Note 10 — Notes Payable

Lines of Credit

The Company’s Japanese subsidiary, STAAR Japan, has an agreement, as amended on June 30, 2009, with Mizuho Bank which provides for borrowings of up to 300,000,000 Yen (approximately $3.9 million based on the rate of exchange on December 30, 2011), at an interest rate equal to the Tokyo short-term prime interest rate (approximately 1.475% as of December 30, 2011) plus 1.125% and may be renewed annually (the current line expires on April 2, 2012). The credit facility is not collateralized. The Company had 200,000,000 Yen outstanding on the line of credit as of December 30, 2011 and December 31, 2010, (approximately $2.6 million and $2.5 million based on the foreign exchange rates on December 30, 2011 and December 31, 2010, respectively) which approximates fair value due to the short-term maturity and market interest rates of the line of credit. In case of default, the interest rate will be increased to 14% per annum. As of December 30, 2011, 100,000,000 Yen (approximately $1.3 million, based on the rate of exchange on December 30, 2011) was available for borrowing.

In August 2010, the Company’s wholly-owned Swiss subsidiary, STAAR Surgical AG, entered into a credit agreement with Credit Suisse (the “Bank”). The credit agreement provides for borrowing of up to 1,000,000 CHF (Swiss Francs) $1,060,000 at the rate of exchange on December 30, 2011), to be used for working capital purposes. Accrued interest and 0.25% commissions on average outstanding borrowings is payable quarterly and the interest rate will be determined by the Bank based on the then prevailing market conditions at the time of borrowing. The credit agreement is automatically renewed on an annual basis based on the same terms assuming there is no default. The credit agreement may be terminated by either party at any time in accordance with its general terms and conditions. The credit facility is not collateralized and contains certain conditions such as providing the Bank with audited financial statements annually and notice of significant events or conditions as defined in the credit agreement. The Bank may also declare all amounts outstanding to be immediately due and payable upon a change of control or a “material qualification” in STAAR Surgical AG’s independent auditors’ report. There were no borrowings outstanding as of December 30, 2011 and the full amount of the line was available for borrowing.

Covenant Compliance

The Company is in compliance with covenants of its credit facilities and lines of credit as of December 30, 2011.

Broadwood Promissory Note

The Company had a $5 million principal amount of indebtedness under an Amended and Restated Senior Secured Promissory Note (the “Note”) held by Broadwood Partners, L.P. (“Broadwood”), which was issued on April 13, 2009 and was scheduled to mature on December 14, 2010.

On June 22, 2010, the Company repaid the $5 million principal plus $322,000 in accrued interest. As a result of repaying the Note, the Company recorded a $267,000 loss on early extinguishment due to the write-off of the remaining unamortized debt discount and issuance costs on the date of the repayment; this loss is included in Other income (expense), net, in the accompanying consolidated statements of operations.

As additional consideration for the loan, on December 14, 2007, the Company also entered into a Warrant Agreement with Broadwood (the “December 2007 Warrant Agreement”) granting the right to purchase up to 700,000 shares of Common Stock at an exercise price of $4.00 per share, exercisable for a period of six years. The December 2007 warrant has been accounted for as an equity instrument.

The December 2007 Note also provided that if any indebtedness remained outstanding under the Note on June 1, 2009, the Company would issue additional warrants on the same terms as set forth in the December 2007 Warrant Agreement in a number equal to 700,000 times the percentage of the original $5 million principal that remains outstanding. On June 1, 2009, as the Note remained outstanding, the Company issued an additional 700,000 warrants to Broadwood, which were valued at approximately $290,000 and included as debt discount and additional paid–in capital in the consolidated balance sheet upon issuance. The December 2007 Warrant Agreement provides that the Company will register the shares issuable upon exercise of the warrants with the Securities Exchange Commission. The Company filed and secured effectiveness of a registration statement covering resale of the shares. If the Company fails to keep the registration statement effective and the lapse exceeds permitted suspensions, as the holder’s sole remedy, the Company will be obligated to issue an additional 30,000 warrants for each month that the Company does not meet this effectiveness requirement through the term of the warrants (“Penalty Warrants”) (a maximum of approximately 1,230,000 warrants issuable as of December 30, 2011 under an assumed noncompliance as of that date). The Company does not consider the issuance of Penalty Warrants likely.

The fair value of the warrants was treated as an additional discount on the loan and was being amortized using the effective interest method over the life of the loan (which approximates an effective interest rate of 32% per annum, assuming the 20% cash interest rate is maintained throughout the life of the Note). During the years ended December 31, 2010 and January 1, 2010, approximately $236,000 and $379,000 of the discount was amortized and included in interest expense.

The fair value of the warrants was estimated on June 1, 2009 issuance dates using a Black-Scholes option valuation model applying the assumptions noted in the following table:

	As of June 1, 2009
Common stock price per share	$	1.01
Number of warrants		700,000
Expected dividends		0	%
Expected volatility		74.4	%
Risk-free rate		3.28	%
Life (in years)		6.0

Broadwood also holds warrants to purchase 70,000 shares of Common Stock at an exercise price of $6.00 per share, which was issued in connection with a loan of $4 million by Broadwood under a Promissory Note dated March 21, 2007. The March 21, 2007 Promissory Note was repaid in full on June 2007. As explained in Note 1, these warrants were classified as a liability. As of December 30, 2011 and December 31, 2010, the fair value was $362,000 and $244,000, and the $118,000 change in fair value since December 31, 2010 has been recorded in other expense.

The fair value of the warrant that was classified as a liability on December 30, 2011 and December 31, 2010 were based on Black-Scholes option valuation model applying the assumption noted on the following table below:

	December 30, 2011			December 31, 2010
Common stock price per share	$	10.49		$	6.10
Number of warrants		70,000			70,000
Expected dividends		0	%		0	%
Expected volatility		63.61	%		103.86	%
Risk-free rate		.25	%		1.02	%
Life (in years)		1.25			2.25