STAAR Surgical Co (STAA) 2002 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Staar Surgical conference call for the third quarter ended September 27, 2002. On the call will be David Bailey, Chairman, President and Chief Executive Officer of Staar Surgical Company, who will be joined by John Bily, Chief Financial Officer. During the course of this conference call the company may make projections or other forward-looking remarks regarding future events, or the future financial performance of Staar Surgical Company. We wish to caution you that such statements are just predictions, and actual events or results may differ materially. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, including it's most recent Form 10K, any subsequent 8K forms and the Form 10Q for the 2002 year. These documents contain important factors that could cause actual results to differ materially from those contained in the company's projections and forward-looking statements. Now I would like to introduce Mr. David Bailey, Chairman, Chief Executive Officer and President of Staar Surgical Company.

Thank you operator. I'd like to welcome everyone to Staar Surgical's quarter three conference call. Before I hand over to John to talk to the numbers, I'd like to inform participants that we also have available in the room Helene Lamielle-ph, our Chief Scientific Officer, and also Nick Curtis, our Senior Vice President of Sales and Marketing for North America. Debra Andrews is also available, who's our Global Controller. During the question and answer period all individuals will be happy to answer questions. With that said, I'd like to hand over to John Bily, our CFO, to talk through and review the financials.

Thank you David. I'd like to welcome all the participants to the financial portion of our Q3 conference call. Good afternoon. I'll start with a brief summary. During the third quarter Staar continued to focus on its core operating activities in the rebuilding of the cataract business. The research and development organization was dedicated to the U.S. FDA submission for the ICL and launching a new clinical program for the Toric ICL submission. Additionally approval was received during the quarter to sell the ICL in Korea.

Significant efforts in R&D were also devoted to lens insertion systems, and expanding the diopter range of the three-piece column or IOL. Manufacturing costs continue to be managed in line with plans and expectations, and our plant in Switzerland is coming up the learning curve on Toric ICL production. Working capital management and cash flow is a priority as we work toward our turn around objectives in the U.S. FDA approval of the ICL.

Cash flow from operating and investing activities was $160,000 positive for the quarter. Sales were disappointing. Gross profit improved marginally over Q2 2002, and operating expenses were again reduced over the prior year and year-to-date periods.

Net sales for the quarter were $11.2 million or 7.8% below prior year results. This reduction in sales was due largely to decreased unit sales of IOL's in the U.S. marketplace. Sales in our German and Australian subsidiaries increased 11% over Q3 2001. Viscoelastic sales increased 146%, ICL sales were flat to the prior quarter and the Aqua Flow glaucoma drainage device increased 30% over the same quarter last year.

For the year-to-date period, net sales were $35 million, or 8% below the prior year-to-date period. This sales decline was again primarily due to IOL unit sales declines in the U.S., international unit IOL sales also declined. Partially offsetting these declines was a 33% increase in ICL sales, a 101% increase in the AquaFlow device, and a 351% increase in viscoelastic sales. Sales in our German distribution subsidiary grew 5% over the same period last year.

Gross profit in the third quarter was 50.2% versus 55% in the prior year period. This decline in margin is due to two factors, high cost IOL inventory produced in 2001 and the negative impact of declining IOL sales and increasing distribution sales. This was especially evident in Q3 as [Damalined] compared to prior year quarter increased over 11% while U.S. sales declined over 14%. During the third quarter the vast majority of the U.S. high cost IOL inventory layers were depleted and this should no longer impact our U.S. IOL profit margins.

Gross profit for the nine-month period was 49.6% versus a prior year gross profit of 57.7. That prior year percentage excludes one-time charges of $5.6 million incurred in 2001. The year-to-date period was heavily impacted by the IOL high cost inventory, and also by the mix shift away from U.S. IOLs and the growth in the German distribution business. Year-over-year growth in the high margin ICL and AquaFlow lines positively impacted gross profit. The company expects gross margins to continue to improve due to the depletion of the high cost IOL inventory, continued growth in the ICL and AquaFlow businesses. The company has been successful in managing down inventory and in keeping current production costs down by aggressive action in our manufacturing facilities.

G&A expenses were $131,000 favorable for the quarter and $46,000 favorable for the year-to-date period. Marketing and selling expenses for Q3 were $450,000 favorable to the prior year quarter, and a full $2.6 million favorable to prior year, year-to-date. Decreased commissions, cost containment measures and subsidiary closes account for this significant improvement. Staar's investment in R&D, clinical and regulatory activities increased by $220,000 in the quarter, and by $520,000 in the year-to-date period.

R&D expenses as a percent of revenue were 8.9 and 8.7% compared to 6.4 and 6.7% for the same periods in 2001. This increased spending is due to ICL and Toric, ICL clinical programs, Toric ICL development, columnar three-piece development and efforts on lens insertion systems.

Non-recurring charges for the quarter decreased $1.9 million. Charges taken in the quarter related to employee separation. For the year to day period, non-recurring charges decreased $650,000 over prior year. Non-recurring charges in the year-to-date period were $1.5 million and related to deferred losses resulting from the translation of foreign currency statements into U.S. dollars of subsidiaries closed, and the employee separation mentioned for the third quarter.

Other expenses for Q3 decreased $35,000 due to exchange gains recorded during the period, partially offset by decreased income from the company's joint venture with Canon Staar. Other expenses net for the year-to-date period increase $500,000 over prior year, due primarily to decreased income from the Canon Staar joint venture, decreased interest income partially offset by decreased interest expense.

For the quarter and year-to-date periods ended September 27, 2002, the company recorded no income tax benefits on U.S. entity losses, consistent with the policy adopted early in the year. Income tax benefits on U.S. losses were recorded in the prior year periods. As a result, income taxes increased $1.3 million in the quarter, and $3.9 million in the year-to-date period. The accounting treatment for U.S. entity tax benefits does not impact at all the company's ability to utilize current or future tax benefits.

Net loss for quarter three was $2.1 million, or 12 cents per share, versus a net loss of $2 million, or 12 cents per share, in Q3 of 2001. Net loss for the year-to-date period was $7 million or 41 cents per share, versus a net loss of $6.4 million or 38 cents in the prior year-to-date period.

Cash flow generated in operating activities during Q3 was $308,000 positive. Cash used in investing activities, primarily the purchase of property, plant and equipment, was $148,000. For the year-to-date period, cash flow generated from operating activities was $2,000 positive. Cash used in investing activities was $773,000. Cash provided from financing activates was $209, which is increase in loans. The effective exchange rate on cash was $372,000 positive and the net decrease in cash was $190,000.

Let's spend a moment on our secured revolving line of credit. During the third quarter the company was not in compliance with certain restrictive covenants of its domestic loan agreement. Specifically operating income and tangible net worth. Covenant violations in August and September were waived, and the agreement was renegotiated. The balance outstanding on the note as of September 27, 2002 was $3.2 million. Thank you. I would now like to turn the call over to David Bailey, the CEO of Staar Surgical.

Thanks John. As stated on our last conference call, Staar's principal objective is to insure through effective commercialization that the ICL in the U.S. represent the next paradigm shift in refractive surgery, thus becoming the core business for Staar. Prior to FDA approval, our goal is to create a transparent and financially viable business based on the existing, but enhanced base cataract products augmented by the new emerging AquaFlow technology, and the ICL in international markets.

While management believes this strategy to be sound, the route to profitability is proving to be more rocky than anticipated. In particular, stabilizing the IOL sales base is proving extremely difficult, particularly in the U.S. market. While many things are on track, the U.S. revenue issue continues to be the stand out item, which is slowing down our progress to profitability. Overall sales decreased $953,000 for the three months ended September 27, 2002, an approximately 8% decrease versus prior year. This is in line with the $2 million revenue decline during the first half of 2002 versus the same period in '01.

The decreased sales for quarter three is again due to decreased sales of IOLs in the U.S., and to a much lesser extent, in Latin America. ICL sales were flat for the quarter, primarily reflecting the summer seasonality in Europe. AquaFlow, STAARVISC and other cataract products increased during the quarter, partially offsetting the shortfall in IOL sales. Sales to Asia Pacific distributors increased following ICL approval in Korea. Subsequent to the April 2002 approval, Korea has quickly become our number one ICL distributor market. Sales in Europe and Australia also increased marginally over the third quarter of '01. This despite the closure of certain affiliates in Europe, which reduced end user revenues in four countries.

For the nine months ended September 27 '02, similar trends were evident with revenues declining by almost 8% year-on-year. Sales of IOL decreased, primarily in the U.S., but once again these decreased sales were partially offset by a 12% increase in non-IOL revenues, primarily of ICLs to Asia Pacific distributors. For the nine months, ICL sales increased 33% year-over-year and sales of STAARVISC and AquaFlow increased 351% and 101% respectively over the same period last year.

During the quarter two conference call, I reported a consistent and negative trend regarding the decline of IOL sales in the U.S. market. This has continued, with the majority of the 8% decrease for the quarter versus the same period in 2001 due to a weak U.S. IOL business, whereas international sales have increased over the same period. The previously announced improvement in our silicon delivery system is slowing the decline, but has not yet resulted in the anticipated increase in market share.

Our new cartridge treatment, which allows us to [tight thread] and fix the lubricity of the cartridge, has significantly reduced IOL tear rates to the smallest incision, but we now need to improve our control over the speed of the delivery of the lens. A modification to achieve this goal was demonstrated for the first time at last week's AAO meeting, and we will begin field trials next week. In addition, while feedback on the new columnar three-piece design is excellent, both in terms of the design and the material, our ability to deliver the lens through a sub 3mm incision has not yet been perfected. We are benchmarking a 2.8mm incision delivery system for this lens, which would yield a significant competitive advantage, particularly versus the market leader. This modified injector system is under development, and we anticipate availability of an optimal system within the first quarter next year.

In the meantime, I am pleased to announce that just this week we received CE marking for the new columnar three-piece lens, which will begin shipping to international markets immediately. While other cataract products are trending well, both for the quarter and for the year-to-date, they are unable to make up the lost IOL business in the U.S. I am confident we will see improved lens sales as we further improve our delivery systems. These projects are active, and though we have achieved major enhancements, we need even greater benefits in order to regain lost market share.

As I said, other cataract products are growing, viscoelastic, phaco and some lens categories, but we have failed to stand the overall trend or fully compensate for the lost lens business. As a result, sales for the quarter were below expectations, and we are, for the second time, forced to reduce projections for the full year, both in terms of sales and income. We are now forecasting $45-50 million in sales and a loss of $7-9 million, versus a $6.2 million loss projected last quarter.

I cannot tell you how disappointed I am to reduce annual expectations still further. All of this reduction is driven by the sales shortfall. Nick, who joined us at the end of August, is making excellent progress in a very short time, and is already on top of the issues. I have no doubt he is the right man for the job. It is however clear he has a major challenge to optimize the effectiveness of our independent sales force. He has already formulated his game plan, and made certain tactical changes, but as with everything at Staar, the past will take more time to unravel than initially anticipated. This has unfortunately been a recurring theme at Staar, and one which causes me, and I know our investors, immense frustration. We are getting there it is just taking longer than I first imagined.

That said, many Staar investors are primarily attracted to the company by the immense potential of the ICL and by other high margin, high technology new products, such as AquaFlow. In this regard I feel we are making excellent progress and sales of new high margin products continue to grow. ICL unit growth slowed in the third quarter because of a seasonal slowdown in Europe primarily. Nevertheless, sales year-to-date have increased by 33% in unit terms, and this despite deliberately tightly controlled roll-outs, as I talked about on earlier calls with regard to Canada and Korea.

We expect ICL growth to accelerate in quarter four as sales pick up following the summer slowdown and more Asian surgeons become qualified by proctoring to implant the ICL. A second Korean training course in October was attended by over 70 MDs with 30 of those surgeons targeted to be implanting by year-end. We are holding training courses in Hong Kong and China over the weekend and early into next week in order to follow the same model as Korea and Canada to insure successful clinical and visual outcomes with the ICL. In addition we are optimistic of ICL approval in Taiwan by year-end. As with Korea, this represents a market of very significant potential. We continue to be very pleased with ICL results in the hands of doctors who have been through our training course, and who are using the new V4 design and a sizing according to our latest recommendations.

We have been broadcasting this message to our key surgeons in Europe who had access to the earlier ICL designs and use different sizing [normal grams] with consequently less than optimal results. The EFCRS meeting this quarter was a turning point for Staar's ICL in Europe. This was quickly followed by a very successful AAO, where we explored new ideas with many of the key opinion leaders in Europe, so as to enhance implantation of the ICL. All are very keen to work with Staar, all have a strong desire to do small incision, state of the art [phakic] implant surgery, and it is evident that many key surgeons recognize Staar ICL to be clearly the [phakic] refractive implant of choice in this regard. As we get the overall message across, especially in respect to product design and sizing, we will take market share away from our competitors in Europe and also begin to grow the market.

Quarter three saw us continue to make solid progress toward U.S. approval for the ICL. On August 29 the first Toric ICL was implanted in the U.S. clinical by [John Vukich] and patient enrollment for this exciting variant is going well. We have made a conscious decision to invest in R&D to improve manufacturing efficiency of the Toric ICL and anticipate CE mark approval within the coming months.

At the IIIC meeting, prior to the AAO, we presented the latest data from the U.S. clinical trial, which continues to show very favorable outcomes. On the myopic side, the visual acuity, subjective satisfaction and safety data, remain excellent at this stage of the three-year data collection.

We also saw the first of a number of targeted peer review publications on the ICL. This article was in the Journal of Refractive Surgery September/October edition, and reported on the use of the ICL in a small group of children with mean follow up of over 24 months. The authors, from a very well respected center in France, commented, "In our series, we were surprised by the good tolerance of the ICL without inflammatory reaction in any eyes. Children's eyes are more predisposed to development of [Ubeitis], that's inflammation after cataract surgery with IOL implantation." They then go on to explain the reasons for using the ICL, rather than any other form of treatment in children. I quote, "The technique is reversible." Second, since children often rub their eyes, there is less risk of corneal endothelial cell loss with an ICL situated in the posterior chamber than with [phakic] anterior chamber IOLs.

Overall, this is an excellent endorsement of the product. We anticipate additional journal articles will appear over the coming months, demonstrating the safety and efficacy of the ICL.

At the AAO in Orlando, two factors in particular caught my attention. First, over the three years since the meeting was last held in Florida the typical cutoff point for LASIK surgery has moved down from minus-10 diopters of myopia, to -6, with a resultant huge increase in the potential market for [phakic] implants. Secondly, the number of doctors who did not fully realize that Staar could, assuming the clinical outcomes remain on track, and the regulatory process, be in a position to launch the ICL at next year's AAO.

Despite this knowledge, many had already begun to develop their target list of patients. Following the AAO, I'm confident many more will be compiling such a list.

Refractive surgery is moving inside the eye, driven by quality of vision issues. With regards to [Phakic] implants, Staar has the ideal small incision lens and a major lead in the US regulatory process. For us, the AAO enforced the belief that there will be a very significant market for this product. I've read with great interest the comments of some analysts, who site the lack of growth in Europe as putting a question mark over the development of the market in the US I don't believe this is the case because the market dynamics are very different in the two geographies.

Everything we are seeing and hearing tells me that the US up tick will be very rapid. And furthermore, it will encourage an acceleration of growth of the markets in Europe and Asia, mirroring exactly what happened with LASIK. Staar's future rests on management's ability to manage the traditional cataract business for cash, while investing in new high-margin products, such as the ICL and AquaFlow. Measured against this benchmark, we are doing very well, despite the lack of profitability.

Switching for a moment to other key measures, I am clearly delighted with the cash flow management during this quarter, especially given the low level of sale. World-class management of inventory, receivables and expenses has allowed us to achieve a modestly cash positive quarter. I know, in speaking to many investors, that you are concerned about our cash position and the prospect of equity dilution ahead of the ICL approval in the US

I would comment as follows. This management team set out in January last year to manage cash flow so as to avoid dilution of your holdings. To date, we have been successful. With an 8% sales decline, we were cash positive. With a slight upturn in sales, we will see a significant swing in our cash position. With everything we have going on at Staar, we hope to continue to avoid dilution.

On the expense front, we were exactly on plan with year-on-year savings, including restructuring of $2 million. In addition to realigning the purely P&L based expenditure we have been aggressively pursing an absolute decrease in the underlying cost base, as John mentioned. This has resulted in a further headcount reduction at our Swiss manufacturing facility, giving annualized savings in total of a little over $1 million. Total headcount has been reduced by one-third over the course of this year. In addition, as I've commented previously, yield improvement has been dramatic, with current yields consistently running at double the level of earlier this year.

These proactive and massive changes have had a huge impact on the underlying business. Having reduced headcount in Monrovia by 30%, since January last year, we will now exit approximately 33% of our building space, giving annualized facility savings in excess of one-quarter of a million dollars, next year. As you can see, we continue to be relentless in our efforts to reduce the cost base and break-even point for the business.

Regarding gross profit, we continue to see a positive trend with overall GP, although geographic mix issues are masking this year's underlying 8% gross profit increase in the US business, driven by an average 36% decrease in the cost of goods, as a result of the restructuring here last year. Moreover, we project the gross margin profit will again increase in Q4, further reducing the break-even point for the business.

As sales of high-margin products, AquaFlow, ICL and Toric ICL increase, and IOL sales are made at the post-restructuring cost of goods, gross margin improvement will accelerate. Mix, both geographic and product is now the key determinant.

So despite the sales shortfall, we continue to make real progress in transforming Staar into an innovative high technology company. The recently completed management team will continue doggedly in its determination to resolve any and all issues that get in the way of this transformation. The senior management team was completed last quarter and has a strong grasp on the remaining key issues. I am confident that the systematic game plan we have been following will make Staar profitable and comfortably cash positive in '03.

We will exit '02 having under performed vs. original P&L estimates, but with the company enjoying much stronger fundamentals, thus giving a solid platform for future growth. The team we have put together is in my opinion of the very highest quality and is jelling well. It has been my privilege to pull these managers together and to work with this group going forward. I sincerely believe we will not fail in our efforts to increase shareholder value at Staar.

I'd like to thank you for your attention and to hand over for questions.

At this time, I would like to inform everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Ryan Rauch, of Adams Harkness and Hill.

Hi guys. Just a few questions, and maybe I missed it. Can you just walk through, David, were ASPs up or down, for IOLs in the quarter, domestically? And then, units I know were down, what were they down against?

When you ask what were they down against, what was the comparative period you were looking for, Ryan?

Year-over-year, what were units and ASPs, as far as increases and decreases?

Well, there was price pressure, even in the US unit decrease, as I said, was high single digits, and there was price pressure but despite that, I want to emphasize this point. Despite the price pressure in the US the gross profit on that business increased the 8 percentage points from quarter one through to quarter three. So, that comparator on the gross profit increase was from January to September, and took into account some price pressure in the US market, although to be fair, we'd forecast that price pressure and slight reductions in ASP.

OK, and then can you, I mean, how will the positive reimbursement changes--am I understanding IOL reimbursement for ambulatory surgical centers is going up roughly 15%, if I'm--is that, in fact, correct? And if so, I mean, do you think that should have a positive impact on your business going forward, correct?

I think there will be some positive impacts, although that the changes are very complex. And, we've followed this quite closely. Staar's business is focused very much on ASCs and high volume centers. And is focused in the silicon segment of the market. So, we probably see more price pressure than companies that are involved in different segments of the market. For example, hospitals are different segments, in terms of material.

That said, we have the benefit of higher reimbursement for the high technology products, like Toric, and we've seen less of a price decline in that segment than we'd originally forecasted. So, we're holding the--net-net, we're holding up very well. I think because of the cost reductions we put in place last year that allows us to be more competitive and to see that gross profit increase.

My disappointment is that that 8% increase on US domestic gross profit is not showing up in the headline numbers because of geographic issues and mix issues in our total business, which are behind our original estimates and plan.

OK, just a couple more quick questions. When do you expect AquaFlow approval in Japan? And then, what were the reorder rates like for the AquaFlow domestically? If you would give us the number of maybe physicians trained, sites, etc.?

I would say Japanese approval, Helene is looking at me and we're thinking...about one year, Ryan. We're actively engaged in that process submission of material, etc. On AquaFlow, we continue to prop there heavily. There was very good press at the AAO meeting about the success of non-penetrating procedures. The number I usually quote is the repeat order rates for the product. These are accounts that have ordered from us and have then come back and reordered. We're seeing a 67% reorder rate in the third quarter. So that tells you that people who've used the product are coming back at the rate of 67% of the accounts that are purchasing. That's gone up from prior periods.

Incidentally, we see that in, just following the quarter, we're seeing an increase in the number of sites that are actually ordering. So, AquaFlow continues to go slowly but steadily. There's a general recognition of the benefits of non-penetrating procedures, so I think that bodes well for the future. But it's a difficult surgery, and we spent an intense amount of time proctoring surgeons, but once you do get them through the learning curve, the repeat order rates are at a fairly high level, at that 67%.

OK, and then finally, John, what's your cash and debt position?

We carry precious little cash because of our revolving line of credit, but we do, as of September 22nd, we had $663 thousand in cash. Our total notes payable was $6.4 million, of which, as I've mentioned, $3.2 was on our domestic line of credit.

OK, thanks a lot.

Thank you. Your next question comes from the line of Neil Bradshear-ph, of Broadwood Capital.

Yeah, I wonder if you could give us some sense of how big the US silicon IOL revenues are at this point? You're growing internationally. You're growing your other products domestically, but the IOL business, domestically, is obviously the problem. And, even if that doesn't turn, there must be some crossover point coming because of the growth of the other businesses. So, if you can give us some detail on the US silicon IOL business I think that would be helpful.

Neil, we've purposely avoided this for competitive reasons, to give absolute details on the different segments. Clearly, your point is a good one and we're suffering across the silicon business with the loss of revenue, which we've indicated in terms of percentages. It's over the 10% level. And then the [collimar] growth is--we started to stem that loss, and then we're going for the growth with the introduction of the new three- piece [collimar], which goes into a completely new segment.

So, looking forward, the opportunity that we have, and we're very optimistic about it, is growing our relatively low market share in that new segment, with the [collimar] material. You know, as I said, the feedback on the new [collimar] three-piece lens is excellent, both on the material and on the design. And we need to improve the delivery system. So, we're confident, looking forward, that that can gain us new market share in that new segment to more than make up for the loss that we've seen in silicon. But we're also anticipating to grow the silicon market share from where it is at the moment.

Got you, and then, can you provide some more detail on a comment you made earlier? I think you said that you might be able to launch the ICL at next year's AAO. That seems optimistic to me, but still possible. Perhaps you have some dialogue with the FDA that gives you some sense of how things will play out, and maybe you can share that with us?

Well, it's optimistic. It depends when the panel meetings would be, etc., so I will hand over to Helene to just talk about the mechanics of exactly where we are in the process.

We have today in more then half of the three [inaudible] stations that has been required by the FDA. We are still actively calling stations back. We have frequent discussion with ADA in [inaudible] submissions to [inaudible]. In February 2003 we should meet with them and for a final strategy analyzing. The filing should occur during the first quarter of 2003, or early second quarter 2003. And then, it's, as you know, [funds] the FDA process.

OK, and just Helene, a little more detail on that. So, the February 2003 meeting would be a pre-filing, dotting the I-s and crossing the T-s kind of meeting, it sounds like. Is that right?

Yes.

And then, how many panel meetings are there for ophthalmology a year? I think it's four, is my vague recollection, but I'm sure you know.

No, it's more than four. They are almost every two months.

I'm sorry?

Every two months, Neil.

OK, so six. And, so there would be a few panel meetings following your filing between then and AAO, and it's a question of how quickly the staff wants to proceed, is that right?

There is a panel meeting in September and also one in November. And [inaudible] the approval will be after the panel review.

Yeah, good. Ok, thanks very much.

Thank you. Your next question comes from Marvin Sterling-ph, of ING.

Hi guys. I might have missed this but this is a question for John. How much cash is on the balance sheet at the end of the quarter?

It was $663,000.

$663,000?

Right. Now, that's cash. Now we also have a line, you know, headroom on our line of credit, currently, with our domestic line of credit.

And what's that?

We've used $3.2 million of roughly $3.9, availability, $4.0 availability. So, we have roughly $4.0 availability, under domestic line of credit, and we've used $3.2.

OK, that's good. And, being that you were, I guess, cash flow positive this quarter, do you plan and hope to repeat that the next quarter, and possibly get you cash flow positive for the year?

It's all going to be very dependent on getting the sales growth, Marvin.

OK, I have no further questions. Thanks.

OK, Marvin.

Thank you. Your next question comes from the line of Kate Sheridan-ph, with GKM.

Hi everybody. Just kind of looking at the ICL issues, I know that historically the issues have been looking at the anterior in contrast to the posterior, the issues of complication rate, etc., and I think it was Dr. Lindstrom at the AAO, you know, that talked about the fact that there could be some pretty good acceptance, providing that all of these devices demonstrate a level of acceptability. I think it was, like, 3% or less of complication rate. Were you guys able to make headway there, at this meeting, with surgeons? And really, because I think that that's important and I was kind of curious if that came a lot, if you were bale to demonstrate the safety and complication profiles of posterior?

Kate, just to be clear, and then I'll hand over to Helene. Your question is what is the clinical data showing in relation to complications, and what did we present?

Well I know, I've seen your data, but you know, I think that there still tends to be this myth that posterior is going to be more of a complication. And, you know, what was the response rate, I guess, from surgeons, with the current data, especially with the US clinical data? Because even though in times past, there has been enough information out there to suggest that, you know, this new material, it's more of a procedure sensitive issue. So, if there is a cataract formation, for instance, it was generally more of a surgeon issue, because they would've happened very soon after the procedure.

Even though there was information available to suggest that, the material itself is not causing a cataract or a complication in that sense. Were you able to really get a sense that people finally accepted that? Because I think that's kind of a critical issue for the ICL.

Great, question.

Right, the surgeon may choose between two concepts; going into the anterior [inaudible], and then the most anticipated complication, inflammation on the [inaudible] issue. And, with [inaudible] available outside the US, high astigmatism.

The posterior [inaudible], the only remaining question, has been cataract weight. 2001 data has been found at the AAO, they don't weigh such concern as used to be based on the previous European experience, with previous designs. So, I would say that I've been very pleased by the ways the surgeons were welcoming the new data, based on the V4 design at the AAO.

OK.

Yeah, I'd just like to add to that, Kate. One of the reasons for me quoting from that peer review publication was to point out that it's well acknowledged that in children's eyes, inflammation can be more severe. And the author's clearly pointed out that the material of the ICL is resulting in extremely good tolerance, even in reactive eyes, i.e., children.

The second thing I point out in the same paper, they talk about their experience with the V2, the V3 and the V4 designs. And, they were the ones that were originally trialed in Europe. And it's certainly true that there's a higher complication rate with those designs.

But that's true of any medical device that goes through iterations to try and reduce complications. So, our efforts have been focused on getting the point across that the V4, with the laser sighting techniques, will give you the kind of complication profile that we're seeing in the US FDA study. We're working very hard to get that message out over in Europe.

So, I think, when you look at that data, people are accepting it. And, I'm going to quote again from that publication, and they say, and I quote, "Published results of ICLs together with our own experience in adults, have shown that implantation of [Phakic] posterior lenses appears to be a safe and effective method for the surgical correction of myopia."

OK.

Actually in this case, high myopia.

All right, OK. Thank you, and then--.

So, I think the message is slowly getting across, Kate, we're being successful at now doing that, particularly over in Europe.

Yeah, OK, and then my understanding is that the next, you know, the product that's sort of somewhat behind you, several months or whatever, on the anterior side, that is not a foldable device. Is that correct? That's a larger incision, right, with the [haptics] and everything, is that...?

You are correct. This product is not a foldable one.

OK, and then I guess the other question is, I'm hearing that that company may try and do a two-year data submission. Is that--do you know anything? Or what's your thought on that?

We have no element to comment on that one. However, it has been clearly indicated during the August panel meeting that the panel wants to see [inaudible]--.

For a year.

Yeah.

Right.

Both companies have a right to submit with two years data because of the original study protocol, Kate. We took the decision because of that conclusion of the FDA that we would submit three-year data. We firmly believe that gives us the best chance of the approval. They, in theory, could certainly submit it at two years, but you heard Helene's comments, with regard to what the panel is looking for.

Right. Well, they don't like to usually suggest something and have someone else try and squeak through, generally, but OK. And are you--just this last thing, and then I'll get out. Are you in dialogue? I mean, generally when we look at the panel members, we kind of see, sometimes, the typical, you know, some usual suspects, and some variations with statisticians and such. Are you--do you think that you are targeting, you know, with the information that you have, and with the data, the type of people that would probably be sitting on the panel?

Well, that's an interesting question. What we are targeting is to have the concept well understood and well accepted, over all of the medical community. We do not make any bet as to who would be on the panel and who would not be on the panel and so and so. I think that if we--our product is widely accepted, with high quality results, that's the best thing to do, with regard to the panel.

And that, we're pursuing very vigorously, Kate.

Right, OK. And--.

To get it accepted across the whole community, and to get this message across of low complications with the V4 and the new sizing.

Right, right. And I think recently there was a round table, or whatever, hosted at AAO, with [Dr. Drury] was suggesting. I think everybody's comments in response there was that these are pretty interesting products and I think, kind of going back to your comments, Dave, about the diopter is kind of going lower. I mean, I think at the original it was, you know, we would go for everything outside of LASIK, and that was even, maybe, the -13 sort of [inaudible] laser approval.

But now, it's sounding like some surgeons are saying, "I would use it for any LASIK patients. I would also use it for anybody, you know, as low as -5. So, that's definitely new stuff.

Yeah, it is and it was very clear to me, both at ESCRS and AAO, where the new [Wafrant] technology was presented. The assumption was that the [Wafrant] technology with the lasers would result in a higher cutoff for myopia. But actually, the consensus is that that's not going to be the case. The [Wafrant] technology will improve outcomes up to about -6, but they call it a very tissue-hungry technology, in that it ablates a lot of tissue, for a relatively small amount of correction.

So, it's very clear that, even with [Wafrant], LASIK is going to cut off in that -6 or slightly above, range. And I purposely wanted to make the comments about the last AAO three years ago. The clear consensus was -10 and above. Clear consensus at the last two meetings, even from the most ardent fans of the new [Wafrant] is that it's going to be much lower than that. And that opens up a huge additional market for implants, overall.

Right, and now we're seeing surgeons actually even say, for all potential patients they would be interested. And, we haven't heard that before. Correct?

I'd not heard that before. The lowest we went down on the US clinical was a -5, right Helene?

Yes.

Yeah, we did a -5k, Kate, on the US clinical.

All right, thanks very much.

Thank you. Your next question comes from the line of Keith Krosz-ph, with Access Media.

Hello. You mentioned a proctor program for the AquaFlow device. The ICL also must take a lot of training. Do you have a similar program in place for the ICL? And if so, has there been increasing interest in that?

Yeah. We put a very rigid proctoring program in, last July, when we got Canadian approval. And it mirrors the programs that Nick and I are very familiar with, from [Kerovision], when we introduced LASIK. And essentially there, we would not sell [Keratomblates] to people who've not been through the Company's course, certified.

And we introduced the same program in international, for the launch in Canada and for the launch in Korea. And that's what I alluded to in my comments.

The interest, the measure of the interest, we did the second course in Korea and we had a huge interest. We had to limit the attendance. We've got a course next week in Hong Kong and in China. Once again, huge interest. And, as a result of the Korean course, as I said earlier, we expect to have another 30 surgeons, who will have gone through the certification.

So, the net is yes, we do a proctoring approach. The demand is such that we're getting stretched from an ophthalmologist's point of view, in terms of having trainers. And so, we're currently engaged in a skills transfer into Asia, so that we have a center there, with a resident trainer, rather than having to fly [John Vukich] down there, or other experienced US or European surgeons. So yeah, it's very successful. It's resulting in very good outcomes, and the demand is extremely large.

And the AquaFlow, as long as I brought it up, is the interest in learning those skills, can you see a continued interest in that?

Yes, with regard to AquaFlow, there is, particularly in the U.S., a strong interest now that the product is approved and has a reimbursement code, for looking at glaucoma surgery that results in reduced complications. The non-penetrating deep [sclerectomy] is a surgical procedure that facilitates that, that's the non-penetrating procedure, at least the surgical one, and there's a strong interest in that procedure and learning that procedure. The caution and the facts are that it's quite a difficult procedure. Based on the advice we get from our proctors, and Nick might want to comment on this, it takes up to about 10 procedures to get somebody through that learning curve, which is probably more than an ICL learning curve. Then once you get through those 10, the reduced complications generally have a very beneficial effect on the surgeon to want to stay with the procedure. But yes, there is interest. The learning curve I would say is higher on AquaFlow than it is on the ICL. Nick, did you want to comment?

Yes, I think in an effort to try to support the AquaFlow business as it grows, and to support the surgeons in this regard, which when they get more confident they're more apt and willing to enroll patients into this form of treatment. So we're going to start a monthly clinical teleconference program where we sort of set up an agenda ahead of time. We get it out to all of our AquaFlow users, they can forward any questions that they might have pertaining to the agenda that night and then we would encourage them through an 800 number and a call in number to get on the call, and that will be chaired by our proctors in the program and sort of like a champion surgeon that will lead the call based on the agenda that evening. So we're going to institute that in the next 30 days or so, and that should help facilitate surgeons' interest and help to get them more confident in enrolling more patients in this.

Thank you that's all I have.

Thank you. Your next question comes from Tyson Housey-ph, with Housey Advisory Management.

Gentlemen, I have some relatively simple questions. The first one for Mr. Bily. Assuming that your cataract sales or IOL sales are consistent in the next quarter, can we assume that you'll also be cash flow positive?

Consistent?

Or flat, I'm sorry.

Similar to the third quarter?

Right.

Well I would think that would probably be good deductive reasoning, yes.

Good. The next question then is for Nick Curtis. My question to you is, how do you envision picking up cataract sales in the U.S. and you come with an excellent reputation, but I just wanted to hear it from the horse's mouth so to speak, how you envision improving over perhaps your predecessor, and what steps you've taken. Can you even give us some numbers in terms of lead build and the like?

Sure. Before I answer your question maybe I could take just a quick minute to just sort of give you a little summary of the activity that I've undertaken over the last nine weeks.

I'd love that.

I've made five visits to Staar and met with every one of the department heads here to really sort of like try to do a little assessment of the organization and sort of the support that was there. I met with all of the departments as well as the department heads, manufacturing and finance, regulatory affairs, R&D, IT and importantly, customer service and marketing. We've had multiple product line business meetings to sort of strengthen our business and address all the product issues and support that we can provide in the field. We had several R&D meetings with the management team and engineering group to take a look at the delivery systems and what not and represent sales interest in that regard.

We've had multiple ICL business meetings to try to look at strategically how we might leverage with the guidelines, the future of ICLs with current business. We've had many marketing team meetings where I was hoping to establish some new goals and direction, which I'll elaborate a little bit in a minute. I attended a mini ICL course in Madison Wisconsin with [Dr. Vukich] and had an opportunity to work with the central part of the United States, that region at that time. I attended an ocular surgery news symposium in New York and I had an opportunity to sit in on several of those meetings and see what the physicians were at the podium discussing, and kind of what the current issues were.

I had a meeting with all eight of the regional marketing managers, we had a one and a half day meeting in that regard, and as an offshoot of that I've had five regional meetings where I had an opportunity to meet each of the TRs within those five regions. Coming out of that we changed some of the sales and commission incentives for a couple of the products that we've got which are going to result in, we sort of lowered some pricing that we could be competitive in some of our bundling in that regard, and provided some higher commission incentives on the higher end, which are resulting in some good interest in bundling activities from the reps to increase sales there.

I personally met with several key physicians around the country to get their ideas about where we could make improvements and where we stand, and what their feelings were about Staar as a company and our technology. I've had many discussions with the various territory representatives and the region managers, and I'm looking to challenge those regions to look at each deal in terms of from a profitability perspective whether it means that it's going to be profitable for the company, and we're modeling those deals with finance before we go ahead and make commitments, which was very different from what was being done in the past.

I attended the AAO meeting and conducted the sales meeting for the entire force that attended that meeting and we really talked about a lot of our new goals and sort of guiding principles going forward. That's been my activity over the last nine weeks to sort of assess what's going on.

Now to try to answer your question about how we can improve our sales and our overall market penetration in the United States, strategically the organization will definitely become much more proactive in marketing as opposed to completely sales driven through the independent sales force. For example, the company in the past has looked at marketing in a single dimension. The independents have been the customer and that's been the only form of marketing that we've done has been through the independent sales force. That's going to be changing, we're going to begin with direct surgeon communication and relationship building to increase the surgeon's interest in Staar as a company and our products, and an appreciation for the technology that we offer.

We're also going to enlist surgeon support at the podium and all the ophthalmic publications that are out there, and participate in the national and regional meetings that are taking place as well. And again from the podium to drive messages on various technologies that we've got and really look at the marketing in a multi-faceted way, with the end user of the products being our customer versus the independents.

We're going to create a medical advisory group as well as these monthly clinical teleconferences that I had mentioned before, so that we can gain more support for our products, and have more surgeon influence out there. There's certain criteria tactically, in terms of the medical advisor group and what not, that I won't bore you with now, but I can talk to you about it more some other time if you're interested. This is all going to involve some changes within our marketing department, and interviews are underway right now, we're looking to strengthen and to make some changes within the marketing department right now in order to be able to support this more proactive marketing outlook.

From a sales perspective, we need to accomplish a lot of different things. We need to increase our account base penetration and the call frequency to the surgeons. To this point I've confirmed in my own conversations with many ophthalmologists that really across the board they're not being called on by the current Staar representatives as much as they should be, and to the numbers that they should be. There's approximately 9,000 cataract surgeons in the United States, and I know that the sales force is calling on a small percentage of this total. So therefore one can conclude that there's a huge opportunity and upside in that regard, and it's something that I'm working hard to motivate these guys to do.

We've recruited two experienced representatives in geographies where we had little business and account penetration. These guys have already, there's a gal and a guy--I apologize. They've already converted business and are making positive strides, and there will be some additional changes and opportunities for us to expand coverage in our account business conversion in geographies that are under served at this time.

The other thing is that there are contracts with our sales people that I've inherited. I need to enforce the performance agreements as the contracts clearly place obligations on the representatives as well, as we need to enforce those performance agreements. I think it's entirely possible and appropriate to link meeting the company's growth and objectives to the representative's future earnings potential of our exciting new technology. I would think that in the future, doing this should provide the proper motivation to the sales force to get on track with us and help us meet these objectives that we're trying to meet now, and increase our market share.

Good answer. I have one last question, and that is, are you considering or in any discussions with regard to licensing agreements potentially for AquaFlow or the ICL, which could perhaps boost or strengthen your current not fabulous financial position. Or are you just inclined to pursue those simply because you're confident in the current model and how things are moving along?

I'm pleased with the current model, I'm not pleased with the sales growth clearly, but we're kind of poised if we can start to pick up the sales, particularly in the U.S., and the way Nick talked about, to have a much better financial position. However I've always said that we'll look at different possibilities and we continue to do that Tyson.

Thank you.

If it makes sense for Staar, we'll continue to explore it.

Thank you.

Thank you. Your next question comes from the line of Larry Hemavich-ph, with HMTC.

Good afternoon. Most of the good questions have been asked, so I'll ask an easier one. David, the guidance for the year is now $45-50 million. Given that we've had nine months of the year behind us I'm kind of surprised you've given us such a broad range. It makes me a tad nervous, because 45 million would clearly be a significantly poorer fourth quarter than I think most of us are expecting. I don't think you really believe that, but I'm just concerned by the broad range of the guidance. I wonder if you'd mind commenting on that?

It's a broad guidance Larry, candidly speaking I clearly am looking for a better fourth quarter than the third quarter.

And that would bring you to the very high 40's wouldn't it? I don't have the numbers in front of me, but it would get you much closer to 50 than 45 if I'm not mistaken.

Well I'd rather stay with what we've given, but I certainly expect an improved fourth quarter over quarter three.

I'm just concerned about, I don't think there's a hidden message here, but I just want to be sure. Because $45 million, if you do the arithmetic, would not be a very, you would not be very happy with the fourth quarter and neither would we.

I would be very unhappy with a fourth quarter at that number.

And despite Nick's eloquence, which was -

There's no hidden message there Larry.

OK, well good. I just looked at that number and I was just a tad surprised at that. John, your cash position, I know we've talked about that; it's something you think about probably every minute of the day. Are you feeling better about the cash position now than several months ago? I mean your line of credit gives you some leeway, but not a lot. You are cash flow positive very modestly. What's your general sense about the cash at this point vis-à-vis say six, nine, twelve months ago?

Well, That's a good question.

Do you sleep better now than you did six months ago?

Sure.

He doesn't have time to sleep either way Larry.

I saw him sleeping standing up in the booth though, catching a catnap.

Cash flow. This will give me the opportunity to talk a little bit more about the cash flow and our banking lines of credit. As David and I both mentioned, from a cash flow perspective the company has rallied and has done a good job. Cash flow from operations for nine months was $2,000 positive, and from where we were coming from in 2001 that's a remarkable turn around. Unfortunately, we need property plant and equipment to keep this place running, and we had to invest three quarters of a million dollars, so we have to use some cash.

The third quarter was net positive, the fourth quarter we did have an AAO, although everything tells me that the fundamentals of the business aren't going to change from Q3 as it relates to spending, etc., cash flow. But with a little more sales it could possibly turn into a better fourth quarter. That being said, we're using about $3.2 million of our line of credit on maybe $4 million availability today. That line of credit ratchets down to $3 million at the end of March 2003. So I need to actually move the company to a better position on cash flow to be able to live within that line of credit. You know Larry, that's basically what we're working on.

So presumably you'll be looking to renegotiate with perhaps another bank or something. Because if you had to do that by year-end that would be an awfully tight noose around your neck, wouldn't it?

Yes, the line of credit ratchets down to the end of March of 2003 Larry. So we have a waiver, we have an agreement with our lender in the U.S. market, we just renegotiated it. We just need to live within that line of credit. I have looked at other opportunities, as David said, we don't want to dilute this company. Quite honestly our current lender is more than fair with their rates and everything, and we're very pleased with those. Money out of that, X that, other opportunities, it's very expensive. So we are going to do everything we can to stay within the line of credit that we have. That's the best answer I can give you, and quarter three gave me some guarded optimism that we will do better and better as we move forward.

Larry just to that point, before the call I asked John where he thought the break even point on the business is, and I'm going to give you a slightly wide range on the top line, but there's a good reason here. It depends on what the margin is, and I've always been targeting to get the overall margin over the 60% level. If it is at 60% the break even is about $50 million in sales. With the increasing sales of higher margin products, particularly when we get the IOLs going in the U.S. and the ICL flowing through in Asia as I fully expect, if I look at Korea as the model, Taiwan, Hong Kong, etc., then you quickly improve that break even point, and clearly cash flow would then come very strongly on the back of that. So we're very focused on that break-even point, and this is why the sales now are so critical. We've got a very leveraged P&L; we've got good control. We now have to drive those sales up, and in doing that we will be fine from a cash flow perspective. It's all going to boil down to that execution on the sales.

Sales growth makes up for lots of sins.

Yes. One of my board members said to me, "A rising tide raises all boats."

Let me jump in. We're not sinning though, currently, but sales will help.

A couple of questions for Nick. Nick, the industry talk that I hear lately about IOL pricing is that some of the bigger players have gotten to the point where they're very unhappy with pricing. They've given away too many good deals and they're going back to some of their accounts and saying basically, "Look we just can't do business at these prices, it's just not profitable." Although prices have gone down over the last several years, do you sense that maybe we have indeed bottomed, and prices could be starting to tick up a little bit?

I think it's entirely possible, especially if you take a look at the fact that AMO has now gone public and they've divested of the pharmaceutical business, which really would more than make up for a lot of loss leader IOL sales. So I think that over the next couple of quarters when they realize that it's a strong number two player in this market, that they're not as profitable as they'd like to be, or maybe not profitable at all, they need to start to look at the kinds of deals that they're doing, and raising prices. I think the same becomes true of Alcon with Nestle beginning to move away from them. So I think that's entirely possible and I think as a small niche player that we are with the technology that we've got, I think it bodes well for us in terms of trying to, as we get more aggressive with the three piece columnar lens and our Toric IOLs.

Nick, second question, you mentioned the filling of a couple of key sales territories. I had heard of one of them recently, with a very strong rep, I believe in Texas. Are there other areas of the country that you can bring on some strong reps that would get the sales growth growing? Or is it more that you've got to get the existing sales force increasing their energy in the sales area?

It's both. We're looking to fill some territories in the northwest part of the United States, northern California, Oregon, Washington State, and that area. Then the other representative that we brought on was in the Wisconsin and Minnesota area, and he's done a nice job already of converting some business. So it is a combination. There are some other territories and some other opportunities as well that we're looking to increase our penetration in.

Great. Thank you.

Thank you. Once again I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. You now have a follow up question from the line of [Neil Bradshear-ph] of Broadwood Capital.

Yeah, it looks like excluding the restructuring charge and normalizing the tax rate, you lost about $1 million or about 6 cents. First of all is my math right on that?

I did not do a pro forma on the taxes, Neil, quite honestly. Are you looking at the year to date period?

No, the quarter.

The quarter, OK so you have $230,000 in restructuring.

Right, and if we back out a 40% tax rate instead of, it's probably not worthwhile going through the details on it, but let me move on to my real question, which is that going forward we have incremental cost reductions from here you'd mentioned. Specifically you've got a quarter million dollars of space reduction savings. What is the timing on that?

That's from January. We exit--well the building's almost empty. We exit the lease at the end of December.

OK and did this quarter fully benefit from all of the cost reductions that you've already made, or not?

Not fully.

So you had some of them for part of the quarter?

We had some of them for part of the quarter. The second traunch in Switzerland only occurred in September after Philippe had come on board, and with his extremely knowledgeable eyes did the final tuning of the organization. Those people finally, all of them come off the payroll by the end of November. The last one goes off in November Neil.

OK, and so it sounds as though that should cut the G&A number a little bit further from the number that you just had, is that right?

Well you've got to be a little careful Neil, because a lot of that goes into the overhead call for the manufacturing. So as I said, it's not a purely P&L based number, it's a total cost number.

I see, so some of it really affects earnings sometime next year when that stuff comes out of the pool. When the inventory get sold.

Exactly, and as I said, we saw those as proactive measures to improve the future as opposed to any kind of purely reactive.

OK. I guess what I'm getting at is obviously you have reduced G&A and marketing and selling. Is there room for further reduction or are there limits to what you can do if you end up closer to the low end of the wide range you provided, or are there incremental adjustments you can make as the quarter goes on? Can you give us any sense on that?

In the operating expense, Neil, there's a couple of things going. Obviously if sales pick up we're going to have more commission expense. But we do have further opportunities versus what occurred in 2002 in G&A, marketing and selling. You know we've had some issues, we've has some severance, we've had some legal settlements; we've had some legal bills. We've had this, that, and the other thing, which I think we have behind us. So as it regards to on a go forward basis, we'd like to invest a little more money in R&D, we'd like to invest a little more money in selling, and we have some non-recurring items or items that occurred in 2002 that I don't anticipate happening in 2003. So there are further opportunities in that regard.

OK. Then the program in Korea, you mentioned that there are 30 new surgeons being trained. The math on this obviously gets very exciting very quickly, because if they each do one ICL a week, it adds close to a penny per share to earnings. This has been the source of some excitement in the past, so I wonder if you can provide us with any sense of what kind of rate we might expect? You'd mentioned earlier that Korea has already become your number one international market. So it sounds as though rapid rates of use for new surgeons aren't out of the question there. Do you have anything you can give us on that?

Well just to reiterate a couple of points related to that Neil, we had the 70 people attend the training course in October. 30 of them will have been able to proctor with surgeons (i.e. somebody will have been in with them to do surgery by the end of the year). So you have, from the training course you have a lag to when they can then really use the product. So you're right in terms of the math, providing you factor in the lag, there can be a strong uptake. We however, are being very careful to audit people, go and see them, proctor them. So in a way I always anticipated this potential particularly in Asia.

So we've slowed it down by controlling the training courses very well and controlling the proctoring. It's more difficult in Asia than it was in Canada, just simply because I knew those markets would take up a new refractive procedure very quickly. So the math is very attractive, but we're very cautious about how quickly we'll let the new people come on and we won't sell them a lens unless they've been proctored, and we're sending people down there routinely to check on implantation, etc., it's critical. So we're really being very careful there, because you're right, the math could get out of control if we don't control people carefully. I do not want to repeat what happened in Europe. I want to repeat, reconfirm, and do what we did in Canada, where we've had slow but steady uptake and excellent outcomes.

I want the same thing in Korea, but I know Korea's going to be from a much higher base line. Our challenge is to keep that control as we open up more markets in Asia. That's what this week's course in Hong Kong is about.

How many implanting surgeons do you currently have in Korea?

Great question Neil. I didn't bring that number with me, I didn't check it.

But this is a sizable percentage increase on top of the number you already have I take it?

Oh the 30 is a sizable increase on the current number. We limited the initial number, until we went back and checked on those people, to see how the surgery was going. So, the 30 is a significant increase.

Good, thank you.

Thank you. Your next question comes from the line of Ryan Rauch, with Adams Harkness and Hill.

Yeah, one quick follow-up. John, was your entire gross margin sort of differential from, let's say, our estimate, just because of lower sales volume? I mean, are you where you want to be, for example, with your manufacturing yields in Switzerland? I know they improved dramatically in the second quarter. Could you see further improvement in the third quarter?

Yeah, let me try to talk about gross profit in the third quarter, there because it is a little bit confusing.

What happens is you have the US IOL market. That market has been, from a gross profit perspective, been negatively impacted by all this high cost inventory that we've been telling you about. We used all of that up for the most part, and we in turn, bumped--I think I've heard the gross profit margin some 8%. And so, we hit all of our internal targets. We used up all those buckets of inventory, etc.

Now, when you look at the quarter, while we achieved what we said we would do, the mix, so the amount of sales at that better margin, was much less than we had anticipated. And the amount of sales in Germany and Australia, which are primarily distribution markets, was much larger in growth. And then, that mix changes substantially, and what you get is a gross profit margin that wasn't where we wanted it to be.

But, certainly from an operating perspective, as I mentioned in my discussion, we have maintained all of our internal goals and targets here in Monrovia, as it relates to current IOL production. So, I don't see any surprises in IOL cost of sales, or IOL margins in the coming months and quarters.

In Switzerland, we've had some issues with costs, but David has addressed them with a whole lot of restructuring and right sizing, etc. So, I think we're kind of on track in Switzerland, on a go-forward basis.

So, on a prospective basis, I think we're fine. And the only reason our gross profit margins didn't achieve our expectations was purely a mix thing. It's not a cost situation. It was a mix of product situation. Does that help, Ryan?

Sounds good, thanks a lot.

At this time, there are no further questions. Mr. Bailey, are there any closing remarks?

Yeah, thank you, operator. I'd just like to thank everybody for some great questions. I'd just like to make a few quick closing remarks.

I think Staar's core business, going forward, is going to be refractive and glaucoma, lead by the ICL and the AquaFlow, with much higher margins. That's what's going to drive the overall margin up, of the Company, and that's what will deliver profitability.

I think the breakeven point for the business has been changed significantly, and continues to be changed. And I think we're progressing extremely well with ICL approval. And clearly, an ICL approval and the growth of ICL sales in Asia will improve our overall position and transform the company. I think the turnaround is nearing completion, and I think the benefits will be seen in '03.

I think we've got a high quality team that's looking after your investments and I firmly believe that team, given the time, will deliver added shareholder value for everyone who invests in stock.

Thank you very much for your time. I look forward to the year-end conference call.

This concludes today's conference. You may now disconnect.