable to any of the parties or any other person, firm or corporation by reason of such compliance, notwithstanding that any such order, judgment or decree be subsequently reversed, modified, annulled, set aside or vacated, or found to have been entered without jurisdiction. (b) The parties expressly agree Pledgeholder has the absolute right at Pledgeholder's election, if Pledgeholder considers it appropriate, to file an action in interpleader requiring the parties to answer and litigate their claims and rights among themselves, and Pledgeholder is authorized to deposit with the clerk of the court all documents and funds held by it pursuant to this Agreement. In the event such action is filed, the parties jointly and severally agree to pay all costs, expenses and reasonable attorneys' fees which Pledgeholder incurs in such interpleader action. Upon filing of such action Pledgeholder shall thereupon be fully released and discharged from all obligations to further perform any duties or obligations otherwise imposed by the terms of this Agreement. (c) Pledgeholder shall not be bound in any way by any other agreement between the parties as to which Pledgeholder is not a party, whether or not Pledgeholder has knowledge thereof, nor by any notice of a claim or demand with respect to this Agreement or the Collateral. Pledgeholder shall have no duties or responsibilities except as expressly set forth in this Agreement. Pledgeholder may rely conclusively on any certificate, statement, request, waiver, receipt, agreement or other instrument which Pledgeholder believes to be genuine and to have been signed and presented by an appropriate person or persons. (d) The retention and distribution of the Collateral in accordance with the terms and provisions of this Agreement shall fully and completely release Pledgeholder from any obligation or liability assumed by Pledgeholder hereunder as to the Collateral. (e) Pledgeholder, while in possession of the Collateral prior to or following the occurrence of an event of Default, as hereinabove provided, and while acting in accordance with the terms of this Agreement or applicable law, is not responsible for any fluctuations in value or delays in disposing of the Collateral. 7 (f) Pledgeholder shall not be liable in any respect for verifying the identity, authority or rights of the parties executing or delivering or purporting to execute and/or deliver this Agreement or any documents or papers deposited hereunder. Pledgeholder shall not be liable for the loss of any rights under any statute of limitations with respect to this Agreement or any documents deposited with Pledgeholder. (g) Notwithstanding anything herein to the contrary, Pledgeholder shall have no duty with respect to the Collateral other than the duty to use reasonable care in the custody and preservation of the Collateral if it is in Pledgeholder's possession. Pledgeholder shall be under no obligation to take any steps necessary to preserve rights in the Collateral against any other parties, to sell the Collateral if it threatens to decline in value, or to exercise any rights represented thereby, including voting or consensual rights; provided, however, Pledgeholder may, at Pledgeholder's option, do so, and any and all expenses incurred in connection therewith shall be for the sole account of Pledgor. (h) Pledgor and Pledgee agree to and each does hereby indemnify, defend (with counsel acceptable to Pledgeholder) and hold Pledgeholder harmless against any and all losses, damages, claims and expenses, including reasonable attorneys' fees, that may be incurred by Pledgeholder by reason of his compliance with the terms of this Agreement. If, as a result of any disagreement between the parties and/or adverse demands and claims being made by any or all of them upon Pledgeholder, Pledgeholder shall become involved in litigation, including any interpleader brought by Pledgeholder as provided in this Agreement, Pledgor and Pledgee each agree that they shall be jointly and severally liable to Pledgeholder on demand for all costs, expenses and attorneys' fees that Pledgeholder shall incur and/or be compelled to pay by reason of such litigation. 8. Replacement of Pledgeholder. --------------------------- In the event Pledgeholder is or becomes unwilling or unable to act in such capacity for any reason, Pledgee shall appoint a successor. Pledgee (but not Pledgor) shall have the right, after delivery of written notice signed by Pledgee to Pledgeholder, to terminate Pledgeholder, and to name Pledgeholder's successor. 9. Miscellaneous. ------------- (a) It is acknowledged by each party that such party either had separate and independent advice of counsel or the opportunity to avail himself or itself of same. This Agreement was prepared by each party in conjunction with counseling from such party's respective attorney or the opportunity to obtain such counseling. In light of these facts it is acknowledged that no party shall be construed to be solely responsible for the drafting of this Agreement, and therefore any ambiguity shall not be construed against any party as the alleged draftsman of it. Each party shall 8 pay all costs and expenses incurred or to be incurred by such party in negotiating and preparing this Agreement and in performing and complying with all representations, warranties, covenants, agreements and conditions contained in this Agreement to be performed or complied with by such party, including legal fees. (b) Each party agrees, without further consideration, to cooperate and diligently perform any further acts, deeds and things and to execute and deliver any documents that may be reasonably necessary to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. Pledgor shall reimburse Pledgeholder and/or Pledgee, upon demand, for any costs and expenses incurred by Pledgeholder or Pledgee in connection with any breach or default of Pledgor under this Agreement, including collection efforts by Pledgee under this Agreement, whether or not suit is commenced or judgement is entered. Such costs shall include legal fees and costs incurred for collection efforts, negotiation of a settlement, enforcement of rights, or other use. Furthermore, should any party institute or should the parties otherwise become a party to any action or proceeding to enforce or interpret this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or any provision hereof, or for a declaration of rights in connection herewith, or for any other relief, including equitable relief, in connection herewith, the prevailing party in any such action or proceeding shall be entitled to receive from the nonprevailing party as a cost of suit, and not as damages, all costs and expenses of prosecuting or defending the action or proceeding, whichever the case may be, including, without limitation, reasonable attorneys' and other professional fees incurred by the prevailing party in connection with such action or proceeding. The term "action or proceeding" shall mean and include actions, proceedings, suits, arbitrations (if required or permitted under this Agreement or consented to by the parties), appeals and other similar proceedings. The term "prevailing party" shall mean the party who is determined to prevail by the Court after its consideration of all damages and equities in the action or proceeding, whether or not the action or proceeding proceeds to final judgment. This Agreement and the rights of each party under this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California applicable to agreements made and to be performed wholly within the State of California, without regard to principals of conflicts of law. Furthermore, in the event that litigation between the parties is necessary, such litigation shall be filed in and heard solely before the state courts of California with venue exclusively in Los Angeles County. (c) The parties expressly acknowledge and agree that this Agreement : (i) is the final, complete and exclusive statement of the parties' agreement with respect to the subject matter hereof, (ii) supersedes any prior or contemporaneous promises, assurances, guarantees, representations, understandings, conduct, proposals, conditions, commitments, acts, course of dealing, warranties, interpretations or terms of any kind, oral or written (collectively "Prior Agreements"), and that any such Prior Agreements are of no force or effect except as expressly set forth herein, and (iii) may not be varied, supplemented or contradicted by evidence of such Prior Agreements or by evidence of subsequent oral agreements. Any agreement hereafter made shall be ineffective to modify, supplement or discharge the terms of this Agreement, in whole or in part, unless such agreement is 9 in writing and signed by the party against whom enforcement of the modification, supplement or discharge is sought. By execution hereof, the parties specifically disavow any desire or intention to create a "third party" beneficiary contract, and specifically declare that no person or entity, save and except for the parties and their permitted successors, and assigns, shall have any rights hereunder nor any right of enforcement hereof. No breach of any agreement or provision herein contained, or of any obligation under this Agreement, may be waived, nor shall any extension of time for performance of any obligations or acts be deemed an extension of time for performance of any other obligations or acts contained herein, except by written instrument signed by the party to be charged or as otherwise expressly authorized herein. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or a waiver or relinquishment of any other agreement or provision or right or power herein contained herein. The remedies of each party under this Agreement are cumulative and shall not exclude any other remedies to which such party may be lawfully entitled. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be determined to be invalid, illegal or unenforceable, then the remaining part of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable, which can be separated from the invalid, illegal or unenforceable term(s) and provision(s), shall not be affected thereby and shall continue in full force and effect to the fullest extent provided by law, and the invalid, illegal or unenforceable term(s) and provision(s) shall be construed as if they had never been incorporated into this Agreement. It is expressly understood and agreed that time of performance is strictly of the essence with respect to each and every term, condition, obligation and provision hereof and that the failure to timely perform any of the terms, conditions, obligations or provisions hereof by any party shall constitute a material breach of and a non-curable (but waivable) default under this Agreement by the party so failing to perform. (d) Pledgor may not delegate his duties under this Agreement, in whole or in part, without the prior written consent of Pledgee, which consent may be withheld in Pledgee's sole and arbitrary discretion. Notwithstanding the preceding sentence, no such delegation shall release Pledgor from any liability or obligation under this Agreement without the written consent of Pledgee, which consent may be withheld in Pledgee's sole and arbitrary discretion. Subject to the foregoing, all of the representations, warranties, covenants, conditions and provisions of this Agreement shall be binding upon and shall inure to the benefit of each party and such party's respective heirs, executors, administrators, legal representatives, successors and/or assigns, whichever the case may be. (e) The headings used in this Agreement are for convenience and reference purposes only, and shall not be used in construing or interpreting the scope or intent of this Agreement or any provision hereof. References to this Agreement shall include all amendments or renewals thereof. As used in this Agreement, each gender shall be deemed to include each other gender, including neutral genders or genders appropriate for entities, if applicable, and the singular shall be deemed to include the plural, and vice versa, as the context requires. 10 (f) All notices, demands, requests, consents, approvals or other communications (for the purposes of this Paragraph hereinafter collectively called "Notices"), required or permitted to be given hereunder, or which are given with respect to this Agreement, shall be in writing, and shall be given by personal delivery, telegraph or by express mail, Federal Express, DHL or other similar form of nationally recognized airborne/overnight delivery service (which forms of Notice shall be deemed to have been given upon delivery), or by telex or facsimile transmission (which forms of Notice shall be deemed delivered upon confirmed transmission), or by mailing in the United States mail by registered or certified mail, return receipt requested, postage prepaid (which forms of Notice shall be deemed to have been given upon the third (3rd) business day following the date mailed). Notices shall be addressed to the appropriate party(s) as set forth on the signature page of this Agreement, or to such other address as the receiving party shall have specified most recently by like Notice, with a copy to the other parties hereto. Any Notice given to the estate of a party shall be sufficient if addressed to the party as provided in this Subparagraph. WHEREFORE, the parties hereto have executed this Agreement on the dates and at the places written below. Executed at Monrovia Pledgor: California on February 28, 1991 /s/ John R. Wolf -------------------------- John R. Wolf c/o Staar Surgical Company 1911 Walker Avenue Monrovia, California 91016 Executed at Monrovia, Pledgeholder: California on February 28, 1991 POLLET & ASSOCIATES By: /s/ Andrew F. Pollet ------------------------- Andrew F. Pollet 10850 Wilshire Blvd. Suite 300 Los Angeles, CA 90024 SIGNATURES CONTINUED ON NEXT PAGE 11 Executed at Monrovia, Pledgee: California on February STAAR SURGICAL COMPANY, a Delaware 28, 1991 Corporation By: /s/ John R. Wolf ----------------------- John R. Wolf Address: 1911 Walker Avenue Monrovia, California 91016 12 EXHIBIT "1" ----------- PROMISSORY NOTE --------------- (SECURED BY STOCK PLEDGE/SECURITY AGREEMENT) ------------------------------------------ $1,301,745.00 February 28, 1991 Monrovia, California FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby acknowledged, John R. Wolf, a married man (hereinafter "Maker"), hereby promises ----- to pay to Staar Surgical Company, a Delaware corporation, or order (hereinafter "Holder"), at the address hereinbelow designated on the signature page of this ------ Note, or such other place as Holder may designate by written notice to Maker, the principal sum hereinbelow described (hereinafter the "Principal Amount"), ---------------- together with interest thereon, in the manner and at the times hereinbelow provided and subject to the terms and conditions hereinbelow described. 1. Principal Amount. ---------------- The Principal Amount means the sum of One Million Three Hundred One Thousand Seven Hundred Forty Five and No/100 Dollars ($1,301,745.00). 2. Interest. -------- Interest on the Principal Amount from time-to-time remaining unpaid shall accrue from the date of this Note at the lesser of eight percent (8%) or that fixed rate of interest (as of the date of this Note) which equals the minimum applicable rate of simple interest (as of the date of this Note) which will avoid the imputation of income to Maker. Interest shall be computed on the basis of a three hundred sixty (360) day year and a thirty (30) day month. 3. Payment of Principal and Interest. --------------------------------- Subject to Paragraph 7, the Principal Amount and accrued and unpaid interest on the Principal Amount and all other indebtedness under this Note shall be paid on February 28, 1994. Until such date, all interest on this Note shall accrue. 4. Prepayments. ----------- Maker shall have the right to prepay any portion of the Principal Amount without prepayment penalty or premium or discount. 13 5. Manner of Payments/Crediting of Payments. ---------------------------------------- Payments of any amount required hereunder shall be made solely in lawful money of the United States, without deduction or offset, and shall be credited first against accrued but unpaid interest, if any, and thereafter against the unpaid balance of the Principal Amount. 6. Security. -------- The payment of this Note is secured by a Stock Pledge/Security Agreement (hereinafter the "Security Agreement") executed by Maker in favor of ------------------ Holder of even date herewith with respect to certain common stock of Holder owned by Maker. The Security Agreement contains provisions for acceleration of the maturity of this Note on the occurrence of certain described events. 7. Acceleration Upon Default. ------------------------- At the option of Holder, all or any part of the indebtedness of Maker hereunder shall immediately become due and payable, irrespective of any agreed maturity, upon the happening of any of the following events of default ("Event ----- of Default"): - ---------- (a) Upon the occurrence of any event of default described under the Security Agreement; (c) If any of the following events constituting default occurs, provided, however, that if any such event of default is reasonably susceptible of being cured, Maker shall be entitled to a grace period of thirty (30) days following written notice of such event of default to cure it, and further provided, that if such event of default is of such character as to reasonably require more than thirty (30) days to cure, Maker has promptly commenced to cure said events of default within the thirty (30) day period and uses reasonable diligence thereafter in curing such events of default, the thirty (30) day period shall be reasonably extended (but not to exceed one hundred twenty days (120)): (i) If Maker shall breach any non-monetary condition or obligation imposed on Maker pursuant to the terms of this Note; (ii) If Maker shall make an assignment for the benefit of creditors; (iii) If a custodian, trustee, receiver, or agent is appointed or takes possession of substantially all of the property of Maker; 14 (iv) If Maker becomes insolvent as that terms is defined in Section 101(26) of Title 11 of the United States Code; (v) If Maker shall (A) file a petition with the Bankruptcy Court under the Bankruptcy Code, or (B) otherwise file any petition or apply to any tribunal for appointment of a custodian, trustee, receiver, or agent of Maker, or commence any proceeding related to Maker under any bankruptcy or reorganization statute, or under any arrangement, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect; (vi) If any petition is filed against Maker under the Bankruptcy Code and either (A) the Bankruptcy Code orders relief against Maker under the chapter of Bankruptcy Code under which the petition was filed, or (B) such petition is not dismissed by the Bankruptcy Court within thirty (30) days of the date of filing; (vii) If any petition or application of the type described in Subparagraph (v)(A) above is filed against Maker, or any proceeding of the type described in Subparagraphs (v)(A) or (v)(B) above is commenced, and either (1) Maker, by any act, indicates his approval thereof, consent thereto, or acquiescence therein, or (2) an order is entered appointing any such custodian, trustee, receiver, or agent, adjudicating Maker bankrupt or insolvent, or approving such petition or application in any such proceeding, and any such order remains in effect for more than thirty (30) days; (viii) If any attachment, execution, or other writ is levied on substantially all of the assets of Maker and remains in effect for more than fifteen (15) days. 8. Collection Costs and Attorneys' Fees. ------------------------------------ (a) Maker agrees to pay Holder all costs and expenses, including actual attorneys' fees, paid or incurred by Holder in connection with the collection or enforcement of the Note or any instrument securing payment of this Note, including defending the priority of such instrument or as a result of foreclosure against, or conducting a trustee sale thereunder. (b) In the event any party institutes or should the parties otherwise become a party to any action or proceeding in connection with the enforcement or interpretation or collection of this Note or any instrument securing payment of this Note, or for damages by reason of any alleged breach of this Note or any provision hereof or any alleged breach of any instrument securing payment of this Note or any provision thereof, or for a declaration of rights in connection with this Note or any instrument securing payment of this Note, or for any other relief, including 15 equitable relief, in connection with this Note or any instrument securing payment of this Note, the prevailing party in any such action or proceeding shall be entitled to receive from the non-prevailing party all costs and expenses including, without limitation, actual attorneys' and other fees incurred by the prevailing party in connection with such action or proceeding. 9. Notice. ------ Any notice to Maker provided for in this Note shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, addressed to Maker at the address set forth below where this Note is executed, or to such other address as Maker may designate by written notice to Holder. Any notice to Holder shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, to Holder at the address set forth below where this Note is executed, or at such other address as may have been designated by written notice to Maker. Mailed notices shall be deemed delivered and received three (3) days after deposit in accordance with this provision in the United States mail. 10. Usury Compliance. ---------------- All agreements between Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the consideration given with respect to this Note, the acceleration of maturity of the unpaid Principal Amount and interest thereon, or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance, or detention of the indebtedness which is the subject of this Note exceed the highest lawful rate permissible under the applicable usury laws. If, under any circumstances whatsoever, fulfillment of any provision of this Note or any agreement securing payment of this Note or executed in connection with this Note after timely performance of such provision is due, shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction deems applicable, then the obligations to be fulfilled shall be reduced to the limit of such validity, and if, under any circumstances whatsoever, Holder shall ever receive as interest an amount that exceeds the highest lawful rate, the amount that would be excessive interest shall be applied to the reduction of the unpaid Principal Amount and/or late charges under this Note and not to the payment of interest, or, if such excessive interest exceeds the unpaid balance of the Principal Amount and/or late charges under this Note, such excess shall be refunded to Maker. 11. General. ------- (a) No delay or omission on the part of Holder in exercising any rights under this Note or under any instrument given to secure this Note, on default by Maker, including, without limitation, Holder's right to accelerate, nor reinstatement of this Note by Holder after such exercise, shall operate as a waiver of Maker's right to exercise such right or of any other right under 16 this Note or the instruments given to secure this Note, for the same default or any other default. (b) Except for the provision of written notice hereinabove set forth, Maker hereby waives presentment for payment, demand, protest, notice of protest and notice of dishonor, and all other notices to which Maker might otherwise be entitled, and further waives the right to require Holder to proceed against any security for this Note before proceeding against Maker, and further waives all defenses based on release of security or extension of time or other indulgence given in respect to payment of this Note. (c) Holder shall have the right to sell, assign, or otherwise transfer, either in part or in its entirety, this Note, and any instrument evidencing or securing the indebtedness of this Note (provided such instrument is transferred as security for the portion of the Note which is conveyed), without the consent of Maker. The assignment of this Note by Holder shall be ineffective until actual notice of same is received by Maker. Maker shall have no right to delegate its duties under this Note or any instrument securing this Note without the written consent of Holder, which consent Holder shall not unreasonably withhold, provided, however, no delegation of such duties or obligations shall release Maker from any duty or obligation under this Note or instrument securing payment of this Note. (d) Subject to the foregoing Subparagraph (c), this Note and all of the covenants, promises, and agreements contained in it shall be binding on and inure to the benefit of the respective legal and personal representatives, devises, heirs, successors, and assigns of Maker and Holder. (e) This writing is intended by the parties to be an integrated and final expression of this Note and also is intended to be a complete and exclusive statement of the terms of that agreement. No course of prior dealing between the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Note except as specifically provided herein. (f) If any provision of this Note, or the application of it to any party or circumstance, is held to be invalid, the remainder of this Note, and the application of such provision to other parties or circumstances, shall not be affected thereby, the provisions of this Note being severable in any such instance. (g) This Note shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of California applicable to contracts entered into in the State of California, by residents of the State of California, and intended to be performed entirely within the State of California. Any action to enforce payment of this Note shall be filed and heard solely in the Municipal or Superior Court of Los Angeles County, California. 17 (h) Time is of the essence for each and every obligation under this Note. MAKER: Exhibit Only--Do Not Sign ------------------------- John R. Wolf MAKER'S ADDRESS: Mr. John R. Wolf c/o Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 HOLDER'S ADDRESS: Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 DO NOT DESTROY THIS NOTE; WHEN PAID, THIS NOTE MUST BE SURRENDERED TO MAKER FOR CANCELLATION 18 EXHIBIT "2" PLEDGED STOCK Corporation Name Certificate No. Number of Shares 1. -------------------- ----------- 2. -------------------- ----------- 3. -------------------- ----------- 19 EXHIBIT "3" ASSIGNMENT OF CORPORATE SHARES (Without Certificate) FOR VALUE RECEIVED, the undersigned hereby assigns to Pollet & Associates, a California corporation, Pledgeholder, pursuant to that certain Stock Pledge/Security Agreement, _____________________ shares of common stock of Staar Surgical Company, a Delaware corporation, represented by certificate(s) number __________________ standing in the undersigned's name on the books of said corporation, and do hereby instruct and appoint the custodian of that corporation's stock books to so transfer the said stock on the books of said corporation. Dated: February 28, 1991 EXHIBIT ONLY - DO NOT SIGN -------------------------- John R. Wolf SIGNATURE GUARANTEE: - -------------------- 20 EX-10.10 5 PROMISSORY NOTE OF HUDDLESTON, DATED 2/28/91 EXHIBIT 10.10 STAAR 1.5 PROMISSORY NOTE --------------- (SECURED BY STOCK PLEDGE/SECURITY AGREEMENT) ------------------------------------------- $119,185.00 February 28, 1991 Monrovia, California FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby acknowledged, WILLIAM C. HUDDLESTON, A MARRIED MAN (hereinafter "Maker"), hereby ----- promises to pay to STAAR SURGICAL COMPANY, A DELAWARE CORPORATION, or order (hereinafter "Holder"), at the address hereinbelow designated on the signature ------ page of this Note, or such other place as Holder may designate by written notice to Maker, the principal sum hereinbelow described (hereinafter the "Principal --------- Amount"), together with interest thereon, in the manner and at the times - ------ hereinbelow provided and subject to the terms and conditions hereinbelow described. 1. Principal Amount. ---------------- The Principal Amount means the sum of One Hundred Nineteen Thousand One Hundred Eighty Five and No/100 Dollars ($119,185.00). 2. Interest. -------- Interest on the Principal Amount from time-to-time remaining unpaid shall accrue from the date of this Note at the lesser of eight percent (8%) or that fixed rate of interest (as of the date of this Note) which equals the minimum applicable rate of simple interest (as of the date of this Note) which will avoid the imputation of income to Maker. Interest shall be computed on the basis of a three hundred sixty (360) day year and a thirty (30) day month. 3. Payment of Principal and Interest. --------------------------------- Subject to Paragraph 7, the Principal Amount and accrued and unpaid interest on the Principal Amount and all other indebtedness under this Note shall be paid on February 28, 1994. Until such date, all interest on this Note shall accrue. 4. Prepayments. ----------- Maker shall have the right to prepay any portion of the Principal Amount without prepayment penalty or premium or discount. 5. Manner of Payments/Crediting of Payments. ---------------------------------------- Payments of any amount required hereunder shall be made solely in lawful money of the United States, without deduction or offset, and shall be credited first against accrued but unpaid interest, if any, and thereafter against the unpaid balance of the Principal Amount. 6. Security. --------- The payment of this Note is secured by a Stock Pledge/Security Agreement (hereinafter the "Security Agreement") executed by Maker in favor of Holder of even date herewith with respect to certain common stock of Holder owned by Maker. The Security Agreement contains provisions for acceleration of the maturity of this Note on the occurrence of certain described events. 7. Acceleration Upon Default. -------------------------- At the option of Holder, all or any part of the indebtedness of Maker hereunder shall immediately become due and payable, irrespective of any agreed maturity, upon the happening of any of the following events of default ("Event of Default"): (a) Upon the occurrence of any event of default described under the Security Agreement; (c) If any of the following events constituting default occurs, provided, however, that if any such event of default is reasonably susceptible of being cured, Maker shall be entitled to a grace period of thirty (30) days following written notice of such event of default to cure it, and further provided, that if such event of default is of such character as to reasonably require more than thirty (30) days to cure, Maker has promptly commenced to cure said events of default within the thirty (30) day period and uses reasonable diligence thereafter in curing such events of default, the thirty (30) day period shall be reasonably extended (but not to exceed one hundred twenty days (120)): (i) If Maker shall breach any non-monetary condition or obligation imposed on Maker pursuant to the terms of this Note; (ii) If Maker shall make an assignment for the benefit of creditors; (iii) If a custodian, trustee, receiver, or agent is appointed or takes possession of substantially all of the property of Maker; (iv) If Maker becomes insolvent as that terms is defined in Section 101(26) of Title 11 of the United States Code; (v) If Maker shall (A) file a petition with the Bankruptcy Court under the Bankruptcy Code, or (B) otherwise file any petition or apply to any tribunal for appointment of a custodian, trustee, receiver, or agent of Maker, or commence any proceeding related to Maker under any bankruptcy or reorganization statute, or under any arrangement, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect; (vi) If any petition is filed against Maker under the Bankruptcy Code and either (A) the Bankruptcy Code orders relief against Maker under the chapter of Bankruptcy Code under which the petition was filed, or (B) such petition is not dismissed by the Bankruptcy Court within thirty (30) days of the date of filing; (vii) If any petition or application of the type described in Subparagraph (v)(A) above is filed against Maker, or any proceeding of the type described in Subparagraphs (v)(A) or (v)(B) above is commenced, and either (1) Maker, by any act, indicates his approval thereof, consent thereto, or acquiescence therein, or (2) an order is entered appointing any such custodian, trustee, receiver, or agent, adjudicating Maker bankrupt or insolvent, or approving such petition or application in any such proceeding, and any such order remains in effect for more than thirty (30) days; (viii) If any attachment, execution, or other writ is levied on substantially all of the assets of Maker and remains in effect for more than fifteen (15) days. 8. Collection Costs and Attorneys' Fees. ------------------------------------ (a) Maker agrees to pay Holder all costs and expenses, including actual attorneys' fees, paid or incurred by Holder in connection with the collection or enforcement of the Note or any instrument securing payment of this Note, including defending the priority of such instrument or as a result of foreclosure against, or conducting a trustee sale thereunder. (b) In the event any party institutes or should the parties otherwise become a party to any action or proceeding in connection with the enforcement or interpretation or collection of this Note or any instrument securing payment of this Note, or for damages by reason of any alleged breach of this Note or any provision hereof or any alleged breach of any instrument securing payment of this Note or any provision thereof, or for a declaration of rights in connection with this Note or any instrument securing payment of this Note, or for any other relief, including equitable relief, in connection with this Note or any instrument securing payment of this Note, the prevailing party in any such action or proceeding shall be entitled to receive from the non- prevailing party all costs and expenses including, without limitation, actual attorneys' and other fees incurred by the prevailing party in connection with such action or proceeding. 9. Notice. ------ Any notice to Maker provided for in this Note shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, addressed to Maker at the address set forth below where this Note is executed, or to such other address as Maker may designate by written notice to Holder. Any notice to Holder shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, to Holder at the address set forth below where this Note is executed, or at such other address as may have been designated by written notice to Maker. Mailed notices shall be deemed delivered and received three (3) days after deposit in accordance with this provision in the United States mail. 10. Usury Compliance. ---------------- All agreements between Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the consideration given with respect to this Note, the acceleration of maturity of the unpaid Principal Amount and interest thereon, or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance, or detention of the indebtedness which is the subject of this Note exceed the highest lawful rate permissible under the applicable usury laws. If, under any circumstances whatsoever, fulfillment of any provision of this Note or any agreement securing payment of this Note or executed in connection with this Note after timely performance of such provision is due, shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction deems applicable, then the obligations to be fulfilled shall be reduced to the limit of such validity, and if, under any circumstances whatsoever, Holder shall ever receive as interest an amount that exceeds the highest lawful rate, the amount that would be excessive interest shall be applied to the reduction of the unpaid Principal Amount and/or late charges under this Note and not to the payment of interest, or, if such excessive interest exceeds the unpaid balance of the Principal Amount and/or late charges under this Note, such excess shall be refunded to Maker. 11. General. ------- (a) No delay or omission on the part of Holder in exercising any rights under this Note or under any instrument given to secure this Note, on default by Maker, including, without limitation, Holder's right to accelerate, nor reinstatement of this Note by Holder after such exercise, shall operate as a waiver of Maker's right to exercise such right or of any other right under this Note or the instruments given to secure this Note, for the same default or any other default. (b) Except for the provision of written notice hereinabove set forth, Maker hereby waives presentment for payment, demand, protest, notice of protest and notice of dishonor, and all other notices to which Maker might otherwise be entitled, and further waives the right to require Holder to proceed against any security for this Note before proceeding against Maker, and further waives all defenses based on release of security or extension of time or other indulgence given in respect to payment of this Note. (c) Holder shall have the right to sell, assign, or otherwise transfer, either in part or in its entirety, this Note, and any instrument evidencing or securing the indebtedness of this Note (provided such instrument is transferred as security for the portion of the Note which is conveyed), without the consent of Maker. The assignment of this Note by Holder shall be ineffective until actual notice of same is received by Maker. Maker shall have no right to delegate its duties under this Note or any instrument securing this Note without the written consent of Holder, which consent Holder shall not unreasonably withhold, provided, however, no delegation of such duties or obligations shall release Maker from any duty or obligation under this Note or instrument securing payment of this Note. (d) Subject to the foregoing Subparagraph (c), this Note and all of the covenants, promises, and agreements contained in it shall be binding on and inure to the benefit of the respective legal and personal representatives, devises, heirs, successors, and assigns of Maker and Holder. (e) This writing is intended by the parties to be an integrated and final expression of this Note and also is intended to be a complete and exclusive statement of the terms of that agreement. No course of prior dealing between the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Note except as specifically provided herein. (f) If any provision of this Note, or the application of it to any party or circumstance, is held to be invalid, the remainder of this Note, and the application of such provision to other parties or circumstances, shall not be affected thereby, the provisions of this Note being severable in any such instance. (g) This Note shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of California applicable to contracts entered into in the State of California, by residents of the State of California, and intended to be performed entirely within the State of California. Any action to enforce payment of this Note shall be filed and heard solely in the Municipal or Superior Court of Los Angeles County, California. (h) Time is of the essence for each and every obligation under this Note. MAKER: /s/ William C. Huddleston ------------------------- William C. Huddleston MAKER'S ADDRESS: Mr. William C. Huddleston c/o Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 HOLDER'S ADDRESS: Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 DO NOT DESTROY THIS NOTE; WHEN PAID, THIS NOTE MUST BE SURRENDERED TO MAKER FOR CANCELLATION EX-10.11 6 STOCK PLEDGE/SECURITY AGREEMENT OF HUDDLESTON EXHIBIT 10.11 STAAR 1.3 STOCK PLEDGE/SECURITY AGREEMENT ------------------------------- This STOCK PLEDGE/SECURITY AGREEMENT (hereinafter "Agreement") is made and entered into this 28th day of February, 1991, by and between William C. Huddleston, a married man ("Pledgor"), Pollet & Associates, a California corporation ("Pledgeholder"), and Staar Surgical Company, a Delaware corporation ("Pledgee") with reference to the following facts: RECITALS -------- WHEREAS, Pledgor has borrowed the sum of One Nineteen Thousand One Hundred Eighty Five Dollars ($119,185.00) from Pledgee pursuant to the terms of a Promissory Note attached hereto as Exhibit "1" and incorporated herein by this reference ("Note"), and WHEREAS, Pledgor desires to pledge his interest in certain common stock, pursuant to the terms of this Agreement, for the purpose of securing Pledgor's indebtedness to Pledgee for the unpaid balance of the Note. NOW, THEREFORE, in consideration of mutual covenants and promises contained herein, and for valuable consideration, the receipt and sufficiency which are hereby mutually acknowledged and confessed, the parties to this Agreement (hereinafter collectively "parties" and individually "party") agree as follows: AGREEMENT --------- 1. Pledge of Stock and Proceeds. ---------------------------- (a) Pledge. As collateral security for the payment and/or performance ------ of all of Pledgor's presently existing or hereinafter arising obligations and liabilities to Pledgee under the Note, Pledgor agrees to deliver, pledge and grant to Pledgeholder, concurrently with the execution of this Agreement, a continuing security interest in the following: (i) the shares of common stock which are set forth on Exhibit "2" to this Agreement ("Stock"). (ii) the proceeds of the Stock including, without limitation, any and all dividends, cash, instruments and other property from time-to-time received, receivable, or otherwise distributed in respect of or in exchange for any of the Stock ("Proceeds"). The Stock and the Proceeds shall hereinafter be collectively referred to as the "Collateral"). (b) Delivery of Stock to Pledgeholder. Pledgor agrees to deliver to --------------------------------- Pledgeholder, upon execution of this Agreement, the certificate(s) representing the Stock. Upon 1 execution of this Agreement, Pledgor shall deliver to Pledgeholder an Assignment of Corporate Shares in the form of Exhibit "3" attached hereto and incorporated herein by this reference ("Stock Assignment"), signed by Pledgor, in blank, such Stock Assignment to be used by Pledgeholder in accordance with the terms of this Agreement. (c) Notification of Payments Under Note. Pledgee agrees to notify ----------------------------------- Pledgeholder of all amounts collected in accordance with the terms and conditions of the Note, including final satisfaction of the Note, at which time Pledgee shall direct Pledgeholder to return the Collateral to Pledgor. (c) Pledgeholder's Acceptance of Collateral and Appointment as ---------------------------------------------------------- Pledgor's Attorney-In-Fact. Pledgeholder hereby agrees to accept the Collateral - -------------------------- and to hold and dispose of the Collateral in accordance with and subject only to the terms of this Agreement and the legal and equitable rights of the parties to it. Pledgor hereby irrevocably appoints Pledgeholder as Pledgor's attorney-in- fact to arrange for the transfer of the Collateral and to do and perform all other actions that are requisite and necessary to be lawfully done in order to affect the terms of this Agreement. (d) Release of Collateral. The Collateral shall be released from this --------------------- Agreement and returned to Pledgor upon receipt by Pledgeholder of written notice from Pledgee that all of Pledgor's obligations under the Note have been satisfied in full. 2. Matters Pertaining to the Collateral. ------------------------------------ (a) Voting and Consensual Rights. Pledgor retains the right to vote ---------------------------- the Stock and to exercise any other consensual rights pertaining to the Stock, provided, however, so long as Pledgor is in "Default" as defined in Paragraph 3 of this Agreement, Pledgeholder shall vote the Stock and shall exercise any consensual rights pertaining to the Stock as directed by Pledgee. (b) Rights to Dividends and Distributions. Pledgor shall be entitled ------------------------------------- to receive and retain any dividends or other payments or distributions with respect to the Stock made to or due Pledgor as a shareholder, provided, however, that: (i) any and all dividends and distributions paid or payable other than in cash in respect of the Stock, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, the Stock; and/or (ii) any and all dividends and distributions paid or payable with respect to the Stock in connection with a partial or total liquidation or dissolution of the issuing corporation or in connection with a reduction of capital, capital surplus or paid-in surplus of the issuing corporation; and/or (iii) any or all dividends or distributions paid with respect to, payable or 2 otherwise distributed in redemption of, or in exchange for, the Stock; shall be delivered to Pledgeholder to be added to and become a part of the Collateral. Further provided, however, to the extent the foregoing dividends and distributions exceed the amount of Pledgor's obligations and liabilities under the Note and/or this Agreement, Pledgor shall be entitled to receive these excess dividends and distributions. Notwithstanding the foregoing, in the event and for so long as Pledgor is in Default, Pledgeholder shall be paid any dividends or other payments or distributions with respect to the Stock to be added to and become part of the Collateral; provided, however, to the extent any amounts are due and payable to Pledgee (whether by acceleration, maturity or otherwise) Pledgeholder shall apply such payments against the outstanding balance of the Note. (c) Stock Adjustments. In the event that, during the term of this ----------------- Agreement, any stock dividend, reclassification, readjustment, or other change is declared or made in the capital structure of the issuing corporation, all new substituted and additional shares or other securities issued with respect to the Stock by reason of any such change shall be delivered to Pledgeholder and held by Pledgeholder under the terms of this Agreement in the same manner as the Stock. (d) Subscription Rights or Warrants. In the event that, during the ------------------------------- term of this Agreement, subscription warrants or any other rights or options shall be issued in connection with the Stock, such warrants, rights, and options shall be immediately assigned by Pledgeholder to Pledgor, and if exercised by Pledgor, all new shares or other securities so acquired by Pledgor shall be considered as part of the Stock and shall be immediately assigned to Pledgeholder to be held under the terms of this Agreement in the same manner as the Stock. 3. Default. ------- At the option of Pledgee, and without necessity of presentment for payment, demand, protest, notice of protest or notice of dishonor or any other notice except as specifically provided herein, Pledgeholder may exercise any remedy under this Agreement upon the happening of any of the following events of default ("Default"): (a) Default Under The Note. If any act or event of "default" on the ---------------------- part of Pledgor occurs under the Note without cure as specifically provided therein; or (b) Default Under This Agreement. If Pledgor defaults in the due ---------------------------- performance or observance of any representation or obligation under this Agreement; provided, however, that if such obligation is monetary, Pledgor shall be entitled to a grace period of ten (10) days following notice of such default to cure said default, and further provided that if such obligation is nonmonetary and is reasonably susceptible of being cured, Pledgor shall be entitled to a grace period of thirty (30) days following written notice of default to cure said default, and further 3 provided that if such nonmonetary default is of such character as to reasonably require more than thirty (30) days to cure, Pledgor shall not be in default if Pledgor has diligently commenced to cure the default within the thirty (30) day period and uses reasonable diligence thereafter in curing the default. Notwithstanding the foregoing, if the event of default is one under both Subparagraphs (a) and (b), the provisions of Subparagraph (a) shall control in determining when and if the default is cured. 4. Remedies. -------- Subject to Paragraph 3 of this Agreement, in the event Pledgor is in Default without cure as hereinabove provided, Pledgee shall have the following rights and remedies: (a) Retention of Collateral by Pledgee. Choose to accept the ---------------------------------- Collateral (but only to the extent of unpaid obligations and liabilities under the Note and/or this Agreement) after directing Pledgeholder to give notice of such proposal to Pledgor and to any other person with a security interest in the Collateral, as provided in Section 9505 of the California Commercial Code, and -------------------------- such acceptance shall fully discharge the obligation of Pledgor providing neither Pledgor, nor any other person with a security interest in the Collateral, objects in writing to such proposal within twenty-one (21) days from receipt of such notice. (b) Sale of Collateral. Choose to sell the Collateral at a public or ------------------ private sale, in one or more sales or lots, at such price as Pledgeholder or Pledgee may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, and the purchaser of any or all of the Collateral so sold shall thereafter hold the same absolutely free from any claim, encumbrance or right of any kind whatsoever. Provided, however, Pledgee shall first direct Pledgeholder to give any notice or notification to Pledgor as required by Section 9504 of the California Commercial Code by mailing such -------------------------- notice, postage prepaid, to Pledgor's address as it appears within this Agreement. Any other requirement of notice, demand or advertisement for sale is, to the extent permitted by law, waived. Any sale hereunder may be conducted by any auctioneer or any officer or agent of Pledgee. Any sale of the Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies or other financial institutions disposing of property similar to the Collateral shall be deemed to be commercially reasonable. The proceeds of any such sale shall be applied in the following order: (i) Reasonable expenses of retaking, holding, preparing for sale, selling, and the like and, to the extent provided for in this Agreement and not prohibited by law, the reasonable attorneys' fees and legal expenses incurred by Pledgeholder and/or Pledgee. (ii) Satisfaction of the balance of unpaid principal and accrued but unpaid interest and other amounts due under the Note. 4 (iii) Satisfaction of any indebtedness secured by any subordinate security interest in the Collateral if written notice and demand therefore is received prior to distribution of the proceeds provided, however, reasonable proof of such interest or interests is reasonably furnished to Pledgeholder. (c) Pledgee's Right to Purchase Collateral. Pledgeholder may, on -------------------------------------- behalf of Pledgee, buy the Collateral at a public sale or private sale described above in Subparagraph (b) pursuant to the conditions specified in Section 9504(3) of the California Commercial Code. (d) Pledgeholder's Right to Execute Documents. Pledgeholder shall ----------------------------------------- have the right to execute any document or form, in its name or in the name of Pledgor, which may be necessary or desirable in connection with the retention of the Collateral as provided above in Subparagraph (a) or in the sale of the Collateral as provided above in Subparagraph (b). (e) Private Placement. In view of the fact that federal and state ----------------- securities laws may impose certain restrictions on the method by which a sale of the Collateral may be effected after an event of Default, and also upon the persons or entities who may qualify or be eligible to purchase the Collateral, Pledgor hereby agrees that upon the occurrence of an event of Default, Pledgeholder, on behalf of Pledgee, may from time to time, if the Collateral is not publicly traded on a nationally recognized stock exchange and/or is considered a "restricted" security, attempt to sell all or any part of the Collateral by a private placement, for cash, restricting the bidders and prospective purchasers to a limited number who will represent and agree that they are purchasing for investment for their own accounts only and not for distribution, and who will otherwise meet state or federal securities law requirements, including those pertaining to sales made pursuant to exemptions from registration under the Securities Act of 1933 and/or registration or qualification under other state or federal securities laws. The solicitation of offers from four (4) or more investors, with the acceptance of the highest offer therefrom by Pledgeholder, shall be deemed to be a commercially reasonable method of disposition of the Collateral in this case. 5. No Impairment of Other Security. ------------------------------- The execution and delivery of this Agreement shall in no manner impair or affect any other security for the payment or performance of the Note and no security taken hereafter as security for payment of any part or all of the Note shall impair in any manner or affect this Agreement; all such present and future additional security is to be considered as cumulative security. Any future assignment or attempted assignment or transfer of the interest of Pledgor in and to any of the Collateral shall not deprive Pledgeholder of the right to sell or otherwise dispose of or utilize all of the Collateral as hereinabove provided or necessitate the sale or disposition thereof. 6. Pledgor's Representations, Warranties and Covenants. --------------------------------------------------- 5 (a) Pledgor represents and warrants to Pledgee as follows: (i) the Stock is validly authorized, fully paid and nonassessable; (ii) the Stock was issued without violation of any statutory or contractual preemptive rights, or any rights of first refusal or other agreements; (iii) the Stock was issued to Pledgor in compliance with federal and applicable state securities laws; (iv) upon delivery to Pledgeholder as contemplated hereby, the Stock will be free of any security interests, liens, pledges or encumbrances created by Pledgor (except for the security interest created hereby), or any claims of third parties of any nature whatsoever, charges, escrows, options, rights of first refusal, or other agreements, arrangements, commitments or obligations, written or oral, created by Pledgor or any other restrictions created by Pledgor affecting the rights and other incidents of record or beneficial ownership of the Stock. (b) Pledgor represents and covenants that the terms and provisions of this Agreement shall prevail over any agreement that Pledgor may have made restricting in any manner the transferability of the Stock. Pledgor shall not make any agreements restricting in any manner the transferability of the Collateral, or otherwise affecting the Collateral. (c) Pledgor represents and covenants that upon occurrence of an event of Default hereunder, any sale of the Collateral made pursuant to the power of sale contained herein shall, at the option of Pledgeholder, terminate any agreement restricting sale or transferability of the Collateral, and the purchaser at any such sale shall take the Collateral free and clear of any such agreement. (d) Pledgor shall do, make, procure, execute and deliver, at no expense to Pledgee, all acts, things, writings and assurances as Pledgee may at any time request to protect, assure or enforce his interests, rights and remedies created by, provided in or emanating from this Agreement and any other agreement made in connection herewith. (e) Pledgor shall, at Pledgor's expense, take any steps necessary to preserve Pledgee's rights in the Collateral against any claims of third parties (except claims arising from any act or failure of act of Pledgeholder). (f) Pledgor has made his own arrangements for keeping informed of changes or potential changes affecting the Collateral (including, without limitation, rights to convert, rights to subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights), and Pledgor hereby agrees that Pledgeholder and Pledgee shall have no responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto. (g) This Agreement, and the delivery to Pledgeholder of the Stock creates a valid, perfected, and first priority security interest in the Collateral in favor of Pledgeholder on behalf of Pledgee, and all actions necessary or desirable to such perfection have been duly taken. 6 7. Matters Pertaining to Pledgeholder. ---------------------------------- (a) Pledgeholder shall not be personally liable for any act it may do or omit to do under the Agreement while acting in good faith and in the exercise of its best judgment, and any act done or omitted by Pledgeholder pursuant to the advice of Pledgeholder's attorney shall be conclusive evidence of such good faith. Except as expressly provided herein, Pledgeholder is expressly authorized and directed to disregard any and all notices or warnings given by any of the parties, or by any other person or corporation, excepting only orders or process of court, and is hereby expressly authorized to comply with and obey any and all orders, judgments or decrees of any court. If Pledgeholder obeys or complies with any such order, judgment or decree of any court, it shall not be liable to any of the parties or any other person, firm or corporation by reason of such compliance, notwithstanding that any such order, judgment or decree be subsequently reversed, modified, annulled, set aside or vacated, or found to have been entered without jurisdiction. (b) The parties expressly agree Pledgeholder has the absolute right at Pledgeholder's election, if Pledgeholder considers it appropriate, to file an action in interpleader requiring the parties to answer and litigate their claims and rights among themselves, and Pledgeholder is authorized to deposit with the clerk of the court all documents and funds held by it pursuant to this Agreement. In the event such action is filed, the parties jointly and severally agree to pay all costs, expenses and reasonable attorneys' fees which Pledgeholder incurs in such interpleader action. Upon filing of such action Pledgeholder shall thereupon be fully released and discharged from all obligations to further perform any duties or obligations otherwise imposed by the terms of this Agreement. (c) Pledgeholder shall not be bound in any way by any other agreement between the parties as to which Pledgeholder is not a party, whether or not Pledgeholder has knowledge thereof, nor by any notice of a claim or demand with respect to this Agreement or the Collateral. Pledgeholder shall have no duties or responsibilities except as expressly set forth in this Agreement. Pledgeholder may rely conclusively on any certificate, statement, request, waiver, receipt, agreement or other instrument which Pledgeholder believes to be genuine and to have been signed and presented by an appropriate person or persons. (d) The retention and distribution of the Collateral in accordance with the terms and provisions of this Agreement shall fully and completely release Pledgeholder from any obligation or liability assumed by Pledgeholder hereunder as to the Collateral. (e) Pledgeholder, while in possession of the Collateral prior to or following the occurrence of an event of Default, as hereinabove provided, and while acting in accordance with the terms of this Agreement or applicable law, is not responsible for any fluctuations in value or delays in disposing of the Collateral. 7 (f) Pledgeholder shall not be liable in any respect for verifying the identity, authority or rights of the parties executing or delivering or purporting to execute and/or deliver this Agreement or any documents or papers deposited hereunder. Pledgeholder shall not be liable for the loss of any rights under any statute of limitations with respect to this Agreement or any documents deposited with Pledgeholder. (g) Notwithstanding anything herein to the contrary, Pledgeholder shall have no duty with respect to the Collateral other than the duty to use reasonable care in the custody and preservation of the Collateral if it is in Pledgeholder's possession. Pledgeholder shall be under no obligation to take any steps necessary to preserve rights in the Collateral against any other parties, to sell the Collateral if it threatens to decline in value, or to exercise any rights represented thereby, including voting or consensual rights; provided, however, Pledgeholder may, at Pledgeholder's option, do so, and any and all expenses incurred in connection therewith shall be for the sole account of Pledgor. (h) Pledgor and Pledgee agree to and each does hereby indemnify, defend (with counsel acceptable to Pledgeholder) and hold Pledgeholder harmless against any and all losses, damages, claims and expenses, including reasonable attorneys' fees, that may be incurred by Pledgeholder by reason of his compliance with the terms of this Agreement. If, as a result of any disagreement between the parties and/or adverse demands and claims being made by any or all of them upon Pledgeholder, Pledgeholder shall become involved in litigation, including any interpleader brought by Pledgeholder as provided in this Agreement, Pledgor and Pledgee each agree that they shall be jointly and severally liable to Pledgeholder on demand for all costs, expenses and attorneys' fees that Pledgeholder shall incur and/or be compelled to pay by reason of such litigation. 8. Replacement of Pledgeholder. --------------------------- In the event Pledgeholder is or becomes unwilling or unable to act in such capacity for any reason, Pledgee shall appoint a successor. Pledgee (but not Pledgor) shall have the right, after delivery of written notice signed by Pledgee to Pledgeholder, to terminate Pledgeholder, and to name Pledgeholder's successor. 9. Miscellaneous. ------------- (a) It is acknowledged by each party that such party either had separate and independent advice of counsel or the opportunity to avail himself or itself of same. This Agreement was prepared by each party in conjunction with counseling from such party's respective attorney or the opportunity to obtain such counseling. In light of these facts it is acknowledged that no party shall be construed to be solely responsible for the drafting of this Agreement, and therefore any ambiguity shall not be construed against any party as the alleged draftsman of it. Each party shall pay all costs and expenses incurred or to be incurred by such party in negotiating and preparing this 8 Agreement and in performing and complying with all representations, warranties, covenants, agreements and conditions contained in this Agreement to be performed or complied with by such party, including legal fees. (b) Each party agrees, without further consideration, to cooperate and diligently perform any further acts, deeds and things and to execute and deliver any documents that may be reasonably necessary to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. Pledgor shall reimburse Pledgeholder and/or Pledgee, upon demand, for any costs and expenses incurred by Pledgeholder or Pledgee in connection with any breach or default of Pledgor under this Agreement, including collection efforts by Pledgee under this Agreement, whether or not suit is commenced or judgement is entered. Such costs shall include legal fees and costs incurred for collection efforts, negotiation of a settlement, enforcement of rights, or other use. Furthermore, should any party institute or should the parties otherwise become a party to any action or proceeding to enforce or interpret this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or any provision hereof, or for a declaration of rights in connection herewith, or for any other relief, including equitable relief, in connection herewith, the prevailing party in any such action or proceeding shall be entitled to receive from the nonprevailing party as a cost of suit, and not as damages, all costs and expenses of prosecuting or defending the action or proceeding, whichever the case may be, including, without limitation, reasonable attorneys' and other professional fees incurred by the prevailing party in connection with such action or proceeding. The term "action or proceeding" shall mean and include actions, proceedings, suits, arbitrations (if required or permitted under this Agreement or consented to by the parties), appeals and other similar proceedings. The term "prevailing party" shall mean the party who is determined to prevail by the Court after its consideration of all damages and equities in the action or proceeding, whether or not the action or proceeding proceeds to final judgment. This Agreement and the rights of each party under this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California applicable to agreements made and to be performed wholly within the State of California, without regard to principals of conflicts of law. Furthermore, in the event that litigation between the parties is necessary, such litigation shall be filed in and heard solely before the state courts of California with venue exclusively in Los Angeles County. (c) The parties expressly acknowledge and agree that this Agreement : (i) is the final, complete and exclusive statement of the parties' agreement with respect to the subject matter hereof, (ii) supersedes any prior or contemporaneous promises, assurances, guarantees, representations, understandings, conduct, proposals, conditions, commitments, acts, course of dealing, warranties, interpretations or terms of any kind, oral or written (collectively "Prior Agreements"), and that any such Prior Agreements are of no force or effect except as expressly set forth herein, and (iii) may not be varied, supplemented or contradicted by evidence of such Prior Agreements or by evidence of subsequent oral agreements. Any agreement hereafter made shall be ineffective to modify, supplement or discharge the terms of this Agreement, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement of the modification, supplement or 9 discharge is sought. By execution hereof, the parties specifically disavow any desire or intention to create a "third party" beneficiary contract, and specifically declare that no person or entity, save and except for the parties and their permitted successors, and assigns, shall have any rights hereunder nor any right of enforcement hereof. No breach of any agreement or provision herein contained, or of any obligation under this Agreement, may be waived, nor shall any extension of time for performance of any obligations or acts be deemed an extension of time for performance of any other obligations or acts contained herein, except by written instrument signed by the party to be charged or as otherwise expressly authorized herein. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or a waiver or relinquishment of any other agreement or provision or right or power herein contained herein. The remedies of each party under this Agreement are cumulative and shall not exclude any other remedies to which such party may be lawfully entitled. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be determined to be invalid, illegal or unenforceable, then the remaining part of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable, which can be separated from the invalid, illegal or unenforceable term(s) and provision(s), shall not be affected thereby and shall continue in full force and effect to the fullest extent provided by law, and the invalid, illegal or unenforceable term(s) and provision(s) shall be construed as if they had never been incorporated into this Agreement. It is expressly understood and agreed that time of performance is strictly of the essence with respect to each and every term, condition, obligation and provision hereof and that the failure to timely perform any of the terms, conditions, obligations or provisions hereof by any party shall constitute a material breach of and a non-curable (but waivable) default under this Agreement by the party so failing to perform. (d) Pledgor may not delegate his duties under this Agreement, in whole or in part, without the prior written consent of Pledgee, which consent may be withheld in Pledgee's sole and arbitrary discretion. Notwithstanding the preceding sentence, no such delegation shall release Pledgor from any liability or obligation under this Agreement without the written consent of Pledgee, which consent may be withheld in Pledgee's sole and arbitrary discretion. Subject to the foregoing, all of the representations, warranties, covenants, conditions and provisions of this Agreement shall be binding upon and shall inure to the benefit of each party and such party's respective heirs, executors, administrators, legal representatives, successors and/or assigns, whichever the case may be. (e) The headings used in this Agreement are for convenience and reference purposes only, and shall not be used in construing or interpreting the scope or intent of this Agreement or any provision hereof. References to this Agreement shall include all amendments or renewals thereof. As used in this Agreement, each gender shall be deemed to include each other gender, including neutral genders or genders appropriate for entities, if applicable, and the singular shall be deemed to include the plural, and vice versa, as the context requires. 10 (f) All notices, demands, requests, consents, approvals or other communications (for the purposes of this Paragraph hereinafter collectively called "Notices"), required or permitted to be given hereunder, or which are given with respect to this Agreement, shall be in writing, and shall be given by personal delivery, telegraph or by express mail, Federal Express, DHL or other similar form of nationally recognized airborne/overnight delivery service (which forms of Notice shall be deemed to have been given upon delivery), or by telex or facsimile transmission (which forms of Notice shall be deemed delivered upon confirmed transmission), or by mailing in the United States mail by registered or certified mail, return receipt requested, postage prepaid (which forms of Notice shall be deemed to have been given upon the third (3rd) business day following the date mailed). Notices shall be addressed to the appropriate party(s) as set forth on the signature page of this Agreement, or to such other address as the receiving party shall have specified most recently by like Notice, with a copy to the other parties hereto. Any Notice given to the estate of a party shall be sufficient if addressed to the party as provided in this Subparagraph. WHEREFORE, the parties hereto have executed this Agreement on the dates and at the places written below. Executed at Monrovia Pledgor: California on February 28, 1991 /s/ William C. Huddleston -------------------------- William C. Huddleston Address: c/o Staar Surgical Company 1911 Walker Avenue Monrovia, California 91016 Executed at Monrovia, Pledgeholder: California on February 28, 1991 POLLET & ASSOCIATES By: /s/ Andrew F. Pollet ---------------------- Andrew F. Pollet 10850 Wilshire Blvd. Suite 300 Los Angeles, CA 90024 SIGNATURES CONTINUED ON NEXT PAGE 11 Executed at Monrovia, Pledgee: California on February STAAR SURGICAL COMPANY, a Delaware 28, 1991 Corporation By: /s/ John R. Wolf ------------------------ John R. Wolf Address: 1911 Walker Avenue Monrovia, California 91016 12 EXHIBIT "1" ----------- PROMISSORY NOTE --------------- (SECURED BY STOCK PLEDGE/SECURITY AGREEMENT) -------------------------------------------- $119,185.00 February 28, 1991 Monrovia, California FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby acknowledged, William C. Huddleston, a married man (hereinafter "Maker"), hereby ----- promises to pay to Staar Surgical Company, a Delaware corporation, or order (hereinafter "Holder"), at the address hereinbelow designated on the signature ------ page of this Note, or such other place as Holder may designate by written notice to Maker, the principal sum hereinbelow described (hereinafter the "Principal --------- Amount"), together with interest thereon, in the manner and at the times - ------ hereinbelow provided and subject to the terms and conditions hereinbelow described. 1. Principal Amount. ---------------- The Principal Amount means the sum of One Ninteen Thousand One Hundred Eighty Five and No/100 Dollars ($119,185.00). 2. Interest. -------- Interest on the Principal Amount from time-to-time remaining unpaid shall accrue from the date of this Note at the lesser of eight percent (8%) or that fixed rate of interest (as of the date of this Note) which equals the minimum applicable rate of simple interest (as of the date of this Note) which will avoid the imputation of income to Maker. Interest shall be computed on the basis of a three hundred sixty (360) day year and a thirty (30) day month. 3. Payment of Principal and Interest. --------------------------------- Subject to Paragraph 7, the Principal Amount and accrued and unpaid interest on the Principal Amount and all other indebtedness under this Note shall be paid on February 28, 1994. Until such date, all interest on this Note shall accrue. 4. Prepayments. ----------- Maker shall have the right to prepay any portion of the Principal Amount without prepayment penalty or premium or discount. 13 5. Manner of Payments/Crediting of Payments. ---------------------------------------- Payments of any amount required hereunder shall be made solely in lawful money of the United States, without deduction or offset, and shall be credited first against accrued but unpaid interest, if any, and thereafter against the unpaid balance of the Principal Amount. 6. Security. -------- The payment of this Note is secured by a Stock Pledge/Security Agreement (hereinafter the "Security Agreement") executed by Maker in favor of Holder of even date herewith with respect to certain common stock of Holder owned by Maker. The Security Agreement contains provisions for acceleration of the maturity of this Note on the occurrence of certain described events. 7. Acceleration Upon Default. ------------------------- At the option of Holder, all or any part of the indebtedness of Maker hereunder shall immediately become due and payable, irrespective of any agreed maturity, upon the happening of any of the following events of default ("Event of Default"): (a) Upon the occurrence of any event of default described under the Security Agreement; (c) If any of the following events constituting default occurs, provided, however, that if any such event of default is reasonably susceptible of being cured, Maker shall be entitled to a grace period of thirty (30) days following written notice of such event of default to cure it, and further provided, that if such event of default is of such character as to reasonably require more than thirty (30) days to cure, Maker has promptly commenced to cure said events of default within the thirty (30) day period and uses reasonable diligence thereafter in curing such events of default, the thirty (30) day period shall be reasonably extended (but not to exceed one hundred twenty days (120)): (i) If Maker shall breach any non-monetary condition or obligation imposed on Maker pursuant to the terms of this Note; (ii) If Maker shall make an assignment for the benefit of creditors; (iii) If a custodian, trustee, receiver, or agent is appointed or takes possession of substantially all of the property of Maker; 14 (iv) If Maker becomes insolvent as that terms is defined in Section 101(26) of Title 11 of the United States Code; (v) If Maker shall (A) file a petition with the Bankruptcy Court under the Bankruptcy Code, or (B) otherwise file any petition or apply to any tribunal for appointment of a custodian, trustee, receiver, or agent of Maker, or commence any proceeding related to Maker under any bankruptcy or reorganization statute, or under any arrangement, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect; (vi) If any petition is filed against Maker under the Bankruptcy Code and either (A) the Bankruptcy Code orders relief against Maker under the chapter of Bankruptcy Code under which the petition was filed, or (B) such petition is not dismissed by the Bankruptcy Court within thirty (30) days of the date of filing; (vii) If any petition or application of the type described in Subparagraph (v)(A) above is filed against Maker, or any proceeding of the type described in Subparagraphs (v)(A) or (v)(B) above is commenced, and either (1) Maker, by any act, indicates his approval thereof, consent thereto, or acquiescence therein, or (2) an order is entered appointing any such custodian, trustee, receiver, or agent, adjudicating Maker bankrupt or insolvent, or approving such petition or application in any such proceeding, and any such order remains in effect for more than thirty (30) days; (viii) If any attachment, execution, or other writ is levied on substantially all of the assets of Maker and remains in effect for more than fifteen (15) days. 8. Collection Costs and Attorneys' Fees. ------------------------------------ (a) Maker agrees to pay Holder all costs and expenses, including actual attorneys' fees, paid or incurred by Holder in connection with the collection or enforcement of the Note or any instrument securing payment of this Note, including defending the priority of such instrument or as a result of foreclosure against, or conducting a trustee sale thereunder. (b) In the event any party institutes or should the parties otherwise become a party to any action or proceeding in connection with the enforcement or interpretation or collection of this Note or any instrument securing payment of this Note, or for damages by reason of any alleged breach of this Note or any provision hereof or any alleged breach of any instrument securing payment of this Note or any provision thereof, or for a declaration of rights in connection with this Note or any instrument securing payment of this Note, or for any other relief, including 15 equitable relief, in connection with this Note or any instrument securing payment of this Note, the prevailing party in any such action or proceeding shall be entitled to receive from the non-prevailing party all costs and expenses including, without limitation, actual attorneys' and other fees incurred by the prevailing party in connection with such action or proceeding. 9. Notice. ------ Any notice to Maker provided for in this Note shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, addressed to Maker at the address set forth below where this Note is executed, or to such other address as Maker may designate by written notice to Holder. Any notice to Holder shall be given by personal delivery or by express mail, Federal Express, DHL or similar airborne/overnight delivery service, or by mailing such notice by first class or certified mail, return receipt requested, to Holder at the address set forth below where this Note is executed, or at such other address as may have been designated by written notice to Maker. Mailed notices shall be deemed delivered and received three (3) days after deposit in accordance with this provision in the United States mail. 10. Usury Compliance. ---------------- All agreements between Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the consideration given with respect to this Note, the acceleration of maturity of the unpaid Principal Amount and interest thereon, or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance, or detention of the indebtedness which is the subject of this Note exceed the highest lawful rate permissible under the applicable usury laws. If, under any circumstances whatsoever, fulfillment of any provision of this Note or any agreement securing payment of this Note or executed in connection with this Note after timely performance of such provision is due, shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction deems applicable, then the obligations to be fulfilled shall be reduced to the limit of such validity, and if, under any circumstances whatsoever, Holder shall ever receive as interest an amount that exceeds the highest lawful rate, the amount that would be excessive interest shall be applied to the reduction of the unpaid Principal Amount and/or late charges under this Note and not to the payment of interest, or, if such excessive interest exceeds the unpaid balance of the Principal Amount and/or late charges under this Note, such excess shall be refunded to Maker. 11. General. ------- (a) No delay or omission on the part of Holder in exercising any rights under this Note or under any instrument given to secure this Note, on default by Maker, including, without limitation, Holder's right to accelerate, nor reinstatement of this Note by Holder after such exercise, shall operate as a waiver of Maker's right to exercise such right or of any other right under 16 this Note or the instruments given to secure this Note, for the same default or any other default. (b) Except for the provision of written notice hereinabove set forth, Maker hereby waives presentment for payment, demand, protest, notice of protest and notice of dishonor, and all other notices to which Maker might otherwise be entitled, and further waives the right to require Holder to proceed against any security for this Note before proceeding against Maker, and further waives all defenses based on release of security or extension of time or other indulgence given in respect to payment of this Note. (c) Holder shall have the right to sell, assign, or otherwise transfer, either in part or in its entirety, this Note, and any instrument evidencing or securing the indebtedness of this Note (provided such instrument is transferred as security for the portion of the Note which is conveyed), without the consent of Maker. The assignment of this Note by Holder shall be ineffective until actual notice of same is received by Maker. Maker shall have no right to delegate its duties under this Note or any instrument securing this Note without the written consent of Holder, which consent Holder shall not unreasonably withhold, provided, however, no delegation of such duties or obligations shall release Maker from any duty or obligation under this Note or instrument securing payment of this Note. (d) Subject to the foregoing Subparagraph (c), this Note and all of the covenants, promises, and agreements contained in it shall be binding on and inure to the benefit of the respective legal and personal representatives, devises, heirs, successors, and assigns of Maker and Holder. (e) This writing is intended by the parties to be an integrated and final expression of this Note and also is intended to be a complete and exclusive statement of the terms of that agreement. No course of prior dealing between the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Note except as specifically provided herein. (f) If any provision of this Note, or the application of it to any party or circumstance, is held to be invalid, the remainder of this Note, and the application of such provision to other parties or circumstances, shall not be affected thereby, the provisions of this Note being severable in any such instance. (g) This Note shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of California applicable to contracts entered into in the State of California, by residents of the State of California, and intended to be performed entirely within the State of California. Any action to enforce payment of this Note shall be filed and heard solely in the Municipal or Superior Court of Los Angeles County, California. 17 (h) Time is of the essence for each and every obligation under this Note. MAKER: Exhibit Only--Do Not Sign ------------------------- William C. Huddleston MAKER'S ADDRESS: Mr. William C. Huddleston c/o Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 HOLDER'S ADDRESS: Staar Surgical Company 1911 Walker Avenue Monrovia, CA 91016 DO NOT DESTROY THIS NOTE; WHEN PAID, THIS NOTE MUST BE SURRENDERED TO MAKER FOR CANCELLATION 18 EXHIBIT "2" ----------- PLEDGED STOCK Corporation Name Certificate No. Number of Shares - ---------------- --------------- ---------------- 1. ------------ ----- -------- 2. ------------ ----- -------- 3. ------------ ----- -------- 19 EXHIBIT "3" ----------- ASSIGNMENT OF CORPORATE SHARES (Without Certificate) FOR VALUE RECEIVED, the undersigned hereby assigns to Pollet & Associates, a California corporation, Pledgeholder, pursuant to that certain Stock Pledge/Security Agreement,____________________________ shares of common stock of Staar Surgical Company, a Delaware corporation, represented by certificate number(s)_____________________, standing in the undersigned's name on the books of said corporation, and do hereby instruct and appoint the custodian of that corporation's stock books to so transfer the said stock on the books of said corporation. Dated: February 28, 1991 EXHIBIT ONLY - DO NOT SIGN -------------------------- William C. Huddleston SIGNATURE GUARANTEE: - ------------------- 20 EX-10.12 7 AMENDED AND RESTATED SOFT IOL LICENSE AGREEMENT EXHIBIT 10.12 AMENDED AND RESTATED -------------------- SOFT IOL LICENSE AGREEMENT -------------------------- THIS AGREEMENT ("Agreement"), originally made and entered into as of the 14th day of March, 1990, by and among STAAR Surgical Company, a Delaware corporation ("STAAR"), Softlensco, Inc., a Delaware corporation ("Softlenscol"), and The Cooper Companies, Inc., a Delaware corporation ("Cooper"), and assigned by Cooper to Iolab Corporation, a California corporation ("Iolab"), is hereby amended and restated as of the 31st day of January, 1992, by and among STAAR, Softlensco and Iolab. W I T N E S S E T H: Whereas, STAAR is the sole owner of the entire right, title and ------- interest in and to the patents, trade secrets, and other proprietary technical know-how used in connection with the manufacture, insertion and application of soft intraocular lens products; Whereas, STAAR has previously granted to Cooper the right to ------- manufacture and sell certain intraocular lens products pursuant to this Agreement; Whereas, STAAR has previously granted to Allergan Medical Optics, a ------- California corporation and a subsidiary of Allergan, Inc., a Delaware corporation ("AFO"), a coexclusive license, except as to STAAR and existing licensees which includes Cooper, to make, have made, use and sell certain products and to practice inventions covered by the Licensed Patents (as defined below) (the "AMO License"); Whereas, the validity of the AMO License is in question; ------- Whereas, concurrently herewith STAAR, Cooper and Iolab have ------- consummated the transactions contemplated by the Stock Purchase and Assignment of License Agreement, dated as of January 31, 1992 (the "Stock Purchase and Assignment of License Agreement"), among STAAR, Cooper, Iolab and TCC Subsidiary Number 11, Inc., pursuant to which, among other things, Cooper has assigned all of its rights and interests under this Agreement to Iolab; and Whereas, STAAR and Iolab wish to amend this Agreement to provide to ------- Iolab a nonexclusive world-wide royalty-bearing license to use the Licensed Patents to manufacture, distribute, market and sell the Licensed Products (as defined below) upon the terms and subject to the conditions contained herein. NOW THEREFORE, in consideration of the premises and mutual covenants set forth in this Agreement, the parties agree as follows: 1 1. DEFINITIONS. ------------ For the purpose of this Agreement, and solely for such purpose, the terms set forth hereinafter shall be defined as follows: 1.1 "Affiliate" of, or any entity "Affiliated" with, a specified entity, shall mean an entity that directly or indirectly controls, is controlled by, or is under common control with, the entity specified. 1.2 "Calendar Quarter" shall mean the usual and customary Iolab calendar quarter, used for internal accounting procedures, of approximately three (3) months, in which each of the first two (2) months consist of four (4) weeks and the third month consists of five (5) weeks. 1.3 "Effective Date" shall mean the date first above written. 1.4 "Licensed Products" shall mean any intraocular lens products, and devices used to insert and/or apply the intraocular lens products, made, used or sold for use in a manner which is covered by a Valid Patent Claim of the Licensed Patents. 1.5 "Licensed Patents" shall mean the patents and patent applications listed on "Exhibit A" and any patents maturing therefrom, together with all divisions, continuations, continuations-in-part, substitutions, reissues, extensions or foreign counterparts thereof. 1.6 "Person" shall mean an individual, corporation, partnership or other entity. 1.7 "Net Sales" or "Net Unit Sales" or "Net Selling Price" shall mean the actual selling price of Licensed Products sold by Iolab to others as per the invoices covering Iolab's sales, less bona fide trade and cash discounts, allowance for returns, give-aways, promotions or replacements or other returns, and less sales and other taxes and governmental charges applicable to sales; provided, that the Licensed Products sold between Iolab and its Affiliates, or between Iolab's Affiliates, shall not be regarded as sold for computation of Net Sales receipts until sold by Iolab or its Affiliate to a third party other than an Affiliate, in which case the computation of Net Sales will be made based on the selling price to such third party. 1.8 "Valid Patent Claim" shall mean a bona fide, unexpired claim in the Licensed Patents which has not been held invalid or unenforceable by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been admitted to be invalid by the owner through reissue or disclaimer. If there should be two or more such decisions conflicting with respect to the validity of the same claim the decision of the higher or highest tribunal shall thereafter control, however, should the tribunals be of equal dignity, the decision or decisions holding the claim invalid shall prevail. 2. LICENSE GRANT. -------------- 2.1 Grant. STAAR hereby grants to Iolab upon the terms and subject ----- to the conditions herein specified, a world-wide, nonexclusive, nontransferable, royalty-bearing license to use the Licensed Patents to manufacture, have manufactured, sell, distribute and market the Licensed Products and to practice the inventions covered by the Licensed Patents. Iolab acknowledges that its rights granted under this Section 2.1 in Japan are subject to the prior rights granted by STAAR to Canon-STAAR Co., Inc. ("Canon-STAAR") in that certain Technical Assistance and License Agreement dated September 6, 1988 (the "Canon- STAAR Agreement"). 2.2 Marketing Obligations. STAAR acknowledges that Iolab has no --------------------- affirmative obligation to sell Licensed Products, and therefore shall not be obligated to use its best efforts in marketing Licensed Products. All business decisions, including without limitation the design, manufacture, sale, price and promotion of Licensed Products shall be within the sole discretion of Iolab. 2 2.3 Limitation. STAAR and Iolab covenant and agree that neither ---------- party shall (i) manufacture for, have manufactured for, or sell Licensed Products to unaffiliated third parties under labels or brand names other than their own respective labels and brand names, or (ii) in any way create a de facto sublicense, unpermitted assignment or private labeling arrangement with an unaffiliated third party; provided, however, that nothing herein shall restrict STAAR from manufacturing Licensed Products for Chiron Ophthalmics, Inc. or Canon-STAAR under their respective labels or brand names for sale or use by such parties or from manufacturing Licensed Products for any licensees of STAAR solely for investigational use; and provided further, that nothing herein shall restrict Iolab from manufacturing Licensed Products for STAAR or any of STAAR's licensees. 3. ROYALTY. -------- 3.1 Percentage. Iolab shall pay STAAR a royalty of six percent (6%) ---------- of Net Sales payable quarterly for all sales of Licensed Products; provided, -------- that unless and until AMO agrees, or a court of competent jurisdiction determines in a final non-appealable judgment, either that the AMO License is no longer valid and enforceable or that AMO does not have a license which is exclusive or co-exclusive under the AMO License to make, have - made, use and sell the Licensed Products and to practice inventions covered by the Licensed Patents, Iolab shall only be required to pay one half the amount of such royalty (three percent (3%) of Net Sales), payable quarterly, and the remaining half of such royalty shall be waived by STAAR and shall not accrue. Notwithstanding the above, no royalties shall accrue for the sale of Licensed Products unless and until the total amount of earned royalties exceeds the Prepaid Royalty (as defined in and adjusted pursuant to the Stock Purchase and Assignment of License Agreement). Further, and in any event, such Prepaid Royalty is considered by STAAR as complete satisfaction of any duty, whether express or implied, imposed upon Iolab to commercially exploit its rights under this Agreement. 3.2 Composite Sales. In the event that a Licensed Product is sold as --------------- part of a composite unit and if, as such part, the Licensed Product does not have a separate invoiced selling price, then for the purposes of computing royalties, the following guidelines shall apply: (1) Net Selling Price of such Licensed Product shall be deemed to be equal to the product of (x) a fraction, the numerator of which is the established current net selling price of such composite unit and the denominator of which is the sum of the established current net selling prices of each of the components of the composite unit sold as a separate unit, times (y) the established current net selling price of the Licensed Product; provided, however, that the product of this fraction shall not be less than 90% of the previous three (3) month rolling average Net Selling Price of the Licensed Product; or (2) If the computation set forth in (1) cannot be made for any reason, then the Net Selling Price of the Licensed Product shall be the established current Net Selling Price for such Licensed Product when sold and invoiced as a separate unit. 3.3 Most Favored Nation. In the event STAAR shall grant to any third ------------------- party any license or other right under any of the Licensed Patents for any period of time, and such license or other right includes a royalty based on sales of Licensed Products, STAAR shall, within thirty (30) days of the granting of such license or other right, provide written notice of such grant to Iolab, and Iolab shall have the option to obtain the same royalty rate granted such third party thereunder. 3.4 Clinical Testing. No royalties shall accrue for the sale of ---------------- Licensed Products in conjunction with clinical tests or trials conducted in accordance with the guidelines of the U.S. Food and Drug Administration and any other appropriate governmental agency. 3.5 Currency. Earned royalties based on sales in any foreign -------- countries shall be payable to STAAR in the United States in United States dollars. The rate of exchange for such payments shall be the midpoint between the buying and selling rate for United States Dollars as quoted by the Federal Reserve Statistical Release, at the close of business on the day immediately preceding the day of payment. 3 4. TERM. ----- This Agreement shall be effective on the Effective Date and shall remain in effect until the expiration of the last Licensed Patent (the "Term"). 5. TERMINATION AND EFFECT OF TERMINATION. -------------------------------------- 5.1 Termination. This Agreement may be terminated by one party ----------- giving notice to the other party of its intent to terminate, while stating with specificity the grounds therefor, in the event that the other party fails to perform or otherwise breaches any material obligations hereunder. The party so notified shall have sixty (60) days after receipt of the notice to cure the breach or seek legal redress. In no event shall such notice of intention to terminate be deemed to waive any right to damages or any other remedy which the party giving the notice may have as a consequence of such failure of such breach. 5.2 Effect of Termination. In the event that this Agreement is --------------------- finally terminated prior to the expiration of its Term pursuant to this Section 5 (i.e., by operation of the present terms or legal decree): A. Iolab shall have the right to dispose of all the Licensed Products coming under the terms of this Agreement, to utilize all inventory then on hand to produce such Licensed Products, and to complete all orders for Licensed Products then on hand. Royalties shall be paid with respect to such Licensed Products as though this Agreement had not been terminated. B. Both parties hereto shall be released from all obligations and duties imposed or assumed hereunder except as expressly provided to the contrary in this Agreement and except as to the provisions of Section 7 below. 6. RECORDKEEPING AND REPORTS. -------------------------- 6.1 Reports. Within sixty (60) days after each Calendar Quarter in ------- respect of which payments are due under Section 3 hereof, Iolab shall prepare and send to STAAR a report setting forth Net Sales of the Licensed Products by Iolab and its Affiliates during such Calendar Quarter, which report shall contain a computation of the payments due hereunder. 6.2 Records. Iolab shall keep accurate records in respect of all ------- sales of the Licensed Products by Iolab and its Affiliates and shall maintain such records for a period of not less than two (2) years from the date of its report to STAAR under Section 6.1 hereof. STAAR shall have the right, at its sole cost and expense, not more than once each year, to have Iolab's records reviewed in respect of sales of the Licensed Products at times which are reasonably convenient to Iolab, using a certified public accountant. Any reports rendered by Iolab to STAAR prior to the date of such review as to which STAAR raises no reasonable written objection within sixty (60) days after the commencement of such review shall be deemed conclusive and binding, provided Iolab has not unreasonably impeded such review. If the review determines that the royalties actually due hereunder exceeded 10% or more than the amount of royalties reported by Iolab for such Calendar Quarter pursuant to Section 6.1 hereof, Iolab shall bear the costs and expense of such review and promptly pay all amounts due plus interest at the legal maximum rate. 6.3 Final Report. At the termination of this Agreement, Iolab shall ------------ render a final report to STAAR within sixty (60) days after the end of the Calendar Quarter in which such termination occurs and payments shall be made to STAAR for the portion of the year ending at the date of termination. 4 7. ENFORCEMENT, WARRANTY AND INDEMNIFICATION. ------------------------------------------ 7.1 STAAR's Warranties and Representations. --------------------------------------- STAAR represents and warrants that: A. it has the sufficient right, title and interest in and to the Licensed Patents to enter into this Agreement; B. to the best of STAAR's knowledge and belief, the Licensed Products do not infringe upon any patent, trademark or copyright of any third party; C. to the best of STAAR's knowledge and belief and except for the possible rights which may be alleged by AMO under the AMO License, there are no additional rights needed from STAAR or any third party for Iolab to manufacture and sell the Licensed Products. 7.2 Indemnification By STAAR. STAAR agrees to indemnify, hold ------------------------ harmless, and defend Iolab from and against any and all damages, costs, and expenses, including reasonable attorneys' fees, incurred in connection with a claim which, if true, would constitute a breach of the foregoing warranties (hereinafter "Infringement Claims"); provided STAAR is notified promptly in writing of an Infringement Claim and has sole control over its defense or settlement, and Iolab provides reasonable assistance (at STAAR's expense and reasonable request) in the defense of the same. A. Following notice of an Infringement Claim, STAAR shall at its option and expense procure for Iolab the right to continue to (i) use the alleged infringing Licensed Products, (ii) replace or modify the Licensed Products to make it not infringing, or (iii) reimburse Iolab for so much of the consideration paid hereunder as is reasonable in light of the amount and duration of impairment of Iolab's use of the Licensed Products. B. STAAR shall have no liability for any Infringement Claim based on Iolab's (i) use or distribution of products utilizing the Licensed Patent(s) after STAAR's written reasonable notice that Iolab should cease such use or distribution due to an Infringement Claim (except that this clause shall not apply to Iolab's use or distribution of products incorporating the Licensed Patent(s) after receipt of such notice to the extent such use or distribution is required for fulfillment of obligations to third parties entered into on or before the date such notice is received), or (ii) Infringement Claims based solely upon Iolab's or its Affiliates' modification or enhancement of the Licensed Products. For all Infringement Claims arising solely under this Section 7B, Iolab agrees to indemnify and defend STAAR from and against all damages, costs and expenses, including reasonable attorneys' fees, provided that such indemnity obligation shall not supersede, replace, limit or relieve any other obligations STAAR may have with respect to said Infringement Claim. 7.3 Third Party Infringement. The parties acknowledge that it is of ------------------------ the utmost importance to STAAR and Iolab to protect the Licensed Patents against infringement. Each party shall promptly notify the other party in writing of any infringement by third parties relating to the Licensed Patents. STAAR shall initiate and pursue legal proceedings and other actions to protect the Licensed Patents, provided that STAAR shall not be obligated to initiate separate -------- litigation against more than one infringer at any one time. Should STAAR refuse to take legal action, Iolab shall have the right, but not the obligation to initiate and pursue legal proceedings to protect the Licensed Patents. Each party shall cooperate, at the other party's request and expense, in any actions taken by such requesting party including, without limitation, being joined as an accessory co-plaintiff in any legal proceeding brought by such requesting party. In any such proceeding, any recoveries or proceeds of a settlement shall first be applied to associated legal costs and expenses and the balance shall be divided between STAAR and Iolab in proportion to their respective provable damages. 7.4 Limitation. STAAR assumes no responsibility for the manufacture ---------- or end-use of Licensed Products manufactured by, or for, or sold by Iolab or any of its Affiliates. All representations or warranties made in connection with the sale of Licensed Products by Iolab and its Affiliates as manufacturer and/or seller shall in no way 5 directly or impliedly refer to or obligate STAAR. Iolab shall indemnify, save and hold harmless STAAR, its successors and assigns from any and all costs, expenses, damages and awards (including reasonable attorneys' fees) of any kind relating to any actual or threatened claim made against or any judgment, award or verdict of any kind against STAAR resulting from or arising from a representation or warranty, whether express or implied, of Iolab or any of its Affiliates. 7.5 Indemnification by Iolab. Iolab agrees to indemnify, hold ------------------------ harmless and defend STAAR from and against any and all damages, costs and expenses, including reasonable attorneys' fees, incurred in connection with a claim made by AMO on any royalties paid by Iolab to STAAR hereunder. 8. DUTY OF CONFIDENTIALITY. ------------------------ 8.1 Confidentiality. Each party ("Receiving Party") shall maintain --------------- in confidence all information disclosed by the other party ("Disclosing Party") which such party knows or has reason to know comprises trade secrets and other proprietary information of the other, and shall not use such trade secrets or proprietary information except as permitted by this Agreement or disclose the same to anyone other than those of its employees, consultants and agents as are necessary in connection with such party's permissible activities as contemplated in this Agreement. To the extent permitted by applicable law, each party shall have obtained written agreement prior to disclosure to such employees, consultants and agents, to hold in confidence and not make use of such trade secrets or proprietary information for any purpose other than those permitted by this Agreement. Each party shall notify the other promptly upon discovery of any unauthorized use or disclosure of the other's trade secrets or proprietary information. The obligation of confidentiality contained in this Section 8 shall not apply to the extent that (i) the Receiving Party is required to disclose information by applicable law, regulation or order of a governmental agency or a court of competent jurisdiction; (ii) the Receiving Party can demonstrate that the disclosed information was at the time of disclosure already in the public domain other than as a result of actions or failure to act by the receiving party in violation hereof; (iii) the disclosed information was rightfully known by the Receiving Party (as shown by its written records) prior to the date of disclosure to the Receiving Party; or (iv) the disclosed information was received by the Receiving Party on an unrestricted basis from a source which is neither STAAR or Iolab and which is not under a duty of confidentiality to the other party. The parties' obligations under this Section 8 shall survive for a period of two (2) years after termination of this Agreement. 9. WAIVER. ------- STAAR hereby waives any claim which STAAR might have for any infringement by Iolab of any of the Licensed Patents. 10. DISCLOSURE. ----------- Iolab and STAAR agree to keep the existence and the terms of this Agreement confidential. This Agreement or any copies of this Agreement may not be given to any third parties, except to legal, accounting, financial or other similar advisors or as may be expressly agreed to by Iolab and STAAR in writing. 11. FURTHER ASSURANCES. ------------------- Iolab and STAAR agree that at any time and from time to time after the execution of this Agreement, whether before or after Closing, either party will, upon the request of the other party, execute and deliver such further documents and do such other things, as such party may reasonably request in order to accomplish the purpose and terms hereof. 6 12. MISCELLANEOUS. -------------- 12.1 Entire Agreement. This Agreement together with the Stock ---------------- Purchase and Assignment of License Agreement constitute the entire agreement and supersedes all prior agreements and understandings, both written or oral, between the parties hereto with respect to the subject matter hereof. 12.2 Successor and Assigns. This Agreement shall be binding upon the --------------------- parties hereto and their respective successors and assigns. The rights and obligations of each party under this Agreement shall not be assignable or otherwise transferable without the prior written consent of the other party, except that any party hereto may (1) assign any or all of its rights or obligations under this Agreement to any of its Affiliates, which assignment shall not release such assigning party from any of its obligations under this Agreement, and (2) assign all of any party's rights and obligations under this Agreement to any other person or entity in connection with the transfer or sale of all or a portion of its business to any person or entity or the merger or consolidation of such party with or into any other entity, so long as such transferee, purchaser or surviving entity shall assume such obligations of such assigning party. 12.3 Notice. All notices hereunder shall be in writing and shall be ------ deemed to have been duly given if delivered personally, one day after delivery to a nationally recognized overnight delivery service, charges prepaid, three days after sent by registered or certified mail, postage prepaid, or when receipt is confirmed if by telex, facsimile or other telegraphic means: In the case of STAAR: STAAR Surgical Co. 1911 Walker Avenue Monrovia, California 91016 Attn: John R. Wolf, President with a copy to: Paul, Hastings, Janofsky & Walker 555 South Flower Street Los Angeles, California 90071 Attn: John W. Avery, Esq. In the case of Iolab: Iolab Corporation 500 Iolab Drive Claremont, California 91711-4881 Attn: Vice President of Sales and Marketing with a copy to: Chief Patent Counsel Johnson & Johnson One Johnson & Johnson Plaza New Brunswick, NJ 08903 Such addresses may be altered by written notice given in accordance with this section. 7 12.4 Waiver. Any terms of this Agreement may be amended, modified or ------ waived only with the prior written consent of the party against whom enforcement of such amendment, modification or waiver is sought. 12.5 Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of California notwithstanding the application of its choice of laws principles. 12.6 Headings. The headings herein are for convenience only and shall -------- not be deemed to limit or otherwise affect the construction hereof. 12.7 Severability. If any provision of this Agreement shall be held ------------ invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of all other provisions of this Agreement shall not in any way be affected or impaired. 12.8 Relationship of Parties. The relationship between STAAR and ----------------------- Iolab is that of independent contractors. Neither party, nor its agents and employees, shall under any circumstances be deemed an agent or representative of the other and neither shall have authority to act for and/or bind the other in any way, or represent that it is in any way responsible for acts of the other. This Agreement does not establish a joint venture, agency or partnership between the parties. 12.9 Time. Time is of the essence of this Agreement with respect to ---- each and every provision of this Agreement in which time is a factor. 12.10 Further Assurances. Each of the parties hereto agrees to execute ------------------ and deliver such other documents and take such other action as may be necessary to more effectively consummate the purposes and subject matter of this Agreement. 12.11 Arbitration. Any controversy or claim arising out of or ----------- relating to this Agreement, or the breach thereof, including any dispute relating to patent validity or infringement arising under this Agreement, shall be settled by arbitration. Such arbitration shall be conducted in Los Angeles, California, in accordance with the rules then pertaining to the American Arbitration Association with a panel of three (3) arbitrators. The law of the State of California shall apply to the arbitration proceedings. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 12.12 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one of such counterpart. 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. STAAR SURGICAL COMPANY a Delaware corporation By: /s/ John R. Wolf _____________________________ Its: President SOFTLENSCO, INC. a Delaware corporation By: /s/ John R. Wolf ______________________________ Its: President IOLAB CORPORATION a California corporation By: /s/ Robert V. Toni ______________________________ Its: V.P. Sales & Marketing _______________________ 9 EXHIBIT A Licensed Patents Patent No. 4,573,998 Methods for Implantation of Deformable Intraocular Lenses Patent No. 4,715,373 Devices for implantation of Deformable Intraocular Lens Structures Patent No. 4,702,244 Surgical Device for Implantation Of a Deformable Intraocular Lens 10 EX-10.20 8 PATENT LICENSE AGREEMENT DATED 1/1/96 EXHIBIT 10.20 PATENT LICENSE AGREEMENT The Eye Microsurgery Entersectoral Research and Technology Complex, Moscow, Russia, represented by General Director Mr. Fedorov S. N., from here and referred to as the "Licenser" and STAAR Surgical AG, a Swise corporation, Hidau, Switzerland represented by President Mr. Vladimir Feingold and Director Mr. John R. Wolf, from here and referred to as the "Licensiate", taking into account that the Licenser possesses the "Technology for Producing Collagen-Based Cross-Linked Drain", and the Licensiate wants to acquired the license on this technology. The Licenser and Licensiate agree as follow understandings, which shall become in force since 1. 1. 96. ARTICLE 1. DEFINITIONS: For the purpose of this Agreement the following expressions have the meanings indicated below: 1.1 "Product" is the product described in Appendix 1. 1.2 "Patent" is the patent whose detailed description is given in Appendix 2 and also future inventions are given in Appendix 3. 1.3 "Technical knowledge" stands for technical information, know-how, manufacturing technology, technical data, material specifications, and other information used by the Licenser during the manufacture of the product (or which is necessary and sufficient for the Licensiate to make the Product according to the standard and quality of the product made by the Licenser), (including any improvements obtained during the validity period of this Agreement). 1.4 "Territory" covers all countries listed in Appendix 5. 1.5 "Exclusive territory" covers the countries listed - 2 - in part 1 of Appendix 4. 1.6 "Non-exclusive territory" covers the countries listed in part 2 of Appendix 4. 1.7 "Year" means any period of time of 12 months starting from the date of executing the Agreement. ARTICLE 2. The Licenser is an owner of Patents listed in Appendix 2, and has the right of disposal of the said Patents. No prior transfers occured. No share or total property covered by the Patents have been transfered, yielded or alienated to any person exept for the Licensiate according to this Agreement. The Licenser has not given any license under listed in Appendix 2 patents yet. The Licenser's rights are free from the right of detension, pledge, backing interest or other proprietary burdans. The Licenser disclosed to any third legal or phisical person no confidental information, production secrets or know-how, relating to the technical aspects of the Patents, except claim 3 in Appendix 1, on which Licenser conduct the joint measures only with Licensiate. Furthermore. the Licenser has production secrets and experience (know-how) concerning the subject matter of this license. ARTICLE 3. Transferense of rights on the Patents and patent applications. For valuable consideration, the receipt and sufficient of which are confirmed by the Licensiate, the Licenser assigns to the Licensiate its entire and exclusive rights, title, interest, and material right relating to the "Patent" described in Appendix 2, and also the future Patents described in Appendix 3 to this Agreement. The Licensiate shall acquire the entire and exclusive right belonging to the Licenser to the Licensiates benefit for the whole term of validity of the Patent. - 3 - ARTICLE 4. I. Technical field of application. The license for the "Technology for Producing Collagen-Based Cross-Linked Drains" relates to time entire sphere of application of the inventions mentioned in the patents and listed in the Appendix 2 and 3, as well as everything that definitively stems from these inventions. The Parties shall infirm each other openly and without any reservations on the possible fields of application of the inventions, that were unknown to the Parties at the day of conclusion of the Agreement, and, as proved later, can be carried by the Parties into effect and/or can be wanted for realization. II. License type. The Patent deals with an exclusive license: (a) In so doing, however, the Licenser keeps the right of manufacturing the products covered by the license, to use them or sell on a non-exclusive territory specified in part 2 of Appendix 4. (b) Furthermore, the Licenser reserves a right of realizing the product by the license in its branches and joint ventures, existing or to be created, on the exclusive specified in part 1 of Appendix 4, without right of salling to any another third person on the exclusive territory. This thesis in force only for cases when operation in medical branches and joint ventures is realized surgeons, these surgeons works in Eye Microsurgery Intersectoral Research and Technology Complex and officialy sents on the contract with the Licenser. (c) This license is intended for manufacture, use and sale. ARTICLE 5. - 4 - Territory covered by the Agreement. The license was granted for use on the exclusive territiry (see Appendix 4). The Licensiate has the right of production on the other countries including those where the Licenser has no protective rights. The Licenser shall prevent export to the countries which belongs to non-exculsive territory. If, in spite of this, the export shall be effected, the Licensiate shall have the right of cancelling the Agreement by means of a simple written message. The Licenser shall pay conventional penalty equal to 20-fold price of the export delivery, which is inadmissible by virtue of the above statements. In the equivalent manner the Licenser shall put on its customers an obligation to avoid export of the subject matter of this license, because it is inadmissible according to the above statemnts, and to pay to it a conventional penalty in an amount of 20-fold price of the exported goods in every case of infringment. This sum the Licenser shall transfer to Licensiate. Article 6. License registration. Each Party shall have the right of registering the license in the Patent Office provided that such registration of the country or countries, with respect to which the license is given. The Licenser shall transfer to the licensiate the authority and approval swich is necessary for this purpose. The registration fee shall be covered by the licensiate. Article 7. Drawings and descriptive documents. - 5 - The Licenser shall give to the Licensiate all existing drawing, plans, quality inspection system, and other technical documents required for the manufacture under license. These documents may be dublicated. The Licensiate shall treat these drawings and documents as secret materials during the entire term of action of this Agreement and after it will be expired. Article 8. Mastering. The Licenser is released from responsibility for the risk associated with the industrial-scale mastering of the manufacture under license for which the Licensiate is responsible. The Licenser is released from responsibility for the risk of the commercial realization of the invention. The realization risk is taken solely by the Licensiate. Article 9. I. Quality of products manufactured under license. The Licesiate shall manufacture the products under license whose quality is the same as those manufactured by Licenser. The licenser provides all necessary consultations and information accumulated from its own experience. II. Consequences of poor quality of products manufactured under license. The Licenser has the right of quality monitoring so as to check of the products manufactured under license correspond to the quality established by the Agreement. III. Sublicenses. 1. The Licensiate has the right to offer sublicenses. - 6 - 2. In case of selling of sublicense the earning is distributed between the Licenser and Licensiate of this Agreement in equal parts. Article 10. Improvements and amendments of the subject of license. The Parties concluding this Agreement agree that they consider as secret all technical and technological information relating to the Production under license and made available to the Licensiate. The information obtained from the Licenser is kept in secret during the entire validity period of the Agreement and after the validity period of this Agreement is expired. The Licensiate has the right to use free of charge the entire technical information after the validity period of this Agreement is expired. Article 11. Improvements and amendments of the subject of license. The Licenser is obliged to inform the Licensiate about all modifications made and improvements, that shall be made during the validity period of this Agreement and concerning the subject matter of the license. If the amendments and improvements shall lead to a patentable invention, it must be transferred to the Licensiate free of charge with simultaneous prolongation of the period validity under definite conditions. Article 12. Technical assistance. The Licenser submits to the Licensiate scrupulously and unconditionally all technical assistance and necessary advisement. - 7 - The Licenser, at the expense of the Licensiate, shall sent specialists under the following conditions: - the skill of the sent personnel must be sufficient for solving the technical problems that may arise with respect to the Agreement; - the period of working shall be agreed later; - the Licensiate shall cover the expenses associated with the accommodation, transportation and insurance of the expartiate personnel. The Licensiate shall pay the personnel wages in US dollars in an amount twice he sum they have in their own country. Article 13. Amendments and improvements to be made by Licensiate. The amendments and improvements that shall be made by the Licensiate with respect to the subject of the license may be made without special permission of the Licenser. The Licensiate has the right to perform the amendments and improvements without Licenser's permission provided that the Licensiate alone shall be responsible for these amendments and improvements. Article 14. Payment with conclusion of the Agreement. 14.1 The Licensiate shall pay to the Licenser on the corresponding account of Russian "Vneshtorgbank" No 608-205-524 in the National Republican Bank of New-York, USA, with an order to credit for the above sum account No 67087105/001 the Eye Microsurgery Intersectoral Research and Technology Complex in the "Vneshtorgbank" Moscow the cum of the three hundred fifty thousand US dollars (350.000 USD) as a single payment within 10 days when this Agreement come into force and before transference of documents and draughts. Documentation shall be transfered to the Licensiate when said sum comes to the specified bank. - 8 - 14.2 The sum of two hundred fifty thousand US dollars (250.000 USD) shall be payed by the Licensiate on the before specified account within 10 dais after receipt if the signed by the Licenser acts about full concession of the patent rights. 14.3 The sum of one hundred fifty thousand US dollars (150.000 USD) shall be payed by the Licensiate on the before specified account within 10 days after receipt of the official decision of US Patent Office about registration of full concession on the Licensiate name. Article 15. Royalty. The Licensiate pays to the Licenser royalty depending on the volume of year sales and as compensation of license price. Royalty pays as a percentages of sums paid by its buyers for the products made under conditions of free plant without packing, as well as the sums obtained from learning the technology used in opthalmosurgery with deduction of trade taxes. Then the volume of sales: to 25.000 pieces.................5,0% from 25.000 to 50.000 pieces.................4,5% from 50.000 to 75.000 pieces.................4,0% from 75.000 to 100,000 pieces................3,5% more than 100,000 pieces................3,0% Article 16. Appearance of the right for license payment. The right for license payment arises as soon as the Licensiate gets payment from the buyer. Article 17. - 9 - Taxes and duties. If direct sales taxes is taken in the Licesiates country, or in the country on non-exclusive territory, they are paid by the Licensiate. Article 18. Accounting and reports. The Licensiate is obligated to keep account in special books, in which it shall put the accurate number of the products manufactured under license according to this Agreement, original numbers applied onto the machines and all other data need for calculation of the license prise. The Licenser has the right to give an order to audit these books and their correspondence with the general accounting of the Licensiate through an auditor by the Licensiate. The Licensiate shall bear the expenses associated with such an audit. Article 19. Calculation on license payments. The calculations on the license payments are performed at the end of each quarter of a calendar year. The Licensiate shall send the complete data on these calculations within a month following the day of their performance and to remit the calculated sum within the same period. If the Licensiate exceeds a time limit for payment, the Licenser may take annual interest of 6% within 60 days each quarter. Article 20. Obligation on using the license. The Licensiate is obliged to use the license. - 10 - Article 21. Affair on patent applications. The Licenser pledges oneself to continue affair in russia and other countries on application, patents on witch are not given by Patient Offices. The Licensiate pledges oneself to give to the Licenser the copies of decision of Patient Offices about full transference of patient rights on inventions, within 10 days since the moment of receipt by the Licensiate. Article 22. Patent support. The Licensiate shall support the Patent that is put as a base of this license Agreement. Article 23. Patent rights protection. If the Patent is infringed by a third party and the Licenser becomes aware such infringement, the Licenser shall promptly notify the Licensiate in writing of such infringement or unfair competition. The Licensiate, in its sole discretion, shall determine if it shall defend the Patent infringement or unfair competition, it shall so notify the Licenser. The Licenser agrees to cooperate and assist in prosecution of any action in the nature of unfair competition or patent infringement prosecuted by the Licensiate. The Licenser shall support the Licensiate, fir of all, if such a support is provided by the property right of the respective country. The Licenser shall give the Licensiate all necessary authority and documents that shall enable the Licensiate to bring a suit and to present witnesses or - 11 - coauthors and also to take an active part infringement proceeding. The party making a decision to suit the third party bears possible expenses in preparation and conduction of legal proceedings. Article 24. Licensiates obligation to defend the parent rights. The Licensiates commit itself that neither its personally nor its authorized person shall dispute the patent rights put in the base of this Agreement except the cases. Article 25. Cancellation of Patent: its effect on the Agreement. If the protective rights setting up the base of this Agreement are cancelled by the claim of a third party, the paid license payments in no case shall be reimbursed, however, if the term of their payment does not yet come,they shall not be taken. Article 26. Agreement validity. The Agreement validity period is equal to that of the patent validity. The Agreement shall come into force from the moment of its signing. Article 27. Force Majeure. Either party is relieved from liability for partial or complete non- performance of their obligations under present - 12 - Agreement is some circumstances that aroused independent of their will. The circumstances caused by events that were independent of the will of the parties of this Agreement so that the fair party could not avoid or eliminate, are considered as cases realising this party from its obligations, if they take place after signing the Agreement and prevent its fulfillment completely of partially. The cases of unsurmountable force are reduced to the following events: war, military actions, revolts, mobilization, road accidents and natural disasters, legal acts of authorities affecting the fulfillment of the obligations, and all other events which are considered as circumstances of unsurmountable force by a competent arbitration court. Article 28. Applicable legislation. This Agreement is applicable to the Swiss Law. Article 29. Legal protection and arbitration. If any dispute or difference shall arise between the parties to this Agreement as to any matter or thing arising in connection with the Agreement then the agrrieved party shall give to the other party a notice in writing setting out in full detailed particulars of the dispute or differences. Upon receipt of the notice the parties shall agree to appoint the International Chamber of Commerce shall appoint a date, time and venue (unless the parties agree to a date, time and venue) for mediation proceedings to be held to discuss in detail the dispute or difference. The parties shall not be legally represented at the mediation proceedings but shall present, in their own manner, with the assistance or witnesses and documentary evidence, the - 13 - details of their respective cases. If, at the conclusion of the mediation proceedings the parties fail to resolve the dispute or difference, either party may give to the other party, within 14 days, a notice stating that the expiration of 30 days it will proceed to have the dispute of differents referred to a court of competent jurisdiction in Switzerland (or another country as the parties agree) and at the expiration of such 30 days may so proceed. Article 30. Miscellaneous. 1. This Agreement covers all agreed provisions and aspects of the License Agreement. It has no additional promises or terms as a condition of execution of the License Agreement, along with other terms except those stated above. All preliminary agreements, promises, negotiations or presentations, which are not included into this License Agreement shall not be valid from the moment of its singing. Any subsequent agreement, which shall lead to a charge or cancellation of this License Agreement, shall be valid solely if it is made in writing and signed by the authorized representatives of both parties. 2. Successors and Assigns. This Agreement and all of its provisions shall be binding and insure to the benefit of the successors and assigns of the parties. If not states specifically in this Agreement, all requested notices, requirements, questions, agreed statements, approvals, or other communications between the partners shall be made in writing and delivered: (A) by a messenger (such a message is delivered personally), (B) by telegraph or air express mail (in doing so the messaged are sent by R-mail), (C) electronic mail, fax or telephone provided that the receipt has a compatible device or confirms the receipt of the message (in this case it is assumed that the - 14 - transmission or reception of the message will be confirmed), or (D) by mailing a registered or valuable letter (in this case it is assumed that the letter shall be delivered at the 14th day after dispatching). The messaged are sent to the following addresses: Licensiate: STAAR Surgical AG Hauptstrasse 104 CH 2560 Hidau Switzerland Attn: President A copy to address: STAAR Surgical Company 1911 Walker Avenue Monrovia, California 91016 Attn: President - Chief Executive Officer Licenser: Eye Microsurgery Intersectoral Research and Technology Complex, Moscow, Russia, 127486, Beskudnikovsky bulvar, 59-a. The above addresses may be changed by notifying the other party about this action, as mentioned above. 3. The right of signing the document. Each party states that it has all necessary authority to sign this License Agreement. All individual signings of this Agreement for the party that is a corporation, company or another legal counsel, or a signature of a proxy or another authorized person, is accompanied by confirmation of the fact that this person has the right of putting his signature under the given document on behalf of a respective organization or its manager. 4. Counterpart Copies. This Agreement may be signed in counterpart or duplicate copies, and any signed counterpart or duplicate copy shall - 15 - be equivalent to a signed original for all purposes. 5. Completeness of the Agreement. This is the entire agreement between the parties covering everything agreed upon or understood between the parties covering everything agreed upon or understood with respect to the subject matter of it. There are no promises, conditions, representations or terms of any kind as conditions or inducements to the execution hereby or in effect between the parties other than as herein set forth. Any prior agreement, promises, negotiations or representations not expressly set forth in this Agreement are of not force or effect. Any agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of this Agreement in whole or in part unless such agreement is in writing and signed by the party against whim enforcement of the change, modification, discharge or abandonment is sought. 6. Preparation of Agreement. It is acknowledged that each party hereto either had separate and independent advice of counsel or the opportunity to avail itself of same. This Agreement was prepared by the parties to it in conjunction with counseling from their respective attorneys, or the opportunity to obtain such counseling. In light of these facts it is acknowledged that no party to this Agreement shall be construed to be solely responsible for the drafting of it, and therefore any ambiguity shall not be construed against any party as the alleged draftsman of this Agreement. 7. Gender and Number. As used in this Agreement, the masculine, feminine, or neuter gender, and the singular or plural number, shall include the others whenever the context so indicated. - 16 - 8. Headings. The titles and headings of the various sections of the Agreement are intended solely for convenience of reference and are not intended solely for convenience and are not intendid to explain, modify, or place any construction on any of the provisions of this Agreement. 9. No Waiver. The failure of a party to insist on the strict performance of any covenant or duty required by this Agreement, or to pursue any remedy under the Agreement, shall not constitute a waiver of the breach or the remedy. 10. Severability. If any part or provision of this Agreement shall be determined to be invalid, illegal or unenforceable,then the remaining part of this Agreement which can be separated from the invalid, illegal or unenforceable provision shall continue in full force and effect, and the invalid, illegal or unenforceable provision shall continue in full force and effect, and the invalid, illegal or unenforceable provision shall be construed as if they had never been incorporated into this Agreement. This Agreement and all of its provisions shall be binding on and inure to the benefit of the successors of the parties. 11. Counterparts and Facsimiles. For the convenience of the parties to this Agreement, this document may be executed by facsimile signatures and in counterpart which shall together constitute the agreement of the parties as one and the same instrument. This License Agreement is conclude din four authentic copies, two of which are in English and in Russian, all copies has an equal juridical force. IN WITNESS WHEREOF, the parties thereto have executed this Assignment Agreement on the day and year set forth opposite their respective signatures below: - 17 - "Licenser": Eye Microsurgery Intersectoral Research and Technology Complex General Director, academician /s/ S.N. Fedorov S.N. Fedorov ------------------- "Licensiate": STAAR Surgical AG President and Director /s/ Vladimir Feingold Vladimir Feingold --------------------- Director /s/ John R. Wolf John R. Wolf ------------------- - 18 - Appendix N 1. Technology of production intraocular lenses from collagen co-polimers Nowadays, intraocular correction is one of the basic medical treatment method of vision body disease. Artificial eye linses are used not only when cataract, but also for removal of refraction anomalies. Artificial eye lenses, which are implantated through small sizes, are most perspective. Several requirements are produced to artificial eye lenses like elasticity, biocompatibility, low specific density and high solidity on rupture. Artificial eye lenses from collagen co-polimers corresponds to these principles. Highest elasticity, hight solidity on rupture are the main quality of these products. It allows to make implantation as tool-making method of injection also. Lenses, which are maked an special technology, passed experimental and hospital tests successfully and inculcated in wide surgical practice as in Eye Microsurgery Intersectoral Research and Technology Complex so in the other Russian and CIS hospitals. - 19 - 1. US patent N 6.286.829 (Russion application N 4745668) "Biocompatible polymer material and a process for producing same", inventors. S.N. Fedorov, S.N. Bagrov, A.V. Osipov, E.A. Linnik, I.A. Maklakova. A.N. Kosmynin, E.V. Larionov, priority 13.10.89, patentee Eye Microsurgery Intersectorial Research and Technology Complex. 2. Russian patent N 2033165 (Russian application N 474568) "Process for producing plastic material from collagen", inventors S.N. Fedorov, S.N. Bagrov, A.V. Osivpov, E.A. Linnik, I.A. Maklakova A.N. Kosmynin, E.V. Larionov, priority 13.10.89, patentee Eye Microsurgery Intersectorial Research and Technology Complex. 3. USSR Inventors Certificate N 1823178 (Russian application N 4881670) "Artificial eye lens and process of its implantation in back eye camera", inventors S.N. Fedorov, V.K. Zuev, B.M. Aznabaev, priority 21.11.80. 4. USA patent N 5258025 (Russian application N 4881670) "correctional intraocular lens", inventors S.N. Fedorov, V.K. Zuev, B.M. Aznabaev, priority 21.11.80, patentee - Eye Microsurgery Intersectoral Research and Technology Complex. 5. German laid-open application (Russian application N 4881670) "Correctional intraocular lens", inventors S.N. Fedorov, B.M. Aznabaev, V.K. Zuev, priority 22.04.93, patentee - Eye Microsurgery Intersectoral Research and Technology Complex. 6. Russian patent N 2033114 (Russian application N EX-10.23 9 BUSINESS LOAN AGREEMENT DATED 2/15/96 EXHIBIT 10.23 BUSINESS LOAN AGREEMENT =============================================================================== Borrower: STAAR SURGICAL COMPANY Lender: First Interstate Bank of California 1911 Walker Avenue San Gabriel Corporate Center Monrovia, CA 91018 1000 E. Garvey Ave. South, Ste. 360 West Covina, CA 91790 =============================================================================== THIS BUSINESS LOAN AGREEMENT between STAAR SURGICAL COMPANY ("Borrower") and First Interstate Bank of California ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of February 15, 1996, and shall continue thereafter until all indebtedness of Borrower to Lender has been performed in full or until February 15, 1997, whichever is later. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means STAAR SURGICAL COMPANY. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security interest in any Collateral for the indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surely, or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by an statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means First Interstate Bank of California, its successors and assigns. Liquid Assets. The words "Liquid Assets" means Borrower's cash on hand plus Borrower's receivables. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time . Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan 02-15-1996 BUSINESS LOAN AGREEMENT Page 2 (Continued) ================================================================================ agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security interest. Security interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting Lender's Security interests; (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel. Borrower's Authorization. Borrower shall have provided in form and substance to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the law of the State of Delaware and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower, do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable. Borrower owns and has good title to all of Borrower's properties free and clear of all Security interest, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The term "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal Laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and approved by Lender in writing, Borrower represents and warrants that (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, or about any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, or about any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purpose only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste. Borrower hereby (a) releases and waives any 02-15-1996 BUSINESS LOAN AGREEMENT Page 3 (Continued) ================================================================================ future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claims, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and not other event has occurred which my materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and approved by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability compiles in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, and (iii) no steps have been taken to terminate any such plan. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 1911 Walker Avenue, Monrovia, CA 91016. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than sixty (60) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios. Working Capital. Maintain Working Capital in excess of $11,000.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the issuer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Other Agreements. Comply with all terms and conditions of all other agreements, whether nor or hereafter existing, between Borrower and any 02-15-1996 BUSINESS LOAN AGREEMENT Page 4 (Continued) ================================================================================ other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Fees and Charges. In addition to all other agreed upon fees and charges, pay the following: Borrower agrees to pay Lender, prior to or contemporaneously with the initial advance of Loan proceeds, a nonrefundable loan fee in the amount of twelve-thousand five-hundred dollars ($12,500.00). Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause to permit to exist, as a result of an unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission of Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending of maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while the Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however, that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares of alter or amended Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or anuity, or (c) incur any obligation as suety or guarnator other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender, or the occurrence of any event or condition which after notice of time would constitute an Event of Default; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there a occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing and Loan; or (d) any Guarantor 02-15-96 BUSINESS LOAN AGREEMENT PAGE 5 (Continued) =============================================================================== seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. ADDITIONAL DEFINITIONS. The following words shall have the following meanings when used in this Agreement. 1) Effective Tangible Net Worth - The words "Effective Tangible Net Worth" mean Borrower's net worth less patents, goodwill, intercompany receivables, and investments in subsidiaries. 2) Quick Ratio - The words "Quick Ratio" mean Borrower's cash plus equivalents plus trade receivables (net) divided by total Current Liabilities. 3) Times Fixed Charge Coverage - The words "Times Fixed Charge Coverage" mean net profit plus depreciation and amortization less non cash income (net non cash expense) plus tax adjusted interest expense plus tax adjusted rent expense plus preferred dividends and withdrawals divided by fixed charges. 4) Current Liabilities - The words "Current Liabilities" mean all Borrower's notes payable plus Borrower's accounts payable plus Borrower's income taxes payable plus Borrower's accruals plus Borrower's current portion of long term debt. ADDITIONAL AFFIRMATIVE CONVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply with the following covenants and ratios: 1) Quick Ratio. Maintain a ratio in excess of 1.20 to 1.00. 2) Times Fixed Charge Coverage. Maintain a ratio in excess of 2.00 to 1.00. 3) Debt to Effective Tangible Net Worth. Maintain a ratio of total liabilities to Effective Tangible Net Worth of less than 0.60 to 1.00. 4) Minimum Effective Tangible Net Worth. Maintain a minimum Effective Tangible Net Worth of not less than $23,000.00. ADDITIONAL AFFIRMATIVE COVENANTS (MEASURED ON AN UNCONSOLIDATED BASIS). Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply with the following covenants and ratios (to be tested on an unconsolidated basis for STAAR Surgical Company (USA): 1) Quick Ratio. Maintain a ratio in excess of 0.95 to 1.00. 2) Minimum Effective Tangible Net Worth. Maintain a minimum Effective Tangible Net Worth of not less than $18,000.00. OUT OF DEBT PERIOD. Borrower agrees with Lender that borrower shall rest the loan with no outstanding principal balances for a minimum of thirty (30) consecutive days during the term of the Loan. PROFITABILITY REQUIREMENT. Borrower and Lender agree that, while this Agreement is in effect, Borrower will maintain annual operating profitability. AGING AND LISTING OF ACCOUNTS RECEIVABLE. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower shall deliver to Lender within sixty (60) days after the end of each quarter, a detailed aging of Borrower's accounts and contracts receivable as of the last day of that quarter, together with an explanation of any adjustments made at the end of that quarter, all in a form acceptable to Lender. INVENTORY CERTIFICATE. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower shall deliver to Lender within sixty (60) days after the end of each quarter, a detailed summary of the inventory of Borrower's as of the last day of that quarter, prepared in form acceptable to Lender. RESTRICTION ON SPLIT BORROWING. Borrowing and Lender agree that, while this Agreement is in effect, Borrower will have no split borrowing to any institution except for leases, purchase money contracts, and existing credit relationships established in support of the Borrower's foreign subsidiaries. RESTRICTION ON GUARANTEES. Borrower and Lender agree that, while this Agreement is in effect, Borrower will not guarantee any obligation of a subsidiary without prior written approval of Lender, Advances and payables to, and investments in, subsidiaries can be made within the parameters of the financial covenants for this facility. DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect payment or 02-15-1996 BUSINESS LOAN AGREEMENT Page 6 (Continued) ================================================================================ performance of the indebtedness is impaired. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement of the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Loans immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, the State of California. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of California. Arbitration. Binding Arbitration. Upon the demand of any part ("Party/Parties"), to a Document (as defined below), whether made before the institution of any judicial proceeding or not more than 60 days after service of a complaint, third party complaint, cross-claim or counterclaim or any answer thereto or any amendment to any of the above, any Dispute (as defined below) shall be resolved by binding arbitration in accordance with the terms of this arbitration program ("Arbitration Program"). A "Dispute" shall include any action, dispute, claim or controversy of any kind, whether founded in contract, tort, statutory or common law, equity, or otherwise, now existing or hereafter arising between any of the Parties arising out of, pertaining to or in connection with any agreement, document or instrument to which this Arbitration Program is attached or in which it appears or is referenced or any related agreements, documents, or instruments ("Documents"). Any Party who fails to submit to binding arbitration following a lawful demand by another Party shall bear all costs and expenses, including reasonable attorneys' fees (including those incurred in any trial, bankruptcy proceeding or on appeal), incurred by the other Party in obtaining a stay of any pending judicial proceeding and compelling arbitration of any Dispute. The Parties agree that any agreement, document or instrument which includes, attaches to or incorporates this Arbitration Program represents a transaction involving commerce as that term is used in the Federal Arbitration Act, Title 9 United States Code ("FAA"). THE PARTIES UNDERSTAND THAT BY THIS AGREEMENT THEY HAVE DECIDED THAT THEIR DISPUTES SHALL BE RESOLVED BY BINDING ARBITRATION RATHER THAN IN COURT, AND ONCE DECIDED BY ARBITRATION NO DISPUTE CAN LATER BE BROUGHT, FILED OR PURSUED IN COURT. Governing Rules. Arbitrations conducted pursuant to this Arbitration Program shall be administered by the American Arbitration Association ("AAA"), or other mutually agreeable administrator ("Administrator") in accordance with the terms of this Arbitration Program and the Commercial Arbitration Rules of the AAA. Proceedings hereunder shall be governed by the provisions of the FAA. The arbitrator(s) shall resolve all Disputes in accordance with the applicable substantive law designated in the Documents. Judgement upon any award rendered hereunder may be entered in any court having jurisdiction; provided, however, that nothing herein shall be construed to be a waiver by any Party that is a bank of the protections afforded pursuant to 12 U.S.C.91 or any similar applicable state law. Arbitrator Powers and Qualifications; Awards. The Parties agree to select a neutral qualified arbitrator or a panel of three qualified arbitrators to resolve any Dispute hereunder. "Qualified" means a retired judge or practicing attorney, with not less than 10 years practice in commercial law, licensed to practice in the state of the applicable substantive law designated in the Documents. A Dispute in which the claims or amounts in controversy do not exceed $1,000,000, shall be decided by a single arbitrator. A single arbitrator shall have authority to render an award up to but not to exceed $1,000,000.00 including all damages of any kind whatsoever, costs, fees, attorneys' fees and expenses. Submission to a single arbitrator shall be a waiver of all Parties' claims to recover more than $1,000,000.00. A Dispute involving claims or amounts in controversy exceeding $1,000,000.00 shall be decided by a majority vote of a panel of three qualified arbitrators. All three arbitrators on the arbitration panel must actively participate in all hearings and deliberations. The arbitrator(s) shall be empowered to, at the written request of any Party in any Dispute, (a) to consolidate in a single proceeding any multiple party claims that are substantially identical or based upon the same underlying transaction; (b) to consolidate any claims and Disputes between other Parties which arise out of or relate to the subject matter hereof, including all claims by or against borrowers, guarantors, sureties and/or owners of collateral; and (c) to administer multiple arbitrations claims as class actions in accordance with Rule 23 of the Federal Rules of Civil Procedure. In any consolidated proceeding the first arbitrator(s) selected in any proceeding shall conduct the consolidated proceeding unless disqualified due to conflict of interest. The arbitrator(s) shall be empowered to resolve any dispute regarding the terms of this arbitration clause, including questions about the arbitrability of any Dispute, but shall have no power to change or alter the terms of the Arbitration Program. The prevailing Party in any Dispute shall be entitled to recover its reasonable attorney's fees in any arbitration, and the arbitrator(s) shall have the power to award such fees. The award of the arbitrator(s) shall be in writing and shall set forth the factual and legal basis for the award. Real Property Collateral. Notwithstanding the provisions of the preceding paragraphs concerning arbitration, no Dispute shall be submitted to arbitration without the consent of all Parties if, at the time of the proposed submission, such Dispute arises from or relates to an obligation which is secured directly or indirectly and in whole or in part by real property collateral. If all Parties do not consent to submission of such a Dispute to arbitration, the Dispute shall be determined as provided in the paragraph below entitled "Judicial Reference". Judicial Reference. At the request of any Party, a Dispute which is not submitted to arbitration as provided and limited in the preceding paragraphs concerning arbitration shall be determined by a reference in accordance with California Code of Civil Procedure Section 538 et seq. If such an election is made, the Parties shall designate to the court a referee or referees selected under the auspices of the AAA, unless otherwise agreed to in writing by all parties. With respect to a Dispute in which the amounts in controversy do not exceed $1,000,000, a single referee shall be chosen and shall resolve the Dispute. The referee shall have authority to render an award up to but not to exceed $1,000,000, including all damages of any kind whatsoever, including costs, fees and expenses. A Dispute involving amounts in controversy exceeding $1,000,000 shall be decided by a majority vote of a panel of three referees (a "Referee Panel"), provided, however, that all three referees on the Referee Panel must actively participate in all hearings and deliberations. Referees, including any Referee Panel, may grant any remedy of relief deemed just and equitable and within the scope of this Arbitration Program and may also grant such ancillary relief as is necessary to make effective any award. The presiding referee of the Referee Panel, or the referee if there is a single referee, shall be a retired judge. Judgement upon the award rendered by such referee(s) shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. Determinations and awards by a referee or Referee Panel shall be binding on all Parties and shall not be subject to further review or appeal except as allowed by applicable law. Preservation of Remedies. No provision of, nor the excise of any rights under, this Arbitration Program shall limit the right of any Party to: 02-15-1996 BUSINESS LOAN AGREEMENT Page 7 (Continued) ================================================================================ (a) foreclose against and/or sale of any real personal property collateral or other security, or obtain a personal or deficiency award: (b) exercise self-help remedies (including/repossession and setoff rights); or (c) obtain provisional or ancillary remedies such as injunctive relief, sequestration, attachment, replevin, garnishment, or the appointment of a receiver from a court having jurisdiction. Such rights can be exercised at any time except to the extent such action is contrary to a final award or decision in any arbitration proceeding. The institution and maintenance of an action as described above shall not constitute a waiver of the right of any Party to submit the Dispute to arbitration, nor render inapplicable the compulsory exercise of any self-help, ancillary or other rights under this paragraph shall be a Dispute hereunder. Miscellaneous. All statues of limitation applicable to any Dispute shall apply to any proceeding in accordance with this Arbitration Program. The Parties agree, to the maximum extent practicable, to take any action necessary to conclude an arbitration hereunder within 180 days of the filing of a Dispute with the Administrator. The arbitrator(s) shall be empowered to impose sanctions for any Party's failure to proceed within the times established herein. Arbitrations shall be conducted in the state of the applicable substantive law designated in the Documents. The provisions of this Arbitration Program shall service a termination, amendment, or expiration hereof or of the Documents unless the Parties otherwise, expressly agree in writing. Each Party agrees to keep all Disputes and arbitration proceedings strictly confidential, except for disclosures of information required in the ordinary course of business of the Parties or as required by applicable law or regulation. If any provision of this Arbitration Program is declared invalid by any court, the remaining provisions shall not be affected thereby and shall remain fully enforceable. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lander's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements covering the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchase of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lander's allocated costs of in-house counsel and expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees, and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs in addition in all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimille, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice will constitute notice to all Borrowers. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competant jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in Exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lander is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. 02-15-1996 BUSINESS LOAN AGREEMENT Page 8 (Continued) ================================================================================ BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF FEBRUARY 15, 1996. BORROWER: STAAR SURGICAL COMPANY By: /s/ William C. Huddleston ---------------------------------------------- William C. Huddleston, Chief Financial Officer LENDER: First Interstate Bank of California By: [Signature Appears Here] ---------------------------------------------- Authorized Officer Vice President ================================================================================ EX-10.24 10 COMMERCIAL SECURITY AGREEMENT DATED 2/15/96 [LOGO OF FIRST INTERSTATE EXHIBIT 10.24 BANK APPEARS HERE] COMMERCIAL SECURITY AGREEMENT ================================================================================ Borrower: STAAR SURGICAL COMPANY Lender: First Interstate Bank 1911 Walker Avenue of California Monrovia, CA 91018 San Gabriel Corporate Center 1000 E. Garvey Ave. South, Ste. 360 West Covina, CA 91790 ================================================================================ THIS COMMERCIAL SECURITY AGREEMENT is entered into between STARR SURGICAL COMPANY (referred to below as "Grantor"); and First Interstate Bank of California (referred to below as "Lender"). For valuable consideration, Grantor hereby grants, conveys, assigns, and pledges to Lender as collateral, a security interest in Grantor's entire interest in the Collateral, whether now existing or hereafter acquired, to secure the indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Commercial Security Agreement, as the Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to the Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: All inventory, accounts, chattel paper and general intangibies. In addition, the word "Collateral" means the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All accounts, contract rights, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral Section. (e) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfische, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means STAAR SURGICAL COMPANY, its successors and assigns. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus interest thereon, of Grantor, or any one or more of them, to Lender, as well as all claims by Lender against Grantor, or any one or more of them, whether existing now or later; whether they are voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others; whether Grantor may be obligated as guarantor, surety, accommodation party or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by any statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means First Interstate Bank of California, its successors and assigns. Note. The word "Note" means the note or credit agreement dated February 15, 1996, in the principal amount of $5,000,000.00 from Grantor to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean and include without limitation all promissary notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. DEPOSIT ACCOUNTS. Grantor hereby grants Lender a contractual possessory security interest in and hereby assigns, conveys, delivers, pledges, and transfers all of Grantor's right, title and interest in and to Grantor's accounts with Lender (whether checking, savings, or some other account), including all accounts held jointly with someone else and all accounts Grantor may open in the future, excluding however all IRA, Keogh, and trust accounts. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: Perfection of Security interest. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattell paper if not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any 02-15-1996 COMMERCIAL SECURITY AGREEMENT Page 2 (Continued) ================================================================================ documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. This is a continuing Security Agreement and will continue in effect even though all or any part of the indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content, and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor; there shall be no setoffs or counterclaims against any such account, and no agreement under which any deductions or discounts may be claimed shall have been made with the account debtor except those disclosed to Lender in writing. Location of the Collateral. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without prior written consent of Lender. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without the prior written consent of Lender. Transactions involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance or charge, other than the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except to the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the collateral against the claims and demands of all other persons. Collateral Schedules and Locations. As often as Lender shall require, and insofar as the Collateral consists of accounts and general intangibles, Grantor shall deliver to Lender schedules of such Collateral, including such information as Lender may require. Including without limitation names and addresses of account debtors and agings of accounts and general intangibles. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. Maintenance and inspection of Collateral. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may select to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Compliance With Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in affect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials, Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations 02-15-1996 PAGE 3 COMMERCIAL SECURITY AGREEMENT (Continued) ================================================================================ and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. The obligation to indemnify shall survive the payment of the indebtedness and the satisfaction of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lander from time to time the policies or certificates of insurance in term satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each Insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such less payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral. Lender shall retain a sufficient amount of the proceeds to pay all of the indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the indebtedness. Insurance Reserves: Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement. Default on indebtedness. Failure of Grantor to make any payment when due on the indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or such Guarantor dies or becomes incompetent. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment of performance of the indebtedness is impaired. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date expenditure until repaid. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of the nominee and receive the payments, rents, income and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action or similar property. Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor, change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in the Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by the Agreement or the Related Documents or by any other writing shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of California. Arbitration Binding Arbitration. Upon the demand of any party ("Party/ Parties")/ to a Document (as defined below), whether made before the Institution of any judicial proceeding or not more than 60 days after service of a complaint, third party complaint, cross-claim or counterclaim or any answer thereto or any amendment to any of the above, any Dispute (as defined below) shall be resolved by binding arbitration in accordance with the terms of this arbitration program ("Arbitration Program"). A "Dispute" shall include any action, dispute, claim or controversy of any kind, whether founded in contract, tort, statutory or common law, equity, or otherwise, now existing or hereafter arising between any of the Parties arising out of, pertaining to or in connection with any agreement, document or instrument to which this Arbitration Program is attached or in which it appears or is referenced or any related agreements, documents, or instruments ("Documents"). Any Party who fails to submit to binding arbitration following a lawful demand by another Party shall bear all costs and expenses, including reasonable attorneys' fees (including those incurred in any trial, bankruptcy proceeding or on appeal). Incurred by the other Party in obtaining a stay of any pending judicial proceeding and compelling arbitration of any Dispute. The Parties agree that any agreement, document or instrument which includes, attaches to or incorporates this Arbitration Program represents a transaction involving commerce as that term is used in the Federal Arbitration Act, Title 9 United States Code ("FAA"). THE PARTIES UNDERSTAND THAT BY THIS AGREEMENT THEY HAVE DECIDED THAT THEIR DISPUTES SHALL BE RESOLVED BY BINDING ARBITRATION RATHER THAN IN COURT, AND ONCE DECIDED BY ARBITRATION NO DISPUTE CAN LATER BE BROUGHT, FILED OR PURSUED IN COURT. Governing Rules. Arbitrations conducted pursuant to this Arbitration Program shall be administered by the American Arbitration Association ("AAA"), or other mutually agreeable administrator ("Administrator") in accordance with the terms of this Arbitration Program and the Commercial Arbitration Rules of the AAA. Proceedings hereunder shall be governed by the provisions of the FAA. The arbitrator(s) shall resolve all Disputes in accordance with the applicable substantive law designated in the Documents. Judgment upon any award rendered hereunder may be entered in any court having jurisdiction; provided, however, that nothing herein, shall be construed to be a waiver by any Party that is a bank of the protections afforded pursuant to 12 U.S.C. 91 or any similar applicable state law. Arbitrator Powers and Qualifications; Awards. The Parties agree to select a neutral qualified arbitrator or a panel of three qualified arbitrators to resolve any Dispute hereunder. "Qualified" means a retired judge or practicing attorney, with not less that 10 years practice in commercial law, licensed to practice in the state of the applicable substantive law designated in the Documents. A Dispute in which the claims or amounts in controversy do not exceed $1,000,000.00 shall be decided by a single arbitrator. A single arbitrator shall have authority to render an award up to but not to exceed $1,000,000 including all damages of any kind whatsoever, costs, fees, attorneys fees and 02-15-1996 COMMERCIAL SECURITY AGREEMENT Page 5 (Continued) ================================================================================ expenses. Submission to a single arbitrator shall be a waiver of all Parties' claims to recover more than $1,000,000.00. A Dispute involving claims or amounts in controversy exceeding $1,000,000.00 shall be decided by a majority vote of a panel of three qualified arbitrators. All three arbitrators on the arbitration panel must actively participate in all hearings and deliberations. The arbitrator(s) shall be empowered to, at the written request of any Party in any Dispute, (a) to consolidate in a single proceeding any multiple party claims that are substantially identical or based upon the same underlying transaction; (b) to consolidate any claims and Disputes between other Parties which arise out of or relate to the subject matter hereof, including all claims by or against borrowers, guarantors, sureties and/or owners of collateral; and (c) to administer multiple arbitration claims as class actions in accordance with Rule 23 of the Federal Rules of Civil Procedure. In any consolidated proceeding the first arbitrator(s) selected in any proceeding shall conduct the consolidated proceeding unless disqualified due to conflict of interest. The arbitrator(s) shall be empowered to resolve any dispute regarding the terms of this arbitration clause, including questions about the arbitrability of any Dispute, but shall have no power to change or alter the terms of the Arbitration Program. The prevailing Party in any Dispute shall be entitled to recover its reasonable attorneys' fees in any arbitration, and the arbitrator(s) shall have the power to award such fees. The award of the arbitrator(s) shall be in writing and shall set forth the factual and legal basis for the award. Real Property Collateral. Notwithstanding the provisions of the preceding paragraphs concerning arbitration, no Dispute shall be submitted to arbitration without the consent of all Parties if, at the time of the proposed submission, such Dispute arises from or relates to an obligation which is secured directly or indirectly and in whole or in part by real property collateral. If all Parties do not consent to submission of such a Dispute to arbitration, the Dispute shall be determined as provided in the paragraph below entitled "Judicial Reference". Judicial Reference. At the request of any Party, a Dispute which is not submitted to arbitration as provided and limited in the preceding paragraphs concerning arbitration shall be determined by a reference in accordance with California Code of Civil Procedure Section 838 et seq. If such an election is made, the Parties shall designate to the court a referee or referees selected under the auspices of the AAA, unless otherwise agreed to in writing by all parties. With respect to a Dispute in which the amounts in controversy do not exceed $1,000,000, a single referee shall be chosen and shall resolve the Dispute. The referee shall have authority to render an award up to but not to exceed $1,000,000, including all damages of any kind whatsoever, including costs, fees and expenses. A Dispute involving amounts in controversy exceeding $1,000,000 shall be decided by a majority vote of a panel of three referees (a "Referee Panel"), provided, however, that all three referees on the Referee Panel must actively participate in all hearings and deliberations. Referees, including any Referee Panel, may grant any remedy of relief deemed just and equitable and within the scope of this Arbitration Program and may also grant such ancillary relief as is necessary to make effective any award. The presiding referee of the Referee Panel, or the referee if there is a single referee, shall be a retired judge. Judgment upon the award rendered by such referee(s) shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 844 and 845. Determinations and awards by a referee or Referee Panel shall be binding on all Parties and shall not be subject to further review or appeal except as allowed by applicable law. Preservation of Remedies. No provision of, nor the excise of any rights under, this Arbitration Program shall limit the right of any Party to: (a) foreclose against and /or sale of any real or personal property collateral or other security, or obtain a personal or deficiency award: (b) exercise self-help remedies (including repossession and setoff rights): or (c) obtain provisional or ancilliary remedies such as injunctive relief, sequestration, attachment, replevin, garnishment, or the appointment of a receiver from a court having jurisdiction. Such rights can be exercised at any time except to the extent such action is contrary to a final award or decision in any arbitration proceeding. The institution and maintenance of an action as described above shall not constitute a waiver of the right of any party to submit the Dispute to arbitration, nor render inapplicable the compulsory exercise of any self-help, auxiliary or other rights under this paragraph shall be a Dispute hereunder. Miscellaneous. All statutes of limitation applicable to any Dispute shall apply to any proceeding in accordance with this Arbitration Program. The Parties agree, to the maximum extent practicable, to take any action necessary to conclude an arbitration hereunder within 180 days of the filing of a Dispute with the Administrator. The arbitrator(s) shall be empowered to impose sanctions for any Party"s failure to proceed within the times established herein. Arbitrations shall be conducted in the state of the applicable substantive law designated in the Documents. The provisions of this Arbitration Program shall survive a termination, amendment, or expiration hereof or of the Documents unless the Parties otherwise expressly agree in writing. Each Party agrees to keep all Disputes and arbitration proceedings strictly confidential, except for disclosures of information required in the ordinary course of business of the Parties or as required by applicable law or regulation. If any provision of this Arbitration Program is declared invalid by any court, the remaining provisions shall not be affected thereby and shall remain fully enforceable. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimille, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by filing formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral: (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral: (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Preference Payments. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the indebtedness and, at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. 02-15-1996 COMMERCIAL SECURITY AGREEMENT Page 6 (continued) ================================================================================ Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Waiver of Co-obligor's Rights. If more than one person is obligated for the indebtedness, Borrower irrevocably waives, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 15, 1996. GRANTOR: STAAR SURGICAL COMPANY By: /s/ William C. Huddleston ------------------------------------------------ William C. Huddleston, Chief Financial Officer ================================================================================ LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver, 3.19A (C) 1996 CFI ProServices, Inc. All rights reserved, [CA-E40 E2.19 STAARS.LN C2.QVL] EX-10.25 11 REVOLVING CREDIT AGREEMENT DATED 12/2/96 EXHIBIT 10.25 WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE - -------------------------------------------------------------------------------- $5,000,000.00 El Monte, California December 2, 1996 FOR VALUE RECEIVED, the undersigned STAAR SURGICAL COMPANY ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Flair Industrial Park RCBO, 9000 Flair Drive Suite 100, El Monte, CA 91731, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $5,000,000.00, or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close. (b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for 1, 2, 3 or 6 months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than $500,000.00; and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage equal to 100% less any LIBOR Reserve Percentage. (i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter- Bank Market. (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. (d) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear -------- interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be 1.75000% above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. (b) Selection of Interest Rate Options. At any time any portion of this ---------------------------------- Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the Revolving Line of Credit Note (08/96), Page 1 principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, (A) Bank receives written confirmation from Borrower not later than 3 Business Days after such telephone notice is given, and (B) such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the applicable fixed rate to Borrower at approximately 10:00 a.m., California time, on the first day of the Fixed Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination by Bank of the applicable fixed rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) Additional LIBOR Provisions. --------------------------- (i) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (A) no new LIBOR option may be selected by Borrower, and (B) any portion of the outstanding principal balance hereof which bears interest determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (ii) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (A) to make LIBOR options available hereunder, or (B) to maintain interest rates based on LIBOR, then in the former event, any obligation of Bank to make available such awful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (iii) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (C) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (d) Payment of Interest. Interest accrued on this Note shall be payable ------------------- on the 1ST day of each MONTH, commencing JANUARY 1, 1997. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on JUNE 1, 1997. (b) Advances. Advances hereunder, to the total amount of the principal -------- sum available hereunder, may be made by the holder at the oral or written request of (i) WILLIAM C. HUDDLESTON or JOHN R. WOLF or JOHN SANTOS or DEBORAH ANDREWS, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. (c) Application of Payment. Each payment made on this Note shall be ---------------------- credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) Prime Rate. Borrower may prepay principal on any portion of this Note ---------- which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note ----- which bears interest determined in relation to LIBOR at any time and in the minimum amount of $100,000.00; provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month --------- on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of -------- interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum 2.000% above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. EVENTS OF DEFAULT: The occurrence of any of the following shall constitute an "Event of Default" under this Note: (a) The failure to pay any principal, interest, fees or other charges when due hereunder or under any contract, instrument or document executed in connection with this Note. (b) The filing of a petition by or against any Borrower, any guarantor of this Note or any general partner or joint venturer in any Borrower which is a partnership or a joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of any Borrower or Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of any Borrower or Third Party Obligor. (c) The death or incapacity of any individual Borrower or Third Party Obligor, or the dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity. (d) Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which any Borrower or Third Party Obligor has incurred any obligation for borrowed money, any purchase obligation, or any other liability of any kind to any person or entity, including the holder. (e) Any financial statement provided by any Borrower or Third Party Obligor to Bank proves to be incorrect, false or misleading in any material respect. (f) Any sale or transfer of all or a substantial or material part of the assets of any Borrower or Third Party Obligor other than in the ordinary course of its business. (g) Any violation or breach of any provision of, or any defined event of default under, any addendum to this Note or any loan agreement, guaranty, security agreement, deed of trust, mortgage or other document executed in connection with or securing this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder -------- of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) Obligations and Joint and Several. Should more than one person or --------------------------------- entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in ------------- accordance with the laws of the state of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. STAAR SURGICAL COMPANY By: /s/ William C. Huddleston -------------------------- WILLIAM C. HUDDLESTON CHIEF FINANCIAL OFFICER REVOLVING LINE OF CREDIT NOTE (08/96), PAGE 4 EX-10.29 12 MODIFICATION TO FEINGOLD EMPLOYMENT AGREEMENT EXHIBIT 10.29 MODIFICATION TO EMPLOYMENT AGREEMENT This Modification to Employment Agreement ("Modification") is dated for identification purposes only as of the 6th day of May 1996 by and between STAAR Surgical Company, a Delaware corporation, located at 1911 Walker Avenue, Monrovia, California 91016 (the "Company") and Vladimir Feingold, whose address is 31732 Isle Vista, Laguna Niguel, California 92677 (the "Executive") based on the following: RECITALS A. On January 1, 1994 the Executive agreed to render services to the Company through December 31, 1996 on the terms and subject to the conditions set forth in that certain "Employment Agreement" signed by the Executive and by the Company. B. Pursuant to paragraph 13(c)(i) of the Employment Agreement, the Company and the Executive wish to modify its terms and conditions. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Modification, the Company and the Executive agree as follows: AGREEMENT 1. MODIFICATION OF EMPLOYMENT TERM. Paragraph 2 of the Employment ------------------------------- Agreement shall be modified to state: Company hereby employs Executive pursuant to the terms of this Agreement and Executive hereby accepts employment with the Company pursuant to the terms of this Agreement for the period beginning on January 1, 1994 and ending on December 31, 2001. Beginning on January 1, 2001, but not later than June 30, 2001, either party may give notice to the other that the party desires to renew this Agreement. Thereafter, the terms and conditions of this Agreement shall apply until the parties reach an agreement modifying them. If an agreement is not reduced to writing and executed by the parties by December 31, 2001, then this Agreement shall continue on a month to month basis until terminated by written notice given by either party at least thirty (30) days prior to the end of any monthly period. 2. GRANT OF ADDITIONAL STOCK OPTIONS. There shall be added to --------------------------------- Paragraph 7 of the Employment Agreement a subparagraph (f) which shall state the following: Non-Qualified Stock Options. Executive shall be included in the 1996 STAAR --------------------------- Surgical Company Non-Qualified Stock Plan (the "Plan") adopted by Company. Pursuant to the terms of the Plan, Executive shall be entitled to purchase seventy thousand (70,000) shares of Company's common stock (which options shall vest over a period of five (5) years, fourteen thousand (14,000) shares each on May 6, 1998, May 6, 1999, May 6, 2000, May 6, 2001 and May 6, 2002, respectively), all of which option rights shall expire on May 6, 2006. The purchase price per share shall be $12.50. Stock issued pursuant to the Plan shall be restricted stock, although Company shall reserve the right to issue registered shares if it so decides. Executive agrees to be bound by the terms of the Plan as adopted. These options shall be non- qualified stock options. 3. DELETION OF PROVISION RELATING TO LOAN FORGIVENESS. Paragraph -------------------------------------------------- 7(e)(iii) of the Employment Agreement which is entitled "Forgiveness of the Loans" shall be deleted in its entirety. 4. ADDITION OF PROVISION FOR CHANGE OF CONTROL. There shall be ------------------------------------------- added to paragraph 7 the following subparagraph (g): Severance Pay Upon Change of Control. Upon the sale or disposition by ------------------------------------ Company of substantially all of its business or assets or the sale of the capital stock of Company in connection with the sale or transfer of a controlling interest in Company to a third party or the merger or consolidation of Company with another corporation as part of a sale or transfer of a controlling interest in Company to a third party, Executive shall receive, as additional compensation and not in lieu of his rights under this Agreement, two (2) years' salary. "A controlling interest" shall be defined as 50% or more of the common stock of the Company. "Two (2) years' salary" shall be defined as only the cash compensation paid to Executive pursuant to subparagraph (a) above, as it may be modified from time to time, and shall not include employee benefits, incentive stock options, automobile allowance or debt forgiveness, if any. Executive shall be entitled to receive this additional compensation if Executive's employment is terminated as a result of the change of control described herein or, if Executive, at Executive's election, terminates his employment as a result of such change of control. 5. ALL OTHER TERMS AND CONDITIONS TO REMAIN THE SAME. The Company ------------------------------------------------- and the Executive agree that all other terms and conditions of the Employment Agreement shall remain the same. IN WITNESS WHEREOF, the parties have executed this Modification on the 6th day of May, 1996. "COMPANY" STAAR Surgical Company By: /s/ John R. Wolf ------------------------------------- "EXECUTIVE" /s/ Vladimir Feingold ---------------------------------------- Vladimir Feingold EX-10.31 13 MODIFICATION TO HUDDLESTON EMPLOYMENT AGREEMENT EXHIBIT 10.31 MODIFICATION TO EMPLOYMENT AGREEMENT This Modification to Employment Agreement ("Modification") is dated for identification purposes only as of the 6th day of May 1996 and is made by and between STAAR Surgical Company, a Delaware corporation, located at 1911 Walker Avenue, Monrovia, California 91016 (the "Company") and William C. Huddleston, whose address is 363 Timken Road, Anaheim, California 92808 (the "Executive") based on the following: RECITALS A. On January 1, 1994 the Executive agreed to render services to the Company through December 31, 1996 on the terms and subject to the conditions set forth in that certain "Employment Agreement" signed by the Executive and by the Company. B. Pursuant to paragraph 12(c)(i) of the Employment Agreement, the Company and the Executive wish to modify its terms and conditions. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Modification, the Company and the Executive agree as follows: AGREEMENT 1. MODIFICATION OF EMPLOYMENT TERM. Paragraph 2 of the Employment ------------------------------- Agreement shall be modified to state: Company hereby employs Executive pursuant to the terms of this Agreement and Executive hereby accepts employment with the Company pursuant to the terms of this Agreement for the period beginning on January 1, 1994 and ending on December 31, 2001. 2. GRANT OF ADDITIONAL STOCK OPTIONS. There shall be added to --------------------------------- Paragraph 6(c) of the Employment Agreement a second paragraph which shall state the following: Executive shall be included in the 1996 STAAR Surgical Company Non- Qualified Stock Plan (the "Plan") adopted by Company. Pursuant to the terms of the Plan, Executive shall be entitled to purchase fifty thousand (50,000) shares of Company's common stock, which options shall vest over a period of five (5) years (ten thousand (10,000) shares each on May 6, 1998, May 6, 1999, May 6, 2000, May 6, 2001 and May 6, 2002, respectively), and all of which option rights shall expire on May 6, 2006. The purchase price per share shall be $12.50. Stock issued pursuant to the Plan shall be restricted stock, although Company shall reserve the right to issue registered shares if it so decides. Executive agrees to be bound by the terms of the Plan as adopted. These options shall be non-qualified stock options. 3. SEVERANCE PAY UPON CHANGE OF CONTROL. Paragraph 6(d) of the ------------------------------------ Employment Agreement shall be modified to state: Upon the sale or disposition by Company of substantially all of its business or assets or the sale of the capital stock of Company in connection with the sale or transfer of a controlling interest in Company to a third party or the merger or consolidation of Company with another corporation as part of a sale or transfer of a controlling interest in Company to a third party, Executive shall receive, as additional compensation and not in lieu of his rights under this Agreement, two (2) years' salary. "A controlling interest" shall be defined as 50% or more of the common stock of the Company. "Two (2) years' salary" shall be defined as only the cash compensation paid to Executive pursuant to subparagraph (a) above, as it may be modified from time to time, and shall not include employee benefits, incentive stock options, automobile allowance or debt forgiveness, if any. Executive shall be entitled to receive this additional compensation if Executive's employment is terminated as a result of the change of control described herein or, if Executive, at Executive's election, terminates his employment as a result of such change of control. 4. MODIFICATION TO TERMINATION PROVISION. The first sentence of ------------------------------------- paragraph 10(b) shall be modified to state: "Executive may, in his sole but reasonable judgment, terminate this Agreement if Executive determines that Company has . . . ." 5. ALL OTHER TERMS AND CONDITIONS TO REMAIN THE SAME. The Company ------------------------------------------------- and the Executive agree that all other terms and conditions of the Employment Agreement shall remain the same. IN WITNESS WHEREOF, the parties have executed this Modification as of the date first written above. "COMPANY" STAAR Surgical Company By: /s/ John R. Wolf ------------------------------------- "EXECUTIVE" /s/ William C. Huddleston ---------------------------------------- William C. Huddleston EX-10.33 14 MODIFICATION TO MANISCO EMPLOYMENT AGREEMENT EXHIBIT 10.33 MODIFICATION TO EMPLOYMENT AGREEMENT This Modification to Employment Agreement ("Modification") is dated for identification purposes only as of the 6th day of May 1996 and is made by and between STAAR Surgical Company, a Delaware corporation, located at 1911 Walker Avenue, Monrovia, California 91016 (the "Company") and Carl M. Manisco, whose address is 12611 Hillside Drive, Moorpark, California 93021 (the "Executive") based on the following: RECITALS A. On January 1, 1994 the Executive agreed to render services to the Company through December 31, 1996 on the terms and subject to the conditions set forth in that certain "Employment Agreement" signed by the Executive and by the Company. B. Pursuant to paragraph 12(c)(i) of the Employment Agreement, the Company and the Executive wish to modify its terms and conditions. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Modification, the Company and the Executive agree as follows: AGREEMENT 1. MODIFICATION OF EMPLOYMENT TERM. Paragraph 2 of the Employment ------------------------------- Agreement shall be modified to state: Company hereby employs Executive pursuant to the terms of this Agreement and Executive hereby accepts employment with the Company pursuant to the terms of this Agreement for the period beginning on January 1, 1994 and ending on December 31, 2001. 2. MODIFICATION OF ADDITIONAL COMPENSATION. Paragraph 6(b) shall be --------------------------------------- deleted in its entirety and the following shall appear in its place: As additional compensation through December 31, 1996, Executive shall receive one-fourth of one percent of all net domestic sales of Company's products, which shall be defined as gross domestic sales less returns, shipping, handling, sales taxes, chargebacks and allowances. After December 31, 1996, Company shall have the right to review the additional compensation prior to each subsequent year of the term of the Employment Agreement and, at the election of Company, Company shall determine if it will continue to pay the additional compensation or if it will modify the computation of the additional compensation. 3. GRANT OF ADDITIONAL STOCK OPTIONS. There shall be added to --------------------------------- Paragraph 6(d) of the Employment Agreement a second paragraph which shall state the following: Executive shall be included in the 1996 STAAR Surgical Company Non- Qualified Stock Plan (the "Plan") adopted by Company. Pursuant to the terms of the Plan, Executive shall be entitled to purchase fifty thousand (50,000) shares of Company's common stock, which options shall vest over a period of five (5) years (ten thousand (10,000) shares each on May 6, 1998, May 6, 1999, May 6, 2000, May 6, 2001 and May 6, 2002, respectively), and all of which option rights shall expire on May 6, 2006. The purchase price per share shall be $12.50. Stock issued pursuant to the Plan shall be restricted stock, although Company shall reserve the right to issue registered shares if it so decides. Executive agrees to be bound by the terms of the Plan as adopted. These options shall be non-qualified stock options. 4. SEVERANCE PAY UPON CHANGE OF CONTROL. Paragraph 6(e) of the ------------------------------------ Employment Agreement shall be modified to state: Upon the sale or disposition by Company of substantially all of its business or assets or the sale of the capital stock of Company in connection with the sale or transfer of a controlling interest in Company to a third party or the merger or consolidation of Company with another corporation as part of a sale or transfer of a controlling interest in Company to a third party, Executive shall receive, as additional compensation and not in lieu of his rights under this Agreement, two (2) years' salary. "A controlling interest" shall be defined as 50% or more of the common stock of the Company. "Two (2) years' salary" shall be defined as only the cash compensation paid to Executive pursuant to subparagraph (a) above, as it may be modified from time to time, and shall not include employee benefits, incentive stock options, automobile allowance or debt forgiveness, if any. Executive shall be entitled to receive this additional compensation if Executive's employment is terminated as a result of the change of control described herein or, if Executive, at Executive's election, terminates his employment as a result of such change of control. 5. MODIFICATION TO TERMINATION PROVISION. The first sentence of ------------------------------------- paragraph 10(b) shall be modified to state: "Executive may, in his sole but reasonable judgment, terminate this Agreement if Executive determines that Company has . . . ." 6. ALL OTHER TERMS AND CONDITIONS TO REMAIN THE SAME. The Company ------------------------------------------------- and the Executive agree that all other terms and conditions of the Employment Agreement shall remain the same. IN WITNESS WHEREOF, the parties have executed this Modification on this 6th day of May, 1996. "COMPANY" STAAR Surgical Company By: /s/ John R. Wolf ------------------------------------- "EXECUTIVE" /s/ Carl M. Manisco ---------------------------------------- Carl M. Manisco EX-10.35 15 MODIFICATION TO LLOYD EMPLOYMENT AGREEMENT EXHIBIT 10.35 MODIFICATION TO EMPLOYMENT AGREEMENT This Modification to Employment Agreement ("Modification") is dated for identification purposes only as of the 6th day of May 1996 by and between STAAR Surgical Company, a Delaware corporation, located at 1911 Walker Avenue, Monrovia, California 91016 (the "Company") and Michael J. Lloyd, whose address is 2409 Bonnie Brae Avenue, Claremont, California 91711 (the "Executive") based on the following: RECITALS A. On January 1, 1994 the Executive agreed to render services to the Company through December 31, 1996 on the terms and subject to the conditions set forth in that certain "Employment Agreement" signed by the Executive and by the Company. B. Pursuant to paragraph 12(c)(i) of the Employment Agreement, the Company and the Executive wish to modify its terms and conditions. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Modification, the Company and the Executive agree as follows: AGREEMENT 1. MODIFICATION OF EMPLOYMENT TERM. Paragraph 2 of the Employment ------------------------------- Agreement shall be modified to state: Company hereby employs Executive pursuant to the terms of this Agreement and Executive hereby accepts employment with the Company pursuant to the terms of this Agreement for the period beginning on January 1, 1994 and ending on December 31, 2001. 2. GRANT OF ADDITIONAL STOCK OPTIONS. There shall be added to --------------------------------- Paragraph 6(c) of the Employment Agreement a second paragraph which shall state the following: Executive shall be included in the 1996 STAAR Surgical Company Non- Qualified Stock Plan (the "Plan") adopted by Company. Pursuant to the terms of the Plan, Executive shall be entitled to purchase fifty thousand (50,000) shares of Company's common stock, which options shall vest over a period of five (5) years (ten thousand (10,000) shares each on May 6, 1998, May 6, 1999, May 6, 2000, May 6, 2001 and May 6, 2002, respectively), and all of which option rights shall expire on May 6, 2006. The purchase price per share shall be $12.50. Stock issued pursuant to the Plan shall be restricted stock, although Company shall reserve the right to issue registered shares if it so decides. Executive agrees to be bound by the terms of the Plan as adopted. These options shall be non-qualified stock options. 3. SEVERANCE PAY UPON CHANGE OF CONTROL. Paragraph 6(d) of the ------------------------------------ Employment Agreement shall be modified to state: Upon the sale or disposition by Company of substantially all of its business or assets or the sale of the capital stock of Company in connection with the sale or transfer of a controlling interest in Company to a third party or the merger or consolidation of Company with another corporation as part of a sale or transfer of a controlling interest in Company to a third party, Executive shall receive, as additional compensation and not in lieu of his rights under this Agreement, two (2) years' salary. "A controlling interest" shall be defined as 50% or more of the common stock of the Company. "Two (2) years' salary" shall be defined as only the cash compensation paid to Executive pursuant to subparagraph (a) above, as it may be modified from time to time, and shall not include employee benefits, incentive stock options, automobile allowance or debt forgiveness, if any. Executive shall be entitled to receive this additional compensation if Executive's employment is terminated as a result of the change of control described herein or, if Executive, at Executive's election, terminates his employment as a result of such change of control. 4. MODIFICATION TO TERMINATION PROVISION. The first sentence of ------------------------------------- paragraph 10(b) shall be modified to state: "Executive may, in his sole but reasonable judgment, terminate this Agreement if Executive determines that Company has . . . ." 5. ALL OTHER TERMS AND CONDITIONS TO REMAIN THE SAME. The Company ------------------------------------------------- and the Executive agree that all other terms and conditions of the Employment Agreement shall remain the same. IN WITNESS WHEREOF, the parties have executed this Modification on the 6th day of May, 1996. "COMPANY" STAAR Surgical Company By: /s/ John R. Wolf ------------------------------------- "EXECUTIVE" /s/ Michael J. Lloyd ---------------------------------------- Michael J. Lloyd EX-10.37 16 MODIFICATION TO ZIEMBA EMPLOYMENT AGREEMENT EXHIBIT 10.37 MODIFICATION TO EMPLOYMENT AGREEMENT This Modification to Employment Agreement ("Modification") is dated for identification purposes only as of the 6th day of May 1996 and is made by and between STAAR Surgical Company, a Delaware corporation, located at 1911 Walker Avenue, Monrovia, California 91016 (the "Company") and Steven L. Ziemba, whose address is 20845 High Country Drive, Diamond Bar, California 91789 (the "Executive") based on the following: RECITALS A. On January 1, 1994 the Executive agreed to render services to the Company through December 31, 1996 on the terms and subject to the conditions set forth in that certain "Employment Agreement" signed by the Executive and by the Company. B. Pursuant to paragraph 12(c)(i) of the Employment Agreement, the Company and the Executive wish to modify its terms and conditions. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Modification, the Company and the Executive agree as follows: AGREEMENT 1. MODIFICATION OF EMPLOYMENT TERM. Paragraph 2 of the Employment ------------------------------- Agreement shall be modified to state: Company hereby employs Executive pursuant to the terms of this Agreement and Executive hereby accepts employment with the Company pursuant to the terms of this Agreement for the period beginning on January 1, 1994 and ending on January 1, 2000. 2. GRANT OF ADDITIONAL STOCK OPTIONS. There shall be added to --------------------------------- Paragraph 6(c) of the Employment Agreement a second paragraph which shall state the following: Executive shall be included in the 1996 STAAR Surgical Company Non- Qualified Stock Plan (the "Plan") adopted by Company. Pursuant to the terms of the Plan, Executive shall be entitled to purchase fifty thousand (50,000) shares of Company's common stock, which options shall vest over a period of five (5) years (ten thousand (10,000) shares each on May 6, 1998, May 6, 1999, May 6, 2000, May 6, 2001 and May 6, 2002, respectively), and all of which option rights shall expire on May 6, 2006. The purchase price per share shall be $12.50. Stock issued pursuant to the Plan shall be restricted stock, although Company shall reserve the right to issue registered shares if it so decides. Executive agrees to be bound by the terms of the Plan as adopted. These options shall be non-qualified stock options. 3. SEVERANCE PAY UPON CHANGE OF CONTROL. Paragraph 6(d) of the ------------------------------------ Employment Agreement shall be modified to state: Upon the sale or disposition by Company of substantially all of its business or assets or the sale of the capital stock of Company in connection with the sale or transfer of a controlling interest in Company to a third party or the merger or consolidation of Company with another corporation as part of a sale or transfer of a controlling interest in Company to a third party, Executive shall receive, as additional compensation and not in lieu of his rights under this Agreement, two (2) years' salary. "A controlling interest" shall be defined as 50% or more of the common stock of the Company. "Two (2) years' salary" shall be defined as only the cash compensation paid to Executive pursuant to subparagraph (a) above, as it may be modified from time to time, and shall not include employee benefits, incentive stock options, automobile allowance or debt forgiveness, if any. Executive shall be entitled to receive this additional compensation if Executive's employment is terminated as a result of the change of control described herein or, if Executive, at Executive's election, terminates his employment as a result of such change of control. 4. MODIFICATION TO TERMINATION PROVISION. The first sentence of ------------------------------------- paragraph 10(b) shall be modified to state: "Executive may, in his sole but reasonable judgment, terminate this Agreement if Executive determines that Company has . . . ." 5. ALL OTHER TERMS AND CONDITIONS TO REMAIN THE SAME. The Company ------------------------------------------------- and the Executive agree that all other terms and conditions of the Employment Agreement shall remain the same. IN WITNESS WHEREOF, the parties have executed this Modification on the 6th day of May, 1996. "COMPANY" STAAR Surgical Company By: /s/ John R. Wolf ------------------------------------- "EXECUTIVE" /s/ Steven L. Ziemba ---------------------------------------- Steven L. Ziemba EX-10.38 17 FERGUSON EMPLOYMENT CONTRACT DATED 5/26/96 EXHIBIT 10.38 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement"), which is dated for identification purposes only as of May 6, 1996, is made by and between STAAR SURGICAL COMPANY, a Delaware corporation, located at 1911 Walker Avenue, Monrovia, California, 91016 and hereinafter referred to as "Company", and DONALD D. FERGUSON, whose address is 416 Gordon Terrace, Pasadena, California 91105, hereinafter referred to as "Executive", based upon the following: RECITALS -------- WHEREAS, Company wishes to retain the services of Executive as its Vice President of International Sales and to set forth in this Agreement the duties and responsibilities that Executive has agreed to undertake on behalf of Company; and WHEREAS, Executive wishes to render services to Company as its Vice President of International Sales and to have set forth in this Agreement the duties and responsibilities he has agreed to undertake on behalf of Company. THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Agreement, Company and Executive (who are sometimes individually referred to as a "party" and collectively referred to as the "parties") agree as follows: AGREEMENT --------- 1. "COMPANY" DEFINED. ----------------- The term "Company" as used in this Agreement shall mean STAAR Surgical Company, any surviving corporation into which it may be merged or any corporation resulting from its consolidation with any other corporation or corporations. 2. SPECIFIED PERIOD. ---------------- Company hereby employs Executive pursuant to the terms of this Agreement and Executive hereby accepts employment with Company pursuant to the terms of this Agreement for the period beginning on January 1, 1996 and ending on December 31, 1998. 3. GENERAL DUTIES. -------------- Executive shall report only to Company's Chief Executive Officer. Executive shall devote his entire productive time, ability, and attention to Company's business during the term of this Agreement. Unless otherwise modified by the Board of Directors (the "Board"), Executive shall serve as the Company's Vice President of International Sales. In this capacity, Executive shall do and perform all services, acts, or things necessary or 1 advisable to discharge his duties under this Agreement, including, but not limited to, overseeing international marketing and sales, recruiting and hiring direct sales persons and/or distributors internationally and supervising their performance, establishing and meeting Company international sales goals, preparing sales forecasts and reporting to the Company on international sales. Executive shall perform such other duties as are commonly performed by a Vice President of a publicly traded corporation or which may from time to time be prescribed by the Board. Furthermore, Executive agrees to cooperate with and work to the best of his ability with Company's management team, which includes the Board and the officers, to continually improve Company's reputation in its industry for quality products and performance. 4. NONCOMPETITION, NONSOLICITATION AND NONINTERFERENCE --------------------------------------------------- AND PROPRIETARY PROPERTY AND CONFIDENTIAL ----------------------------------------- INFORMATION PROVISIONS. ---------------------- (A) NONCOMPETITION. -------------- (1) "Applicable Definitions" For purposes of this paragraph ---------- ----------- 4, the following capitalized terms shall have the definitions set forth below: i. "Business Segments" - The term "Business Segments" is -------- -------- defined as each of Company's (or Company's affiliates') products or product lines. ii. "Competitive Business" - The term "Competitive Business" is ----------- -------- defined as any business that is or may be competitive with or similar to or adverse to any of Company's (or Company's affiliates') Business Segments, whether such business is conducted by a proprietorship, partnership, corporation or other entity or venture. iii. "Territory" - The term "Territory" is defined as the --------- geographic area (both within the United States and internationally) in which each Business Segment is carried on including, by way of example and not limitation, the entire geographic area in which Company conducts various phases of such Business Segment, including purchasing, production, distribution, promotional and marketing activities, sales, and location of plants and warehouses. (2) Covenant Not To Compete. Executive hereby covenants and ----------------------- agrees that during the term of this Agreement, and for a period of one (1) year from the date this Agreement is terminated or expires, Executive shall not, with respect to each Business Segment and within the boundaries of the Territory applicable to such Business Segment, without the prior written consent of Company (which consent may be withheld in the sole and absolute discretion of Company), directly or indirectly, either 2 alone or in association or in connection with or on behalf of any person, firm, partnership, corporation or other entity or venture now existing or hereafter created: (i) be or become interested or engaged in, directly or indirectly, with any Competitive Business including, without limitation, being or becoming an organizer, investor, lender, partner, joint venturer, stockholder, officer, director, employee, manager, independent sales representative, associate, consultant, agent, supplier, vendor, vendee, lessor, or lessee to any Competitive Business, or (ii) in any manner associate with, or aid or abet or give information or financial assistance to any Competitive Business, or (iii) use or permit the use of Executive's name or any part thereof to be used or employed in connection with any Competitive Business (collectively and severally, the "Noncompetition Covenants"). Notwithstanding the foregoing, the ------------------------ provisions of this paragraph 4(a)2. shall not be deemed to prevent the purchase or ownership by Executive as a passive investment of the outstanding capital shares of any publicly held corporation, so long as any other obligation or duty under the Noncompetition Covenants are not breached. (3) Separate Covenants. The Noncompetition Covenants shall be ------------------ construed to be divided into separate and distinct Noncompetition Covenants with respect to (i) each Business Segment and (ii) each matter or type of conduct described therein. Each of such divided Noncompetition Covenants shall be separate and distinct from all such other Noncompetition Covenants with respect to the same or any other Business Segment. (4) Acknowledgements. Executive acknowledges that: (i) the covenants ---------------- and the restrictions contained in the Noncompetition Covenants are necessary, fundamental, and required for the protection of Company's business; (ii) the Noncompetition Covenants relate to matters which are of a special, unique and extraordinary value; and (iii) a breach of any of the Noncompetition Covenants will result in irreparable harm and damages which cannot be adequately compensated by a monetary award. (5) Judicial Limitation. Notwithstanding the foregoing, if at any ------------------- time a court of competent jurisdiction holds that any portion of any Noncompetition Covenant is unenforceable by reason of its extending for too great a period of time or over too great a geographical area or by reason of its being too extensive in any other respect, such Noncompetition Covenant shall be interpreted to extend only over the maximum period of time, maximum geographical area, or maximum extent in all other respects, as the case may be, as to which it may be enforceable, all as determined by such court in such action. 3 (B) NONSOLICITATION AND NONINTERFERENCE. ----------------------------------- (1) Covenants. Executive hereby covenants and agrees that --------- during the term of this Agreement, and for a period of one (1) year from the date this Agreement terminates or expires, Executive shall not, either for Executive's own account or directly or indirectly in conjunction with or on behalf of any person, partnership, corporation or other entity or venture: i. Solicit or employ or attempt to solicit or employ any person who is then or has, within twelve (12) months prior thereto, been an officer, partner, manager, agent or employee of Company or any affiliate of Company whether or not such a person would commit a breach of that person's contract of employment with Company or any affiliate of Company, if any, by reason of leaving the service of Company or any affiliate of Company (the "Nonsolicitation Covenant"); or ---------------- -------- ii. On behalf of, directly or indirectly, any Competitive Business (as such term is defined in paragraph 4 (a)1.ii.), or for the purpose of or with the reasonably foreseeable effect of harming the business of Company, solicit the business of any person, firm or company which is then, or has been at any time during the preceding twelve (12) months prior to such solicitation, a customer, client, contractor, supplier or vendor of Company or any affiliate of Company (the "Noninterference --------------- Covenant)". -------- (2) Acknowledgements. Each of the parties acknowledges that: ---------------- (i) the covenants and the restrictions contained in the Nonsolicitation and Noninterference Covenants are necessary, fundamental, and required for the protection of the business of Company; (ii) such Covenants relate to matters which are of a special, unique and extraordinary value; and (iii) a breach of either of such Covenants will result in irreparable harm and damages which cannot be adequately compensated by a monetary award. (3) Judicial Limitation. Notwithstanding the foregoing, if at ------------------- any time, despite the express agreement of Company and Executive, a court of competent jurisdiction holds that any portion of any Nonsolicitation or Noninterference Covenant is unenforceable by reason of its extending for too great a period of time or by reason of its being too extensive in any other respect, such Covenant shall be interpreted to extend only over the maximum period of time or to the maximum extent in all other respects, as the case may be, as to which it may be enforceable, all as determined by such court in such action. 4 (C) PROPRIETARY PROPERTY; CONFIDENTIAL INFORMATION. ---------------------------------------------- (1) "Applicable Definitions" For purposes of this paragraph ---------- ----------- 4(c), the following capitalized terms shall have the definitions set forth below: i. "Confidential Information" - The term "Confidential ------------ ----------- Information" is collectively and severally defined as any information, matter or thing of a secret, confidential or private nature, whether or not so labelled, which is connected with Company's business or methods of operation or concerning any of Company's suppliers, customers, licensors, licensees or others with whom Company has a business relationship, and which has current or potential value to Company or the unauthorized disclosure of which could be detrimental to Company. Confidential Information shall be broadly defined and shall include, by way of example and not limitation,: (i) matters of a business nature available only to management and owners of Company of which Executive may become aware (such as information concerning customers, vendors and suppliers, including their names, addresses, credit or financial status, buying or selling habits, practices, requirements, and any arrangements or contracts that Company may have with such parties, Company's marketing methods, plans and strategies, the costs of materials, the prices Company obtains or has obtained or at which Company sells or has sold its products or services, Company's manufacturing and sales costs, the amount of compensation paid to employees of Company and other terms of their employment, financial information such as financial statements, budgets and projections, and the terms of any contracts or agreements Company has entered into) and (ii) matters of a technical nature (such as product information, trade secrets, know-how, formulae, innovations, inventions, devices, discoveries, techniques, formats, processes, methods, specifications, designs, patterns, schematics, data, compilation of information, test results, and research and development projects). For purposes of the foregoing, the term "trade secrets" shall mean the broadest and most inclusive interpretation of trade secrets as defined by Section 3426.1(d) of the California Civil Code (the --------------------- Uniform Trade Secrets Act) and cases interpreting the scope of said Section. ii. "Proprietary Property" - The term "Proprietary Property" is ----------- -------- collectively and severally defined as any written or tangible property owned or used by Company in connection with Company's business, whether or not such property also qualifies as Confidential Information. Proprietary Property shall be broadly defined and shall include, by way of example and not limitation, products, samples, equipment, files, lists, books, notebooks, records, documents, memoranda, reports, patterns, schematics, compilations, designs, 5 drawings, data, test results, contracts, agreements, literature, correspondence, spread sheets, computer programs and software, computer print outs, other written and graphic records, and the like, whether originals, copies, duplicates or summaries thereof, affecting or relating to the business of Company, financial statements, budgets, projections, invoices. (2) Ownership of Proprietary Property. Executive acknowledges --------------------------------- that all Proprietary Property which Executive may prepare, use, observe, come into possession of and/or control shall, at all times, remain the sole and exclusive property of Company. Executive shall, upon demand by Company at any time, or upon the cessation of Executive's employment, irrespective of the time, manner, cause or lack of cause of such cessation, immediately deliver to Company or its designated agent, in good condition, ordinary wear and tear and damage by any cause beyond the reasonable control of Executive excepted, all items of the Proprietary Property which are or have been in Executive's possession or under his control, as well as a statement describing the disposition of all items of the Proprietary Property beyond Executive's possession or control in the event Executive has not previously returned such items of the Proprietary Property to Company. (3) Agreement Not to Use or Divulge Confidential Information. -------------------------------------------------------- Executive agrees that he will not, in any fashion, form or manner, unless specifically consented to in writing by Company, either directly or indirectly use, divulge, transmit or otherwise disclose or cause to be used, divulged, transmitted or otherwise disclosed to any person, firm or corporation, in any manner whatsoever (other than in Executive's performance of duties for Company or except as required by law) any Confidential Information of any kind, nature or description. The foregoing provisions shall not be construed to prevent Executive from making use of or disclosing information which is in the public domain through no fault of Executive, provided, however, specific information shall not be deemed to be in the public domain merely because it is encompassed by some general information that is published or in the public domain or in Executive's possession prior to Executive's employment with Company. (4) Acknowledgement of Secrecy. Executive acknowledges that the -------------------------- Confidential Information is not generally known to the public or to other persons who can obtain economic value from its disclosure or use and that the Confidential Information derives independent economic value thereby, and Executive agrees that he shall take all efforts reasonably necessary to maintain the secrecy and confidentiality of the Confidential Information and to otherwise comply with the terms of this Agreement. 6 (5) Inventions, Discoveries. Executive acknowledges that any ----------------------- inventions, discoveries or trade secrets, whether patentable or not, made or found by Executive in the scope of his employment with Company constitute property of Company and that any rights therein now held or hereafter acquired by Executive individually or in any capacity are hereby transferred and assigned to Company, and agrees to execute and deliver any confirmatory assignments, documents or instruments of any nature necessary to carry out the intent of this paragraph when requested by Company without further compensation therefor, whether or not Executive is at the time employed by Company. Provided, however, notwithstanding the foregoing, Executive shall not be required to assign his rights in any invention which qualifies fully under the provisions of Section 2870(a) of the California Labor Code, which provides, in pertinent part, that --------------------- the requirement to assign "shall not apply to any invention that the employee developed entirely on his or her own time without using employer's equipment, supplies, facilities or trade secret information except for those inventions that either: (i) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (ii) Result from any work performed by the employee for the employer." Executive understands that he bears the full burden of proving to Company that an invention qualifies fully under Section 2870(a). By signing this Agreement, Executive acknowledges receipt of a copy of this Agreement and of written notification of the provisions of Section 2870. 5. COMPLIANCE WITH SECURITIES LAWS. Executive acknowledges that Company ------------------------------- and Executive will be subject to the provisions of Sections 10(b), 16(a) and 16(b) of the Securities Exchange Act of 1934. Executive acknowledges that Section 16(a) of the Securities Exchange Act requires Executive to report the ownership or transfer of his stock or other securities in Company to the Securities and Exchange Commission and that Sections 10(b) and 16(b) can prohibit Executive from selling or transferring his stock or securities in Company. Executive agrees that he will comply with Company's policies, as stated from time to time, relating to selling or transferring his stock or securities in Company. 7 6. COMPENSATION. ------------ (A) SALARY. During the term of this Agreement, Company shall pay to ------ Executive a base salary of One Hundred Twenty Thousand Dollars ($120,000) per year. Executive's annual salary shall be reviewed periodically by Company for the purpose of determining whether Executive's salary shall be increased. In no event shall this review take place less frequently than annually. Executive shall also be entitled to receive such bonuses or other compensation from time to time as may be granted to him by Company's Board, in its discretion. (B) ADDITIONAL COMPENSATION. As additional compensation to be paid ----------------------- during the first year of the term of this Agreement, Executive shall receive one-half of one percent of all net international sales of products manufactured by Company up to $15 million, which percentage shall be reduced to one-quarter of one percent of all net international sales in excess of $15 million. "Net international sales" shall be defined as gross international sales less returns, shipping, handling, sales taxes, chargebacks and allowances. International sales shall not include sales made in North America, South America, the Caribbean, Japan, sales made pursuant to the Agreement between Company and China Eye Joint Venture, or sales made to any existing or future joint venture partner or other entity with which Company establishes a business relationship and to which Company sells its products without the services of direct sales persons or distributors. After December 31, 1996, Company shall have the right to review the additional compensation prior to each subsequent year of the term of this Agreement and, at the election of Company, Company shall determine if it will continue to pay the additional compensation or if it will modify the computation of the additional compensation. (C) EMPLOYEE BENEFIT PLANS. Executive shall be entitled, during the ---------------------- term of this Agreement, to participate in any retirement, pension, profit- sharing, insurance, or other plans which may now be in effect or which may be adopted by Company. During the term of this Agreement, Company, at its sole cost and expense, shall provide to Executive: (i) disability insurance, the terms of which shall be determined in the sole discretion of the Board; and (ii) life insurance on the life of Executive in the face amount of Two Hundred Thousand Dollars ($200,000). (D) STOCK OPTIONS. Executive shall be included in the 1996 STAAR ------------- Surgical Company Non-Qualified Stock Plan (the "Plan") as adopted by Company. Pursuant to the terms of the Plan, Executive shall be entitled to purchase thirty thousand (30,000) shares of Company's common stock, which options shall vest over a period of five (5) years (six thousand (6,000) shares each on May 6, 1997, May 6, 1998, May 6, 1999, May 6, 2000 and May 6, 2001, respectively), and all of which option rights shall expire on May 8 6, 2006. The purchase price per share shall be $12.50. Stock issued pursuant to the Plan shall be restricted stock, although Company shall reserve the right to issue registered shares if it so decides. Executive agrees to be bound by the terms of the Plan as adopted. These options shall be non-qualified stock options. (E) SEVERANCE PAY UPON CHANGE OF CONTROL. Upon the sale or ------------------------------------ disposition by Company of substantially all of its business or assets or the sale of the capital stock of Company in connection with the sale or transfer of a controlling interest in Company to a third party or the merger or consolidation of Company with another corporation as part of a sale or transfer of a controlling interest in Company to a third party, Executive shall receive, as additional compensation and not in lieu of his rights under this Agreement, one (1) year's salary. "A controlling interest" shall be defined as 50% or more of the common stock of the Company. "One (1) year's salary" shall be defined as only the cash compensation paid to Executive pursuant to subparagraph (a) above, as it may be modified from time to time, and shall not include employee benefits, incentive stock options, automobile allowance or debt forgiveness, if any. Executive shall be entitled to receive this additional compensation if Executive's employment is terminated as a result of the change of control described herein or, if Executive, at Executive's election, terminates his employment as a result of such change of control. (F) LOANS MADE TO EXECUTIVE. If Company makes any loan to Executive, ----------------------- including any loan that Company may, in its discretion, make to Executive by Company for the purpose of exercising the stock options discussed in subparagraph (d) above, Executive shall be required to keep any such loan adequately secured throughout its term by transferring to Company collateral having a value which is not less than 110% of the unpaid principal and accrued and unpaid interest of the loan. If the value of the collateral is impaired or decreases, Executive shall transfer to Company additional collateral so that the collateral securing repayment of any loan will always equal or exceed 110% of the unpaid principal and accrued and unpaid interest of the loan. 7. REIMBURSEMENT OF BUSINESS EXPENSES. ---------------------------------- (A) REIMBURSEMENT FOR ORDINARY EXPENSES. Company shall promptly ----------------------------------- reimburse Executive for all reasonable business expenses incurred by Executive in connection with the business of Company. However, each such expenditure shall be reimbursable only if Executive furnishes to Company adequate records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of each such expenditure as an income tax deduction. (B) REIMBURSEMENT FOR EXTRAORDINARY EXPENSES. Any single business ---------------------------------------- expense with a cost in excess of Five Thousand 9 Dollars ($5,000) shall be deemed to be an extraordinary business expense. Executive shall not incur any extraordinary business expense unless the expense has been approved by the Chief Executive Officer. If Executive fails to obtain the approval of the Chief Executive Officer, Company may refuse to reimburse Executive for that expense. 8. ANNUAL VACATION/SICK LEAVE. -------------------------- Executive shall be entitled to at least four (4) weeks vacation time each year without loss of compensation. Executive shall be entitled to sick leave in accordance with Company's general policy for its employees. 9. INDEMNIFICATION OF LOSSES. ------------------------- So long as Executive's actions were taken in good faith and in furtherance of Company's business and within the scope of Executive's duties and authority, Company shall indemnify and hold Executive harmless to the full extent of the law from any and all claims, losses and expenses sustained by Executive as a result of any action taken by him to discharge his duties under this Agreement, and Company shall defend Executive, at Company's expense, in connection with any and all claims by stockholders or third parties which are based upon actions taken by Executive to discharge his duties under this Agreement. 10. PERSONAL CONDUCT. ---------------- Executive agrees promptly and faithfully to comply with all present and future policies, requirements, directions, requests and rules and regulations of Company in connection with Company's business. Executive further agrees to conform to all laws and regulations and not at any time to commit any act or become involved in any situation or occurrence tending to bring Company into public scandal, ridicule or which will reflect unfavorably on the reputation of Company. 11. TERMINATION FOR CAUSE. --------------------- (A) TERMINATION BY COMPANY. Company reserves the right to declare ---------------------- Executive in default of this Agreement if Executive willfully breaches or habitually neglects the duties which he is required to perform under the terms of this Agreement, or if Executive commits such acts of dishonesty, fraud, or misrepresentation as would prevent the effective performance of his duties and results in material harm to Company's business, taken as a whole. Company may terminate this Agreement for cause by giving written notice of termination to Executive. With the exception of the covenants included in paragraph 4 above, upon such termination the obligations of Executive and Company under this Agreement shall immediately cease. Such termination shall be 10 without prejudice to any other remedy to which Company may be entitled either at law, in equity, or under this Agreement. If Executive's employment is terminated pursuant to this paragraph, Company shall pay to Executive, within two (2) business days of such termination, any deferred or unpaid compensation to which Executive is entitled at the time of such termination. (B) TERMINATION BY EXECUTIVE. Executive may terminate this Agreement ------------------------ if, in his sole but reasonable judgment, Executive determines that Company has: (i) breached or failed to fulfill any of the representations, warranties, or covenants in any agreements entered into between Company and Executive; (ii) demoted Executive; (iii) required Executive to participate in any felony or other serious crime; (iv) committed any act which may adversely reflect upon the name and reputation of Executive; (v) effectuated any of the following actions (unless Executive voted, in any of his capacities as a director or shareholder of Company, in favor of such action): (A) authorized the future sale or disposition by Company of substantially all of the business or assets of Company, (B) authorized the sale of the capital stock of Company in connection with the sale or transfer of a controlling interest in Company to a third party or parties and its/their affiliates who are not presently affiliated with the present stockholders of Company, (C) authorized the merger or consolidation of Company with another corporation as part of a sale or transfer of a controlling interest in Company to a third party or parties and its/their affiliates who are not presently affiliated with the present stockholders of Company, or (D) authorized the dissolution or liquidation of Company. 12. TERMINATION WITHOUT CAUSE. ------------------------- (A) DEATH. Executive's employment shall terminate upon the death of ----- Executive. Upon such termination, the obligations of Executive and Company under this Agreement shall immediately cease. (B) DISABILITY. Company reserves the right to terminate Executive's ---------- employment upon ten (10) days written notice if, for a period of sixty (60) days, Executive is prevented from discharging his duties under this Agreement due to any physical or mental disability. With the exception of the covenants included in paragraph 4 above, upon such termination the obligations of Executive and Company under this Agreement shall immediately cease. (C) ELECTION. Executive's employment may be terminated at any time -------- by Executive upon not less than one hundred eighty (180) days written notice by Executive to the Board. With the exception of the covenants included in paragraph 4 above, upon such termination the obligations of Executive and Company under this Agreement shall immediately cease. 11 13. MISCELLANEOUS. ------------- (A) PREPARATION OF AGREEMENT. It is acknowledged by each party that ------------------------ such party either had separate and independent advice of counsel or the opportunity to avail itself or himself of same. In light of these facts it is acknowledged that no party shall be construed to be solely responsible for the drafting hereof, and therefore any ambiguity shall not be construed against any party as the alleged draftsman of this Agreement. (B) COOPERATION. Each party agrees, without further consideration, ----------- to cooperate and diligently perform any further acts, deeds and things and to execute and deliver any documents that may from time to time be reasonably necessary or otherwise reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. (C) INTERPRETATION. -------------- (i) Entire Agreement/No Collateral Representations. Each party ---------------------------------------------- expressly acknowledges and agrees that this Agreement, including all exhibits attached hereto: (1) is the final, complete and exclusive statement of the agreement of the parties with respect to the subject matter hereof; (2) specifically supersedes and replaces the "Employment Contract for Director of European Sales" entered into by and between Company and Executive on March 23, 1992 as well as any prior or contemporaneous agreements, promises, assurances, guarantees, representations, understandings, conduct, proposals, conditions, commitments, acts, course of dealing, warranties, interpretations or terms of any kind, oral or written (collectively and severally, the "Prior Agreements"), and that any such prior agreements are of no force or effect except as expressly set forth herein; and (3) may not be varied, supplemented or contradicted by evidence of Prior Agreements, or by evidence of subsequent oral agreements. Any agreement hereafter made shall be ineffective to modify, supplement or discharge the terms of this Agreement, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement of the modification or supplement is sought. (ii) Waiver. No breach of any agreement or provision herein ------ contained, or of any obligation under this Agreement, may be waived, nor shall any extension of time for performance of any obligations or acts be deemed an extension of time for performance of any other obligations or acts contained herein, except by written instrument signed by the party to be charged or as otherwise expressly authorized herein. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or a waiver or relinquishment of any other agreement or provision or right or power herein contained. 12 (iii) Remedies Cumulative. The remedies of each party under ------------------- this Agreement are cumulative and shall not exclude any other remedies to which such party may be lawfully entitled. (iv) Severability. If any term or provision of this Agreement ------------ or the application thereof to any person or circumstance shall, to any extent, be determined to be invalid, illegal or unenforceable under present or future laws effective during the term of this Agreement, then and, in that event: (A) the performance of the offending term or provision (but only to the extent its application is invalid, illegal or unenforceable) shall be excused as if it had never been incorporated into this Agreement, and, in lieu of such excused provision, there shall be added a provision as similar in terms and amount to such excused provision as may be possible and be legal, valid and enforceable, and (B) the remaining part of this Agreement (including the application of the offending term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable) shall not be affected thereby and shall continue in full force and effect to the fullest extent provided by law. (v) Time is of the Essence. It is expressly understood and ---------------------- agreed that time of performance is strictly of the essence with respect to each and every term, condition, obligation and provision hereof and that the failure to timely perform any of the terms, conditions, obligations or provisions hereof by any party shall constitute a material breach and a noncurable (but waivable) default under this Agreement by the party so failing to perform. (vi) No Third Party Beneficiary. Notwithstanding anything else -------------------------- herein to the contrary, the parties specifically disavow any desire or intention to create any third party beneficiary obligations, and specifically declare that no person or entity, other than as set forth in this Agreement, shall have any rights hereunder or any right of enforcement hereof. (vii) No Reliance Upon Prior Representation. The parties ------------------------------------- acknowledge that no other party has made any oral representation or promise which would induce them prior to executing this Agreement to change their position to their detriment, partially perform, or part with value in reliance upon such representation or promise; the parties acknowledge that they have taken such action at their own risk; and the parties represent that they have not so changed their position, performed or parted with value prior to the time of their execution of this Agreement. (viii) Headings; References; Incorporation; Gender. The headings ------------------------------------------- used in this Agreement are for convenience and reference purposes only, and shall not be used in construing or 13 interpreting the scope or intent of this Agreement or any provision hereof. References to this Agreement shall include all amendments or renewals thereof. All cross-references in this Agreement, unless specifically directed to another agreement or document, shall be construed only to refer to provisions within this Agreement, and shall not be construed to be referenced to the overall transaction or to any other agreement or document. Any exhibit referenced in this Agreement shall be construed to be incorporated in this Agreement. As used in this Agreement, each gender shall be deemed to include the other gender, including neutral genders or genders appropriate for entities, if applicable, and the singular shall be deemed to include the plural, and vice versa, as the context requires. (D) ENFORCEMENT. ----------- (i) Applicable Law. This Agreement and the rights and -------------- remedies of each party arising out of or relating to this Agreement (including, without limitation, equitable remedies) shall be solely governed by, interpreted under, and construed and enforced in accordance with the laws (without regard to the conflicts of law principles thereof) of the State of California, as if this agreement were made, and as if its obligations are to be performed, wholly within the State of California. (ii) Consent to Jurisdiction; Service of Process. Any ------------------------------------------- action or proceeding arising out of or relating to this Agreement shall be filed in and heard and litigated solely before the state courts of California located within the County of Los Angeles. Each party generally and unconditionally accepts the exclusive jurisdiction of such courts and to venue therein, consents to the service of process in any such action or proceeding by certified or registered mailing of the summons and complaint in accordance with the notice provisions of this Agreement, and waives any defense or right to object to venue in said courts based upon the doctrine of "Forum Non Conveniens". Each party irrevocably agrees to be bound by any judgement rendered thereby in connection with this Agreement. (iii) Waiver of Right to Jury Trial. Each party hereby ----------------------------- waives such party's respective right to a jury trial of any claim or cause of action based upon or arising out of this Agreement. Each party acknowledges that this waiver is a material inducement to each other party hereto to enter into the transaction contemplated hereby, that each other party has already relied upon this waiver in entering into this Agreement, and that each other party will continue to rely on this waiver in their future dealings. Each party warrants and represents that such party has reviewed this waiver with such party's legal counsel, and that such party has knowingly and voluntarily waived its jury trial rights following consultation with legal counsel. 14 (vi) Consent to Specific Performance and Injunctive Relief and Waiver ---------------------------------------------------------------- of Bond or Security. Each party acknowledges that Company may, as a result of - ------------------- Executive's breach of the covenants and obligations included in paragraph 4 of this Agreement, sustain immediate and long-term substantial and irreparable injury and damage which cannot be reasonably or adequately compensated by damages at law. Each party agrees that in the event of Executive's breach or threatened breach of the covenants and obligations included in paragraph 4, Company shall be entitled to obtain from a court of competent jurisdiction or arbitration, as the case may be under this Agreement, equitable relief, including, without limitation, enforcement of all of the provisions of this Agreement by specific performance and/or temporary, preliminary and/or permanent injunctions enforcing any of Company's rights, requiring performance by Executive, or enjoining any breach by Executive, all without proof of any actual damages that have been or may be caused to Company by such breach or threatened breach and without the posting of bond or other security in connection therewith. Executive waives the claim or defense that Company has an adequate remedy at law and Executive shall not allege or otherwise assert the legal position that any such remedy at law exists. Each party agrees and acknowledges: (1) that the terms of this paragraph are fair, reasonable and necessary to protect the legitimate interests of the other party; (2) that this waiver is a material inducement to the other party to enter into the transaction contemplated hereby; (3) that the other party has already relied upon this waiver in entering into this Agreement; and (4) that each party will continue to rely on this waiver in their future dealings. Each party warrants and represents that such party has reviewed this provision with such party's legal counsel, and that such party has knowingly and voluntarily waived its rights following consultation with legal counsel. (v) Attorneys' Fees and Costs. If any party institutes or should the ------------------------- parties otherwise become a party to any Action Or Proceeding (as defined below) based upon or arising out of this Agreement including, without limitation, to enforce or interpret this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or any provision hereof, or for a declaration of rights in connection herewith, or for any other relief, including equitable relief, in connection herewith, the Prevailing Party in any such Action Or Proceeding, whether or not such Action Or Proceeding proceeds to final judgement or determination, shall be entitled to receive from the non-Prevailing Party as a cost of suit, and not as damages, all Costs And Expenses (as defined below) of prosecuting or defending the Action Or Proceeding, as the case may be, including, without limitation, reasonable Attorneys' And Other Fees. (vi) Definitions. The term "Action Or Proceeding" is defined as any ----------- and all claims, suits, actions, notices, 15 inquiries, proceedings, hearings, arbitrations or other similar proceedings, including appeals and petitions therefrom, whether formal or informal, governmental or non-governmental, or civil or criminal. The term "Prevailing Party" is defined as the party who is determined to prevail by the Court after its consideration of all damages and equities in the Action Or Proceeding, whether or not the Action Or Proceeding proceeds to final judgment. The Court shall retain the discretion to determine that no party is the Prevailing Party in which case no party shall be entitled to recover its Costs And Expenses under this subparagraph 12(d). The term "Attorneys' And Other Fees" is defined as attorneys' fees, accountants' fees, fees of other professionals, witness fees (including experts engaged by the parties, but excluding shareholders, officers, employees or partners of the parties), and any and all other similar fees incurred in the prosecution or defense of the Action Or Proceeding. The term "Costs And Expenses" is defined as the cost to take depositions, the cost to arbitrate this dispute, if applicable, and the costs and expenses of travel and lodging incurred with respect to the Action Or Proceeding, provided, however, the party incurring said travel and lodging expense must ordinarily travel over one hundred (100) miles, one way, from his or her residence in incurring such expense. (E) NO ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES BY EXECUTIVE. ------------------------------------------------------------ Executive's rights and benefits under this Agreement are personal to him and therefore (i) no such right or benefit shall be subject to voluntary or involuntary alienation, assignment or transfer; and (ii) Executive may not delegate his duties or obligations hereunder. (F) NOTICES. Unless otherwise specifically provided in this ------- Agreement, all notices, demands, requests, consents, approvals or other communications (collectively and severally called "Notices") required or permitted to be given hereunder, or which are given with respect to this Agreement, shall be in writing, and shall be given by: (A) personal delivery (which form of Notice shall be deemed to have been given upon delivery), (B) by telegraph or by private airborne/overnight delivery service (which forms of Notice shall be deemed to have been given upon confirmed delivery by the delivery agency), (C) by electronic or facsimile or telephonic transmission, provided the receiving party has a compatible device or confirms receipt thereof (which forms of Notice shall be deemed delivered upon confirmed transmission or confirmation of receipt), or (D) by mailing in the United States mail by registered or certified mail, return receipt requested, postage prepaid (which forms of Notice shall be deemed to have been given upon the fifth {5th} business day following the date mailed). Each party, and their respective counsel, hereby agree that if Notice is to be given hereunder by such party's counsel, such counsel may communicate directly with all principals, as required to comply with the foregoing notice provisions. Notices shall be addressed to the address hereinabove set forth in the introductory 16 paragraph of this Agreement, or to such other address as the receiving party shall have specified most recently by like Notice, with a copy to the other parties hereto. Any Notice given to the estate of a party shall be sufficient if addressed to the party as provided in this subparagraph. (G) COUNTERPARTS. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, and all of which together shall constitute one and the same instrument, binding on all parties hereto. Any signature page of this Agreement may be detached from any counterpart of this Agreement and reattached to any other counterpart of this Agreement identical in form hereto by having attached to it one or more additional signature pages. (H) EXECUTION BY ALL PARTIES REQUIRED TO BE BINDING; ELECTRONICALLY --------------------------------------------------------------- TRANSMITTED DOCUMENTS. This Agreement shall not be construed to be an offer and - --------------------- shall have no force and effect until this Agreement is fully executed by all parties hereto. If a copy or counterpart of this Agreement is originally executed and such copy or counterpart is thereafter transmitted electronically by facsimile or similar device, such facsimile document shall for all purposes be treated as if manually signed by the party whose facsimile signature appears. IN WITNESS WHEREOF, the parties have executed this Agreement on the 26th day of May, 1996. EXECUTIVE: COMPANY: STAAR SURGICAL COMPANY, a Delaware corporation /s/ Donald D. Ferguson - ------------------------ BY: /s/ John R. Wolf Donald D. Ferguson ------------------------- 17 EX-21 18 LIST OF SIGNIFICANT SUBSIDIARIES EXHIBIT 21 List of Significant Subsidiaries Name County of Organization ---- ---------------------- STAAR Surgical AG Switzerland Canon STARR Japan EX-24 19 POWERS OF ATTORNEY POWER OF ATTORNEY OF OFFICERS AND/OR DIRECTORS OF STAAR SURGICAL COMPANY The undersigned officer and/or director of Staar Surgical Company, a Delaware corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending January 3, 1997, an Integrated Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints John R. Wolf and William Huddleston and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 26th day of March, 1997. /s/ Donald R. Sanders ------------------------------- Donald R. Sanders POWER OF ATTORNEY OF OFFICERS AND/OR DIRECTORS OF STAAR SURGICAL COMPANY The undersigned officer and/or director of Staar Surgical Company, a Delaware corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending January 3, 1997, an Integrated Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints John R. Wolf and William Huddleston and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 25th day of March, 1997. /s/ John R. Wolf ------------------------------- John R. Wolf POWER OF ATTORNEY OF OFFICERS AND/OR DIRECTORS OF STAAR SURGICAL COMPANY The undersigned officer and/or director of Staar Surgical Company, a Delaware corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending January 3, 1997, an Integrated Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints John R. Wolf and William Huddleston and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 26th day of March, 1997. /s/ Michael R. Deitz, M.D. ------------------------------- Michael R. Deitz, M.D. POWER OF ATTORNEY OF OFFICERS AND/OR DIRECTORS OF STAAR SURGICAL COMPANY The undersigned officer and/or director of Staar Surgical Company, a Delaware corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending January 3, 1997, an Integrated Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints John R. Wolf and William Huddleston and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 25th day of March, 1997. /s/ Andrew F. Pollet ------------------------------- Andrew F. Pollet POWER OF ATTORNEY OF OFFICERS AND/OR DIRECTORS OF STAAR SURGICAL COMPANY The undersigned officer and/or director of Staar Surgical Company, a Delaware corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending January 3, 1997, an Integrated Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints John R. Wolf and William Huddleston and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 26th day of March, 1997. /s/ Peter J. Utrata ------------------------------- Peter J. Utrata, M.D. POWER OF ATTORNEY OF OFFICERS AND/OR DIRECTORS OF STAAR SURGICAL COMPANY The undersigned officer and/or director of Staar Surgical Company, a Delaware corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending January 3, 1997, an Integrated Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints John R. Wolf and William Huddleston and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 25th day of March, 1997. /s/ William C. Huddleston ------------------------------- William C. Huddleston EX-27 20 FINANCIAL DATA SCHEDULE
5 12-MOS JAN-03-1997 JAN-03-1997 6,469,515 0 6,938,775 111,525 12,365,867 28,670,318 17,196,358 8,275,369 51,119,019 13,184,586 0 0 0 130,707 36,473,470 51,119,019 41,212,511 42,212,511 10,195,396 10,195,396 21,940,160 36,309 557,406 10,229,640 3,338,544 6,891,096 0 0 0 6,891,096 .50 .50
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