UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 22, 2003
STAAR SURGICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 0-11634 95-3797439
(State or other jurisdiction) (Commission File Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
1911 Walker Avenue, Monrovia, California 91016
(Address of principal executive offices) (Zip Code)
(626) 303-7902
(Registrant's telephone number, including area code)
Item 4. Changes in Registrant's Certifying Accountant
(a) On August 22, 2003, STAAR Surgical Company ("STAAR") dismissed
McGladrey & Pullen, LLP ("McGladrey"), its principal independent accountant. The
decision to dismiss McGladrey was made by the Audit Committee of the Board of
Directors of STAAR.
McGladrey was engaged as STAAR's principal independent accountant on
June 6, 2003, and during its engagement McGladrey has not issued a report on the
financial statements of STAAR.
During the period of McGladrey's engagement a disagreement as to
accounting principles and financial statement disclosure arose among McGladrey,
STAAR and STAAR's previous auditor, BDO Seidman, LLP ("BDO"), which disagreement
was not resolved to the satisfaction of McGladrey. BDO had been STAAR's
principal independent accountant between 1993 and May 30, 2003.
On July 29, 2002, McGladrey informed the Audit Committee of the Board
of Directors of STAAR that McGladrey had been reviewing certain promissory notes
of former officers and directors (the "Notes"), which had been given in
connection with the exercise of stock options. McGladrey informed the Audit
Committee that based on a review of the relevant facts and circumstances,
McGladrey had reached a preliminary conclusion that the Notes, which had
historically been accounted for as full recourse notes, should instead have been
accounted for as non-recourse notes. McGladrey confirmed its conclusion to STAAR
on August 13, 2003, and informed BDO in writing of its conclusion on August 14,
2003. The determination that the Notes were non-recourse obligations would
effectively result in the awards exercised with the Notes continuing to be
accounted for as stock options rather than completed stock purchases. Because of
the underlying terms of the initial awards and subsequent modifications to the
Notes, McGladrey further believes that the awards related to the Notes should be
accounted for under variable plan accounting. Accordingly, McGladrey believes
that the financial statements previously audited by BDO as of and for fiscal
years 2002, 2001 and 2000 may have been misstated and that accounting for the
awards would require adjustment to those financial statements.
On August 21, 2003, BDO completed an analysis of the accounting
treatment of the Notes. BDO informed STAAR and McGladrey that it had no basis to
conclude that STAAR's historical treatment of the Notes as full recourse
obligations was incorrect and that a restatement based on a change in character
of the Notes and variable plan accounting for the related awards would be
incorrect. On August 21, 2003, McGladrey re-confirmed its conclusion that the
Notes should be re-characterized as non-recourse obligations, that the related
awards were subject to variable plan accounting, and that restatements would be
necessary.
After considering the information and analyses of the two firms,
STAAR's management determined that its historical treatment of the Notes was
correct, basing its decision on a number of factors, including the following:
o Management believes that the Notes had always been regarded as
full recourse obligations and that they had been accounted for
according to their substance. Prior legal counsel had advised
management that both STAAR's option plan and Delaware law would
not permit the exercise of options for non-recourse notes.
o Former management and present management have collected the full
principal amount of mature Notes. Even in circumstances that made
collection difficult, such as bankruptcy or litigation, current
management has realized the full principal amount of $5.4 million
of Notes (paid in cash or by surrender of stock) from the
approximately $7.4 million owed at the time it assumed authority.
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o McGladrey was reluctant to identify the single specific triggering
point or event which caused the character of the Notes to change,
and in the opinion of management the conclusions that led
McGladrey to determine that the Notes should be accounted for as
non-recourse notes were subjective.
o BDO afforded management direct access to a technical team in its
national office with specific expertise in the area of accounting
for compensation arrangements to review all of the pertinent facts
surrounding the Notes.
o BDO's technical team reached definitive conclusion that
management's characterization of the Notes as full recourse
obligations had not been contradicted by facts or circumstances,
and that as a result variable plan accounting was not required and
a restatement of the historic financial statements would be wrong.
On August 22, 2003, the Audit Committee accepted the conclusions of
management, dismissed McGladrey and re-engaged BDO to review its financial
statements for the quarter ended July 4, 2003. The Audit Committee also
determined that STAAR should seek the guidance of the Office of the Chief
Accountant of the SEC's Division of Corporation Finance as soon as possible
regarding the subject matter of the disagreement and should be prepared to
promptly make any restatements or adjustments required by such guidance.
If required, the characterization of the Notes as non-recourse
obligations and the application of variable plan accounting to the related
awards would have a material effect on STAAR's reported financial position and
results of operations during recent periods. The adjustments would not affect
STAAR's cash position or operations, but would have the following principal
effects on the Company's financial statements:
o The exercise of a stock option with a non-recourse note is treated
as the grant of a new option or the continuation of the existing
option, rather than a completed share purchase and, depending upon
the terms of the notes, may be subject to variable plan
accounting. Accordingly, the Company would record a compensation
charge against earnings during each period in which a Note was
unpaid and the value of the stock purchased with the Note exceeded
the initial principal amount of the Note.
o Prior reserves established for the possibility of default on the
Notes were recorded as charges against income in 2000 and 2001
totaling $3.6 million. No reserve would have been required if the
Notes had been accounted for as non-recourse. As a result, income
would have been understated in 2000 and 2001 by the amount of such
charges.
o Certain amounts recorded as retained earnings on STAAR's balance
sheet would be re-classified as paid-in capital.
o STAAR reported accrued interest receivable on certain Notes as
"other income" in the amount of $280,430 for the quarterly period
ended April 4, 2003, and included $40,876 in accrued interest in
the net income announced for the quarterly period ended July 4,
2003. The accrued interest would instead have been recorded as
additional paid-in capital and income for the period would have
been reduced by a like amount. Similar adjustments might have been
necessary for other periods.
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STAAR estimates the cumulative effect of these changes would have been non-cash
charges and credits against income as follows:
Pro Forma Estimated Compensation Expense
(In Thousands)
Cumulative
Through Fiscal Year Ending Quarterly Period Ending Total
January 2 January 1, December December December January 3, April 4, July 4, Cumulative
Period 1998 1999 31, 1999 29, 2000 28, 2001 2003 2003 2003 Effect
------ ---- ---- -------- -------- -------- ---- ---- ---- ------
Estimated increase
(decrease) in net $(29,099) $17,507 $(4,437) $(4,966) $18,700 $97 $(1,391) $(7,652) $(11,241)
income =========
These estimates of the effect on net income have not been reviewed by
either McGladrey or BDO, and are the estimates of STAAR management. If STAAR is
required to adopt the accounting principles recommended by McGladrey, these
estimates will be reviewed by STAAR's independent accountants, which could
result in material changes to the estimated amounts.
The disagreement between STAAR and McGladrey regarding accounting
treatment of the Notes has not been resolved to the satisfaction of McGladrey
and is the type of disagreement described in Item 304(a)(1)(iv) of Regulation
S-K. STAAR has authorized McGladrey to respond fully to inquiries of BDO
concerning the subject matter of the disagreement.
STAAR has provided McGladrey with a copy of the above disclosures and
requested that McGladrey furnish STAAR with a letter addressed to the Securities
and Exchange Commission stating whether McGladrey agrees with the above
statements and, if not, stating the respects in which it does not agree. A copy
of the letter from McGladrey will be provided as Exhibit 16.1 to an amendment to
this report.
(b) On August 22, 2003, STAAR engaged BDO as its principal independent
accountant. The decision to re-engage BDO was made by the Audit Committee upon
the recommendation of management.
During the two most recent fiscal years and the subsequent interim
period prior to the re-engagement BDO, the only matter set forth in Item
304(a)(2)(i)-(ii) of Regulation S-K on which STAAR has consulted with BDO is the
disagreement with McGladrey concerning the accounting treatment of the Notes,
which is described above.
This Report on Form 8-K contains statements which constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements include comments regarding the intent, belief or
current expectations of STAAR and its management. The words "anticipates,"
"expects," "intends," "plans," variations thereof and similar expressions are
intended to identify forward-looking statements. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements. These
risks and uncertainties include the possibility of adjustments to STAAR's
historical financial reports and the magnitude of those adjustments, if
required, and the factors discussed in STAAR's other documents filed with the
Securities and Exchange Commission.
Item 7. Financial Statements and Exhibits
(a) Not applicable.
(b) Not applicable.
(c) Exhibits. The following is a list of exhibits filed as a part of this
report.
Exhibit Number Description
-------------- -----------
16.1* Letter of McGladrey & Pullen, LLP regarding change in
independent auditors.
*To be filed by amendment.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAAR SURGICAL COMPANY
Date: August 25, 2003 By: /s/ John Bily
____________________________________
John Bily
Chief Financial Officer
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