STAAR Surgical Co (STAA) 2002 Q4 法說會逐字稿

Welcome to the Staar Surgical Company conference call to discuss the fourth quarter and year-end financial results. 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 will make projections and other forward-looking remarks regarding future events or the future financial performance of Staar Surgical Company. We caution you that these statements are just forecasts and that a number of factors beyond the control of the company could cause actual events or results to differ materially from those contained in this company's projections or forward-looking statements. For discussion of some of these factors we refer you to the documents the company files from time to time with the Securities and Exchange Commission, including its most recent form 10K, any subsequent 8K reports and any 10Qs for the 2002 year, first, second and third quarters. Now I would like to introduce Mr. David Bailey, Chairman, Chief Executive Officer and President of Staar Surgical Company.

Thank you, and welcome to the Staar year-end conference call. For the benefit of all those listening as well as John Bily and myself we have Nick Curtis our Executive Vice President of sales and marketing for the U.S. in the room, along with Helene Lamielle, our Chief Scientific Officer and Debra Andrews, our Global Controller. John, I would like to hand it over to you to review the financials to start.

Thank you, David. Good afternoon all and welcome to the financial portion of Staar's fourth quarter conference call. Staar's financial performance for the fourth quarter continued the positive trends which resulted from management's focus on core operating activities, cost controls and reorganization initiatives. Gross profit margins improved for the third consecutive quarter. Overall cash flow was positive. Operating expenses continued in check and below prior-year levels. Manufacturing costs were well within planned and expectations and sales achieved the best quarter of the year. Throughout the year, the organization focused on many issues, including the U.S. F.D.A. submission for the ICL, and Toric ICL, production efficiencies, improvement to lens insertion systems, three piece polymer eyeowell production enhancements, closure on certain legal issues and general working capital management and cash flow.

Revenues for the fourth quarter increased 488,000 or 3.8% over the prior year quarter. Sales in our German and Australian subsidiaries increased 1.4 million or 34%, partially offset by sales in the U.S. which declined 730,000 or 10.5%. Other international markets were flat to prior year. From a product line perspective, ICL sales grew almost 34%, viscoelastic sales increased almost 70% and IOL sales declined 7.7%. For the full year revenue was 48.2 million versus 50.8 million in 2001, a decline of 2.5 million or 5%. U.S. sales declined 2.8 million or 10.6%. International sales increased 500,000 or 2%. Sales of ICLs increased 33.4%, AquaFlow sales grew 54.1% and viscoelastic sales grew 200%. And IOL sales declined overall 14%.

Gross profit for the fourth quarter was 51.4% versus 55% in the prior year period. Gross profit has improved each quarter during 2002 as U.S. high cost IOL inventory layers have been depleted and replaced with significantly lower cost product. Additionally favorable mix from the high margin ICL and AquaFlow product liners enhanced gross profit percentage. Partially offsetting these improvements was a very favorable sales growth in both the German and Australian subsidiaries both which operate with lower gross margins. Gross profit for the year to date period was 50.1% versus 57% in 2001, calculated on a comparable basis and excluding one-time charges of 6.4 million in 2001. Gross profit for the full year 2002 was significantly impacted by high cost IOL inventory produced during a period of restructuring in 2001. Favorably impacting gross margin in 2002 was a 33% plus growth in ICLs and a 54% plus growth in AquaFlow, both product lines realized significantly higher margins than other components of the business. Declines in U.S. IOL sales and a year over year growth of 8% in our German subsidiary negatively impacted gross margin percentages.

The company anticipates gross margin to continue to improve as they did during the course of 2002 due to the successful reduction of IOL manufacturing costs achieved throughout 2002, growth in the ICL and AquaFlow product segments, and improvements in U.S. IOL sales. G&A expenses for the fourth quarter were 213,000 or 12% over the prior year quarter. Legal expenses, bank charges and an increase in DNO insurance accounted for this increase. For the year to date period G&A expenses were essentially flat to prior year. Sales and marketing expenses for the fourth quarter were 589,000 or 12% below prior year while year to date results were 3.2 million or 16% under prior year. These expense improvements are the result of closing unproductive non-U.S. subsidiaries and successful cost containment measures in the U.S. Staar's fourth quarter spending for R&D, clinical and regulatory activities was 274,000 or 22% below prior year. For the year to date period, R&D spending increased 336,000 or 9%. During 2002 Staar's investment in R&D increased to 8.4% of net sales versus 7.3% in 2001.

During the year the company added key R&D employees, increased spending for ICL and Toric ICL activities, three piece polymer eyowell design and new cartridge technology for the IOL. I'll spend a minute talking about nonrecurring charges that were classified in operating expenses. Nonrecurring charges for 2002 were 1,455,000 and the results of employee separation expenses, and deferred losses from the translation of foreign currency statements into U.S. dollars for subsidiaries which were closed. Nonrecurring charges for 2001 were 7.8 million and related to the closure of foreign subsidiaries, fixed asset write downs and notes receivable reserves. Total SG&A and R&D excluding these nonrecurring charges for the fourth quarter was 635,000 or 7.8% below prior year. For the year to date period spending was 2.8 million or 8.5% favorable to the prior year. These results again reflect a successful execution of the commitment management made to reduce operating expenses and improve efficiency.

Other expenses increased 55,000 for the quarter entirely due to foreign exchange losses for the year to date period. Other expenses increased 556,000 due to exchange losses and reduced equity and earnings of the Canon Staar joint venture. I'll also spend an extra minute here on income taxes. During 2002 for both the quarter and year to date periods, the company recorded no income tax benefits on U.S. entity net operating losses. In 2001, the company recorded domestic tax benefits of over $9 million. During the fourth quarter of 2002, the company recorded a valuation allowance of 9.2 million dollars against its deferred tax assets. This non-cash charge increased the valuation allowance which now fully offsets the value of the deferred tax asset on the company's balance sheet. This asset reflected the potential income tax benefits that would result from the company -- when the company uses losses incurred during 2000 and 2001 to offset future taxable income.

Management believes that further development and commercialization of the company's ICL technology and other initiatives will yield sufficient future income for the company to realize the deferred tax asset. However, the company determined that an adjustment to its valuation allowance was appropriate in accordance with the requirements of statements of financial accounting standard number 109. The company federal net operating loss carry forwards are not impacted and generally can continue to be used to offset income for up to 20 years from the time the loss was realized. Net loss for the quarter was 10.1 million or 59 cents per share for the year to date period the net loss was 17.2 million or $1 per share. Excluding the effects of the nonrecurring charges and the tax valuation allowance, net loss for the quarter was 933,000 or 5 cents per share, and for the year to date period 6.5 million or 38 cents per share. On a comparable basis, the net loss for the fourth quarter of 2001 was 438,000 or 3 cents per share.

For the 2001 year to date period again on a comparable basis, the net loss was 4.5 million or 26 cents per share. Spend a minute on cash flow for 2002. Net cash flow for the fourth quarter was 934,000 positive reflecting 567,000 cash generated in operating activities, and 367 from investing activities. Investing activities included purchase of property, plant and equipment, which was 157,000. We collected a notes receivable for 100,000 and a tax refund of 300,000. Fourth quarter 2001 net cash flow was 298,000, 228,000 from operating activities and 70,000 from investing activities. Net cash flow for the full year was $163,000 positive which included 569,000 cash generated in operating activities and 406,000 cash used in investing activities. Net cash flow results for 2001 were 3.2 million dollars negative which included 2.6 million dollars cash used in operating activities and 687,000 cash used in investing activities. For 2002 Staar achieved a 3.4 million dollar improvement in cash flow over 2001 results.

The net increase in cash at year-end was 156,000, and notes payable were reduced by 2.6 million dollars. Our secured revolving line of credit, I'll spend a moment on that. As a result of the company's decision to record a valuation allowance against its deferred tax asset, it was not in compliance with bank covenants, certain bank covenants. A waiver for these violations has been obtained from the lender. The company is currently in negotiations to renew the credit facility agreement which expires on March 31st, 2003. At the end of February, Staar had utilized 2,185,000 of the $3 million available line of credit. In closing, I would like to say that my first year at Staar was a very rewarding one and an extremely productive year for the finance organization, and I look forward to 2003 with optimism. I would now like to turn the call over to David Bailey, Staar's C.E.O..

Thanks, John. Well, picking up on John's last point, this is my second full year as C.E.O. of the company, and I'm pleased to report significant progress with our plan to convert Staar into a viable business which can compete profitably in each of the three core business segments, cataract and glaucoma devices and most importantly, refractive implants. Our principal aim, as I have stated previously, is to ensure that the ICL represents the next paradigm shift in refractive surgery. In order to achieve this ambitious goal, it was clear that we needed to improve the financial health of the company, concurrent with attaining new regulatory approvals worldwide but most critically in the key U.S. market. Measured against these benchmarks, I am pleased to report significant progress throughout 2002. As John indicated, the restructuring plan that was initiated in late 2001 targeted fundamental changes within Staar in order to ensure the financial well-being of the company over the long-term. Successful implementation of this plan began to show real and meaningful results over the course of 2002 which is now being reflected in the financials.

And improving gross profit trend gained momentum throughout the year and accelerated in quarter four. Tight expense control which eliminate 2.8 million dollars of cost versus prior year, and much improved asset management which resulted in a positive transformation of cash flows for the business. The improved cash position was achieved despite a 5% decline in overall revenues. Since our key future priority will be sales growth, I will comment on the sales situation first, and then move to other aspects of the turn-around. I was obviously pleased with the fourth quarter sales which climbed 18% versus quarter three, and improved by 5% over quarter 4, 2001. It is clearly our priority to maintain this trend and grow sales for the whole of 2003 versus 2002. With this objective in mind, let's look at the -- look and understand the 5% or 2.5 million year on year decline in a little more detail. As reported previously, our European business, with the exception of Germany, underwent significant change in late 2001, early 2002 as part of the restructuring program which saw the elimination of loss making affiliates in favor of third party distributors. This resulted in revenue reduction of 1.3 million dollars for 2002 versus 2001, but critically, it reduced operating losses by 750,000 dollars. This clearly represented an immediate and significant payback from these actions.

Despite the impact of this revenue reduction, international sales still enjoyed a modest growth when comparing full-year 2002 with 2001, and became an increasing percentage of our overall business. In line with our key strategic goal of growing the refractive business, we spent significant promotional time throughout this restructuring period repositioning the ICL in a number of European markets in order to reverse some negative historical legacy issues. As a result, year on year unit sales increased by 33%, having been flat between 2000 and 2001. As I have referenced on earlier calls, the critical activity with the ICL is effective surgeon training and proctoring, together with a tightly-managed and controlled release of the latest V4 design. We are getting this message across and seeing a renewed interest in the ICL in all markets. In new markets such as Canada and Korea, this approach has been highly successful, and has resulted in a solid sales.

Given the economic and system nuances of the Canadian market and it's strategic decision to tightly manage the rollout of the ICL, growth has been steady and very solid in terms of out comes. A Similar approach in Korea has achieved the same high quality outcomes but with more rapid up take reflecting the faster adoption rates in this market. Korea exited 2002 as our second best distributor market. Insulated from all the restructuring activity in Europe, our German business has continued to perform very well, growing 8% versus prior year. Given the importance of this 80% owned affiliate to our overall business, Staar opted to acquire the remaining 20% interest. This has been achieved through a cashless transaction involving the transfer of share ownership with cancellation of outstanding loans being the quid pro quo. This transaction has multiple benefits to Staar but also retains the services and loyalty of the existing general manager in whom we have great confidence. I believe this transaction is a real win-win for all concerned. Comparing quarter four '02 with quarter 4 '01 our overall international business showed good growth driven by almost all product categories, ICL in particular continued its positive trend with year on year sales up 33% for full year 2002 versus 2001.

While international represents increasingly good news, our North American sales continue to disappoint having recorded a decline of 11% in quarter 4 versus the prior year period. The annual comparison showed an identical shortfall. Because of this continued weakness, we have vigorously moved ahead with the changes outlined by Nick Curtis on our last conference call. The early signs are that we appear to have halted the sales contraction. On the last call, Nick had been with the company for just one month, but already demonstrated a clear understanding of the main changes which needed to be made to reverse the declining revenues. Critically, we are requiring all territories to meet growth targets if they are to participate in enhanced commission programs for new products, including the ICL. Nick is absolutely committed to this program and has the full support of the board, the operating committee, and indeed for much of the sales team as he tackles the implementation of this change. Additionally, new product introductions and rule-outs will further enhance our ability to gain lost market share in the U.S. going forward. Moving to new product approvals, they are a key requirement to drive sales growth, and in this regard 2002 was a very productive year for Staar with keynote approvals for the ICL in Korea and for the Toric ICL in Europe.

Both were significant events for the company and will drive international sales growth through 2003. Furthermore, we have made significant and steady progress with the approval process for the ICL in the U.S. Based on discussions with the F.D.A., we decided during 2002 to compile and complete three-year followup on patients before filing for approval. That process is effectively finalized and we will informally present our file to the F.D.A. during a meeting scheduled to take place shortly. Dependent on the F.D.A.'s response, it is our current intent to submit the formal clinical module very quickly following that meeting. The manufacturing and pre-clinical modules were approved by the F.D.A. during 2002. On our last conference call, I highlighted the fact that we would be publishing a number of key review articles on the ICL and talked in particular about the first of these articles which appeared in the September edition of the Journal of Refractive Surgery. This article highlighted the successful use of the ICL in children to treat myopia.

Since that article appeared, we have had two additional peer review publications. The most recent in the authoritative publication of Opthalmology summarized the two-year data from the U.S. clinical trial and concluded the results support the safety, efficacy and predictability of the ICL implantation to treat moderate to high myopia. Let me just repeat that quote. The results support the safety, efficacy and predictability of the ICL implantation to treat moderate to high myopia. This is an excellent endorsement and we fully expect the three-year data to reinforce this conclusion. Critically, this represents the opportunity to position the ICL as a viable alternative to LASIK in the mild to moderate myopia market segment with the resultant significant increase in potential revenues to Staar. Future peer review articles will present results that will clearly establish the ICL as an alternative to LASIK in a wide range of patients.

Two such articles are in press. Three others are awaiting confirmation of acceptance. In addition to these peer review publications, we have multiple presentations on the ICL at the April ASCRS meeting in San Francisco. Interest in the ICL is mounting as product credibility builds. Moving to the Toric, the approval in Europe during late quarter four takes us into the custom-made refractive business for which we've been preparing throughout 2002. As many of you are aware, I spent considerable time in Switzerland during the first half of 2002 making the operational changes required to deliver this product to market. Previously the company had over promised and under delivered on the supply of a custom Toric ICL. However, since implementing numerous changes, our delivery time has improved significantly, and as a result of this and the [UNINTELLIGIBLE] approval, we expect to see a steady upward trend in demand for the Toric ICL.

Due to its ability to simultaneously correct myopia and astigmatism, the Toric ICL is a outstanding alternative to LASIK for many patients and avoids the requirement for a double procedure. Taken together, all of these factors position us well to build on the sales momentum evidenced during the fourth quarter. With further new approvals and an increased ability to reverse the loss of market share in the U.S., we would expect to see sales grow through 2003. When we entered 2002 we knew that gross profit would be depressed by a little over 2 million dollars as we worked through that expensive inventory. Despite that drag gross profit improved steadily quarter by quarter as we saw the positive benefits of the manufacturing restructuring. Quarter 2 through quarter 4 saw an almost 3 percentage improvement to the company's gross profit. The underlying increase was actually much stronger but was masked by both the burden of the high cost inventory and the geographic mix issues whereby our international business contributed a greater percentage of total sales, but at a lower gross margin. We expect this positive trend on gross profit to continue driven by increasing sales of high margin ICL in international markets and growth within the U.S. market of both the cataract and the glaucoma product line.

Expenses, as John highlighted, continue to be tightly controlled with savings for the year being 2.8 million dollars below 2001 and better than our targeted savings of 2.5. Expenses rose in the fourth quarter driven by the key [UNINTELLIGIBLE] meeting and also a peak in legal expenses as we move to close off some legacy litigation in particular, the XEO lawsuit against the company. As you will all be aware, this was one of the major undertakings given to shareholders at my first meeting in May 2001. Litigation issues over the course of 2001 and 2002 have sapped both management time and valuable cash from the company. Despite this, we have made immense progress in resolving multiple and damaging disputes. It is my clear aim to avoid costly future litigation. That said, anyone associated with Staar needs to be aware that I will hold people accountable in respect of contractual commitments to which they have agreed and will take all steps necessary to enforce contractual performance. Management will not be held hostage by any third party or employee. No one individual is that critical or important to the company.

So while I anticipate future litigation costs will reduce, we will have no hesitation in spending in this area if we judge it to be in the best interests of the company. In his talk, John highlighted the excellent and continuing positive trend in both asset management and cash flow. Staar is achieving a stellar result in both areas, given where we started. This is a remarkable achievement. In the first quarter of 2001 we were burning cash at the rate 2.8 million a quarter. In 2002 we actually generated cash from operations and by the end of 2002 were able for the first time to actually self-fund the business. All of these positive trends with the business have helped build the relationships with our banking partner Wells Fargo. Until the decision was made to take a valuation allowance against the deferred tax asset, we were in compliance with all bank covenants. When this decision was taken, they were quick to work with us to obtain a waiver. We will be working diligently with them to conclude a new agreement before expiration of the current one at the end of March, and are hopeful for a positive out come. In summary, I am of the firm belief that two years of hard work is now beginning to show through as solid trends in the financial results of the company.

Although we have much still to do, we have clear positive trends in terms of expense controls, gross margin, cash flow, and for the last quarter of 2002, sales. Quarter 4, 2002 sales were the highest sales in any quarter since quarter four, 2000. As a result of all of these actions which have been described, we have an organization and infrastructure which means that sales growth such as we have experienced in the fourth quarter will move as quickly to profitability. This, and U.S. ICL approval, are our clear goals for 2003. I would now like to hand over for questions.

At this time I would like to inform everyone that in order to ask a question please press star then the number 1 on your telephone key pad. Please stand by for your first question. Your first question comes from Kate Sharadin, GKM.

Hi, everybody. Congratulations.

Hi, Kate. Thank you.

Good, thanks. Can you just real quickly, could you tell us what that loan amount was on that 20%, the sort of quid pro quo? What was that?

On the German subsidiary?

Yes.

I'm just checking, Kate, to make sure I give you the right number. It was about 950,000 dollars.

Okay. And what did that 20% reflect? I mean, what's the whole subsidiary doing in terms of revenue contribution?

The whole subsidiary is significant, around about 15, 16 million, Kate.

Great, that was for 20%.

Yeah. That was the final 20%, and we did an external valuation for the board before moving ahead with that.

Okay. Great. And what would Nick be doing specifically to curb the market share losses? Is it a market environment issue or a Staar Surgical specific issue that's allowing you?

That's a good question, Kate. It's actually a combination of both, as there has been some erosion over the past year or two in the marketplace on -- in silicone lenses and moving towards the higher technology material lenses, but I feel like, you know, based on the size of the company and the size of the overall market, that there's other things that play here. I think we've made a pretty significant headway in the mission to stop the decreasing American sales and to move back in a positive direction. We've made some changes in January of this year to replace one of the existing regional managers and bring in a new regional manager. This is transitioning pretty well and will prove to give Staar a lot more coverage and better account penetration as well as representing our full product line of what we have to offer. We also, over the course of the last quarter, recruited in two -- I'm sorry, three new territory representatives to cover sales in territories where we had little or no account penetration. In fact, these were areas where we had eroded sales over the past few years. It's important to note here that in those particular markets, physicians had not seen or had any contact with the Staar representative for quite some time, and we're continuing to recruit quality TRs into the regions and I'm working pretty close right now with several of the regional managers to look at quality of folks and to try to get people into territories where we're lacking some coverage so we can pick up some business there as low-hanging fruit fairly easily by just making the calls. The sales force has really been challenged over the past quarter to increase their call schedule and activity. As I noted in the last call, I felt like this was one area that we really needed to either push for some improvement in, and we've seen some evidence to support the belief that we're starting to have some effect in that regard as we're starting to target new accounts, and accounts that we had lost previously for some trial activity with some of the new cartridges and injection systems and the demand for that has really been increasing from the field. So we're -- it's showing that that is starting to have a pretty good effect. We've worked pretty hard to align the goals and objectives of the company along with the RMRs in the field, and I'm pleased to say that for the first time, most likely in Staar's history, we've probably -- well, what we've done is we've taken the new product lines and tied the sales performance within the regions to a variable commission incentive, and to be a little more clear on that, each region was provided with clearly-defined sales goals and objectives on all of our base products, as well as ASPs or average sell price targets on each product. These performance objectives are going to tie to the commission percentages that are going to be available on the ICL at the time the ICL is launched and that's going to be in a variable fashion. So in other words the higher the sales performance to their objective, the higher the percentage of commission that would be available to them at the beginning. The region managers are then taking these performance objectives and dividing them amongst the TRs and providing the same variable incentives so we're also managing to the average sale prices so the idea here is that we're not going to sacrifice gross profit over the year for pure unit volume. We're managing to both of those which again is something that most likely hasn't been done in the past. We've also provided an opportunity to exceed the ICL launch in commission percentages available in the second year if they maintain and grow that baseline business in the next year as well. So the idea here is that as the new products become available that we continue to manage to the base business and we grow.

Okay. Thanks. You wouldn't expect any -- you're not expecting any declines in the first quarter year over year then in U.S. IOLs? Or are you expecting maybe lighter...

We've taken a lot of steps to prevent the decline and provide a platform for growth, and all of those steps are the ones Nick just talked about. A lot of progress in that area, Kate.

Okay. Just refresh me on the Toric ICL. Once you get -- is that -- are we looking roughly then one year out after ICL approval? Is that right?

Yeah. We've all started about a year. We have a clinical for 125 patients one year followup. We have been limited in our recruitment because of the limitations on the manufacturing capacity, so recruitment was initially slow. Actually we've taken the stops of now and they are accelerating improvement.

We approved at this time to provide Toric IOL to investigate and that's on process right now. We have included 33 patients of those 125 required since August.

You've done 33?

Yes.

But that will go up quickly, Kate because of the manufacturing constraint going away.

Okay. So when do you think you'd have all 120 implanted?

Latest the end of the year, Helene and I are of the opinion.

Okay. Thank you.

Your next question comes from Jayson Bedford

Hi, guys. Nice quarter. I just have a few quick questions. Can you break out US - OUS revenue in the quarter and then just speak to domestic gross margin trends? Are you seeing -- is there any price erosion or are you making any manufacturing efficiencies to account for that?

Okay. Jayson, thanks for the comment. In 2001, international sales accounted for 46% of the business. U.S. obviously 54%. For the year 2002, the international had grown to 50% of the business. So it was a 50-50 split. In quarter four the percentage was actually higher international was higher, contributing 53% versus 47% from U.S. So we're seeing -- we always knew that we'd gotten to grips with our international business early on, and you can see that both in terms of the growth, even though we walked away from that 1.2 million in sales, but the quarter on quarter percentage of the total is increasing. The challenge we now have, as Nick just talked to, is the U.S. piece, okay? In terms of gross margin, John?

Jayson, thanks. As it relates to gross product margin, I'll let Nick talk about the ASP situation in the U.S. but I certainly spend a minute on our cost structures. As you can see for the improving gross profit performance over the fourth -- four quarters in 2002, and we continued to talk about the reduction in the layer of high-cost inventories, what we did in 2002 from a production perspective was significant reductions in cost in our primary IOL facility in Monrovia. It was a very very good year, we kept, as mentioned in the presentation earlier, those costs. We kept as I mentioned in the presentation earlier, that we held to our plans and our expectations. We had a very good year in production for 2002. And you know, with FIFO inventory valuation you're going to see a lot of that go to the P&L in 2003 so that will be a good story. And we continue to look at cost reductions programs in Monrovia and we will implement those and we have a good plan for 2003. To make a long story short, you'll see continued lower costs in 2003, and continued low -- to the P&L and I feel continued lowered manufacturing costs themselves. Nick?

I think overall, you know, prices over the year dropped about 4% so there is some pressure on our ASPs. You know, we're moving into some of the higher technology product in changing our mix of business in that regard and pursuing other product opportunities to help to offset that.

Okay. Great. And then please comment on the rollout of the second generation three-piece polymer in Europe. How is that rollout coming along?

In Europe early stages. We've got our first orders in December time frame so from distributors, so it's early days but good interest in the material itself. Very good interest in the three-piece design which dominates international markets, and we're testing various injectors in Europe with the various distributors. So it's early days, Jayson, but good interest and initial shipments were showing up in the December invoice sales.

Okay. Great. Then in terms of the ICL in Taiwan, when do we expect that approval?

Well, as I've said previously, I'd expected it by now, so Helene and I are a little bit frustrated on that one. Everything's done. The file's in. We're just waiting for the government process to be complete, Jayson

Okay. Sounds good. And then finally, can you comment on AquaFlow sales in the quarter? Can you put a number on it and maybe just qualitatively the reorder rate you're seeing?

I don't want to get too much detail on that. It grew for the year. The reorder rate was a little bit short of what we had seen previously which I think was around 65%. It was a bit lower than that. We need to redouble our efforts with regard to AquaFlow just in terms of additional proctoring, et cetera, and Nick's got some strong plans in that regard.

Okay. Sounds good. Thanks, guys.

Thanks, Jayson.

Bye, Jayson.

Your next question comes from Tyson Housey, Housey Advisory Management

Nice quarter, gentlemen.

Hi, Tyson.

I have a couple questions, the first is for Helene. And the data that recently was released with regard to what David had mentioned including moderate myops having safe and efficacious and predictable results, is that going to in any way impact how you make the submission to the F.D.A. on the ICL? In other words, are you going to now include lower myop -- I should say moderate myops in that or are you all strictly higher myops with regard to this current submission?

The submission will be done for minus 3 to minus 20 for the F.D.A. approval. So that includes moderate rate myopia.

I guess this is for Mr. Bily. Are you discussing possible lines of credits with other banks other than Wells Fargo or are there any alternative discussions or strategies you might have? I mean, obviously, the operations are improving nicely, but it's still a concern and...

Well, Tyson, David and I had decided that a mission that we had for 2002 was to improve operations, prove to Wells Fargo that we were a worthy client, not to dilute our equity, and just work real hard in the business, and we did that. But I also haven't been resting on our laurels here so we've talked to a lot of people, Tyson and I have talked to a lot of people. There are options out there. Our primary strategy is still to stay with Starr. Stay with Wells and not to dilute the company.

We're reasonably optimistic of that, Tyson. We're working very hard in that regard.

Good to hear. My last question is a great opportunity in Staar, in my opinion, probably many, is in the ICL, and the 30% growth rate seems conservative, and now a lot of that has to do with the training of surgeons. And I guess when looking at retailers people talk about same store sales growth. Is there some sort of anecdotal evidence you can suggest in terms of maybe same surgeon sales of people that you have trained to give us an idea of the potential momentum behind the ICL product?

Yeah. There's a lot of anecdotal evidence, Tyson, but let's focus on a few different pieces with regard to the ICL. First is as I referenced in my text, we knew we were fighting some legacy issues in Europe through early commercialization and a lack of a control launch. That was evidenced in the fact that sales between 2000 and 2001 were flat in unit terms in those markets. Last year we put a huge amount of effort into changing those perceptions, revisiting people, and getting them interested in the product again. That paid significant dividends in terms of the growth we saw in those markets despite all that restructuring and change in Europe over the last year. Now, those efforts have paid off with a relatively -- I think you're right, a relatively modest growth rate for a new technology, but our efforts are kind of redoubling as we move into '03. So if I give you just a statistic, over the course of February and March in international, we'll run eight ICL training courses, and they range from Munich to Belgium to the Middle East to Rome, Italy, to Korea, and all that is accelerating that control launch we talked about. So we had a big legacy of the past and I think that significantly added a lot of inertia to overcome -- you had to overcome that in order to get the growth. And we're certainly working very hard on that. If you look at the anecdotal evidence, I referenced Canada. One of our users in one of our key trainers in Canada is Lou Prost, and Lou has a web site which you can visit where he talks about his experience with the ICL. And our company has the details of this, and he concludes at that web site that patient satisfaction with the ICL has been very high, and he is a very big LASIK surgeon but sees, obviously, a clear place for the ICL. And if you read his comments on that web site, you'll also see that there's a strong place for the Toric ICL. What we're seeing in the market is an increasing interest in phakic implants because of the realization of the limitations of LASIK. And I'm going to ask Helene to talk to a couple of those in a moment. But also the fact that there are different market segments emerging. Initially we were talking about high myops which is a very significant population in the U.S. but a huge population in Asia where the average myopia is much higher than in the U.S. So if you look at Hong Kong and Singapore, the average myopia is around minus 7, minus 7 1/2. If you ask a Korean surgeon what the average myopia he sees he'll say that 60% of his refractive patients are above minus 8. So we're seeing a lot of evidence and both anecdotal and quantifiable of an increasing segmentation of the market and an increasing opportunity for the ICL and phakic implants in each of those areas. I mentioned the limitations of LASIK. I'd like Helene to just talk about some of the increasing concern in those areas.

More and more publications refers to some up tick evaluation that's observed with LASIK when we go to moderate to higher myopia, and the usual LASIK recommendation and used to be minus 10 and from surgeon to surgeon it goes now to minus 8, even minus 7. So that's an optical limitation. On the other hand, there are some physical limitations and constraints to LASIK. The first one is corneal sickness. As you know, when we proceed in oblation with the LASIK procedure, we remove cornea in order to provide the refractive outcome desired. A prominent German surgeon states that he does not recommend LASIKS in patients with corneal less than 500 microns at the thinnest point, and interestingly enough,. [ [ audio not understandable ] ] The cornea sickness in the German population is 538 micron with a standard deviation of 34 micron. That will put that at approximately 20% of the population, of the general population with cornea under 500 micron of thickness. So the cornea physiological anatomy represents a limitation to LASIK. Another one is the dry eye situation. LASIK doesn't work as good in dry-eye people, and more than 75% of the patients undergoing LASIK do have dry eye. Actually, that is the fact why they are seeking for LASIK because they begin to have a hard time to tolerate the contact lens. And once they go after a LASIK procedure, some 59.4% of the patients who do not have dry eye [UNINTELLIGIBLE] will end up with it, [UNINTELLIGIBLE]. That means it represents another physiological constraint to the LASIK procedure. So more we know about LASIK, more we know that it's not the holy grail that was expected five or four years ago and that left alternative technology such as ICL or IOL a significant opportunity.

Thanks, Helene.

Thank you.

Thanks, Tyson.

Again, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad. Your next question comes from Larry Hemavich, HMTC

Good afternoon.

Hello, Larry.

I wanted to hone in a little bit more on the ICL, and specifically your regulatory timelines. You mentioned during the conference call a meeting, sort of a pre-meeting with the F.D.A. to be followed by the formal final filing of the PMA. What does that mean in terms of the final filing before the end this have quarter? Is it in the second quarter? Can you give us a little more specifics on that?

Yeah. We've always adopted a policy of meeting with the F.D.A. to discuss whatever data or file we were going to submit. So we did the same when we did module one and two. We met with them, and the philosophy there, Larry, which has paid big dividends for us is that we get all the most of the questions and issues before they ever get to the final file. Remembering that questions that come up slow the whole process down once you submit it. So this is one of those situations where you can save time up front by having these meetings, and talking through the data and how you're going to present it, and understanding what questions they may ask later, and basically answering them up front in the file.

Right.

You're refining the method of putting the file together before it goes in. Now, that's worked for us and we're -- Helene and I are great believers in that approach. So we're adopting exactly the same philosophy with the three-year data that we now have.

Are all the patients fully followed up with, David?

Yes.

Yes.

Sorry.

We are concerned that we have closed the database earlier this month.

Okay. So in terms of -- I totally agree with your philosophy of going to the F.D.A. and talking with them before the final submission, but what should we expect in terms of the final submission? Should it be by the end of this have quarter or early in Q2? Is that kind of the thinking here?

It's either late March or during the month of April.

Okay. So you're pretty much on target then with the guidance I recall you gave on the last conference call?

Well, I've always said that we try and do it by the end of quarter 1. It looks like we'll be slightly over that but I have no concerns about it because we're going to catch -- we're going to gain time from being prudent.

Yeah. And David, obviously, predicting the F.D.A.'s a task fraught with lots of risk, what would be a reasonable panel meeting date for you? I know there are several already on the F.D.A. advisory panel schedule. I think there's one in October or November, I can't remember. You sounded like in your prepared remarks you said you hoped for a F.D.A. final approval by year-end. Did I understand that correct?

I think panel you'd be looking at the end of November.

There is a panel meeting in August, one also in October, and one in November.

The November's probably where we would be hoping to hit, Larry.

So you won't have final approval probably until Q1 of next year.

I guess realistically, yeah.

Okay. Because.

Larry, Helene and I focus on when we're going to put the data in, the best way to put it in and which panel meeting we hit, and then approval is after that.

Right.

Kind of focused on each step.

Got it. Right. Your head is down and you're focused on the task in front of you.

Yeah, and the data is in and the database is locked.

The data, as you've said and as we've seen and as you know I've heard several other papers at some of the other meetings has been consistently very good, Helene, are you pleased with the final data that you gathered over the last, you know, couple months? Has it continued to be the same kind of very consistently good data that you've seen all along?

We have the same consistency of data, yes.

Larry, we kind of are not going to go into detail on the three-year data. We're referencing people back to that super paper on the two-year data because we feel now other than commenting on trends that it's important for the F.D.A. to be the first people to see that three-year database.

Of course. Of course. I understand. Okay. Well, congratulations on all the progress.

Thanks, Larry.

Your next question comes from Neil Bradshear, Broadwood Capital.

I will add my happiness on the good revenue trend. Could you add two more columns to the table you provided on the revenue break down between international and U.S.? You'd given us 2001 as a whole, 2002 as a whole, 2002 fourth quarter. Could you also do 2001 fourth quarter and 2002 third quarter just so we can understand the comparison sequentially in year over year?

You want 2002 third quarter, Neil, right?

2002 third quarter and 2001fourth quarter, those two.

2002 third quarter was 50-50.

Okay.

2001, third quarter, 54% U.S., 46% international.

Okay. I have 2002 Q3, 50-50 and 2001 Q4, 46 international, 50 for U.S.

I think you gave him Q3. 2001 Q4 split, David?

2001 Q4 split, was 56% U.S., 44% international.

56-44. Okay. Hi it at 54-46.

That's the third quarter 2001.

Yeah, Neil. Sorry. I'm not trying to confuse people. Quarter 3, 2001, U.S. 54 --

Quarter 3 2001 is not a question of mine. I'm interested in the third quarter of 2002, the one that precedes the one you just reported, and the fourth quarter 2001, the one that's the year-ago comparison for the quarter you just reported.

It was 50-50 in Q3 '02, 56% U.S. and 44% international quarter 4, '01.

Thank you. That's exactly what I was looking for. That does make it even clearer the trends that you've been talking about in terms of the strength of Germany and so forth. Good. Then with respect to the Wells relationship, the number provided in the press release regarding the current size of that is a current number. It's a February number. It's not a January 3rd number. What portion of the 5.845, John, is the Wells relationship?

At the end of the year, Neil?

Yeah, on the balance sheet, January 3rd shows 5.845 notes payable. I assume that the Wells is some portion of that.

I think it was 2.9.

Yeah, rounds up to 2.9 at the end of December.

Okay. And what was cash at the same measuring point as the February Wells measuring point of 2.2?

Actually, we haven't consolidated February results, Neil, so I'm not exactly sure what global cash was.

Okay. But you see what I'm getting at? I'm just trying to make sure these are apples to apples comparisons because you had a million in cash. I guess what I'm really getting at here is that the Wells relationship is just so tiny at this point, you had a million in cash January 3rd and 2.9 at Wells. It's a net of 1.9 that you have any issue on here, and if in fact the cash didn't come down but Wells did since then from incremental cash generation then this is a really tiny issue at this point. And there's a lot of angst but this issue but if it's really that small I think it's helpful to understand that.

Yeah. I understand your position, Neil. From a U.S. perspective, all of our cash is swept against that Wells note on a daily, weekly, monthly basis so that's how we manage that line.

Is there a tax issue with respect to repatriating the amount of cash then?

No.

So you could if you need today repatriate that.

Yeah. There's no blockage on repatriating cash.

So that million dollars is fairly usable if you needed to pay down the Wells line and get a little money somewhere else to finish paying it down.

Yeah. You know, when you take a snapshot balance sheet, a snapshot of the balance sheet at any one given month, you have cash here, there, and in other places. I don't know exactly where that is but certainly, it's available and free flowing, right.

But would you guess that the 700,000 drop in the Wells exposure from the January 3 measuring point to the February measuring point is offset by a cash drop or not offset?

Not offset.

Okay. Really so I guess I'd be hard-pressed to think that Wells would have any problem with extending this relationship given that it was 3.2, now down to 2.2 just since the last conference call. You're bringing it down pretty quickly here.

Yeah. I can't definitively tell you Wells' position. What I can tell you is we clearly improved the business significantly, and the relationship with Wells is vastly different to where it was a year ago. And we're very hopeful to work with the people at Wells Fargo.

Great.

We have other options if that doesn't happen, but we would want to build on the relationship that's been developed, Neil.

Great. That makes sense. Then just one other thing on this and again there's been angst on this and it's so small it barely justifies anything but you mentioned that prior to the tax valuation SFAS 109 adjustment you were in compliance on covenants. Should I take that to mean that you have been in compliance in all the operating trends covenants? Is that correct?

That's correct. Yes. We were in compliance for the quarter. Simple as that.

That's encouraging because that was one of the issues before. And then your consultation meeting with the F.D.A. prior to filing the final ICL module, has a date been scheduled for that meeting?

We're working on that at the moment.

But we don't have finalized the date with the F.D.A. yet.

But your sense is it's no later than mid March it sounds like.

Sometime in March.

Sometime in March. Okay.

It's difficult to pin a date because you're trying to get so many people together but it could be that, could be slightly later, Neil.

Okay. But in terms of the module filing, how long does that have to wait after a meeting if you get a green light at the meeting?

During the time we are working on scheduling the meeting, we are as well building the file as of now because as we mentioned earlier, the data bank is closed so we do not need to wait until the F.D.A. meeting to put the file together. So that's something on process right now.

Okay.

I think the key things are, Neil, the data's in. The database is locked. Helene and her group are under no constraints to get the experts together to analyze the data, to look at it and all our process goes ahead irrespective of a particular date with the F.D.A..

That is very encouraging. I'm very glad about that.

It's full speed ahead with no financial constraints. Helene's group are working very very hard.

Dynamite. Helene, you were mentioning some of the issues showing up that limit the market size for LASIK and provide kind of low-hanging fruit for Staar, and I heard your comment on the corneal thickness issue in the portion of the population that's disqualified for LASIK because of that. Did you have a percentage of population number for the dry eye issue? I didn't hear that.

Yeah. About 75% of the people who have LASIK surgery, right, Helene?

Yes.

Have dry eye.

Okay. So that's not really a disqualification ahead of time. It's more of a problem afterwards?

Right. But because it's a problem afterwards it can become some sort of disqualification before.

Is there any sort of rule of thumb that's been developed for that as there is for 500 microns for the thickness issue?

No.

I don't believe there is, Neil.

No.

Okay. Great. All right. Well, thank you. Again, the revenue trend is nice and certainly all the ICL data has been very encouraging. Thank you.

Thanks, Neil.

Your final question comes from Marvin Sperling, ING

Hi, guys.

Hi, Marvin.

Congratulations on a nice fourth quarter, and also congratulations on landing the lead article in the February Ophthalmology Journal. The data was obviously very impressive and clean and lack of post-op complications was nice. There was also an article in Eye World. I don't know if you -- I'm sure you guys might have seen it about the ICL being the talk around town, and I think the street is very used to seeing refractive surgeons as the segment of ophthalmology who are most concerned with refractive surgery. Have you noticed -- maybe can you give us a little color on the presumed increase in traffic through Staar and about the ICL with regards to the cataract surgeons who are interested in possibly doing the ICL and that being a difference between your product and LASIK? That was my first question.

Well, I'll hand over to Helene but my initial read on -- or answer to your question is we know that an awful lot of cataract surgeons are very interested in getting to interphakic implants. Refractive surgeons are but a lot of cataract surgeons who are not in refractive certainly see it as a vehicle to get themselves into refractive surgery. They want to get inside the eye and it leans right to their skill there. So what we see is a huge interest from existing cataract surgeons as well as a significant interest from refractive surgeons. And the fact is that there's about 6,000 cataract surgeons not doing refractive surgery at the moment. So if you like the ICL opens up the door to another 6,000 potential customers who do an inter-operative work every day.

Okay. My next question is on the panel meeting timing. Does the F.D.A. give you any kind of indication that there are other ophthalmic medical tech devices that may be submitting P.M.A.approvals and therefore they might have an additional meeting either earlier or in between those dates that were originally mentioned?

F.D.A. didn't mention how our competitor are doing. Most significance of your question, no. We have no elements regarding to perceive additional panel dates.

I wasn't talking about a competitor but sometimes on ophthalmic panel meetings it could be a LASIK machine or something like that might be coming in front of the F.D.A. panel in addition to the ICL and therefore depending upon the schedule they might add another date. I was just wondering whether or not...

We're not aware of that, Marvin.

Okay. And just as a comment to give you guys a little bit of confidence in your methodology of approaching the F.D.A., there was a BioC.E.O. meeting today here in New York, and Dr. McClellan who's the head of the F.D.A. actually laid out a plan of how he wanted companies to approach the F.D.A. prior to the final approval of a drug or a biologic or a device, and his methods were precisely the ones that you folks are taking and that was frequent meetings, especially meetings before the final submission so that there are a lack of surprises for both the company and for investors. So you could I guess sleep better now and you might even see that in the press tomorrow. So I just wanted to let now about that.

Thanks, Marvin. That's good to know that we were ahead of the curve on that one, right?

Yeah, you were. And I know they taped that talk today and the press was certainly watching that so you may see that exact issue there tomorrow morning. But anyway, congratulations again.

Great. Thanks, Marvin. Marvin, you'll be interested I think in the next two publications. One's going to be in Cataract and Refractive Surgery. That's in press. And that concerns the ICL moderate myopia and the other one's in Cornea and it compares ICL and LASIK to moderate to high myopia. And that's in press at the moment.

Good. I'm looking forward to reading them.

Great.

Bye-bye.

Mr. Bailey do you have any closing remarks?

No. I'd just like to thank all of our investors for their patience and their belief in the company. I think we're slowly getting there, and look forward to the next call with interest. Thank you all.

Thank you for participating in today's conference. You may now disconnect.