NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Description
Of Business And Summary Of Significant Accounting
Policies
|
Business
We
are a
leading developer and operator of fixed-site laser vision correction centers
at
our Lasik
Plus
vision
centers
.
Our
vision centers provide the staff, facilities, equipment and support services
for
performing laser vision correction that employ advanced laser technologies
to
help correct nearsightedness, farsightedness and astigmatism.
We
currently use fixed-site excimer lasers manufactured by Bausch & Lomb,
Advanced Medical Optics, Alcon and Wavelight.
Our
vision centers are supported mainly by independent board-certified
ophthalmologists and credentialed optometrists as well as other health care
professionals. The ophthalmologists perform the laser vision correction
procedures in our vision centers, and either ophthalmologists or optometrists
conduct pre-procedure evaluations and post-operative follow-ups in-center.
Most
of our patients receive a procedure called LASIK, which we began performing
in
the United States in 1997.
As
of
December 31, 2007, we operated 72 Lasik
Plus
fixed-site laser vision correction centers generally located in larger
metropolitan markets in the United States. We are also part of a joint venture
in Canada. Due to the nature of our operations and organization, we operate
in
only one business segment.
Consolidation
and Basis of Presentation
We
use
the consolidation method to report our investment in majority-owned subsidiaries
and other companies that are not considered variable interest entities (VIEs)
and in all VIEs for which we are considered the primary beneficiary. In
addition, we consolidate the results of operations of professional corporations
with which we contract to provide the services of ophthalmologists or
optometrists at our vision centers in accordance with EITF 97-2,
Application
of FASB Statement 94
and
APB Opinion No. 16 to Physician Management
Entities and Certain Other Entities with Contractual Management
Agreements
.
Investments in joint ventures and 20% to 50% owned affiliates where we have
the
ability to exert significant influence are accounted for by the equity method.
Intercompany transactions and balances have been eliminated upon
consolidation.
Use
of Estimates
The
preparation of our consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities.
Significant items that are subject to such estimates and assumptions include
patient financing receivables and reserves, insurance reserves, income taxes
and
enhancement accruals. Although management bases its estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances, actual results could differ significantly from the
estimates under different assumptions or conditions.
Reclassifications
Certain
prior period amounts have been reclassified in the Consolidated Balance Sheets
and Consolidated Statements of Cash Flows to conform to current period
presentation. The reclassifications were not material to the consolidated
financial statements.
Cash
and Cash Equivalents
We
consider highly liquid investments with an original maturity of 90 days or
less
when purchased to be cash equivalents. Other assets include $500,000 of cash
maintained by our consolidated captive insurance company pursuant to statutory
requirements as of December 31, 2007. These funds are not available for general
corporate purposes.
Investments
Management
determines the appropriate classification of securities at the time of purchase
and reevaluates such designation as of each balance sheet date. Currently all
securities are classified as available-for-sale. Available-for-sale securities
are carried at fair market value, with unrealized gains and losses, net of
tax,
reported in accumulated other comprehensive income. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity computed under the effective interest method.
Such amortization is included in net investment income. Realized gains and
losses and declines in value judged to be other-than-temporary are also included
in net investment income. The cost of securities sold is based upon the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in net investment income.
The
following table is a summary of available-for-sale securities (dollars in
thousands) at December 31, 2007 and 2006:
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
(Net
Carrying Value)
|
|
Corporate
bonds
|
|
$
|
12,459
|
|
$
|
-
|
|
$
|
-
|
|
$
|
12,459
|
|
Municipal
bonds
|
|
|
29,293
|
|
|
61
|
|
|
-
|
|
|
29,354
|
|
Equities
|
|
|
2,884
|
|
|
87
|
|
|
-
|
|
|
2,971
|
|
Total
investments
|
|
$
|
44,636
|
|
$
|
148
|
|
$
|
-
|
|
$
|
44,784
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
(Net
Carrying Value)
|
|
Corporate
bonds
|
|
$
|
6,795
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,795
|
|
U.S.
Government securities
|
|
|
11,468
|
|
|
12
|
|
|
(6
|
)
|
|
11,474
|
|
Municipal
bonds
|
|
|
52,615
|
|
|
10
|
|
|
(93
|
)
|
|
52,532
|
|
Total
investments
|
|
$
|
70,878
|
|
$
|
22
|
|
$
|
(99
|
)
|
$
|
70,801
|
|
The
gross
realized gains and losses on sales of available-for-sale securities for the
twelve months ended December 31, 2007 totaled $133,000 and $22,000,
respectively. The gross realized gains and losses on sales of available-for-sale
securities for the twelve months ended December 31, 2006 totaled $18,000 and
$7,000, respectively.
Certain
of the corporate and municipal bonds included in our available-for-sale security
portfolio are auction rate instruments that pay a floating rate of interest
that
is set periodically through a Dutch Auction process. Rates are determined by
the
credit quality of the issuer, supply and demand of a particular issue, frequency
of the rate reset and any tax benefits associated with the security. At December
31, 2007, our available-for-sale security portfolio includes $18,300,000 in
auction rate instruments.
At
December 31, 2007, there were two instruments with a combined fair value of
$2,250,000 that had experienced a failed auction. These instruments have been
classified as long-term assets in our Consolidated Balance Sheets at December
31, 2007. In February 2008, the Company had four additional instruments
with a combined fair value of $2,275,000 that had experienced a failed auction.
In instances where failures occur, the reset interest rate typically range
from
LIBOR plus 50 to 200 basis points for corporate bond securities to as high
as
20% for municipal bonds. As with our entire corporate and municipal bond
portfolio, these instruments are all investment grade and guaranteed by
investment grade monoline insurers. We have no reason to believe that the
underlying issuers are at risk. Because the underlying bonds are all AAA rated,
guaranteed by investment grade monoline insurers and the interest rate resets
are above market, we believe these securities offer good value. We have the
ability to hold these instruments until maturity, if necessary.
Other
than the two instruments totaling $2,250,000 noted above, our available-for-sale
security portfolio is classified as short-term at December 31, 2007, since
we
intend that such investments are available for operating purposes. The net
carrying value and estimated fair value of debt securities available for sale
at
December 31, 2007, by contractual maturity, is shown below. Expected maturities
may differ from contractual maturities because the issuers of the securities
may
have the right or obligation to prepay obligations without prepayment penalties.
|
|
Amortized
Cost
|
|
Estimated Fair
Value
|
|
(Dollars
in thousands at December 31, 2007)
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
18,904
|
|
$
|
18,936
|
|
Due
after one year through three years
|
|
|
2,546
|
|
|
2,565
|
|
Due
after three years
|
|
|
20,302
|
|
|
20,312
|
|
Total
debt securities
|
|
$
|
41,752
|
|
$
|
41,813
|
|
Equities
|
|
|
2,884
|
|
|
2,971
|
|
Total
investments
|
|
$
|
44,636
|
|
$
|
44,784
|
|
Patient
and Other Accounts Receivable
Patient
and other accounts receivable are comprised primarily of amounts owed to the
Company from patients and from credit card companies, a third-party financing
company and vendors. Patient receivables are presented net of allowances for
doubtful accounts of $5,117,000 and $2,842,000 at December 31, 2007 and 2006,
respectively. For patients that we finance with an initial term over 12 months,
we recognize revenues based upon the present values of the expected payments.
Finance
charges on patient receivables were $1,843,000 in 2007, $1,094,000 in 2006
and
$857,000 in 2005. These amounts are included in net investment income within
the
Consolidated Statements of Operation. At December 31, 2007 and 2006, the
discount in receivables with an initial term over 12 months was $99,000 and
$117,000, respectively.
Allowance
for Doubtful Accounts
We
provide patient financing to certain of our customers, including those who
could
not otherwise obtain third-party financing. The terms of the financing require
the patient to pay an up-front fee which is intended to cover some or all of
our
variable costs, and the remainder is generally deducted automatically from
the
patient’s checking account over a period of 12 to 36 months. We have recorded an
allowance for doubtful accounts as a best estimate of the amount of probable
credit losses from our patient financing program. Each month, we review the
allowance and adjust the allowance based upon our own experience with patient
financing and the credit experience of other centers that provide financing
to
customers similar to ours. Receivables are charged off against the allowance
for
doubtful accounts when it is probable a receivable will not be recovered. Our
policy is to reserve for all receivables that remain open past financial
maturity date and to provide reserves for receivables prior to the maturity
date
so as to bring receivables net of reserves down to the estimated net realizable
value based on historical collectibility rates and recent default
activity.
Property
and Equipment, and Depreciation and Amortization
We
record
our property and equipment at its original cost, net of accumulated
depreciation. At the time property or equipment is
retired,
sold, or otherwise disposed of, the related cost and accumulated depreciation
are deducted from the amounts reported in the Consolidated Balance Sheets and
any gains or losses on disposition are recognized in the Consolidated Statements
of Operations. We expense repair and maintenance costs as incurred. Assets
recorded under capitalized leases are included within property and
equipment.
We
compute depreciation using the straight-line method, which recognizes the cost
of the asset over its estimated useful life. We use the following estimated
useful lives for computing the annual depreciation expense: building and
building improvements, 5 to 39 years; furniture and fixtures, 3 to 7 years;
medical equipment, 3 to 5 years; other equipment, 3 to 5 years. Amortization
of
leasehold improvements is recorded in the Consolidated Statements of Operations
as a component of depreciation expense using the straight-line method based
on
the lesser of the useful life of the improvement or the lease term, which is
typically five years or less.
We
assess
the impairment of property and equipment whenever events or circumstances
indicate that the carrying value might not be recoverable. Recorded values
of
property and equipment that are not expected to be recovered through
undiscounted future net cash flows are written down to fair value, which is
generally determined from estimated discounted cash flows for assets held for
use.
Deferred
Compensation Plan Assets
The
deferred compensation plan assets are invested in a variety of mutual funds
including a money market fund, a bond fund and several equity funds. Assets
are
reported at fair value.
Financial
Instruments
Concentration
of Credit Risk
Financial
instruments that subject us to concentrations of credit risk consist primarily
of temporary cash investments and investments. Our policy is to place our
temporary cash investments in investment-grade, interest-bearing corporate
securities or obligations of, or guaranteed by, the U.S. government or state
and
municipal related entities and in selected equities.
Fair
Values of Financial Instruments
The
cost
basis of our cash and cash equivalents, patient and other accounts receivable
with an initial term within 12 months and accounts payable approximate their
fair values due to their short term maturities. For patient receivables with
an
initial term in excess of 12 months, we record the present value of the expected
payments discounted at a rate commensurate with current market rates charged
by
other providers of unsecured credit to similar customers. The fair values of
available-for-sale securities are based on quoted market prices.
Accrued
Enhancement Expense
Effective
June 15, 2007, participation in our lifetime acuity program is included in
the
base surgical price for substantially all of our patients. Under the lifetime
acuity program, we provide post-surgical enhancements free of charge should
the
patient not achieve the desired visual correction during the initial procedure.
Under the revised pricing structure, we account for the lifetime acuity program
as a warranty obligation under the provisions of Financial Accounting Standards
Board (FASB) Statement No. 5 (SFAS 5),
Accounting
for Contingencies.
Accordingly, the costs expected to be incurred to satisfy the obligation are
accrued as a liability and direct cost of service at the point of sale given
our
ability to reasonably estimate such costs based on historical trends and the
satisfaction of all other revenue recognition criteria.
We
record
the post-surgical enhancement accrual based on our best estimate of the number
and associated cost of the procedures to be performed. Each month, we review
the
enhancement accrual and consider factors such as procedure cost and historical
procedure volume when determining the appropriateness of the recorded balance.
Deferred
Revenues
We
offer
our patients extended acuity programs. Prior to June 15, 2007, these programs
were separately priced and included a no-acuity plan, a one-year acuity plan,
and a lifetime acuity plan. Under applicable accounting rules, 100% of revenues
from the sale of the extended acuity program are to be deferred and recognized
over the life of the contract on a straight-line basis unless sufficient
experience exists to indicate that the costs to provide the service will be
incurred other than on a straight-line basis. We believe we have sufficient
experience to support recognition on other than a straight-line basis.
Accordingly, we have deferred these revenues and are recognizing them over
the
period in which the future costs of performing the enhancement procedures are
expected to be incurred. For programs that included one-year and lifetime
options but did not include a no-acuity option, costs associated with the
sale
of
the lifetime acuity plan begin after the expiration of the one-year acuity
plan
included in the base price. Accordingly, we deferred 100% of all revenues
associated with the sale of the lifetime acuity plan and are recognizing them
beginning one year after the initial surgery date. For programs that included
a
no-acuity option in addition to the one-year and lifetime options, all revenues
from the sale of the one-year and lifetime acuity plans were deferred and are
being recognized in proportion to the total costs expected to be incurred,
beginning immediately following the initial surgical procedure.
Effective
June 15, 2007, we changed our pricing model and no longer offer separately
priced acuity options. For substantially all patients, participation in the
Company’s lifetime acuity program now is included in the base surgical price.
Under this pricing model, no warranty-related revenue deferrals have occurred
or
will occur for procedures performed after June 15, 2007. Revenue previously
deferred from the sale of the separately priced acuity programs will be
recognized in the future over a seven year period.
In
addition to the deferral of revenues for those procedures performed prior to
the
elimination of separately priced acuity programs on June 15, 2007, we also
have
deferred a portion of our costs of service related to professional fees paid
to
the attending surgeon when a procedure is performed. The physician receives
no
incremental fee for an enhancement procedure. Accordingly, a portion of the
professional fee paid to the physician relates to the future enhancement
procedures to be performed and qualifies for deferral as a direct and
incremental cost of the warranty contract. We use the same historical experience
to amortize deferred professional fees that we use to amortize deferred
revenue.
Insurance
Reserves
We
maintain a captive insurance company to provide professional liability insurance
coverage for claims brought against us after December 17, 2002. In addition,
our
captive insurance company’s charter allows it to provide professional liability
insurance for our doctors, none of whom are currently insured by the captive.
The Company uses the captive insurance company for both primary insurance and
excess liability coverage. A number of claims are now pending with our captive
insurance company. The financial statements of the captive insurance company
are
consolidated with our financial statements since it is a wholly-owned
enterprise. As of December 31, 2007 and 2006, we maintained insurance reserves
of $8,493,000 and $6,163,000, respectively, which primarily represent an
actuarially determined estimate of future costs associated with claims filed
as
well as claims incurred but not yet reported. The loss reserves developed by
our
actuaries are determined by comparing our historical claim experience to
comparable insurance industry experience.
Income
Taxes
We
are
subject to income taxes in the United States and Canada. Significant judgment
is
required in determining our provision for income taxes and the related assets
and liabilities. Income taxes are accounted for under FASB Statement
No. 109 (SFAS 109),
Accounting
for Income Taxes
. The
provision for income taxes includes income taxes paid, currently payable or
receivable, and those deferred. Under SFAS 109, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities, and are measured using
enacted tax rates and laws that are expected to be in effect when the
differences reverse. The effect on deferred taxes of changes in tax
rates is recognized in the period in which the enactment date
changes. Valuation allowances are established when necessary on a
jurisdictional basis to reduce deferred tax assets to the amounts expected
to be
realized. During 2007, we utilized our remaining $1,954,000 in net operating
loss carryforwards to reduce our current period taxable income.
In
the
ordinary course of business, there are many transactions and calculations where
the ultimate tax determination is uncertain. In June 2006, the FASB
issued Interpretation No. 48 (FIN 48),
Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
109
. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS 109 and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The evaluation of a tax position in
accordance with this Interpretation is a two-step process. The first
step is a recognition process to determine whether it is more-likely-than-not
that a tax position will be sustained upon examination, including resolution
of
any related appeals or litigation processes, based on the technical merits
of
the position. The second step is a measurement process whereby a tax
position that meets the more-likely-than-not recognition threshold is assessed
to determine the cost or benefit to be recognized in the financial
statements. We adopted the provisions of FIN 48 on January 1, 2007 as
further discussed in Note 4. The cumulative effect of adoption of FIN 48
resulted in a reduction to the January 1, 2007 opening retained earnings balance
of $243,000.
Per
Share Data
Basic
per
share data is income applicable to common shares divided by the weighted average
common shares outstanding. Diluted per share data is income applicable to common
shares divided by the weighted average common shares outstanding plus shares
issuable upon the vesting of outstanding restricted stock units and the exercise
of in-the-money stock options.
The
following is a reconciliation of basic and diluted earnings per share for the
years ended December 31, 2007, 2006 and 2005 (in thousands, except per share
data).
|
|
2007
|
|
2006
|
|
2005
|
|
Basic
Earnings
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,504
|
|
$
|
28,370
|
|
$
|
22,981
|
|
Weighted
average shares outstanding
|
|
|
19,572
|
|
|
20,694
|
|
|
20,500
|
|
Basic
earnings per share
|
|
$
|
1.66
|
|
$
|
1.37
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,504
|
|
$
|
28,370
|
|
$
|
22,981
|
|
Weighted
average shares outstanding
|
|
|
19,572
|
|
|
20,694
|
|
|
20,500
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
251
|
|
|
525
|
|
|
992
|
|
Restricted
stock
|
|
|
35
|
|
|
16
|
|
|
-
|
|
Weighted
average common shares and potential dilutive shares
|
|
|
19,858
|
|
|
21,235
|
|
|
21,492
|
|
Diluted
earnings per share
|
|
$
|
1.64
|
|
$
|
1.34
|
|
$
|
1.07
|
|
For
each
reported year, outstanding stock options having a grant price greater than
the
average market price of the common shares for the year were not included in
the
computation of diluted earnings per share because the effect of these options
would be antidilutive. The total number of these shares was 42,970, 26,317
and
19,578 in 2007, 2006 and 2005, respectively.
Revenue
Recognition
We
recognize revenues as services are performed and pervasive evidence of an
arrangement for payment exists. Additionally, revenue is recognized when the
price is fixed and determinable and collectibility is reasonably assured.
Revenues associated with separately priced acuity programs are deferred and
recognized over the period in which future costs of performing the post-surgical
enhancement procedures are expected to be incurred as we have sufficient
experience to support that costs associated with future enhancements will be
incurred on other than a straight-line basis.
Marketing
and Advertising Expenditures
Marketing
and advertising costs are expensed as incurred, except for the costs associated
with direct mail. Direct mail costs include printing mailers for future use,
purchasing mailing lists of potential customers and postage cost. The printing
and postage costs are expensed as the items are mailed. The mailing lists are
amortized over a twelve-month period consistent with their use. Prepaid
advertising expense (principally direct mail cost) was $1,665,000 at December
31, 2007, and $3,702,000 at December 31, 2006.
Stock-Based
Compensation
Effective
January 1, 2006, on a modified prospective basis, the Company began using the
fair value method under SFAS No. 123(R),
Share
Based Payment
,
to
recognize equity compensation expense in our results of operations. Prior to
January 1, 2006, the Company accounted for stock options using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25 (Opinion
25),
Accounting
for Stock Issued to Employees
.
SFAS
123(R) requires the cost of all stock-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values at grant date, or the date of later modification,
over the requisite service period. In addition, SFAS 123(R) requires
unrecognized cost (based on the amounts previously disclosed in our pro forma
footnote disclosure) related to options vesting after the date of initial
adoption to be recognized in the financial statements over the remaining
requisite service period.
Under
the
modified prospective approach, the amount of compensation cost recognized
includes: (i) compensation cost for all share-based payments granted prior
to,
but not yet vested as of, January 1, 2006, based on the grant date fair value
estimate in accordance with the provisions of SFAS 123(R) and (ii) compensation
cost for all stock-based payments granted subsequent to January 1, 2006, based
on the grant date fair value estimate in accordance with the provisions of
SFAS
123(R). We recognize the cost of stock-based awards on a straight-line basis
over the requisite service period. The amount of stock-based compensation
capitalized was not material to our consolidated financial statements.
SFAS
123(R) requires the cash flows resulting from income tax deductions in excess
of
compensation costs to be classified as financing cash flows. This requirement
resulted in reduced net operating cash flows and increased net financing cash
flows of $5,409,000 for 2006. Prior to the adoption of SFAS 123(R), we presented
all income tax benefits from deductions resulting from stock-based compensation
costs as operating cash flows in the Consolidated Statements of Cash
Flows.
Prior
to
the adoption of SFAS 123(R), the Company granted primarily stock options to
employees. Since the adoption of SFAS 123(R), the Company has not granted any
stock options except for one stock option grant for 3,000 shares, but instead
has issued restricted stock units. Restricted stock unit awards to executive
officers have performance conditions and cliff vesting. Restricted stock units
awarded to other employees and non-employee directors do not have performance
conditions and vest over specified time periods subject to continued employment
or service.
As
a
result of adopting SFAS 123(R) on January 1, 2006, and our resulting decision
to
begin issuing restricted stock units after January 1, 2006, the Company’s income
before income taxes and net income for 2006 were lower than if we had continued
to account for share-based compensation under Opinion 25 in the following
amounts (in thousands except per share amounts):
|
|
2006
|
|
Decrease
in income before income taxes
|
|
$
|
5,665
|
|
Decrease
in net income
|
|
$
|
4,511
|
|
|
|
|
|
|
Decrease
in earnings per share
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
0.21
|
|
Because
we adopted SFAS 123(R) using the modified prospective approach, the prior years
were not restated. The following table sets forth the effect on net income
and
basic and diluted earnings per share as if we had applied the fair value
recognition provisions for our stock-based compensation arrangements for 2005
(dollars in thousands except per share amounts).
|
|
2005
|
|
Net
income, as reported
|
|
$
|
22,981
|
|
Deduct:
total stock-based employee compensation expense determined under
fair
value based method, net of tax
|
|
|
2,627
|
|
Pro
forma net income
|
|
$
|
20,354
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
Basic
- as reported
|
|
$
|
1.12
|
|
Basic
- pro forma
|
|
$
|
0.99
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
1.07
|
|
Diluated
- pro forma
|
|
$
|
0.95
|
|
Geographic
Information
Information
about our domestic and international operations follows. We have no operations
or assets in any countries other than the U.S. and Canada. No single customer
represented more than 10% of revenues in 2007, 2006 or 2005.
|
|
Revenues from External Customers
|
|
Net Assets
|
|
Property and Equipment
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
United
States
|
|
$
|
292,635
|
|
$
|
238,925
|
|
$
|
171,906
|
|
$
|
90,117
|
|
$
|
106,846
|
|
$
|
53,916
|
|
$
|
30,924
|
|
Canada
|
|
|
-
|
|
|
-
|
|
|
4,968
|
|
|
3,482
|
|
|
2,270
|
|
|
-
|
|
|
-
|
|
|
|
$
|
292,635
|
|
$
|
238,925
|
|
$
|
176,874
|
|
$
|
93,599
|
|
$
|
109,116
|
|
$
|
53,916
|
|
$
|
30,924
|
|
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Account Standards No.
157
(SFAS 157),
Fair
Value Measurements
,
which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 also requires expanded disclosures to provide
information about the extent to which fair value is used to measure assets
and
liabilities, the methods and assumptions used to measure fair value, and the
effects of fair value measures on earnings. This Statement applies under other
accounting pronouncements that require or permit fair value measurements since
the FASB has previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. SFAS 157 became effective for
us on
January 1, 2008. We are currently in the process of finalizing the effect the
adoption of SFAS 157 will have on the consolidated financial
statements.
2.
Stockholders'
Investment
On
November 22, 2006, the Company announced that the Board of Directors authorized
a share repurchase plan under which the Company was authorized to purchase
up to
$50,000,000 of its common stock. Through August 13, 2007, the Company
repurchased 1,481,630 shares of its common stock under this program at an
average price of $33.75 per share, for a total cost of approximately
$50,000,000.
On
August
21, 2007, our Board of Directors authorized a new share repurchase plan under
which the Company is authorized to purchase up to $50,000,000 of its common
stock. Though December 31, 2007, the Company had repurchased 588,408 shares
of
its common stock under this new program at an average price of $16.99 per share,
for a total cost of approximately $10,000,000.
At
December 31, 2007, there were 6,631,586 shares of common stock held in treasury.
3.
Investment
in Unconsolidated Businesses
Our
investments in unconsolidated businesses were $590,000 and $904,000 at December
31, 2007 and 2006, respectively. These balances represent our equity investments
in Eyemed/LCA-Vision, LLC (50% ownership at December 31, 2007) and Lasik M.D.
Toronto Inc. (30% ownership at December 31, 2007). We account for these
investments using the equity method.
On
July
1, 2005, we transferred financial and operational control of Lasik M.D. Toronto
Inc. to our joint venture partners in Toronto, Canada. As a result, effective
July 1, 2005, we began to account for the results of Lasik M.D. Toronto Inc.
using the equity method. Prior to July 1, 2005, the financial results and
balance sheet of Lasik M.D. Toronto Inc. were consolidated into our financial
statements. For accounting purposes, reclassification of prior period financial
statements is not permitted under U.S. generally accepted accounting principles.
While there was no material difference in the net income or earnings per share
as a result of this change, our revenues and reported procedure volume no longer
include the procedures performed in Canada.
4.
Income
Taxes
The
components of income tax expense for the three years ended December 31, 2007
are
presented in the following table (dollars in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,990
|
|
$
|
21,686
|
|
$
|
14,247
|
|
State
and local
|
|
|
1,862
|
|
|
4,060
|
|
|
3,386
|
|
Foreign
|
|
|
-
|
|
|
-
|
|
|
496
|
|
Total
|
|
|
13,852
|
|
|
25,746
|
|
|
18,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,865
|
|
|
(5,964
|
)
|
|
(2,255
|
)
|
State
and local
|
|
|
504
|
|
|
(472
|
)
|
|
(42
|
)
|
Total
|
|
|
5,369
|
|
|
(6,436
|
)
|
|
(2,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
19,221
|
|
$
|
19,310
|
|
$
|
15,832
|
|
The
foreign tax provisions consist primarily of Canadian income taxes. We have
made
no provision for U.S. income taxes on undistributed earnings of approximately
$3,300,000 from our international business because it is our intention to
reinvest those earnings in that operation. If those earnings are distributed
in
the form of dividends, we may be subject to both foreign withholding taxes
and
U.S. income taxes net of allowable foreign tax credits. The amount of additional
tax that might be payable upon reparation of these foreign earnings is
approximately $447,000.
Income
before income taxes for the last three years is presented in the following
table
(dollars in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Domestic
|
|
$
|
50,880
|
|
$
|
46,972
|
|
$
|
37,638
|
|
Foreign
|
|
|
845
|
|
|
708
|
|
|
1,175
|
|
Total
|
|
$
|
51,725
|
|
$
|
47,680
|
|
$
|
38,813
|
|
Deferred
taxes arise because of temporary differences in the book and tax bases of
certain assets and liabilities. Significant components of our deferred taxes
are
shown in the following table (dollars in thousands):
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Current
deferred tax assets:
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
1,014
|
|
$
|
8,133
|
|
Net
operating loss carryforwards
|
|
|
-
|
|
|
684
|
|
Allowance
for doubtful accounts
|
|
|
2,043
|
|
|
1,135
|
|
Insurance
reserves
|
|
|
259
|
|
|
601
|
|
Accrued
enhancement expense
|
|
|
134
|
|
|
571
|
|
Other
|
|
|
-
|
|
|
31
|
|
Total
current deferred tax assets
|
|
$
|
3,450
|
|
$
|
11,155
|
|
|
|
|
|
|
|
|
|
Long-term
deferred tax assets:
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
7,842
|
|
$
|
9,366
|
|
Deferred
compensation
|
|
|
2,203
|
|
|
1,567
|
|
Insurance
reserves
|
|
|
1,696
|
|
|
-
|
|
Deferred
lease credits
|
|
|
226
|
|
|
-
|
|
Share-based
compensation
|
|
|
1,548
|
|
|
978
|
|
Property
and equipment
|
|
|
46
|
|
|
230
|
|
Total
long-term deferred tax assets
|
|
$
|
13,561
|
|
$
|
12,141
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
17,011
|
|
$
|
23,296
|
|
The
following table reconciles the U.S. statutory federal income tax rate and the
tax expense shown in our Consolidated Statements of Operations (dollars in
thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Tax
at statutory federal rate
|
|
$
|
18,104
|
|
$
|
16,689
|
|
$
|
13,585
|
|
State
and local income taxes, net of federal benefit
|
|
|
1,714
|
|
|
2,169
|
|
|
2,084
|
|
Permanent
differences
|
|
|
(194
|
)
|
|
702
|
|
|
49
|
|
Other
|
|
|
(403
|
)
|
|
(250
|
)
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
19,221
|
|
$
|
19,310
|
|
$
|
15,832
|
|
During
2007, we utilized our remaining $1,954,000 in net operating losses to reduce
our
current period taxable income.
We
adopted the provisions of FIN 48 as of January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS 109. This interpretation also provides that
a
tax benefit from an uncertain tax position may be recognized when it is more
likely than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the
technical merits. The amount recognized is measured as the largest amount of
tax
benefit that is greater than 50% likely of being realized upon settlement.
The
cumulative effect of adoption was a reduction in the January 1, 2007 opening
balance of retained earnings of $243,000. Prior to the adoption of FIN 48,
accruals for tax contingencies were provided for in accordance with the
requirements of SFAS 5
.
Through
December 31, 2007, the amount of our unrecognized tax benefits decreased by
$972,000 to $574,000, principally as a result of a tax accounting method change
related to fixed asset depreciable lives. This decrease was offset by a
$1,134,000 change in deferred tax assets and a $162,000 increase of income
tax
expense. A reconciliation of the beginning and ending amount of unrecognized
tax
benefits is as follows:
Balance
at January 1, 2007
|
|
$
|
1,546,000
|
|
Additions
based on tax positions related to the current year
|
|
|
28,000
|
|
Additions
for tax positions of prior years
|
|
|
342,000
|
|
Reductions
for tax positions of prior years
|
|
|
(2,000
|
)
|
Reductions
due to statute expiration
|
|
|
(24,000
|
)
|
Settlements
|
|
|
(1,316,000
|
)
|
Balance
at December 31, 2007
|
|
$
|
574,000
|
|
The
total
amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate is $141,000. The remaining unrecognized tax benefits relate
to tax positions for which ultimate deductibility is highly certain but for
which there is uncertainty as to the timing of such deductibility. Recognition
of these tax benefits would not affect our effective tax rate. It is reasonably
possible that the amount of the unrecognized tax benefits may increase or
decrease within the next 12 months. However, the Company does not presently
anticipate that any increase or decrease in unrecognized tax benefits will
be
material to the consolidated financial statements.
We
recognize interest and penalties related to unrecognized tax benefits as a
component of income tax expense in the Consolidated Statements of Operations.
During the year ended December 31, 2007, we recognized tax benefit of
approximately $62,000 in interest and penalties. We have approximately $68,000
in interest and penalties related to unrecognized tax benefits accrued as of
December 31, 2007.
We
file
income tax returns in the U.S. federal jurisdiction, various U.S. state
jurisdictions and Canada. With few exceptions, the Company is subject to audit
by taxing authorities for fiscal years ending 2004 through 2006. Our federal
and
state income tax return filings generally are subject to a three-year statute
of
limitations from date of filing; however the statute of limitations also remains
open for prior tax years because, in 2007, the Company utilized net operating
losses that were generated in prior years. The net operating loss carryforwards
from those prior tax years are subject to adjustments for three years after
the
filing of the income tax return for the year in which the net operating losses
are utilized. The Internal Revenue Service recently began an audit of our 2006
tax year. It is not possible to predict the timing of the conclusion of this
audit. Based on the early status of the audit and the protocol of finalizing
audits by the relevant tax authorities, it is not possible to estimate the
impact of such changes, if any, to previously recorded unrecognized tax
benefits.
5.
Leasing Arrangements
We
lease
office space for our vision centers under lease arrangements that qualify as
operating leases.
For
leases that contain predetermined fixed escalations of the minimum rentals
and/or rent abatements subsequent to taking possession of the leased property,
we recognize the related rent expense on a straight-line basis and record the
difference between the recognized rental expense and amounts payable under
the
leases as deferred lease credits. The liability for predetermined fixed
escalations of the minimum rentals and/or rent abatements is not material to
the
consolidated financial statements at December 31, 2007 and 2006.
Capitalized
leases are being used to finance the lasers used in the laser vision correction
procedures. Capital lease assets are included in property and
equipment.
The
following table displays our aggregate minimal rental commitments under
noncancellable leases for the periods shown (dollars in thousands):
|
|
December 31, 2007
|
|
|
|
Capital Leases
|
|
Operating Leases
|
|
Year
|
|
|
|
|
|
2008
|
|
$
|
4,412
|
|
$
|
9,034
|
|
2009
|
|
|
2,066
|
|
|
8,578
|
|
2010
|
|
|
263
|
|
|
7,276
|
|
2011
|
|
|
-
|
|
|
5,694
|
|
2012
|
|
|
-
|
|
|
4,089
|
|
Beyond
2012
|
|
|
-
|
|
|
4,174
|
|
Total
minimum rental commitment
|
|
|
6,741
|
|
$
|
38,845
|
|
Less
interest
|
|
|
788
|
|
|
|
|
Present
value of minimum lease payments
|
|
|
5,953
|
|
|
|
|
Less
current installments
|
|
|
3,941
|
|
|
|
|
Long-term
obligations at December 31, 2007
|
|
$
|
2,012
|
|
|
|
|
The
net
book value of assets under capitalized leases was $9,474,000 at December 31,
2007 and $5,763,000 at December 31, 2006.
Total
rent expense under operating leases amounted to $11,471,000 in 2007, $8,661,000
in 2006 and $6,385,000 in 2005.
6.
Employee
Benefits
Savings
Plan
We
sponsor a savings plan under Internal Revenue Code Section 401(k) to provide
an
opportunity for eligible employees to save for retirement on a tax-deferred
basis. Under this plan, we may make discretionary contributions to the
participants' accounts. We made contributions of $80,882 in 2007; $68,000 in
2006; and $52,000 in 2005.
Stock
Incentive Plans
We
have
four stock incentive plans, the 1995 Long-Term Stock Incentive Plan (“1995
Plan”), the 1998 Long-Term Stock Incentive Plan (“1998 Plan”), the 2001
Long-Term Stock Incentive Plan (“2001 Plan”), and the 2006 Stock Incentive Plan
(“2006 Plan”). With the adoption of the 2006 Plan, all prior plans were frozen
and no new grants will be made from the 1995 Plan, the 1998 Plan or the 2001
Plan. Under the stock incentive plans, at December 31, 2007, approximately
781,000 shares of our common stock were reserved for issuance upon the exercise
of outstanding stock options and the vesting of outstanding restricted stock
units, including 91,000 shares under the 1995 Plan, 333,000 shares under the
1998 Plan, 266,000 shares under the 2001 Plan, and 91,000 shares under the
2006
Plan. At December 31, 2007, a total of 1,633,414 shares were available for
future awards under the 2006 Plan. The Compensation Committee of the Board
of
Directors administers all of our stock incentive plans.
The
2006
Plan permits us to issue incentive or non-qualified stock options to purchase
shares of common stock, stock appreciation rights, restricted and unrestricted
stock awards, performance awards, and cash awards to employees and non-employee
directors.
As
disclosed in Note 1, we adopted SFAS 123(R) on January 1, 2006 under the
modified prospective method. The components of our pre-tax stock-based
compensation expense (net of forfeitures) and associated income tax benefits
are
as follows (in thousands of dollars):
|
|
2007
|
|
2006
|
|
Stock
Options
|
|
$
|
2,179
|
|
$
|
4,080
|
|
Restricted
Stock
|
|
|
2,845
|
|
|
1,585
|
|
|
|
$
|
5,024
|
|
$
|
5,665
|
|
|
|
|
|
|
|
|
|
Income
Tax Benefit
|
|
$
|
1,294
|
|
$
|
1,154
|
|
Stock
Options
Our
stock
incentive plans permit certain employees to receive grants of fixed-price stock
options. The option price is equal to the fair value of a share of the
underlying stock at the date of grant. Option terms are generally 10 years,
with
options generally becoming exercisable between one and five years from the
date
of grant.
The
fair
value of each stock option is estimated on the date of the grant using a
Black-Scholes option pricing model that uses assumptions noted in the following
table. Expected volatility is based on a blend of implied and historical
volatility of our common stock. We use historical data on exercises of stock
options and other factors to estimate the expected term of the share-based
payments granted. The risk free rate is based on the U.S. Treasury yield curve
in effect at the date of grant. The expected life of the options is based on
historical data and is not necessarily indicative of exercise patterns that
may
occur. The dividend yield reflects the assumption that the current dividend
payout will continue with no increases.
In
2007,
there were 3,000 stock options granted. No stock options were granted in 2006.
The fair value of each common stock option granted during 2007 and 2005 was
estimated using the following weighted-average assumptions:
|
|
2007
|
|
2005
|
|
Dividend
yield
|
|
|
3.69
|
%
|
|
1.0
- 1.2
|
%
|
Expected
volatility
|
|
|
417
|
%
|
|
77
- 93
|
%
|
Risk-free
interest rate
|
|
|
3.54
|
%
|
|
3.28
- 4.33
|
%
|
Expected
lives (in years)
|
|
|
3
|
|
|
2
- 5
|
|
The
total
intrinsic value (market value on date of exercise less exercise price) of
options exercised during 2007, 2006 and 2005 was approximately $7,472,000,
$16,389,000 and $19,780,000 respectively. As of December 31, 2007, the aggregate
intrinsic value of outstanding stock options, options vested and expected to
vest, and options exercisable was $2,662,000, $2,648,000 and $2,448,000,
respectively. The aggregate intrinsic values represent the total pretax
intrinsic value (the difference between the closing stock price of our stock
on
the last trading day of 2007 and the exercise price, multiplied by the number
of
in-the-money options) that would have been received by the holders of those
options had all option holders exercised their options on December 31, 2007.
These amounts will change based on the fair market value of our
stock.
Cash
received from option exercises under all share-based payment arrangements for
2007 was approximately $3,499,000 for 2007, $5,528,000 for 2006 and $4,884,000
for 2005. The actual tax benefit recognized for the tax deductions from option
exercises under all share-based payment arrangements for 2007 and 2006 was
approximately $2,121,000 and $5,409,000, respectively. SFAS 123(R) requires
the
cash flows resulting from income tax deductions in excess of compensation costs
to be classified as financing cash flows. Prior to the adoption of SFAS 123(R),
we presented all income tax benefits from deductions resulting from stock-based
compensation costs as operating cash flows in the consolidated statements of
cash flows.
At
December 31, 2007, there was $1,404,000 of total unrecognized, pre-tax
compensation cost related to non-vested stock options. This cost is expected
to
be recognized over a weighted-average period of approximately 0.82
years.
The
Company did not make any modifications to outstanding share options prior to
the
adoption of SFAS 123(R). There were no changes in valuation methodology after
the adoption of SFAS 123(R). The only change of assumptions was in the
recognition of forfeitures. Prior to the adoption of SFAS 123(R), forfeitures
were recognized on a proforma basis in the period in which they occurred. With
the adoption of SFAS 123(R), the Company now estimates forfeitures based on
a
number of factors, including historical forfeiture rates, trends and expected
forfeitures (currently estimated at 4%).
The
following table summarizes the status of options granted under our 1995, 1998,
2001 and 2006 Plans:
|
|
Stock Options
|
|
Weighted Average
Exercise Price
|
|
Outstanding
at January 1, 2005
|
|
|
1,773,465
|
|
$
|
10.83
|
|
Granted
|
|
|
403,398
|
|
|
28.99
|
|
Exercised
|
|
|
(601,639
|
)
|
|
8.12
|
|
Cancelled/forfeited
|
|
|
(80,584
|
)
|
|
16.54
|
|
Outstanding
at December 31, 2005
|
|
|
1,494,640
|
|
|
16.64
|
|
Exercised
|
|
|
(440,774
|
)
|
|
12.54
|
|
Cancelled/forfeited
|
|
|
(96,624
|
)
|
|
19.21
|
|
Outstanding
at December 31, 2006
|
|
|
957,242
|
|
|
18.27
|
|
Granted
|
|
|
3,000
|
|
|
18.43
|
|
Exercised
|
|
|
(259,017
|
)
|
|
13.51
|
|
Cancelled/forfeited
|
|
|
(61,627
|
)
|
|
20.39
|
|
Outstanding
at December 31, 2007
|
|
|
639,598
|
|
|
19.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable, December 31, 2007
|
|
|
506,666
|
|
|
18.87
|
|
Options
expected to vest, December 31, 2007
|
|
|
632,614
|
|
|
19.71
|
|
The
following table summarizes information about the stock options granted under
the
1995, 1998, 2001 and 2006 Plans that were outstanding at December 31,
2007:
|
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
|
|
Range of exercise prices
|
|
Outstanding as
of
December 31,
2007
|
|
Weighted-
average
remaining
contractual life
|
|
Weighted-
average
exercise price
|
|
Exercisable as
of December
31, 2007
|
|
Weighted-
average
exercise prie
|
|
|
$
|
2.33
|
|
$
|
10.59
|
|
|
74,960
|
|
|
4.15
|
|
$
|
6.05
|
|
|
74,960
|
|
$
|
6.05
|
|
|
|
10.65
|
|
|
12.19
|
|
|
90,368
|
|
|
5.82
|
|
|
11.95
|
|
|
86,618
|
|
|
11.95
|
|
|
|
12.50
|
|
|
14.08
|
|
|
73,125
|
|
|
2.77
|
|
|
13.42
|
|
|
65,625
|
|
|
13.42
|
|
|
|
14.31
|
|
|
16.60
|
|
|
103,389
|
|
|
6.40
|
|
|
16.39
|
|
|
67,089
|
|
|
16.28
|
|
|
|
17.27
|
|
|
22.81
|
|
|
60,401
|
|
|
6.00
|
|
|
20.67
|
|
|
44,300
|
|
|
20.82
|
|
|
|
27.05
|
|
|
27.05
|
|
|
120,337
|
|
|
7.01
|
|
|
27.05
|
|
|
61,225
|
|
|
27.05
|
|
|
|
28.59
|
|
|
30.59
|
|
|
78,334
|
|
|
2.26
|
|
|
30.28
|
|
|
76,667
|
|
|
30.32
|
|
|
|
33.45
|
|
|
42.56
|
|
|
28,684
|
|
|
5.18
|
|
|
37.42
|
|
|
23,516
|
|
|
37.66
|
|
|
|
44.60
|
|
|
44.60
|
|
|
5,000
|
|
|
7.56
|
|
|
44.60
|
|
|
3,333
|
|
|
44.60
|
|
|
|
48.25
|
|
|
48.25
|
|
|
5,000
|
|
|
7.50
|
|
|
48.25
|
|
|
3,333
|
|
|
48.25
|
|
|
$
|
2.33
|
|
$
|
48.25
|
|
|
639,598
|
|
|
5.17
|
|
$
|
19.73
|
|
|
506,666
|
|
$
|
18.87
|
|
The
weighted-average fair value of options granted was $18.43 per share during
2007
and $28.99 per share during 2005.
Restricted
Stock
Our
stock
incentive plans permit certain employees and non-employee directors to be
granted restricted share unit awards in common stock. Awards of restricted
share
units are valued by reference to shares of common stock and entitle a
participant to receive, upon the settlement of the unit, one share of common
stock for each unit. The awards vest annually, over either a two or three year
period from the date of the award, and do not have voting rights.
Restricted
stock awards granted to employees and non-employee directors during 2007 totaled
95,507 shares. There were no restricted stock awards prior to January 1, 2006.
The fair value of the awards at the grant date is expensed over the applicable
vesting periods.
As
of
December 31, 2007, there was $4,870,000 of total unrecognized pre-tax
compensation cost related to non-vested restricted stock. This cost is expected
to be recognized over a weighted-average period of approximately 1.7
years.
The
following table summarizes the restricted stock activity for 2007 and
2006:
|
|
Number
of
Share
Unit
Awards
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Outstanding
at January 1, 2006
|
|
|
-
|
|
$
|
-
|
|
Granted
|
|
|
142,895
|
|
|
42.40
|
|
Released
|
|
|
(4,776
|
)
|
|
41.57
|
|
Forfeited
|
|
|
(18,872
|
)
|
|
42.45
|
|
Outstanding
at December 31, 2006
|
|
|
119,247
|
|
|
42.43
|
|
Granted
|
|
|
95,507
|
|
|
39.73
|
|
Released
|
|
|
(40,685
|
)
|
|
40.86
|
|
Forfeited
|
|
|
(32,845
|
)
|
|
42.28
|
|
Outstanding
at December 31, 2007
|
|
|
141,224
|
|
|
41.10
|
|
7.
Commitments
and Contingencies
On
September 13, 2007, and October 1, 2007, two complaints were filed against
LCA-Vision and certain of its current and former directors and officers by
Beaver County Retirement Board and Spencer and Jean Lin, respectively, in the
United States District Court for the Southern District of Ohio (Western
Division) purportedly on behalf of a class of shareholders who purchased our
common stock between February 12, 2007, and July 30, 2007. On November 8,
2007, an additional complaint was filed against LCA-Vision and certain of its
current and former directors and officers in the United States District Court
for the Southern District of Ohio (Western Division). This action was
filed purportedly on behalf of a class of shareholders who purchased our common
stock between February 12, 2007, and November 2, 2007. The plaintiffs in
each complaint assert claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, alleging that certain of LCA-Vision's public disclosures
regarding its financial performance and prospects were false or misleading.
The
plaintiffs seek to recover damages on behalf of the class members. These
cases have been consolidated into one action; the consolidated complaint is
due
on March 11, 2008. LCA-Vision is in the process of evaluating these
claims. We strongly believe that these actions lack merit, and we intend to
defend against the claims vigorously. However, due to the inherent uncertainties
of litigation, we cannot predict the outcome of the action at this time, and
can
give no assurance that these claims will not have a material adverse effect
on
our financial position or results of operations.
On
October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
County, Ohio, against certain current and former officers and directors of
LCA-Vision, derivatively on behalf of the Company. The plaintiff, Nicholas
Weil, asserts that three of the defendants breached their fiduciary duties
when
they allegedly sold LCA-Vision's securities on the basis of material non-public
information in 2007. The plaintiff also asserts claims for breach of
fiduciary duty, abuse of control, corporate waste, and unjust enrichment in
connection with the disclosures that also are the subject of the securities
actions described above. LCA-Vision is named as a nominal defendant in the
complaint, although the action is derivative in nature. The plaintiff
demands damages and attorneys fees, and seeks other equitable relief. On
December 20, 2007, the court stayed this action, pursuant to a stipulation
of
the parties, pending the resolution of the motion to dismiss to be filed in
the
consolidated class action, discussed above. LCA-Vision is in the process of
evaluating these claims. However, due to the inherent uncertainty of
litigation, we cannot predict the outcome of the action at this time, and can
give no assurance that these claims will not have a material adverse effect
on
our financial position or results of operations.
Our
business results in a number of medical malpractice lawsuits. Claims reported
to
us prior to December 18, 2002 were generally covered by external insurance
policies and to-date have not had a material financial impact on our business
other than the cost of insurance and our deductibles under those policies.
Due
to substantial increases in insurance premiums, effective as of December 18,
2002, we established a captive insurance company to provide coverage for claims
brought against us after December 17, 2002. The Company uses the captive
insurance company for both primary insurance and excess liability coverage.
A
number of claims are now pending with our captive insurance company. As of
December 31, 2007 and 2006, we maintain an insurance reserve amount of
$8,493,000 and $6,163,000, respectively, which primarily represents an
actuarially determined estimate of future costs associated with claims filed
as
well as claims incurred but not reported.
In
addition to the above, we are periodically subject to various other claims
and
lawsuits. We believe that none of these other claims or lawsuits to which we
are
currently subject, individually or in the aggregate, will have a material
adverse effect on our business, financial position, results of operations or
cash flows.
8.
Additional Financial Information
The
tables below provide additional financial information related to our
consolidated financial statements (dollars in thousands):
Balance
Sheet Information
|
|
At December 31,
|
|
|
|
2007
|
|
2006
|
|
Property
and Equipment is comprised of the following:
|
|
|
|
|
|
Land
|
|
$
|
354
|
|
$
|
354
|
|
Building
and improvements
|
|
|
5,513
|
|
|
6,351
|
|
Leasehold
improvements
|
|
|
19,840
|
|
|
12,929
|
|
Furniture
and fixtures
|
|
|
5,403
|
|
|
4,804
|
|
Equipment
|
|
|
51,581
|
|
|
40,913
|
|
Equipment
under capital leases
|
|
|
13,944
|
|
|
7,834
|
|
|
|
|
96,635
|
|
|
73,185
|
|
Accumulated
depreciation
|
|
|
(52,872
|
)
|
|
(46,399
|
)
|
Construction
in progress
|
|
|
10,153
|
|
|
4,138
|
|
|
|
$
|
53,916
|
|
$
|
30,924
|
|
|
|
|
|
|
|
|
|
Accrued
Liabilities and Other is comprised of the following:
|
|
|
|
|
|
|
|
Accrued
payroll and related benefits
|
|
|
4,595
|
|
|
2,851
|
|
Accrued
financing fees
|
|
|
2,047
|
|
|
1,257
|
|
Accrued
enhancement expense
|
|
|
1,372
|
|
|
1,314
|
|
Invoices
and other expenses accrued at year-end
|
|
|
5,847
|
|
|
4,378
|
|
|
|
$
|
13,861
|
|
$
|
9,800
|
|
Cash
Flow Information
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
507
|
|
$
|
302
|
|
$
|
104
|
|
Income
taxes
|
|
|
15,928
|
|
|
18,961
|
|
|
15,348
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
$
|
5,944
|
|
$
|
5,030
|
|
$
|
3,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss) Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,504
|
|
$
|
28,370
|
|
$
|
22,981
|
|
Unrealized
investment gain (loss), net of tax
|
|
|
59
|
|
|
5
|
|
|
(6
|
)
|
Foreign
currency translation adjustments
|
|
|
367
|
|
|
1
|
|
|
(286
|
)
|
Total
comprehensive income
|
|
$
|
32,930
|
|
$
|
28,376
|
|
$
|
22,689
|
|
9.
Quarterly Financial Data (unaudited)
Financial
results for interim periods do not necessarily indicate trends for any
twelve-month period. Quarterly results can be affected by the number of
procedures performed and the timing of certain expense items (dollars in
thousands, except per share amounts):
|
|
2007 Quarters
|
|
2006 Quarters
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Revenues
|
|
$
|
78,663
|
|
$
|
69,685
|
|
$
|
74,584
|
|
$
|
69,703
|
|
$
|
66,750
|
|
$
|
60,297
|
|
$
|
55,841
|
|
$
|
56,037
|
|
Operating
income
|
|
|
15,543
|
|
|
10,039
|
|
|
14,130
|
|
|
5,853
|
|
|
14,710
|
|
|
12,400
|
|
|
6,818
|
|
|
6,851
|
|
Income
before taxes
|
|
|
17,298
|
|
|
12,033
|
|
|
15,848
|
|
|
6,546
|
|
|
16,282
|
|
|
13,992
|
|
|
8,518
|
|
|
8,888
|
|
Net
income
|
|
|
10,926
|
|
|
7,414
|
|
|
10,018
|
|
|
4,146
|
|
|
9,427
|
|
|
8,033
|
|
|
5,337
|
|
|
5,573
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
$
|
0.37
|
|
$
|
0.51
|
|
$
|
0.22
|
|
$
|
0.45
|
|
$
|
0.39
|
|
$
|
0.26
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.54
|
|
$
|
0.36
|
|
$
|
0.51
|
|
$
|
0.22
|
|
$
|
0.44
|
|
$
|
0.37
|
|
$
|
0.25
|
|
$
|
0.27
|
|