STAAR Surgical Co (STAA) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the STAAR Surgical fourth quarter 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). Now as a reminder, the conference is being recorded today on Monday the 16th of March, 2009. I'll now turn the conference over to Mr. Doug Sherk with the UBC Group. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us this afternoon for the STAAR's Surgical conference call to review the Company's progress and financial results for the fourth quarter and full year 2008 which ended on January 2nd, 2009. The news release announcing the results crossed the wire this afternoon shortly after the market closed and is available at STAAR's website at www.staar.com. Additionally, we've arranged for a taped replay of the call which may be accessed by phone. The replay will become available approximately one hour after the call's conclusion and will remain available for seven days. The operator will provide the dial-in information at the conclusion of today's call. In addition today's call is being broadcast live and along with an archive replay will be available at STAAR's website at www.staar.com.

Before we get started, during the course of this conference call the Company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes: any projections of earnings, revenues, sales, cash or other financial statements, any statements about plans, strategies or objectives of management for future operations, any statements about the effective of the jury verdict against us in recent litigation, our attempt to challenge that verdict both by post trial motions and if necessary by appeal, or the outcome of future litigation, any statements regarding expectations for the success of the ICL or other products in the US and international markets, any statements concerning proposed new products or government approval of new products, any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions underlying any of the foregoing.

These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks are described in the Safe Harbor statement in today's press release and in the risk factors section of our quarterly report on Form 10Q filed with the Securities and Exchange Commission on November 11th, 2008, and our annual report on Form 10K filed with the commission on March 12th, 2008. Investors and potential investors should read these risks. STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. In addition, today's presentation includes certain financial measures used to better understand our business that have not been prepared in accordance with generally accepted accounting principles.

An explanation reconciliation of these non-GAAP measures has been provided in today's press release by the Company which is available on the website at www.staar.com. Now I'd like to turn the call over to Barry Caldwell, President and Chief Executive Officer of STAAR Surgical.

Thank you, Doug, and good afternoon, everyone. Thank you for joining us today to review our fourth quarter and full year 2008 financial and operational results. With me today is Deborah Andrews, our Chief Financial Officer. After my opening remarks, Deborah will cover in more detail the highlights of the quarter as well as our progress during the first quarter. Then I'll come back to add a few additional comments about recent developments. We've got a lot to cover today, so let's get started.

At the beginning of 2008 we laid out five key metrics upon which you could judge our performance during the course of the year. During the fourth quarter we met three of the five metrics. For the first three quarters we met all five. So though not perfect, a pretty good score overall for the year. While the fourth quarter experienced some impact from the challenging world economic environment, the first quarter of 2009 has shown continuous improvement in our progress to profitability.

Now I'd like to update you on how we performed against the five key metrics during the fourth quarter of 2008. The first metric is to reduce or operating cash burn and again we produce positive results as a result of our rising margins and cost cutting efforts. During the fourth quarter we continue to focus on reducing operational expenses both domestically and abroad and on an apples-to-apples basis generate a reduction of $1.8 million or 16% from prior year's fourth quarter spending. Cash used in operations in the fourth quarter was under $1 million. We reduced our cash use in operations excluding Japan, which was acquired in January 2008 by 58% as compared to the fourth quarter of 2007. For the year the cash used in operation excluding Japan was $5 million as compared to over $11 million in 2007.

Our second measure is to drive quarterly improvement in our overall gross margin and we just missed that in fourth quarter. During the quarter gross margin increased to 57.1%, which is a 600 basis point improvement from the fourth quarter of last year. However, we fell slightly short of the 57.7% gross margin achieved during the third quarter. That's largely due to the overall -- lower overall sales growth in our Visian and ICL products. For the year our gross margin was 53.6% as reported which includes purchase accounting charges from the Japan acquisition. Excluding this $1.5 million adjustment the gross margin for the year was 55.6% as compared to 49.3% in 2007.

The third metric was to generate the strong international revenue growth seen in 2007. End user demand remains strong. During the fourth quarter international sales increased by 23% which was 30% when you exclude the impact of currency. For the year international experienced an overall 41% revenue growth. The key impact of the weakened economy was inventory reduction in several key markets where distributors were conserving cash during the fourth quarter by reducing inventory purchases, as compared to the fourth quarter of 2007 when they were in their typical year-end inventory build mode, but again end user demand remains strong.

Our fourth metric that we gave you to evaluate our progress during 2008 was achieving $12 million in sales from STAAR Japan. During the quarter STAAR Japan contributed $3.7 million in sales and for the full year STAAR Japan operations recorded $12.7 million in sales. This was a very important acquisition for the Company and you may recall it was necessary for us to own 100% of STAAR Japan in order to control the ICL technology worldwide. I want to congratulate the entire team for working together in order to overcome the challenges of an acquisition like this. These efforts were led by David Bailey, our President of International Operations, and embraced by the entire management team at STAAR Japan. We expect overall profitability and positive cash flows in 2009 and results so far indicate we're well on track for that.

Finally our fifth metric was to grow Visian ICL sales in the US. While we consistently achieved this metric in each of the first three quarters we fell short in the fourth quarter. US Visian ICL sales were basically flat during the fourth quarter. While flat is not good it is excellent compared to the estimated to the 40% decline for the total refractive market during the fourth quarter. Certainly the news has not been good for refractive procedures during the fourth quarter. LCA Vision has already reported a 51% decline in procedures for the quarter and AMO has basically reported a 40% decline. For the year the Visian ICL sales in the US increased by 18% while the market declined by about 35%. As a result, using the market share data for procedures we believe that we entered 2008 with a .4% share of refractive procedures and during the fourth quarter we achieved a 1% share of these procedures. Further, the true demand trends for the ICL in the US were better than sales indicate because of our strategic decision early in the year to reduce bulk sales.

For the fourth quarter the number of bulk orders was at -- by far the lowest level for the year against a very strong comp during the fourth quarter of 2007 when we were accepting bulk orders. As a matter of fact, overall our sales to nonbulk or singles as we call them increased by 13% during the fourth quarter. In summary, though we stumbled a bit during the fourth quarter on a few of our metrics we were successful on all five for the full year, and while you've heard this before from me and you're going to likely hear it again, we still have work to do. It's important to note that so far in 2009 our progress has continued toward our goal to profitability. Now I'd like to have Deborah review some of the fourth quarter financial highlights and operational highlights. Then I'll come back to provide some updates on some other key events which will then be followed by your questions. Deborah, I'll turn it over to you.

Thanks, Barry. Good afternoon, everyone. I'd like to start off this afternoon reviewing our cash situation. As Barry mentioned in his opening remarks, we've been aggressively managing our cash position all year by carefully cutting costs and we continue to do so in the fourth quarter. During the quarter we used just $991,000 of cash for operating activities, excluding Japan we used $514,000. We had cash expenses of $600,000 for legal fees during the fourth quarter, so non-Japan operations would have generated cash were it not for the legal fees.

Each quarter during 2008 we've lowered our cash use for operating activities and we finished the year with just under $5 million in cash, although $2 million of this cash is available only in Japan. Cash used in operating activities for the year-ended January 2nd, 2009, was $8.2 million compared to $11.2 million reported for the year-ended December 28, 2007. STAAR Japan used $477,000 and $3.4 million in cash for operating activities for the three months and year ended January 2nd, 2009, respectively. Excluding cash used by STAAR Japan, cash used in operating activities was $4.8 million, a 57% reduction over 2007. As Barry mentioned earlier, STAAR Japan was expected to use cash in 2008, but is expected to be cash flow positive in 2009.

Turning to our P&L, our gross profit margin as compared to last year has improved by 430 basis points. Compared to last year the increase was mostly attributable to higher margin Visian ICL sales, specifically higher margin US ICL sales and higher margin TICL sales in international, along with cataract sales in Japan where higher ASPs prevailed. In the fourth quarter gross margins flattened due to the slowdown in ICL sales Barry mentioned. Improved gross margins and reduced operating expenses are the two key factors behind our improved cash utilization during the year. For example, during the fourth quarter we recorded $4.3 million in G&A expenses. Japan expenses totaled $1.1 million. Excluding Japan our fourth quarter G&A expenses were 5% under last year's level of $3.4 million even including legal expenses.

More impressive were the decline in sales and marketing expenses during the fourth quarter which were down 19% when Japan's costs are excluded and the decline in R&D costs which were town 22% when Japan is excluded. Of course, the big impact to reporting bottom line in the fourth quarter is the $5.9 million in other operating expenses resulting from the Parallax litigation verdict reached earlier this month and the $1 million non-cash charge associated with the certain patents in our portfolio. Based on our financial position at this time, as a result of the verdict, we will likely see a going concern opinion from our auditors. We will be filing a 15-day extension for a 2008 10K so we can fully assess the effects of the verdict on our liquidity and capital resources. During this time we expect the final judgment to be filed.

During our fourth quarter call for 2007 we announced that we're implementing a management task team to find $5 million to $6 million in cost reduction and manufacturing efficiencies. Subsequently during 2008 we reduced operating expenses by $2.6 million and achieved $3.3 million improvement in our global gross profit excluding Japan. For 2009 we will continue to aggressively pursue cost reductions in our business without hindering our ability to grow the business. At the beginning of the year we implemented a new US sales force structure designed to maximize our Collamer material positioning for both ICLs and IOLs as well as improve go to market efficiencies. We expect the implementation of the structure should yield us approximately $1 million in additional cost savings in 2009. In addition, as we reported in our news release this afternoon, we've begun a centers of excellence project which is designed to take advantage of our key competencies in both Japan and the US.

STAAR Japan has demonstrated a core competency in delivery systems for IOLs while the US has broad experience in optics material and designs. Japan will become the STAAR center of excellence for delivery systems while the US will be the center of excellence for optics materials, design and manufacturing. The actions taken as a part of this project should enhance our ability to introduce new technologies while reducing the cost of our IOLs significantly beginning in 2010. Additionally, we've created a 2009 budget that resulted from challenges to all uses of cash and is focused on the bottom line, achieving profitability and positive cash flow in 2009. Through February we're off to a good start with respect to these goals. I'd like to now turn the call back over to Barry.

Thanks, Deborah. I'd like to cover three recent developments in our business before we open the call up for questions. First I'd like to speak about two compliance tests which the Company has successfully passed. During the last two weeks of February the FDA conducted a routine audit of our facilities here in Monrovia. Though our objective, of course, is to not have any observations from such a visit, I'm very pleased to report they noted only three minor observations which we believe can be quickly addressed. I think this reflects the continuous improvement which the Company has been diligently pursuing in this area for some time.

I'd like to congratulate John Santos, our head of quality and regulatory, and the entire quality and regulatory team on this successful review and challenge them to continue to focus on improvements. Additionally, with the acquisition of the business in Japan, our finance team has been challenged during the year with the project to become SOX compliant in Japan. We did use outside consultants for assistance which cost us about $300,000 during 2008 and will not be repeated in 2009. I am happy to report that we've successfully passed this test without any significant deficiencies. I want to congratulate the entire finance teams in both Japan and the US, and in particular, our global controller here in Monrovia and our controller in Japan.

The second development which has been mentioned is the judgment that Deborah noted earlier which we reported on March 3rd. Clearly we vehemently disagree with the jury's verdict and believe there are several legal arguments to pursue as part of a vigorous appeal. The judgment has not yet been entered by the court. While $4.9 million is the maximum amount of damages that the plaintiffs in this case can recover, as a result of the post trial motions that we anticipate filing, the judge could choose to reduce the amount of either or both of the compensatory and punitive damages awarded by the jury.

Because of the legal proceedings are ongoing we will not be answering any specific questions about those proceedings today. We aren't making any predictions about the possibilities of reduced judgment. However, upon the entry of the judgment in this case we will be able to refine the wide range of options we're currently examining at this point in time. Unfortunately again today we won't be able to offer any further comment on the judgment or our strategy until there are further developments to report.

Third, I'd like to update you on the approval process for the Toric ICL here in the US and the ICL in Japan. First in the US, the FDA examiner who had been reviewing this process retired at year-end which we had previously noted. This submission was transferred to a new examiner in early January and then transferred again to a third reviewer the first week of February. We did receive the second report of the third party auditor which the FDA allowed to be released the third week of February. The FDA had two additional questions to the third party auditor which were answered today to the FDA. Once the FDA has reviewed the two answers we should be allowed to submit our corrective action plan. The FDA stated that it should take them about three weeks to review our most recent answers and then they'll call us for a one-day inspection by the local FDA office. Once that inspection is completed the local office will issue a simple e-mail report and the FDA would be in a position to begin the clinical trial review.

In Japan we continue to move forward with the combined application for approval of the ICL and TICL based on a clinical trials completed in Japan. The data is under active review and as a part of that review we expect a routine good clinical practice audit to occur this month. Following that we would expect an expert review with a final determination on approvability by the middle of this year. Now we're getting ready to go to the question-and-answer session, but I would like to after that session come back and give you our key metrics for 2009, upon which we'd like for you to judge our performance. So at this point, operator, we can open the line for questions.

Alright. Certainly. Thank you, sir. Ladies and gentlemen, at this time we will begin our question and answer session. (Operator Instructions) Our first question is from the line of Joanne Wuensch with BMO Capital Markets. Please go ahead.

Hi. Thank you for taking question. Where to begin. Okay. Deborah, you talked about your '09 budget. Could you outline for us what you think your use of cash could be throughout the year? And this leads right into the next question, so I'm going to ask it now. You talked about a going concern opinion. That doesn't sound good. What does that mean exactly? And I suspect that, one, in '09 budget in cash would lead into the results of what a going concern opinion could lead to.

Okay. Why don't you try to take it first and then I'll comment. The last part, Joanne, you cut out. Could you restate that?

Yes. Essentially I'm asking two different questions which are linked. One is what is it the '09 budget look like with the cash and what does it mean for the going concern opinion?

Well, our '09 budget is to be cash flow positive in all four quarters of 2009. Yes.

Simply stated.

Right. And I don't think, Joanne.

From operating activities anyway.

And that's not really the basic link to a potential going concern.

Okay.

Although our '09 budget would show profits and cash flow, the judgment itself is significantly beyond what our plans were for '09 in terms of cash flows and --

All right. But can you give us some more information or help me understand what it would encapsulate then, are we looking -- please?

A going concern.

Would you state your question again, Joanne? Sorry.

What are they looking for in the going concern opinion?

Well, they want to see that you have sufficient cash flows to cover the judgment and any other requirements over the next 15 months let's say through the end of first quarter of 2010.

And Deborah earlier stated that we are extending the filing for 15 days. It's likely that we'll get a going concern, but at this point in time that's not a final decision. We're going through several potential options considering all of those options in order to protect the interest of our shareholders, employees and customers, but I would say this, a couple of comments, Joanne. I know here at STAAR the Company several years ago went through a going concern. It was quite traumatic for the Company.

I think number one, in today's environment auditors are scrutinizing particularly small companies much more closely and going concerns are, I won't say routine, but there are certainly more going concerns being issued today than there were five, six, seven years ago. Secondly, we feel quite confident about where the business is today and it is about exactly where we thought it would be and we feel very confident about our plans in 2009. So with both of those considerations in mind, we don't believe that a going concern will be a major obstacle for the Company in 2009.

Okay.

But I think, Joanne, considering that we have $4.9 million in cash now and the jury verdict is $4.9 million, that pretty much, automatically puts us in a difficult situation with our auditors. They can rely on our projections for the year, but only to a certain extent and so -- but as Barry said, we believe that will probably be the case, but that's not certain at this point in time. We need a little bit of time to evaluate our liquidity situation and that's what we're in the process of doing.

And certainly without the verdict we did not think this would be the case and we've been planning that way accordingly throughout the audit and the year-end process.

Right.

Okay. That's helpful to know. Can you give us some granularity on what you saw in US Visian sales? I mean you've bucked the trend of laser vision correction businesses, which is great, but could you give us an idea as time has moved forward month by month by month, are you seeing a weakening in demand?

Joanne, we have not and I believe in our press release we stated that the Visian ICL sales through the first two months of this year are up over 25% both globally and in the US. So even though our fourth quarter overall sales were flat, most of that was due to our bulk order decisions. Our sales in fourth quarter of the Visian ICL only 5% of those were related to bulk orders, whereas that number has been driven down throughout the year from 29% to 16% to 13%. So we've been driving that out of the comparables that we've had to run against, against 2007, and as we said, if you take the bulk out for fourth quarter, our single users, the ones that buy based upon demand and don't have a bulk opportunity, those did increase 13%.

Okay. If you had to put odds on the Toric ICL being approved this year, what would they be?

Odds, let me see, odds and the FDA and Las Vegas, all those seem to go together, right? I -- the data that's been resubmitted in terms of the clinical results is the same that was looked at a couple years ago. It's not new results to the FDA, but what it is, it's clean results. It's clean audited, all the Is are dotted, all the Ts are crossed, and that's what's different. I feel quite confident and I still will be disappointed if we don't have approval by the middle of this year in the US for the Toric ICL.

Okay. Thank you very much.

Thank you.

All right. Thank you. Our next question is from the line of Jack Fraser with Seamark Capital. Please go ahead with your question.

Hi, Jack.

Good afternoon, guys. Actually I think this button was from me trying to let you know that the press release had not come out, so we started the call blind actually. So I'll circle back into queue and come back to you.

Okay. Do you have it now, Jack?

We do now. It came out after you guys started actually, thanks.

Okay, thank you.

Thank you. Moving on to our next question from the line of Rick D'Auteuil with Columbia Management. Please go ahead.

Yes. This is more on the communication front. Barry, I think you were interviewed a couple times in the fourth quarter, mid, maybe even 2/3 of the way through the fourth quarter and had pretty strong optimism, not only about what you've restated today about being profitable in all four quarters of '09, but having at least cash flow breakeven in Q4. You didn't achieve it. So it sort of implies something happened at least in the month of December. What happened?

Well, I think first of all, Rick, you're right. And secondly, as we said all along, our fourth quarter goal was to make a buck in cash at the operating income line. And that would be excluding the non-cash expenses that you typically see. Our revenues fell a little bit short for fourth quarter as we've recognized. We didn't see, maybe we should have. We did not see the inventory management by our key distributors being an issue fourth quarter as compared to last year, but it clearly was. Second, in December our expenses were higher than we anticipated and some of this was the legal expenses with the delay in the trial.

Okay. So and year-to-date, you feel better about things. So you think the destocking or whatever was going on in the distributor base is behind you now?

Yes. We think so. As a matter of fact as I stated, outside the US where distributor inventory has become an issue through the first two months our Visian ICL sales are up over 25%. So we're certainly seeing that. We haven't seen any slowdown in the demand at the physician level in terms of procedures they're doing. So that's also encouraging to us.

What about I mean you're focusing on Visian and I understand that, but what about the IOL business?

Well, yes, you're right. I thought the question was more around the ICL, sorry. The IOL business was extremely strong in Japan in the fourth quarter. As a matter of fact, our worldwide IOL sales increased by 47% during the quarter. Japan is doing extremely well the first two months of 2009. As a matter of fact, their IOL sales have increased by over 35% during the first two months. We've seen in the US the first two months that we've gotten back to ground zero, and we think we got a shot at actually seeing growth of IOL sales in the US during first quarter.

What do you attribute the gains in Japan to, one? And then, two, back to the US, we had expected with some better technology that we'd see improved reimbursement or improved revenues and margins. Have you now kind of gotten away from the commodity products and fully converted your domestic IOL business? So two questions, Japan, what do you attribute the benefit to, and then back to the US.

Right. Good questions, Rick and thank you. First of all, in Japan I think a couple of factors there have been key to our success in Japan. One is the technology and that's the preloaded IOL technology, which you will recall is a part of our US plan later in 2009. But I think second is, in 2008 it was a huge transition year for the organization in Japan. During most of the year in sales and marketing we had duplicate staffs and that means staff from the Cannon days while we were in the process of hiring our own group there. They're now in place and that's why we're so encouraged by the quick start through the first two months Japan's gotten off to. So I think those are the two key reasons in Japan.

Now to the US, we have certainly seen a decrease in our decline in IOL sales quarter by quarter through 2008. And as I said, now through the first two months we're basically at the bottom. We are where we were through the first two months of last year. So that is quite encouraging. We have seen increases in our average selling price. We still have one NTIOL product we've yet to get to market and that product is -- we're waiting for an FDA approval on a sterilization -- I'm sorry, on a cap change that we made to the Collamer bottle, which we actually made a few years ago and had not properly reported to the FDA.

So we're going through that process with them right now. As a matter of fact, we returned answers to them of questions on Friday. So getting that to commercialization will be very helpful. It will also be very helpful to us for the CAST team because they're waiting for that, for the product. That's the Collamer accommodating study team who will meet next month during the AFCRS. We've got to get that aspheric single piece Collamer lens to them, so they can set the beginning stages of understanding where that product stands in terms of accommodation today. So hopefully that helped to answer your question there, Rick.

But are there still commodity priced margins IOLs that STAAR is selling today? There are, aren't there?

We've been in the process, and it depends upon what you call generic, but I mean you're exactly right that, STAAR has historically been at the bottom of the food chain of pricing. I think it's probably fair to say today that STAAR still, though, is at a higher level, we're at the lower end of in terms of pricing what our competition is able to get. And I do think today that that's causing physicians to take another look at STAAR IOLs, because as you can imagine, physicians in the US are being challenged by the economic conditions everywhere in their practice and particularly if they own an ASC being able to get a new technology IOL that's reimbursed for an additional $50 than their normal lens at a better price than they're able to get the competition is attractive to them, maybe more attractive to them today than it was a year ago and it's clearly giving us more trials and first starts in new centers that we haven't been in before.

Thank you.

Thank you, Rick.

All right. Thank you. Our next question is from Larry Haimovitch with the HMTC. Please go ahead with your question.

Good afternoon.

Hi, Larry.

Several questions. I'd actually buzzed in earlier because I was trying to get the press release which I guess came out late. So one of my questions to Deborah was, what was the cash, but now have I the press release. Deborah, on the going concern your cash ended the year a little lower than I thought it was going to be. So I'm just wondering would the auditors have had a going-concern concern out the lawsuits? Take those away for a minute. Had you had any indication from them before the verdict came out that they were leaning that way anyway?

No. But they we that we had a good strategy for avoiding going concern this year. We knew -- we actually although the cash was low, it was pretty close to our target for the year. We knew that we would be low heading into 2009. Certainly we didn't consider that we would have enough cash available for a judgment like this for a verdict like this.

Right, right.

And that's unfortunate, but we were on target at the end of the year and do believe that those the trend that we saw of declining cash flows in 2007 -- or 2008, which we've demonstrated will continue and have continued into 2009, such that we would be able to avoid a going concern opinion.

So basically take away the verdicts for a minute or the verdict and another one to come. What you're saying is that you think you could have convinced the auditors that look, we're going to be cash flow positive for '09. Therefore, we really don't want to see a going concern on the financial statements. Is that what essentially you just told me?

Yes. I think that's exactly what she's saying, Larry. This is Barry, of course.

Yes.

And we have had active discussions with them. We had a plan in process we thought that was doable. I think the other thing that's been important for us with our auditors and our relationship is that during 2008 we hit very close to exactly where we said we'd be almost every quarter. So we built a very good reputation, if you would, with the auditors from the last several quarters of being on target with our projections. So as they were looking at our projections for 2009, it certainly gives us more credibility.

Yes. Thanks. Okay. A question on Japan. Forgive the skepticism, but so many companies that I've seen over the years, they'll have some very, very strong growth in a couple quarters or in a year and particularly maybe in the geographic area, and then the next year we find out, as the year-over-year comparison isn't so good that oh, well, we had stocking orders, or there was unusual situation and that's why things were so good. Barry, is there anything going on in Japan except just good blocking and tackling, your own organization, is there anything that we should be concerned about that this is really not sustainable? Because the ICL, Barry, is a great example. The ICL sales were inflated by some of these bulk sales. Now you've had to live with those comparisons. Thankfully it looks like you're done with them, but that's the kind of thing I'm concerned about.

Yes. Good questions. I think what we've seen during 2008 from Japan has been continuous improvement every quarter, and obviously their fourth quarter was outstanding at $3.7 million overall, and the start they've gotten to during 2009 through two full months of the third quarter is as I said, the IOLs have grown over 35% compared to a year ago. So I think there's been a lot of good blocking and tackling. The motivation level in Japan is very high and we're very fortunate to have that organization in place. We're very fortunate that the work that took place in 2008 was successful, because as we all know, things happen during acquisitions, and whatever happened the team was able to come together, solve the issues and move forward. So no, I feel very confident about the sales results in Japan and the consistency and the continued improvement.

Okay. So bottom line, this should be sustainable perhaps not at 35% every quarter, but we should expect Japan likely to continue to be a solid performer?

Yes, and we planned that way, and as Deborah pointed out we also had planned for profitability in Japan in '09.

If you look at their margins, they were fantastic at 70%.

So that leads a little bit to my next question which is the ICL sales in Q4 as you talked about were down. And I think you reviewed geographically what the performance was, but could you just do that again, please.

You mean between US and international?

Yes, yes.

The US sales were basically flat and the international sales were down -- I'm sorry. The international ICL sales were down -- where's my number? I want to --

It must be 25%, 30% or something.

7%.

That doesn't seem to make sense to me because the whole quarter -- we're talking for the year now?

We're talking for the quarter.

We're talking for the quarter, I'm sorry. So 5.4% for the quarter for the entire ICLs and US is flat and international is down seven.

Well, US is down slightly.

.9%.

.9%.

Okay. So I think we can understand a little bit the US market given that the economy just fell off a cliff in Q4, and as you pointed out, Barry, LASIK has just plummeted. Is that the main reason Europe would be so slower, because you had such a tremendous performance in Europe for so many quarters, back to back to back to back.

Really good, question. Part of the analysis we did is we looked at six of our top markets, and these six markets all grew by 10% during 2008 overall versus 2007, but if you look at their sales in fourth quarter because of this stocking situation, meaning they were basically destocking fourth quarter of 2008 and they were stocking in fourth quarter 2007. If you look at their fourth quarter sales as a percent of their overall sales for the year, in 2007 in these six countries 34% of their sales were in the fourth quarter last year. This year those same six countries only 23% of their sales were in the fourth quarter. So it was more of a typical quarter for them rather than more of an inventory building quarter.

Right. And that speaks to my earlier question which is sometimes you get these quarters which are very, very strong and you find out later, oh, well, they are were building inventory.

Yes. Well, depending upon cash situations, those typically come more at the end of the year than they do in other quarters.

Yes, right. Okay. One more quick question. In the product sales other what does that mainly constitute and why was that down [5.2%] versus [5.4%]?

That's mainly sales in Germany, yes, right, and they sell everything -- outside of IOLs they sell everything except the kitchen sink.

Let me comment on that, Larry, because that's a really good question that a lot of times we just kind of skimmed over or not even mentioned. In Germany as you know we've got a new general manager there and we've really -- he's really done a good job along with Dave with really analyzing that business, and a lot of that other business is very low margin stuff. I mean very low margin stuff. And a lot of the past considerations were that we were selling some very low volume things in accounts because we were getting higher volume IOL sales or other product there, and as we analyzed account by account, we found a lot of accounts where that's just not true. So part of their efforts during the end of '08 and even more so in 2009, is to first try to raise the price on that business to a reasonable gross margin. If not, we're just walking away from it. So what you would expect to see in (inaudible) in 2009 is not so much driven by the revenue line. It's driven by the gross margin line and what operating income we can get out of that business because of the strategic business decisions we're making.

Okay. Thanks for all the good answers, and I'll get back in queue.

Thank you, Larry.

All right. Thank you. Our next question is from the line of Tyson Halsey with Halsey Advisory and Management. Please go ahead.

Hi, Barry.

Hi, Tyson.

Congratulations on getting the Company to the cusp of profitability. I wanted to ask some simple questions to perhaps alleviate some of the nervous Nellies, because selling begets selling, and I feel like we just hit an air pocket and we dropped about 1,000 feet and I think a lot of people are still shaken up if you know what I mean.

Yes.

Anyway, so here's my question, and if there's a question I ask you don't feel comfortable just say next or take off line, but this one is really pretty simple. It seems to me there have been two major ophthalmic companies in the last nine months that have been bought out, one being AMO and the other one called Alcon and also Ionics was bought out in the last nine months. What kind of multiples of revenues were those? About three times, is that about a fair comparable?

Yes. I think it's fair. Of course, there were a lot of other factors involved. The Ionics I think was 10X as an example, whereas AMO maybe a 2X.

Okay. I'll go to the next question. I'm going to write that down. 10X sounds good to me. We spoke over the weekend. I said, geez, I said if you're worried about the stock, why don't you sell it. I said are you kidding me I think the stock's worth $10. They've got this great Collamer, they've got this ICL, the TICL, it's got the ASCRS, AAL, I've gotten to know everybody. I've gotten to know the products. They have the technology. It's just a matter of their executing.

Anyway, my next question is I think on the upside, I see a $10 stock. On the downside the liability seems to be around the going concern which relates specifically to the legal case. And I wanted to know what you think the maximum -- if you can answer this, what the maximum liability is of this Stewart and Moody case, and if you can't answer it, just say I can't answer.

Well, why don't we go with what we know? I don't want to speculate anything about the Moody case.

I wouldn't want you to speculate either.

No.

No.

So let's just take the Stewart case for example. That's at this point a $5 million judgment.

Right.

What's the valuation of the Company? A verdict, I'm sorry. It's not a judgment. It's still a verdict at this point. But what do you consider the overall value of the Company? If you say it's $100 million, it's a 5% problem we have.

Right.

If it's taken out.

Right.

I mean STAAR Surgical has $72 million in trailing revenues, multiple of three is $210 million. So you could write a check if you were bought out for $15 million, walk away from your liability and hopefully with a smaller liability. Is that right?

Yes, that's right, yes.

Okay. Next question, I'm going to try to save you time. What would be the maximum you'd pay just to get rid of this litigation and not get sued again? And if you can't answer it, don't.

I can't answer it.

Okay. Not a problem. Who had the better contract, David Bailey or Herb Stewart?

Wow, that's a really tough question, because --

Okay. Why don't you pass on that. Let me does you another one.

Herb had a seven-year contract.

Okay. I don't know who got paid what. I'm not privy to their contracts. It's just kind of an open-ended question. Let me ask you another one. How much money has STAAR Surgical spent in the lawsuits that have been between Jay, Scott and Herb, round numbers, over the last three years and maybe on the last quarter?

I think we already stated that we spent $600,000 in cash in the fourth quarter, and I think that's as far as I'll go.

Okay. Next question. Would it be safe to say that if we didn't have those litigations, we'd be profitable by now? Skip it. Next question. This is a comment about life. I had an attorney who once said, if you don't want to get sued, don't ever piss anybody off, and I remember that. I've paid a lot of money to attorneys and that's just one of those things in life. My question is, how much time did Dave Bailey spend talking to Herb Stewart and Scott Moody about an applicable resolution, face-to-face, knee-to-knee, maybe go out for a beer? If you don't know, you don't know, and that's okay.

Of course, I wasn't here, but I'd like to come back to where you first started if you don't mind, Tyson.

Oh, sure, sure. I'm like eighth in line. So I'm just trying to throw out my questions real quick. Go ahead.

And that is the cusp of profitability. That's a true statement and I'm very proud of the people here at STAAR, because we have worked very hard the last five quarters to get to where we are. And yes, we get obstacles thrown at us. It seems like that's the history here at STAAR. Somebody told me it's the karma of STAAR, but I'll tell you what, we've got a great team of folks and we've got great technologies here, and we're going to succeed. I'm very confident --

That's why I own the stock.

And we are turning the corner and we see it happening every day. So whether we got a going concern in 2009 or whatever label you want to put to us, it's not going to stop us because we're going to keep moving forward.

Well, that's why I invested in the stock. Can you tell me about the mediation process that you have engaged with regard to these guys to get rid of this nagging legal battle, a waste of what I think is probably your valuable talent because you have demonstrated bringing this Company to the cusp of profitability?

I think it's probably most people know in cases like this there is required mediation and we certainly did go through that before trial and I won't comment any further.

Okay. Well, I'd certainly be willing to help if you guys flew me out first class and I took a couple people out and for a Diet Coke or something like that and said, come on, let's go home to our wives and families and get this past us. But do you think that Dave Bailey would take a salary cut or that the board could possibly loan the Company money so that we could avoid a going concern?

Tyson, I do appreciate all your questions and we are taking very serious our situation. We're considering all potential options to protect the interests of our shareholders, our employees and our customers.

Excellent. That's great. I'm sorry if I asked a hard question.

No, no, no.

I'm just trying to help by asking provocative ones.

No, but I think if you don't mind let me get you back in the queue, because you've asked about eight questions now and we've got folks waiting.

Listen, I understand. Thank you for your time. Excuse me?

If there are actions that can be taken to avoid the going concern, we will take them.

Awesome. That's great. I'm an owner. I'm a buyer probably.

Thank you.

All right, thank you. Wayne Schroeder, Private Investor. Please go ahead.

Yes. Two questions really. The first is I think relates to what was just being talked, the other case. Is there a date? Is that on the docket yet somewhere?

Yes, there is Wayne. It's currently scheduled for May 25th.

Okay. Shareholders meeting should be just before that, right?

I forget the date, but around the same time.

Okay. Second question is, when you're talking about the growth increases like 47% increase in Japan, 25% in the first two months of this year, are you generally referring to over the previous month or this quarter last year?

Most of the comparisons all along, Wayne, are to the prior year at the same point in time. So the numbers regarding the first two months of 2009 would be compared to the first two months of 2008.

Okay. Okay. Those are my questions. Thank you very much.

Thank you.

All right. Thank you. And Jack Fraser with Seamark Capital. Please go ahead.

Hi, guys.

Hi, Jack.

A couple of housekeeping questions first. So just to make sure I understand, Deborah, the $600,000 in expenses currently incurred in the fourth quarter for legal, was that carried in G&A?

Yes.

It was, okay.

And that was cash paid in the fourth quarter.

And that was cash paid in the fourth quarter?

Yes.

Okay. And do we -- have you attempted to look at a breakout between -- of those expenses between the Herb Stewart case and the Scott Moody case? How does that $600,000 break, or is that all for the Parallax case?

To be honest, they bill it under one case.

I understand.

The caption is billed under one case up until now.

And it's very hard to split out, Jack, because a lot of the deposition costs, etc., were in both cases.

Yes, yes. I guess what I'm driving at is just, there's a portion of the $600,000 that's probably front end loaded, if you will, getting ready for going to actual trial.

Oh, definitely.

Oh, absolutely, yes.

That's pretrial, definitely.

Yes, absolutely.

Okay. Are you yet comfortable, Deborah, in sort of round number ballparking what you think legal will look like in Q1?

Let's see.

Do we know through February what we have incurred?

Yes. I would say around -- I don't know -- maybe around $500,000.

Okay, okay of that's helpful.

Sorry.

That's fine, thank you. And then I want to get into the technical handling from an accounting point of view of what is coming through as a current liability from the jury verdict, and so I'm guessing that that's going to be carried as a current. My question is do have I that right, by the way?

Yes.

Okay. My question is in the event that you elect to go to appeal, and I would certainly be one of those that would be right behind you on that, and the potential liability of any payments to her would become probably due at the end of an appeal process which could well exceed a year, would that liability change classification? Or would the auditors require you to carry this as a current liability even though it was patently obvious it would not be paid in any upcoming current term, in fact, maybe not even for up to three years?

Yes, Jack. I mean that's a really good question. The answer is I don't know and I don't know that we could say with certainty the likelihood of when that would be, what the appeal timing is. So --

Okay.

-- that's something I guess I'd have to get back to you on.

Because it seems -- it would seem pretty obvious to even the auditors that if it were to be a year, two or three event, we're talking at a very different point in the history and evolution of STAAR and the new products and the gross margins and the gross profit dollars that are available and all the rest of it, so it would change seemingly the status of the threat behind the going concern terminology. Just lastly, it sounds as if the current thinking is to aggressively pursue on appeal, as someone who has read a good chunk of the legal documents, I certainly would stand behind that. Is this -- I mean, Larry asked the question and then Tyson tried to. I mean is there a circumstance where you would just feel like okay, we're just not going to go to appeal? Because I mean it just seems to me for one that it's going to take a pretty steep reduction to even really contemplate this dialogue due to the some significant errors that were incurred.

I think, Jack, you make some very good points. Underlying, in some of your questions here about our total litigation costs, it does point out that, number one, most of the costs related to the Moody case have already been incurred by the Company. And secondly, our current estimate for costs of an appeal in the Parallax case is about $300,000, and the appeal process involves paperwork and judges and attorneys and not juries. So we are evaluating, as I said earlier, all potential options in order to protect your interests and our employees and our customers, and we'll continue to look at it that way.

Okay. And lastly, I'd be remiss if I didn't congratulate all of you on what was from an operating standpoint a pretty superb year in a very, very tough environment. Thanks a lot.

Thank you, Jack.

Thank you, Jack.

Alright. Thank you. And there are no further questions at this time. Please continue with any closing comments.

Great. Thank you, operator. And now please don't hang up because as we did last year, I'd like to provide you with the key operating metrics that we're going to be focusing on during 2009 and which we'd like for you to judge our performance. First, and Deborah already mentioned this, but our first metric is to generate positive cash flow from operating activities during every quarter of the year. And we say that, though, while we recognize first quarter's always our most challenging from a cash utilization perspective, and that won't be any different this year, but it is our goal to achieve for all four quarters. Secondly, second metric would be to improve our gross margin percent of revenue each and every quarter.

Third metric, successfully implement the cost reduction efforts we reported to you today and others as they've become apparent. The two we've reported to you today is the US sales organization and the centers of excellence projects. Fourth is to gain key regulatory approvals for our Visian Toric ICL in the US and both Visian ICL products in Japan. And our fifth metric would be to increase our overall share of the refractive market in some key markets that we're focused on. Those would be: the US, Korea, China, India, Spain, Germany and Latin America, and throughout the year we'll be reporting to you on our progress there. Again, we want to thank you for being on the call and for your interest in STAAR Surgical, and if you have any additional questions, please feel free to call Deborah or I. We look forward to reporting to you our progress on our first quarter earnings call. Thank you and good evening.

All right. Thank you, sir. Ladies and gentlemen, this concludes the STAAR Surgical fourth quarter 2008 earnings conference call. If you'd like to listen to a replay of today's conference in its entirety, you can do so by dialing 1-800-405-2236 or 303-590-3000, and input the access code 11125535. I would like to thank you, very much, for your participation today, and you may now disconnect. Have a very pleasant rest of your day.