U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended September 30, 2008.
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT of
1934
|
For
the
transition period from __________ to __________
Commission
file number
0-27610
LCA-Vision
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
11-2882328
|
(State
or other jurisdiction of
|
|
(IRS
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
7840
Montgomery Road, Cincinnati, Ohio 45236
(Address
of principal executive offices)
(513)
792-9292
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large
accelerated filer
o
|
Accelerated
filer
x
|
|
|
Non-accelerated
filer
o
(Do
not check if a smaller reporting
company)
|
Smaller
reporting company
o
|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 18,547,417 shares as of October
22,
2008.
LCA-Vision
Inc.
INDEX
Part I.
|
Financial
Information
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2008 (unaudited)
and
December 31, 2007
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended
September 30, 2008 and 2007 (unaudited)
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flow for the Nine Months Ended
September
30, 2008 and 2007 (unaudited)
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
23
|
|
|
|
Item
4.
|
Controls
and Procedures
|
23
|
|
|
|
Part
II.
Other
Information
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
24
|
|
|
|
Item
6.
|
Exhibits
|
25
|
|
|
|
|
Signatures
|
26
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
Condensed
Consolidated Balance Sheets (Unaudited)
(Dollars
in thousands)
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
24,669
|
|
$
|
17,614
|
|
Short-term
investments
|
|
|
37,993
|
|
|
42,534
|
|
Patient
receivables, net of allowance for doubtful accounts of $1,945 and
$2,987
|
|
|
10,957
|
|
|
12,712
|
|
Other
accounts receivable
|
|
|
2,260
|
|
|
5,941
|
|
Prepaid
professional fees
|
|
|
1,105
|
|
|
1,872
|
|
Prepaid
income taxes
|
|
|
2,880
|
|
|
6,391
|
|
Deferred
tax assets
|
|
|
3,385
|
|
|
3,450
|
|
Prepaid
expenses and other
|
|
|
5,238
|
|
|
5,076
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
88,487
|
|
|
95,590
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
122,080
|
|
|
106,788
|
|
Accumulated
depreciation and amortization
|
|
|
(66,139
|
)
|
|
(52,872
|
)
|
Property
and equipment, net
|
|
|
55,941
|
|
|
53,916
|
|
|
|
|
|
|
|
|
|
Long-term
investments
|
|
|
4,406
|
|
|
2,250
|
|
Patient
receivables, net of allowance for doubtful accounts of $1,931 and
$2,130
|
|
|
3,499
|
|
|
4,556
|
|
Deferred
compensation plan assets
|
|
|
3,106
|
|
|
5,540
|
|
Investment
in unconsolidated businesses
|
|
|
398
|
|
|
590
|
|
Deferred
tax assets
|
|
|
14,044
|
|
|
13,561
|
|
Other
assets
|
|
|
2,398
|
|
|
3,644
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
172,279
|
|
$
|
179,647
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Investment
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,077
|
|
$
|
10,396
|
|
Accrued
liabilities and other
|
|
|
9,961
|
|
|
13,219
|
|
Deferred
revenue
|
|
|
11,050
|
|
|
18,719
|
|
Income
taxes payable
|
|
|
1,308
|
|
|
642
|
|
Debt
obligations maturing in one year
|
|
|
7,281
|
|
|
3,941
|
|
Total
current liabilities
|
|
|
37,677
|
|
|
46,917
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations (less current portion)
|
|
|
15,331
|
|
|
2,012
|
|
Deferred
compensation liability
|
|
|
3,067
|
|
|
5,516
|
|
Insurance
reserve
|
|
|
9,689
|
|
|
8,493
|
|
Deferred
revenue
|
|
|
15,830
|
|
|
23,110
|
|
|
|
|
|
|
|
|
|
Stockholders'
Investment
|
|
|
|
|
|
|
|
Common
stock ($0.001 par value; 25,193,866 and 25,114,244 shares issued
and
18,547,417 and 18,482,658 shares outstanding as of September 30,
2008 and
December 31, 2007, respectively)
|
|
|
25
|
|
|
25
|
|
Contributed
capital
|
|
|
173,540
|
|
|
172,965
|
|
Common
stock in treasury, at cost (6,646,449 and 6,631,586 shares at September
30, 2008 and December 31, 2007)
|
|
|
(114,632
|
)
|
|
(114,427
|
)
|
Retained
earnings
|
|
|
31,735
|
|
|
34,597
|
|
Accumulated
other comprehensive income
|
|
|
17
|
|
|
439
|
|
|
|
|
|
|
|
|
|
Total
stockholders' investment
|
|
|
90,685
|
|
|
93,599
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' investment
|
|
$
|
172,279
|
|
$
|
179,647
|
|
The
notes
to the Condensed Consolidated Financial Statements are an integral part of
this
statement.
LCA-Vision
Inc.
|
Condensed
Consolidated Statements of Operations
(Unaudited)
|
(Dollars
in thousands except per share data)
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue —
Laser refractive surgery
|
|
$
|
37,397
|
|
$
|
74,584
|
|
$
|
171,147
|
|
$
|
222,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
professional and license fees
|
|
|
8,201
|
|
|
12,344
|
|
|
34,222
|
|
|
37,738
|
|
Direct
costs of services
|
|
|
17,686
|
|
|
23,304
|
|
|
62,532
|
|
|
72,399
|
|
General
and administrative expenses
|
|
|
4,869
|
|
|
4,637
|
|
|
15,914
|
|
|
15,225
|
|
Marketing
and advertising
|
|
|
8,294
|
|
|
17,208
|
|
|
43,744
|
|
|
50,100
|
|
Depreciation
|
|
|
4,508
|
|
|
2,961
|
|
|
13,375
|
|
|
7,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(6,161
|
)
|
|
14,130
|
|
|
1,360
|
|
|
39,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings from unconsolidated businesses
|
|
|
132
|
|
|
244
|
|
|
453
|
|
|
598
|
|
Net
investment (loss) income
|
|
|
(724
|
)
|
|
1,474
|
|
|
842
|
|
|
4,900
|
|
Other
income (expense), net
|
|
|
-
|
|
|
-
|
|
|
18
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before taxes
|
|
|
(6,753
|
)
|
|
15,848
|
|
|
2,673
|
|
|
45,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(2,036
|
)
|
|
5,830
|
|
|
1,088
|
|
|
16,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(4,717
|
)
|
$
|
10,018
|
|
$
|
1,585
|
|
$
|
28,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.25
|
)
|
$
|
0.51
|
|
$
|
0.09
|
|
$
|
1.43
|
|
Diluted
|
|
$
|
(0.25
|
)
|
$
|
0.51
|
|
$
|
0.09
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$
|
-
|
|
$
|
0.18
|
|
$
|
0.24
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,537
|
|
|
19,521
|
|
|
18,519
|
|
|
19,834
|
|
Diluted
|
|
|
18,537
|
|
|
19,754
|
|
|
18,572
|
|
|
20,147
|
|
The
notes
to the Condensed Consolidated Financial Statements are an integral part of
this
statement.
LCA-Vision
Inc.
Condensed
Consolidated Statements of Cash Flow (Unaudited)
(Dollars
in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,585
|
|
$
|
28,358
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
13,375
|
|
|
7,758
|
|
Provision
for loss on doubtful accounts
|
|
|
4,303
|
|
|
4,383
|
|
Loss
on investment
|
|
|
1,074
|
|
|
-
|
|
Deferred
income taxes
|
|
|
(50
|
)
|
|
9,927
|
|
Stock
based compensation
|
|
|
966
|
|
|
3,623
|
|
Insurance
reserve
|
|
|
1,196
|
|
|
1,684
|
|
Equity
in earnings of unconsolidated affiliates
|
|
|
(453
|
)
|
|
(598
|
)
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
Patient
receivables
|
|
|
(1,491
|
)
|
|
(9,617
|
)
|
Other
accounts receivable
|
|
|
3,681
|
|
|
(2,934
|
)
|
Prepaid
income taxes
|
|
|
3,511
|
|
|
(5,365
|
)
|
Prepaid
expenses and other
|
|
|
(162
|
)
|
|
1,400
|
|
Accounts
payable
|
|
|
(2,319
|
)
|
|
(1,313
|
)
|
Deferred
revenue, net of professional fees
|
|
|
(13,454
|
)
|
|
(1,059
|
)
|
Income
taxes payable
|
|
|
666
|
|
|
-
|
|
Accrued
liabilities and other
|
|
|
(2,499
|
)
|
|
2,505
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operations
|
|
$
|
9,929
|
|
$
|
38,752
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(13,597
|
)
|
|
(13,012
|
)
|
Purchases
of investment securities
|
|
|
(297,128
|
)
|
|
(258,415
|
)
|
Proceeds
from sale of investment securities
|
|
|
297,433
|
|
|
260,328
|
|
Other,
net
|
|
|
645
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(12,647
|
)
|
$
|
(11,176
|
)
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
Principal
payments of capital lease obligations and debt
|
|
|
(4,328
|
)
|
|
(3,873
|
)
|
Proceeds
from loan
|
|
|
19,184
|
|
|
-
|
|
Shares
repurchased for treasury stock
|
|
|
(205
|
)
|
|
(34,943
|
)
|
Tax
benefits related to stock-based compensation
|
|
|
(624
|
)
|
|
1,107
|
|
Exercise
of stock options
|
|
|
193
|
|
|
3,402
|
|
Dividends
paid to stockholders
|
|
|
(4,447
|
)
|
|
(10,658
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
9,773
|
|
|
(44,965
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
7,055
|
|
|
(17,389
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
17,614
|
|
|
24,431
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
24,669
|
|
$
|
7,042
|
|
The
notes
to the Consolidated Condensed Financial Statements are an integral part of
this
statement.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements
About
Our Company
We
are a
leading provider of fixed-site laser vision
correction
services 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 three suppliers for fixed-site excimer lasers: Bausch & Lomb,
Advanced Medical Optics and Alcon. Our vision centers are supported mainly
by
independent, board-certified ophthalmologists and credentialed optometrists,
as
well as other healthcare 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 currently receive a procedure called LASIK,
which we began performing in the United States in 1997.
As
of
September 30, 2008, we had 78 Lasik
Plus
fixed-site laser vision correction centers in the United States and a joint
venture in Canada.
Summary
of Significant Accounting Policies
This
filing includes condensed consolidated Balance Sheets as of September 30,
2008
and December 31, 2007; condensed consolidated Statements of Operations for
the
three and nine months ended September 30, 2008 and 2007; and condensed
consolidated Statements of Cash Flow for the nine months ended September
30,
2008 and 2007. In the opinion of management, these condensed consolidated
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for the interim periods reported. These
financial statements and notes should be read together with the financial
statements and notes in our annual report on Form 10-K for the fiscal year
ended
December 31, 2007. Results of operations for the period ending September
30,
2008 are not necessarily indicative of results to be expected for the year
ended
December 31, 2008.
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 Emerging Issue Task
Force
(EITF) Issue No. 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 condensed 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 investments, 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.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements
Reclassification
Certain
prior-period amounts have been reclassified in the Condensed Consolidated
Balance Sheets and Condensed Consolidated Statements of Cash Flow to conform
to
current period presentation. The reclassifications were not material to the
consolidated financial statements.
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 value, with unrealized gains and losses, net of tax,
reported in other comprehensive income, a component of stockholders’ investment.
The amortized cost of debt securities in this category reflects amortization
of
premiums and accretion of discounts to maturity computed under the effective
interest method. Such amortization is included in the caption “net investment
(loss) income” within the condensed consolidated statements of operations.
Realized gains and losses and declines in value judged to be other than
temporary are also included in net investment (loss) 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 (loss) income.
As
of
September 30, 2008 and December 31, 2007, there were available-for-sale
securities, both current and long-term, of $42,399,000 and $44,784,000,
respectively. The following table is a summary of available-for-sale securities
at September 30, 2008 (dollars in thousands):
|
|
Amortized Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated Fair
Value (Net
Carrying Value)
|
|
Corporate
bonds and credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
default
swaps
|
|
$
|
21,992
|
|
$
|
-
|
|
$
|
-
|
|
$
|
21,992
|
|
U.S.
Government securities
|
|
|
2,638
|
|
|
-
|
|
|
-
|
|
|
2,638
|
|
Municipal
bonds
|
|
|
15,593
|
|
|
32
|
|
|
(244
|
)
|
|
15,381
|
|
Equities
|
|
|
2,944
|
|
|
-
|
|
|
(556
|
)
|
|
2,388
|
|
Total
investments
|
|
$
|
43,167
|
|
$
|
32
|
|
$
|
(800
|
)
|
$
|
42,399
|
|
At
September 30, 2008, corporate bonds and credit default swaps and municipal
bonds
included $6,200,000 in par value of auction rate instruments for which there
was
not an active market. These securities have historically traded at par and
are
callable at par at the option of the issuer. Interest is typically paid at
the
end of each auction period. Until January 2008, the auction rate securities
market was highly liquid. Beginning in January 2008, certain of our auction
rate
instruments “failed,” meaning that there was insufficient demand to sell all of
the securities that holders desired to sell at auction. The immediate effect
of
a failed auction is that holders cannot sell the securities at auction and
the
interest rate on the security generally resets to a maximum auction rate.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements (Unaudited)
At
September 30, 2008, there was insufficient observable auction rate market
information available to determine the fair value of most of our auction
rate
security investments. Therefore, we estimated fair value using a trinominal
discount model employing assumptions that market participants would use in
their
estimates of fair value. Certain of these assumptions included financial
standing of the issuer, final stated maturities, estimates of the probability
of
the issue being called prior to final maturity, estimates of the probability
of
defaults and recoveries, expected changes in interest rates paid on the
securities, interest rates paid on similar instruments, and an estimated
illiquidity discount due to extended redemption periods.
Two
of
the eight auction rate securities held within our investment portfolio at
September 30, 2008, with a combined par value of $2,250,000, were designed
to
serve as vehicles for credit default swaps. The recent disruptions in the
credit
and financial markets are having a significant adverse impact on the credit
default swap markets, with spreads increasing sharply on investment grade
entities due to the demand to protect against counterparty risk. Some defaults
have occurred in the financial sector. Due to increased risk of default,
it is
probable that all amounts due (principal and interest) will not be collected
according to these instruments’ contractual terms. Accordingly, an
other-than-temporary impairment of $1,074,000 for these two auction rate
security investments was recognized within the consolidated statement of
operations in the September 30, 2008 quarter to record the investments at
fair
value and establish a new cost basis. Five of the eight auction rate securities,
consisting primarily of municipal bonds with a combined par value of $3,450,000,
were reported at fair value with total unrealized losses of $220,000, or
$132,000 on an after-tax basis, included in accumulated other comprehensive
income, a component of stockholders’ investment, as of September 30, 2008. The
remaining auction rate security was redeemed by the issuer in October 2008
at
its $500,000 par value.
As
a
result of the failed auctions and excluding those securities redeemed subsequent
to September 30, 2008, our auction rate instruments are not currently liquid.
Due to the continuation of the unstable credit environment, we believe the
recovery period for our auction rate instruments will exceed 12 months.
Accordingly, we have classified the fair value of the auction rate instruments
that have not been redeemed subsequent to September 30, 2008, as long-term.
The
fair value and par value of our long-term auction rate instruments were
$4,406,000 and $5,700,000 at September 30, 2008, respectively.
The
net
carrying value and estimated fair value of debt securities available for
sale
and equity investments at September 30, 2008, 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.
(dollars
in thousands)
|
|
Amortized Cost
|
|
Estimated Fair
Value
|
|
Due
in one year or less
|
|
$
|
28,214
|
|
$
|
28,222
|
|
Due
after one year through three years
|
|
|
6,883
|
|
|
6,883
|
|
Due
after three years
|
|
|
5,126
|
|
|
4,906
|
|
Equities
|
|
|
2,944
|
|
|
2,388
|
|
Total
investments
|
|
$
|
43,167
|
|
$
|
42,399
|
|
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements (Unaudited)
F
air
Values of Financial Instruments
Effective
January 1, 2008, we adopted Financial Accounting Standards Board (FASB)
Statement No. 157 (SFAS 157),
Fair
Value Measurements.
SFAS
No. 157 clarifies the definition of fair value, prescribes methods for
measuring fair value, establishes a fair value hierarchy based on the inputs
used to measure fair value and expands disclosures about the use of fair
value
measurements. In accordance with Financial Accounting Standards Board Staff
Position No. FAS 157-2 (FSP 157-2),
Effective
Date of FASB Statement No. 157
,
we will
defer the adoption of SFAS No. 157 for our nonfinancial assets and
nonfinancial liabilities, except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis, until January 1,
2009. The adoption of SFAS No. 157 did not have a material impact on our
fair value measurements. Additionally, in October 2008, the FASB issued Staff
Position No. 157-3,
Determining
the Fair Value of a Financial Asset when the Market for that Asset is not
Active
.
FSB
157-3 clarifies the application of FAS 157 in a market that is not
active.
Level
inputs, as defined by SFAS 157, are as follows:
Level
Input:
|
|
Input
Definition:
|
Level
1
|
|
Inputs
are unadjusted, quoted prices for identical assets or liabilities
in
active markets at the measurement date.
|
|
|
|
Level
2
|
|
Inputs
other than quoted prices included in Level 1 that are observable
for the
asset or liability through corroboration with market data at the
measurement date.
|
|
|
|
Level
3
|
|
Unobservable
inputs that reflect management’s best estimate of what market participants
would use in pricing the asset or liability at the measurement
date.
|
The
following table summarizes fair value measurements by level at
September 30, 2008 for assets and liabilities measured at fair value on a
recurring basis (dollars in thousands):
|
|
Fair Value Measurements as of September 30, 2008 Using
|
|
|
|
Quoted Prices in
|
|
|
|
Significant
|
|
|
|
|
|
Active Markets for
|
|
Significant Other
|
|
Unobservable
|
|
|
|
|
|
Identical Assets
|
|
Observable Inputs
|
|
Inputs
|
|
|
|
Description
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
24,669
|
|
$
|
-
|
|
$
|
-
|
|
$
|
24,669
|
|
Investments
|
|
|
2,388
|
|
|
35,605
|
|
|
4,406
|
|
|
42,399
|
|
Deferred
compensation assets
|
|
|
3,106
|
|
|
-
|
|
|
-
|
|
|
3,106
|
|
Total
|
|
$
|
30,163
|
|
$
|
35,605
|
|
$
|
4,406
|
|
$
|
70,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation liabilities
|
|
$
|
3,067
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,067
|
|
Cash
and
cash equivalents are comprised of either bank deposits or amounts invested
in
money market funds, the fair value of which is based on quoted market prices.
The fair values of some investment securities included within our investment
portfolio are based on quoted market prices from various stock and bond
exchanges. Certain of our debt securities are classified at fair value utilizing
Level 2 inputs. For these securities, fair value is measured using observable
market data that includes dealer quotes, live trading levels, trade execution
data, credit information and the bond’s terms and conditions. The fair values of
our auction rate investment instruments are classified in Level 3 as previously
described. We maintain a self-directed deferred compensation plan structured
as
a rabbi trust for certain highly compensated individuals. The investment
assets
of the rabbi trust are valued using quoted market prices. The related deferred
compensation liability represents the fair value of the participants’ investment
elections, determined using quoted market prices. We consider our credit
risk,
taking into consideration the legal rights of participants to receive deferred
amounts, in the fair value determination of the deferred compensation
liability.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements (Unaudited)
For
assets measured at fair value using significant unobservable inputs (Level
3)
during the period, a reconciliation of beginning and ending balances for
each
major category is set forth in the table below (dollars in
thousands):
For
the
three months ended September 30, 2008
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
Taxable
|
|
Tax
Exempt
|
|
|
|
|
|
Auction
|
|
Auction
|
|
|
|
|
|
Rate
|
|
Rate
|
|
|
|
Description
|
|
Securities
|
|
Securities
|
|
Total
|
|
Balance
as of July 1, 2008
|
|
$
|
1,834
|
|
$
|
3,893
|
|
$
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
acquired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Assets
sold
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Transfers
in (out) of Level 3
|
|
|
-
|
|
|
(500
|
)
|
|
(500
|
)
|
Gains
(losses) included in earnings
|
|
|
(1,074
|
)
|
|
-
|
|
|
(1,074
|
)
|
Gains
(losses) included in other comprehensive income
|
|
|
416
|
|
|
(163
|
)
|
|
253
|
|
Balance
as of September 30, 2008
|
|
$
|
1,176
|
|
$
|
3,230
|
|
$
|
4,406
|
|
For
the
nine months ended September 30, 2008
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
Taxable
|
|
Tax
Exempt
|
|
|
|
|
|
Auction
|
|
Auction
|
|
|
|
|
|
Rate
|
|
Rate
|
|
|
|
Description
|
|
Securities
|
|
Securities
|
|
Total
|
|
Balance
as of Janurary 1, 2008
|
|
$
|
2,600
|
|
$
|
15,125
|
|
$
|
17,725
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
acquired
|
|
|
-
|
|
|
2,150
|
|
|
2,150
|
|
Assets
sold
|
|
|
(350
|
)
|
|
(11,925
|
)
|
|
(12,275
|
)
|
Transfers
in (out) of Level 3
|
|
|
-
|
|
|
(1,900
|
)
|
|
(1,900
|
)
|
Gains
(losses) included in earnings
|
|
|
(1,074
|
)
|
|
-
|
|
|
(1,074
|
)
|
Gains
(losses) included in other comprehensive income
|
|
|
-
|
|
|
(220
|
)
|
|
(220
|
)
|
Balance
as of September 30, 2008
|
|
$
|
1,176
|
|
$
|
3,230
|
|
$
|
4,406
|
|
Allowance
for Doubtful Accounts
We
provide patient financing to some 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 it based upon our experience with patient financing.
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 the 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
collectability rates, recent default activity and the current credit
environment.
Accrued
Enhancement Expense
Effective
June 15, 2007, participation in our Lifetime Satisfaction Program (“acuity
program”) is included in the base surgical price for substantially all of our
patients. Under the acuity program, we provide post-surgical enhancements
free
of charge should the patient not achieve the desired visual correction during
the initial procedure. Under this pricing structure, we account for the acuity
program as a warranty obligation under the provisions of 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.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements (Unaudited)
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
Prior
to
June 15, 2007, our acuity programs were separately priced and included a
no-acuity plan, a one-year acuity plan, and a lifetime acuity plan. Under
FASB
Technical Bulletin No. 90-1 (FTB 90-1),
Accounting
for Separately Priced Extended Warranty and Product Maintenance
Contract
s,
100%
of revenues from the sale of an 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 the
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
acuity program now is included in the base surgical price. No warranty-related
revenue deferrals have occurred for procedures performed since that date
and
there will be no additions to the deferral account in the future. Revenues
previously deferred from the sale of the separately priced acuity programs
are
being recognized over a seven-year period, our current estimate of the period
over which costs to provide the enhancement service will be
incurred.
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.
As
of
September 30, 2008 and December 31, 2007, the deferred revenue balance totaled
$26,880,000 and $41,829,000, respectively.
Captive
Insurance Company Reserves
We
have 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, although none are currently insured by the captive.
We use 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 September 30, 2008 and December 31, 2007, we maintained
insurance reserves of
$9,689,000
and $8,493,000, respectively, which represents an actuarially determined
estimate of future costs associated with claims filed as well as claims incurred
but not yet reported. The loss reserve developed by our actuaries is determined
by comparing historical claim experience to comparable insurance industry
experience.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements
Debt
Long-term
debt obligations consist of (dollars in thousands):
|
|
Amount Outstanding
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Capitalized lease obligations
|
|
$
|
4,851
|
|
$
|
5,953
|
|
Bank
loan
|
|
|
17,761
|
|
|
-
|
|
Total
long-term debt obligations
|
|
$
|
22,612
|
|
$
|
5,953
|
|
Debt
obligations maturing in one year
|
|
|
(7,281
|
)
|
|
(3,941
|
)
|
Long-term
obligations (less current portion)
|
|
$
|
15,331
|
|
$
|
2,012
|
|
Capitalized
lease obligations are used to finance purchases of some of our medical
equipment. The leases cover a period of 24 months to 36 months from the date
the
medical equipment is installed.
On
April
24, 2008, we entered into a bank loan agreement for $19,184,000 to finance
medical equipment. The loan will be paid in equal monthly installments over
a
five-year period at a fixed interest rate of 4.96%. The loan agreement contains
no financial covenants.
Both
the
capital lease obligations and the bank loan are secured by certain medical
equipment.
Income
Taxes
The
following table summarizes the components of the income tax provision for
the
three- and nine-month periods ended September 30, 2008 and 2007 (dollars
in
thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Federal
income tax (benefit) expense
|
|
$
|
(1,559
|
)
|
$
|
5,455
|
|
$
|
874
|
|
$
|
14,681
|
|
State
income tax (benefit) expense, net of federal benefit
|
|
|
(477
|
)
|
|
375
|
|
|
214
|
|
|
2,141
|
|
Income
tax (benefit) expense
|
|
$
|
(2,036
|
)
|
$
|
5,830
|
|
$
|
1,088
|
|
$
|
16,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
30.2
|
%
|
|
36.8
|
%
|
|
40.7
|
%
|
|
37.2
|
%
|
Our
effective income tax rate fluctuated for the three- and nine-month periods
ended
September 30, 2008 when compared to the same periods last year primarily
because
of lower pre-tax income for 2008 compared with 2007 and the corresponding
effect
of favorable permanent differences constituting a larger percentage of our
overall taxable income, partially offset by the non-tax-deductibility of
the
$1.1 million loss on investments recorded in the September 2008
quarter.
In
June
2006, the FASB issued Interpretation No. 48 (FIN 48),
Accounting
for Uncertainty in Income Taxes
,
which
is effective for fiscal years beginning after December 15, 2006. This
interpretation prescribes a framework for recognizing and measuring income
tax
benefits for inclusion in the financial statements and also provides guidance
on
derecognition, classification, interest and penalties. FIN 48 provides that
an
income tax benefit is recognized in the financial statements when it is more
likely than not that the benefit claimed or to be claimed on an income tax
return will be sustained upon examination. The amount of income tax benefit
recognized is measured as the largest amount of benefit that is greater than
50
percent likely of being realized upon ultimate settlement.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements
During
the three and nine months ended September 30, 2008, there were no significant
changes to the liability for unrecognized tax benefits or potential interest
and
penalties recorded as a component of income tax expense. The total amount
of
unrecognized tax benefits was approximately $398,000 and $584,000 at September
30, 2008 and December 31, 2007, respectively. During the June 2008 quarter,
the
Internal Revenue Service completed its examination of our 2006 tax returns
with
no significant affect to the financial statements. It is reasonably possible
that, within the next 12 months, there could be a change in the amount of
unrecognized tax benefits resulting from IRS reviews for tax years after
2006 or
other taxing authorities, including possible settlement of audit issues,
or the
expiration of applicable statutes of limitations. It is not possible to
reasonably estimate the amount of any such change in unrecognized tax benefits
at this time.
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 calculated by dividing
income applicable to common shares 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.
Following
is a reconciliation of basic and diluted earnings per share for the three
and
nine months ended September 30, 2008 and 2007 (dollars in thousands, except
per
share amounts):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(4,717
|
)
|
$
|
10,018
|
|
$
|
1,585
|
|
$
|
28,358
|
|
Weighted
average shares outstanding
|
|
|
18,537
|
|
|
19,521
|
|
|
18,519
|
|
|
19,834
|
|
Basic
(loss) earnings per share
|
|
$
|
(0.25
|
)
|
$
|
0.51
|
|
$
|
0.09
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(4,717
|
)
|
$
|
10,018
|
|
$
|
1,585
|
|
$
|
28,358
|
|
Weighted
average shares outstanding
|
|
|
18,537
|
|
|
19,521
|
|
|
18,519
|
|
|
19,834
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
211
|
|
|
28
|
|
|
277
|
|
Restricted
stock
|
|
|
-
|
|
|
22
|
|
|
25
|
|
|
36
|
|
Weighted
average common shares and potential dilutive shares
|
|
|
18,537
|
|
|
19,754
|
|
|
18,572
|
|
|
20,147
|
|
Diluted
(loss) earnings per share
|
|
$
|
(0.25
|
)
|
$
|
0.51
|
|
$
|
0.09
|
|
$
|
1.41
|
|
For
the
three and nine months ended September 30, 2008, 701,477 and 678,898 weighted
shares, respectively, that were issuable upon the exercise of stock options
and
non-vested restricted stock were excluded from the computation of diluted
earnings per share as their effect was antidilutive.
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 collectability is reasonably assured.
Revenues associated with our former separately priced acuity programs have
been
deferred and are being 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 cost associated with future
enhancements will be incurred on other than a straight-line basis.
Stock-Based
Compensation
We
have
four stock incentive plans through which employees and directors have been
or
are granted stock-based compensation. We recognize compensation expense for
the
grant date fair value of stock-based awards over the applicable vesting period.
The components of our pre-tax stock-based compensation expense, net of
forfeitures, and associated income tax benefits were as follows for the three
and nine months ended September 30, 2008 (dollars in thousands):
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Stock
options
|
|
$
|
(83
|
)
|
$
|
223
|
|
$
|
80
|
|
$
|
1,610
|
|
Restricted
stock
|
|
|
437
|
|
|
621
|
|
|
886
|
|
|
2,013
|
|
|
|
$
|
354
|
|
$
|
844
|
|
$
|
966
|
|
$
|
3,623
|
|
Income
tax benefit
|
|
|
181
|
|
|
513
|
|
|
425
|
|
|
916
|
|
|
|
$
|
173
|
|
$
|
331
|
|
$
|
541
|
|
$
|
2,707
|
|
The
stock
option expense for the three-month period ended September 30, 2008 was negative
due to a revision to the forfeiture estimates resulting from layoffs and
other
personnel reductions that occurred during the quarter.
Commitments
and Contingencies
On
September 13, 2007, and October 1, 2007, two complaints were filed against
the
Company and certain of our 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 by named plaintiff Diane B. Callahan against
the
Company and certain of our current and former directors and officers in the
United States District Court for the Southern District of Ohio (Western
Division). This third action was filed purportedly on behalf of a class of
shareholders who purchased our common stock between February 12, 2007 and
November 2, 2007. These actions have been consolidated into one action. A
consolidated complaint was filed on April 19, 2008. The plaintiffs in the
consolidated complaint are seeking damages on behalf of a class of shareholders
who purchased our common stock between October 24, 2006 and November 2, 2007,
asserting claims under Sections 10(b) and 20(a) of the Securities Exchange
Act
of 1934. They allege that certain of the Company’s public disclosures regarding
its financial prospects and historical accounting for bad-debt reserves and
expenses were false or misleading. On July 10, 2008, the Company, together
with
the other defendants, filed a motion to dismiss the consolidated complaint.
On
September 5, 2008, plaintiffs filed their memorandum in opposition to the
motion
to dismiss. We strongly believe that these claims lack merit, and we intend
to
defend against the claims vigorously. 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. No amount has been
accrued for these claims at September 30, 2008.
On
October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
County, Ohio, against certain of our current and former officers and directors,
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. The Company 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
filed in the consolidated class action, discussed above. We are 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 due to our indemnification
obligations to these persons if liability were found. No amount has been
accrued
for these claims at September 30, 2008.
LCA-Vision
Inc.
Notes
to
Condensed Consolidated Financial Statements
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.
Effective
in
December 2002, we established a captive insurance company to provide coverage
for claims brought against us after December 17, 2002. We use the captive
insurance company for both primary insurance and excess liability coverage.
A
number of claims are now pending with our captive insurance company. Since
the
inception of the captive insurance company in 2002, total claims and expense
payments of $1,171,000 have been disbursed.
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.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
This
quarterly report on Form 10-Q contains forward-looking statements within
the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based
on
information available to us as of the date hereof. Actual results could differ
materially from those stated or implied in such forward-looking statements
due
to risks and uncertainties associated with our business, including, without
limitation, those concerning economic, political and sociological conditions;
the acceptance rate of new technology, and our ability to successfully implement
new technology on a national basis; market acceptance of our services; the
successful execution of marketing strategies to cost effectively drive patients
to our vision centers; competition in the laser vision correction industry;
an
inability to attract new patients; the possibility of long-term side effects
and
adverse publicity regarding laser vision correction; operational and management
instability; legal or regulatory action against us or others in the laser
vision
correction industry; our ability to profitably operate vision centers and
retain
qualified personnel during periods of lower procedure volumes; the relatively
high fixed cost structure of our business; the continued availability of
non-recourse third-party financing for our patients on terms similar to what
we
have paid historically; and the future value of revenues financed by us and
our
ability to collect on such financings which will depend on a number of factors,
including the worsening consumer credit environment and our ability to manage
credit risk related to consumer debt, bankruptcies and other credit trends.
In
addition, an ongoing FDA study about post-Lasik quality of life matters could
potentially impact negatively the acceptance of Lasik. Except to the extent
required under the federal securities laws and the rules and regulations
promulgated by the Securities and Exchange Commission, we assume no obligation
to update the information included herein, whether as a result of new
information, future events or circumstances, or otherwise. In addition to
the
information given herein, please refer to “Item 1A. Risk Factors” in this report
and our annual report on Form 10-K for the fiscal year ended December 31,
2007
for a discussion of important factors that could affect our
results.
The
following discussion and analysis of the Company's financial condition and
results of operations should be read together with our Condensed Consolidated
Financial Statements and the accompanying Notes included in this Quarterly
Report.
Overview
We
are a
leading provider 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 vision correction procedures that employ advanced
laser
technologies to help correct nearsightedness, farsightedness and astigmatism.
We
derive
all of our revenues from the delivery of laser vision correction services
performed in our U.S. vision centers. Our revenues therefore depend on our
volume of procedures, which is impacted by a number of factors, including
the
following:
|
·
|
General
economic conditions and consumer confidence
levels
|
|
·
|
Our
ability to generate customers through our arrangements with managed
care
companies, direct-to-consumer advertising and word-of-mouth
referrals
|
|
·
|
The
availability of patient financing
|
|
·
|
The
level of consumer acceptance of laser vision
correction
|
|
·
|
The
effect of competition and discounting practices in our
industry
|
Other
factors that may impact our revenues include:
|
·
|
Deferred
revenue from the sale, prior to June 15, 2007, of separately priced
extended warranties
|
|
·
|
Our
mix of procedures among the different types of laser
technology
|
Our
operating costs and expenses include:
|
·
|
Medical
professional and license fees, including per procedure fees for
the
ophthalmologists performing laser vision correction and license
fees per
procedure paid to certain equipment suppliers of our excimer
lasers
|
|
·
|
Direct
costs of services, including center rent and utilities, equipment
lease
and maintenance costs, surgical supplies, center staff expense,
finance
charges for third-party patient financing and costs related to
other
revenues
|
|
·
|
General
and administrative costs, including headquarters staff expense
and other
overhead costs
|
|
·
|
Marketing
and advertising costs
|
|
·
|
Depreciation
of equipment
|
Our
revenues are primarily a function of the number of laser vision correction
procedures performed and the pricing for these services. Our vision centers
have
a relatively high degree of operating leverage due to the fact that many
of our
costs are fixed in nature. As a result, our level of procedure volume can
have a
significant impact on our level of profitability. As indicated below, we
have
experienced significant declines in levels of procedure volume during the
first
nine months of 2008, primarily during the three months ended September 30,
2008.
We believe this is due to the occurrence of a number of factors cited in
the
first paragraph of this Item 2 as risks and uncertainties associated with
our
business. These factors include the effect of deteriorating U.S. economic
conditions on consumer spending habits, the inability of our marketing
strategies to drive procedure volume in the current economic environment
and,
perhaps, an increase in consumer concern about laser vision correction resulting
from the ongoing FDA study. We expect these conditions will continue to
adversely affect our procedure volume and our revenues for at least the balance
of 2008.
The
following table details the number of laser vision correction procedures
performed at our consolidated vision centers.
|
|
2008
|
|
2007
|
|
First
Quarter
|
|
|
44,159
|
|
|
59,101
|
|
Second
Quarter
|
|
|
30,086
|
|
|
48,668
|
|
Third
Quarter
|
|
|
21,484
|
|
|
44,547
|
|
Fourth
Quarter
|
|
|
|
|
|
39,888
|
|
Year
|
|
|
95,729
|
|
|
192,204
|
|
Our
strongest quarter in terms of procedures performed historically has been
the
first quarter of the year. We believe this is related to a number of factors,
including the availability of funds under typical employer medical flexible
spending programs and the general effect of the New Year season.
Prior
to
June 15, 2007, we offered our patients separately priced acuity programs.
These
programs 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 an 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 eliminated the use of separately priced extended acuity
warranties. No warranty-related revenue deferrals have occurred for procedures
performed since that date and there will be no additions to the deferral
account
in the future. The following table provides an estimate of the run-off of
the
balance in future periods based upon historical enhancement rates. All amounts
related to the one-year acuity program have been fully amortized. These rates
are reviewed quarterly and the amortization will be modified as needed (dollars
in thousands).
|
|
Lifetime if Base
|
|
Lifetime if Base
|
|
|
|
|
|
Price Includes
|
|
Price Does Not
|
|
|
|
|
|
the One-Year
|
|
Include an
|
|
|
|
|
|
Acuity Plan
|
|
Acuity Plan
|
|
Total
|
|
Balance as of September 30, 2008
|
|
$
|
22,947
|
|
$
|
3,933
|
|
$
|
26,880
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
amortization:
|
|
|
|
|
|
|
|
|
|
|
2008
Q4
|
|
|
3,225
|
|
|
544
|
|
|
3,769
|
|
2009
Q1
|
|
|
2,618
|
|
|
442
|
|
|
3,060
|
|
2009
Q2
|
|
|
1,972
|
|
|
322
|
|
|
2,294
|
|
2009
Q3
|
|
|
1,659
|
|
|
268
|
|
|
1,927
|
|
2009
Q4
|
|
|
1,572
|
|
|
255
|
|
|
1,827
|
|
2010
|
|
|
5,266
|
|
|
885
|
|
|
6,151
|
|
2011
|
|
|
3,713
|
|
|
663
|
|
|
4,376
|
|
2012
|
|
|
2,119
|
|
|
397
|
|
|
2,516
|
|
2013
|
|
|
727
|
|
|
144
|
|
|
871
|
|
2014
|
|
|
76
|
|
|
13
|
|
|
89
|
|
In
addition to the deferral of revenues under FTB 90-1, 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. These costs total 10% of
the
revenue. 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
under FTB 90-1 as a direct and incremental cost of the warranty contract.
We use
the same historical experience to amortize deferred revenue and deferred
professional fees.
Results
of Operations for the Three Months Ended September 30, 2008 and
2007
We
have
seen a decline in appointments and in the show rates for both appointments
and
treatments. We believe this is primarily due to the current economic uncertainty
and other macroeconomic factors. Particularly, we believe that tightening
consumer discretionary spending has negatively impacted our volume.
In
the
third quarter of 2008, revenues decreased by $37,187,000, or 49.9%, to
$37,397,000 from $74,584,000 in the third quarter of 2007. Procedure volume
of
21,484 was a decrease of 51.8% from 44,547 in the third quarter of 2007.
For
vision centers open at least 12 months, procedure volume decreased by
approximately 54.6% in the third quarter of 2008 to 20,231 compared to 44,547
in
the third quarter of 2007. The components of the revenue change include (dollars
in thousands):
Decrease
in revenues from lower procedure volume
|
|
$
|
(34,624
|
)
|
Impact
from increase in average selling price, before revenue
deferral
|
|
|
739
|
|
Change
in deferred revenues
|
|
|
(3,302
|
)
|
Decrease
in revenues
|
|
$
|
(37,187
|
)
|
The
average reported revenue per procedure, which includes the impact of taking
into
income deferred revenue from separately priced extended warranties as well
as
some price increases related to the adoption of IntraLase technology, increased
4.0% to $1,741 in the third quarter of 2008 from $1,674 in the third quarter
of
2007. IntraLase is now operational in most of our vision centers.
Effective
July 1, 2008, we implemented a simplified market-specific pricing structure
based on the results of four months of earlier testing in multiple markets.
The
revised structure, which was intended to drive procedure volume while
maintaining acceptable margins, establishes local price points that take
into
account market competition and other factors. When excluding the impact of
deferred revenue, the revised pricing structure has resulted in a $100 decline
in average price per procedure when compared with the second quarter of 2008.
The price reduction benefited conversion in some markets but not all markets
where price was reduced. We will continue to monitor the relationship between
price and conversion and make adjustments to price where we believe revenue
can
be maximized.
Change
in deferred revenue
The
following table summarizes the effect on period-over-period revenues of the
change in deferred revenues for the third quarters of 2008 and 2007 (dollars
in
thousands):
|
|
2008
|
|
2007
|
|
Decrease in
Revenues
|
|
Revenues deferred
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Amortization
of prior deferred revenues
|
|
|
4,404
|
|
|
7,706
|
|
|
(3,302
|
)
|
Net
decrease in revenues
|
|
|
|
|
|
|
|
$
|
(3,302
|
)
|
Medical
professional and license fees
Medical
professional and license fees decreased by $4,143,000, or 33.6%, in the third
quarter of 2008 from the third quarter of 2007. This decrease was primarily
due
to lower costs and physician fees associated with lower revenues, partially
offset by higher costs associated with IntraLase license fees. The amortization
of the deferred medical professional fees attributable to prior years was
$440,000 in the third quarter of 2008 and $771,000 in the third quarter of
2007.
IntraLase accounted for approximately 74% of the procedures in the third
quarter
of 2008 but only 5% in the third quarter of 2007.
Direct
costs of services
Direct
costs of services include the salary component of physician compensation
for
certain physicians employed by us, staffing, equipment, financing charges,
medical supplies, facility costs of operating laser vision correction centers
and bad debt expense. Direct costs of services decreased in the third quarter
of
2008 by $5,618,000, or 24.1%, over the third quarter of 2007. This decrease
was
principally the result of procedure volume declines driving decreases in
surgical supplies, bad debt expense, finance fees and employee incentives
and,
secondarily, was attributable to workforce reductions, which reduced salary,
fringe benefits and stock-based compensation expense. These decreases were
partially offset by increases in rent/utilities and equipment expense for
new
centers. New center costs in the third quarter 2008 were
$1,514,000.
In
response to lower procedure volume, we reduced our workforce by approximately
16% in the first quarter and by an additional 25% in the third quarter of
2008.
We recorded a severance charge of $812,000 during the third quarter in
connection with this recent workforce reduction.
In
October 2008 we closed our Boise, Idaho vision center due to poor financial
performance. We will take a charge of approximately $600,000 in the fourth
quarter of 2008 related to this closure. We will continue to monitor the
financial performance of all vision centers on a monthly basis.
General
and administrative
General
and administrative expenses increased by $232,000, or 5.0%, in the third
quarter
of 2008 from the third quarter of 2007. This was primarily due to an increase
in
professional services and rent/utilities. The professional services included
costs for our customer service and sales training program, legal fees and
consulting costs for strategic planning and human resource support. The rent
increase resulted from the addition of our national call center and data
center
in December of 2007.
Marketing
and advertising expenses
Marketing
and advertising expenses decreased by $8,914,000, or 51.8%, in the third
quarter
of 2008 from the third quarter of 2007. This decrease was made to better
align
our spending with anticipated consumer demand. We are continuing to work
to
develop more efficient marketing techniques and recently consolidated our
media programs under a single, proven lead agency that will manage our
marketing programs and vendors. Our future operating profitability will
depend
in large part on the success of our efforts in this regard.
Depreciation
expense
Depreciation
expense increased by $1,547,000 in the third quarter of 2008 from the third
quarter of 2007 as a result of capital investments in new vision centers
over
the past year, expenditures at our national call center and data center,
the
purchase of IntraLase lasers and capital improvements made to our Bausch
&
Lomb laser platforms.
Non-operating
income and expenses
We
recorded a net investment loss of $724,000 in the third quarter of 2008
as
compared to net investment income of $1,474,000 in the third quarter of
2007.
The $2,198,000 decline is due to an other-than-temporary impairment on
investments of $1,074,000, a decrease in investment income of $1,300,000
as a
result of a decline in investment holdings that were used for our share
buyback
program in 2007, declining deferred compensation asset values resulting
from
changing market conditions and reduced investment balances, and a shift
of some
investments from taxable and tax exempt bonds to U.S. Treasury money market
accounts that earn a lower rate of interest. These decreases were partially
offset by a $176,000 increase in income from patient financing
charges.
Income
taxes
The
following table summarizes the components of the income tax provision for
the
third quarter of 2008 and 2007 (dollars in thousands):
|
|
Three
months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
Federal
income tax (benefit) expense
|
|
$
|
(1,559
|
)
|
$
|
5,455
|
|
State
income tax (benefit), net of federal benefit
|
|
|
(477
|
)
|
|
375
|
|
Income
tax (benefit) expense
|
|
$
|
(2,036
|
)
|
$
|
5,830
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
30.2
|
%
|
|
36.8
|
%
|
Income
tax expense decreased from 36.8% of pre-tax income during the third quarter
of
2007 to 30.2% of pre-tax loss during the third quarter of 2008. The decrease
resulted primarily from the lower pre-tax earnings for 2008 compared to
2007,
the corresponding effect of favorable permanent differences constituting
a
larger percentage of our overall tax provision and the non-deductibility
of the
loss on investments recorded this quarter.
Results
of Operations for the Nine Months Ended September 30, 2008 and
2007
In
the
first nine months of 2008, revenues decreased by $51,786,000, or 23.2%,
to
$171,147,000 from $222,933,000 in the first nine months of 2007. Procedure
volume of 95,729 was a decrease of 37.2% from 152,316 in the first nine
months
of 2007. The components of the revenue change include (dollars in
thousands):
Decrease
in revenues from lower procedure volume
|
|
$
|
(82,385
|
)
|
Impact
from increase in average selling price, before revenue
deferral
|
|
|
16,826
|
|
Change
in deferred revenues
|
|
|
13,773
|
|
Decrease
in revenues
|
|
$
|
(51,786
|
)
|
The
average reported revenue per procedure, which includes the impact of taking
into
income deferred revenue from separately priced extended warranties, increased
22.2% to $1,788 in the first nine months of 2008 from $1,464 in the first
nine
months of 2007.
We
have
seen a decline in pre-operative appointment bookings and in the show rates
for
both appointments and treatments. We believe this is primarily due to the
current economic uncertainty and other macroeconomic factors.
Change
in deferred revenues
The
following table summarizes the effect on revenues of the change in deferred
revenues for the first nine months of 2008 and 2007 (dollars in
thousands):
|
|
Nine Months Ended
September 30, 2008
|
|
|
|
|
|
2008
|
|
2007
|
|
Increase in Revenues
|
|
Revenues
deferred
|
|
$
|
-
|
|
$
|
(20,054
|
)
|
$
|
20,054
|
|
Amortization
of prior deferred revenues
|
|
|
14,950
|
|
|
21,231
|
|
|
(6,281
|
)
|
Net
increase in revenues
|
|
|
|
|
|
|
|
$
|
13,773
|
|
Medical
professional and license fees
Medical
professional and license fees decreased by $3,516,000 or 9.3%, in the first
nine
months of 2008 from the first nine months of 2007. This decrease was primarily
due to lower costs and physician fees associated with lower revenues, partially
offset by higher costs associated with IntraLase license fees. As a result
of
deferring revenue associated with separately priced extended warranties,
$2,006,000 of medical professional fees were deferred in the first half
of 2007.
The amortization of the deferred medical professional fees attributable
to prior
years was $1,495,000 in the first nine months of 2008 and $2,123,000 in
the
first nine months of 2007.
Direct
costs of services
Direct
costs of services decreased in the first nine months of 2008 by $9,867,000,
or
13.6%, over the first nine months of 2007. This decrease was primarily
the
result of lower expense for surgical supplies, employee incentives, laser
rent
and financing fees due to lower procedure volumes and, secondarily, to
workforce
reductions which reduced salary and stock-based compensation expense. This
decrease was partially offset by increased rent and utilities costs for
new
centers.
General
and administrative
General
and administrative expenses increased by $689,000 or 4.5%, in the first
nine
months of 2008 from the first nine months of 2007. This amount was primarily
due
to increases in professional services, salaries, fringe benefits, and
telecommunications costs for the new call center, partially offset by decreases
in stock-based and employee incentive compensation due to lower performance
expectations for 2008.
Marketing
and advertising expenses
Marketing
and advertising expenses decreased by $6,356,000, or 12.7%, in the first nine
months of 2008 from the first nine months of 2007. These expenses were 25.6%
of
revenue during the first nine months of 2008, compared with 22.5% during the
first nine months of 2007. Due to deteriorating returns on some marketing
initiatives, marketing spending levels were reduced significantly in the third
quarter of 2008 as discussed above. We are continuing to work to develop more
efficient marketing techniques. Our future operating profitability will depend
in large part on the success of our efforts in this regard.
Depreciation
expense
Depreciation
expense increased by $5,617,000, or 72.4%, in the first nine months of 2008
from
the first nine months of 2007 as a result of capital investments in new centers
over the past year, expenditures at our national call center and data center,
the purchase of IntraLase lasers and capital improvements made to our Bausch
& Lomb laser platforms.
Non-operating
income and expenses
Net
investment income in the first nine months of 2007 decreased $4,058,000, or
82.8%, due to the recognition of an other-than-temporary impairment on
investments of $1,074,000, a decrease in investment income of $3,745,000 as
a
result of a decline in investment holdings that were used for our share buyback
program in 2007, declines in deferred compensation assets and the returns on
those assets resulting from changing market conditions and a shift of some
investments from taxable and tax exempt bonds to U.S. Treasury money market
accounts that earn a lower rate of interest. This decrease was partially offset
by a $761,000 increase in income from patient financing charges.
Income
taxes
The
following table summarizes the components of income tax provision for the first
nine months of 2008 and 2007 (dollars in thousands):
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Federal income tax
expense
|
|
$
|
874
|
|
$
|
14,681
|
|
State
income tax, net of federal benefit
|
|
|
214
|
|
|
2,141
|
|
Income
tax expense
|
|
$
|
1,088
|
|
$
|
16,822
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
40.7
|
%
|
|
37.2
|
%
|
Income
tax expense increased from 37.2% of pre-tax income during the first nine months
of 2007 to 40.7% of pre-tax income during the first nine months of 2008. The
increase resulted primarily from lower pre-tax earnings for 2008 compared with
2007, the non-deductible charge for unrealized loss on investments, and the
corresponding effect of favorable permanent differences constituting a larger
percentage of our overall tax provision.
Liquidity
and Capital Resources
Cash
and
cash equivalents and short-term investments totaled $62,662,000 as of September
30, 2008, up from $60,148,000 at December 31, 2007. Net cash provided by
operating activities in the first nine months of 2008 was $9,929,000 as compared
to $38,752,000 for the corresponding period in the prior year. The decrease
in
cash provided by operating activities from 2007 to 2008 resulted from lower
earnings and the $12,395,000 reduction in deferred revenue between 2007 and
2008.
Long-term
investments totaled $4,406,000 as of September 30, 2008, up from $2,250,000
at
December 31, 2007. These assets are comprised of auction rate securities that
were failing auction at those dates. The auction rate securities have maturity
dates ranging from 2016 to 2036. As of December 31, 2007, the Company had
$18,300,000 of auction rate securities at par value, $12,100,000 of which had
been redeemed by September 30, 2008 and another $500,000 in October 2008. These
investments are being reported at a fair value. See the notes to the condensed
consolidated financial statements for additional information.
As
of
September 30, 2008, we had approximately $14,456,000 in patient receivables,
net
of allowance for doubtful accounts. Gross patient receivables decreased
$4,053,000 since December 31, 2007, primarily as a result of a decrease in
procedure volume. At the same time, the allowance for doubtful accounts
decreased by $1,241,000 from $5,117,000 to $3,876,000. This decrease in the
allowance for doubtful accounts was a result of sending uncollected balances
to
collections earlier in the process.
Collection
patterns have shown deterioration over the past year. In response, we have
implemented new policies and strengthened our underwriting standards. Although
it will take approximately 18 to 36 months to fully assess the impact of these
changes, bad debt expense is approximately 2.5% of revenues which is consistent
with past quarters. We are carefully monitoring our collection rates and related
underwriting standards in order to ensure the adequacy of our allowance for
doubtful accounts and that collectability of our revenue is reasonably assured
at the time service is rendered.
Other
accounts receivable decreased from $5,941,000 at December 31, 2007 to $2,260,000
at September 30, 2008. This was primarily due to the reduction in vendor rebates
as a result of converting some purchases to every-day discounted pricing rather
than gross pricing subject to future rebates.
Prepaid
taxes decreased from $6,391,000 at December 31, 2007 to $2,880,000 at September
30, 2008. This decrease occurred primarily as a result of receiving the refund
of previously paid taxes due to a change in tax accounting methods for deferred
revenue that was accepted by the IRS.
Deferred
compensation plan assets and liabilities both declined from December 31, 2007
to
September 30, 2008. This decline was primarily attributed to participant
withdrawals and the current stock market valuation reductions.
As
of
September 30, 2008, accounts payable decreased to $8,077,000 from $10,396,000
at
December 31, 2007. This decrease was the result of decreased activity and a
high
level of invoiced-but-not-paid capital expenditures at year end that
subsequently were paid.
On
April
24, 2008, we entered into a loan agreement with PNC Equipment Finance, LLC
to
finance the majority of the IntraLase units purchased by us. At closing, we
drew
$19,184,000 on the loan facility, which requires monthly payments over a
five-year period at a fixed interest rate of 4.96%. We have typically financed
our laser purchases with capital lease obligations provided by the vendors.
The
IntraLase purchases were made with cash at the time of purchase. The loan
transaction frees-up that capital to be used in the business for other corporate
purposes. The remaining unpaid balance on the bank loan was $17,761,000 at
September 30, 2008.
On
August
21, 2007, our board of directors authorized a share repurchase plan under which
we are authorized to purchase up to $50,000,000 of our common stock. During
2007, we repurchased 588,408 shares of our common stock under this program
at an
average price of $16.99 per share, for a total cost of approximately
$10,000,000. No shares were repurchased during the first nine months of
2008.
In
the
third quarter of 2008, the board of directors decided to suspend payment of
a
dividend and to revisit this decision in the future.
Our
costs
associated with the opening of a new vision center primarily consist of capital
expenditures, including the purchase or lease of lasers, diagnostic equipment
and office equipment, rent and leasehold improvements. In addition, we typically
incur other startup expenses and pre-opening advertising expenses. Generally,
we
estimate the costs associated with opening a new vision center to be between
$1,000,000 and $1,500,000. Actual costs vary from vision center to vision center
based upon the market, the number of lasers purchased or leased for the vision
center, the site of the vision center and the level of leasehold improvements
required, among other variables. Our capital expenditures consist primarily
of
investments incurred in connection with the opening of new vision centers and
equipment purchases or upgrades at existing facilities.
Year-to-date,
we have opened six new vision centers: Savannah, Georgia; Des Moines, Iowa;
Tulsa, Oklahoma; Woodbridge, New Jersey; Nashville, Tennessee; and Arlington,
Texas. Capital expenditures through September 30, 2008 were $13,597,000 which
were comprised primarily of the costs to open new vision centers and the
purchases of IntraLase lasers.
During
the second half of 2008, we have continued our efforts to reduce capital
expenditures by halting new 2008 center openings, reducing the number of center
relocations planned for the year from five to three, and limiting new laser
purchases by moving under-utilized lasers to new centers. In the third quarter
of 2008, our capital expenditures were $1,007,000. No new centers or relocations
are planned for the fourth quarter.
The
ability to fund our marketing and advertising program, planned capital
expenditures and new vision center rollouts depends on our future performance,
which, to a certain extent, is subject to general economic, competitive,
legislative, regulatory and other factors, some of which are beyond our control.
Based upon our current anticipated level of operations, we believe that cash
flow from operations and available cash and short-term investments should
provide sufficient cash reserves and liquidity to fund our working capital
and
capital expenditure needs.
Critical
Accounting Estimates
There
have been no material changes in the critical accounting policies described
in
Management’s Discussion and Analysis in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007.
Item
3. Quantitative and Qualitative Disclosure About Market
Risk
The
carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value because of the short maturity of these
instruments.
Short-term
investments are recorded at market value. Due to the short-term nature of the
investments in corporate bonds and the significant portion of the investments
in
Treasury money market funds, municipal and U.S. Government bonds, we believe
there is little risk to the valuation of debt securities. The investments in
equity securities carry more market risk.
Long-term
investments include auction rate securities that are currently failing auction.
These investments are recorded at fair value using a discounted cash flow
approach. We are divesting all auction rate securities as the market allows.
Many of the issuers of the auction rate securities are redeeming their issues
so
as to reduce the overall interest costs for the issuer. There can be no
assurance, however, that the issuers of the action rate securities we hold
will
do so in advance of their maturity or the restoration of a regularized auction
market.
We
have a
low exposure to changes in foreign currency exchange rates and, as such, have
not used derivative financial instruments to manage foreign currency fluctuation
risk.
Item
4. Controls and Procedures
(a)
|
Evaluation
Of Disclosure Controls And
Procedures
|
Under
the
supervision of and with the participation of the Company's management, including
the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
an evaluation of the effectiveness of the Company's disclosure controls and
procedures was performed as of September 30, 2008. Based on this evaluation,
the
CEO and CFO concluded that the Company's disclosure controls and procedures
are
effective to ensure that material information is (1) accumulated and
communicated to our management as appropriate to allow timely decisions
regarding disclosure and (2) recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission.
(b)
|
Changes
in Internal Control over Financial
Reporting
|
Under
the
supervision of, and with the participation of our management, including the
CEO
and CFO, an evaluation of the Company’s internal control over financial
reporting was performed as of September 30, 2008. Based on this evaluation,
management concluded that there were no changes in the Company’s internal
control over financial reporting that occurred during the quarter ended
September 30, 2008 that have materially affected, or are reasonably likely
to
materially affect, the Company’s internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
On
September 13, 2007, and October 1, 2007, two complaints were filed against
the
Company and certain of our 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 by named plaintiff Diane B. Callahan against
the
Company and certain of our current and former directors and officers in the
United States District Court for the Southern District of Ohio (Western
Division). This third action was filed purportedly on behalf of a class of
shareholders who purchased our common stock between February 12, 2007 and
November 2, 2007. These actions have been consolidated into one action. A
consolidated complaint was filed on April 19, 2008. The plaintiffs in the
consolidated complaint are seeking damages on behalf of a class of shareholders
who purchased our common stock between October 24, 2006 and November 2, 2007,
asserting claims under Sections 10(b) and 20(a) of the Securities Exchange
Act
of 1934. They allege that certain of the Company’s public disclosures regarding
its financial prospects and historical accounting for bad-debt reserves and
expenses were false or misleading. On July 10, 2008, the Company, together
with
the other defendants, filed a motion to dismiss the consolidated complaint.
On
September 5, 2008, plaintiffs filed their memorandum in opposition to the motion
to dismiss. We strongly believe that these claims lack merit, and we intend
to
defend against the claims vigorously. 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. No amount has been
accrued for these claims at September 30, 2008.
On
October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
County, Ohio, against certain of our current and former officers and directors,
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. The Company 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
filed in the consolidated class action, discussed above. We are 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 due to our indemnification
obligations to these persons if liability were found. No amount has been accrued
for these claims at September 30, 2008.
Our
business results in 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 in December 2002, we established
a
captive insurance company to provide coverage for claims brought against us
after December 17, 2002. We use the captive insurance company for both primary
insurance and excess liability coverage. A number of claims are now pending
with
our captive insurance company. Since the inception of the captive insurance
company in 2002, total claim and expense payments of $1,171,000 have been
disbursed.
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.
Item
6.
Exhibits
Exhibits
|
|
|
|
|
|
Number
|
|
Description
|
31.1
|
|
CEO Certification under Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
|
CFO
Certification under Section 302 of the Sarbanes-Oxley Act of
2002
|
32
|
|
Certifications
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
LCA-VISION INC.
|
|
|
Date: October 28, 2008
|
/s/ Steven C. Straus
|
|
Steven C. Straus
|
|
Chief Executive Officer
|
|
|
Date: October 28, 2008
|
/s/ Michael J. Celebrezze
|
|
Michael J. Celebrezze
|
|
Interim Chief Financial Officer
|
|
Senior Vice President of Finance and Treasurer
|
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