Attached files
file | filename |
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EX-32 - LCA VISION INC | v191449_ex32.htm |
EX-31.2 - LCA VISION INC | v191449_ex31-2.htm |
EX-31.1 - LCA VISION INC | v191449_ex31-1.htm |
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 June 30, 2010.
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT.
|
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 Sections 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
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨
No ¨
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 ¨
|
Accelerated
filer x
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 18,702,525 shares as of July 23,
2010.
LCA-Vision
Inc
TABLE
OF CONTENTS
Part
I. FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
|
Condensed
Consolidated Balance Sheets (Unaudited)
|
||
June
30, 2010 and December 31, 2009
|
3
|
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
||
Three
Months and Six Months Ended June 30, 2010 and 2009
|
4
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
||
Six
Months Ended June 30, 2010 and 2009
|
5
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
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
|
22
|
Item
4.
|
Controls
and Procedures
|
23
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Part
II. OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
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23
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Item
1A.
|
Risk
Factors
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23
|
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
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Item
3.
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Defaults
Upon Senior Securities
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23
|
Item
4.
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(Removed
and Reserved)
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24
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Item
5.
|
Other
Information
|
24
|
Item
6.
|
Exhibits
|
24
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Signatures
|
25
|
2
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
Condensed
Consolidated Balance Sheets (Unaudited)
(Dollars
in thousands)
June 30, 2010
|
December 31, 2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 26,303 | $ | 24,049 | ||||
Short-term
investments
|
31,467 | 28,455 | ||||||
Patient
receivables, net of allowance for doubtful accounts of $1,972 and
$1,645
|
3,032 | 4,562 | ||||||
Other
accounts receivable, net
|
2,508 | 2,002 | ||||||
Assets
held for sale
|
405 | 1,031 | ||||||
Prepaid
professional fees
|
526 | 615 | ||||||
Prepaid
income taxes
|
694 | 12,270 | ||||||
Deferred
compensation plan assets
|
- | 400 | ||||||
Prepaid
expenses and other
|
4,878 | 5,582 | ||||||
Total
current assets
|
69,813 | 78,966 | ||||||
Property
and equipment
|
79,898 | 79,993 | ||||||
Accumulated
depreciation and amortization
|
(58,835 | ) | (53,995 | ) | ||||
Property
and equipment, net
|
21,063 | 25,998 | ||||||
Long-term
investments
|
1,981 | 2,090 | ||||||
Patient
receivables, net of allowance for doubtful accounts of $494 and
$674
|
575 | 854 | ||||||
Investment
in unconsolidated businesses
|
160 | 137 | ||||||
Other
assets
|
3,975 | 4,590 | ||||||
Total
assets
|
$ | 97,567 | $ | 112,635 | ||||
Liabilities
and Stockholders' Investment
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 5,350 | $ | 6,504 | ||||
Accrued
liabilities and other
|
11,372 | 11,581 | ||||||
Deferred
revenue
|
5,262 | 6,151 | ||||||
Deferred
compensation liability
|
- | 400 | ||||||
Debt
obligations maturing in one year
|
3,696 | 3,998 | ||||||
Total
current liabilities
|
25,680 | 28,634 | ||||||
Long-term
rent obligations and other
|
2,244 | 2,395 | ||||||
Long-term
debt obligations (less current portion)
|
6,353 | 9,145 | ||||||
Insurance
reserve
|
8,102 | 9,154 | ||||||
Deferred
license fee
|
3,747 | 4,428 | ||||||
Deferred
revenue
|
5,445 | 7,852 | ||||||
Stockholders'
investment
|
||||||||
Common
stock ($.001 par value; 25,291,637 and 25,287,387 shares
and
|
||||||||
18,702,525
and 18,619,185 shares issued and outstanding,
respectively)
|
25 | 25 | ||||||
Contributed
capital
|
174,940 | 174,325 | ||||||
Common
stock in treasury, at cost (6,589,112 shares and 6,668,202
shares)
|
(114,099 | ) | (114,668 | ) | ||||
Retained
deficit
|
(15,342 | ) | (9,729 | ) | ||||
Accumulated
other comprehensive income
|
472 | 1,074 | ||||||
Total
stockholders' investment
|
45,996 | 51,027 | ||||||
Total
liabilities and stockholders' investment
|
$ | 97,567 | $ | 112,635 |
The notes
to the Condensed Consolidated Financial Statements are an integral part of this
statement.
3
LCA-Vision
Inc.
Condensed
Consolidated Statements of Operations (Unaudited)
(Amounts
in thousands except per share data)
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
- Laser refractive surgery
|
$ | 26,290 | $ | 31,681 | $ | 60,303 | $ | 79,602 | ||||||||
Operating
costs and expenses
|
||||||||||||||||
Medical
professional and license fees
|
6,102 | 6,987 | 14,440 | 17,762 | ||||||||||||
Direct
costs of services
|
12,777 | 17,269 | 25,891 | 35,085 | ||||||||||||
General
and administrative expenses
|
3,643 | 4,452 | 7,432 | 8,869 | ||||||||||||
Marketing
and advertising
|
6,330 | 9,485 | 14,197 | 22,511 | ||||||||||||
Depreciation
|
2,454 | 3,768 | 4,996 | 8,127 | ||||||||||||
Consent
revocation solicitation charges
|
- | - | - | 804 | ||||||||||||
Impairment
charges
|
87 | 1,203 | 87 | 1,189 | ||||||||||||
Restructuring
charges
|
311 | 351 | 648 | 1,266 | ||||||||||||
31,704 | 43,515 | 67,691 | 95,613 | |||||||||||||
Gain
on sale of assets
|
18 | 20 | 1,311 | 22 | ||||||||||||
Operating
loss
|
(5,396 | ) | (11,814 | ) | (6,077 | ) | (15,989 | ) | ||||||||
Equity
in earnings from unconsolidated businesses
|
- | 48 | 25 | 75 | ||||||||||||
Net
investment income
|
1,145 | 633 | 1,296 | 455 | ||||||||||||
Loss
before taxes on income
|
(4,251 | ) | (11,133 | ) | (4,756 | ) | (15,459 | ) | ||||||||
Income
tax expense (benefit)
|
36 | (4,246 | ) | 96 | (5,728 | ) | ||||||||||
Net
loss
|
$ | (4,287 | ) | $ | (6,887 | ) | $ | (4,852 | ) | $ | (9,731 | ) | ||||
Loss
per common share
|
||||||||||||||||
Basic
|
$ | (0.23 | ) | $ | (0.37 | ) | $ | (0.26 | ) | $ | (0.52 | ) | ||||
Diluted
|
$ | (0.23 | ) | $ | (0.37 | ) | $ | (0.26 | ) | $ | (0.52 | ) | ||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
18,678 | 18,590 | 18,656 | 18,576 | ||||||||||||
Diluted
|
18,678 | 18,590 | 18,656 | 18,576 |
The notes
to the Condensed Consolidated Financial Statements are an integral part of this
statement.
4
LCA-Vision
Inc.
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(Dollars
in thousands)
Six months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
loss
|
$ | (4,852 | ) | $ | (9,731 | ) | ||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
4,996 | 8,127 | ||||||
Provision
for loss on doubtful accounts
|
1,136 | 1,957 | ||||||
(Gain)
loss on sale of investments
|
(994 | ) | 365 | |||||
Impairment
charges
|
87 | 1,103 | ||||||
Gain
on sale of assets
|
(1,311 | ) | (19 | ) | ||||
Non
cash restructuring charge
|
377 | 774 | ||||||
Deferred
income taxes
|
368 | (265 | ) | |||||
Stock-based
compensation
|
602 | 568 | ||||||
Insurance
reserve
|
(1,052 | ) | 425 | |||||
Equity
in earnings of unconsolidated affiliates
|
(25 | ) | (75 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Patient
accounts receivable
|
831 | 1,394 | ||||||
Other
accounts receivable
|
(111 | ) | 413 | |||||
Prepaid
income taxes
|
11,576 | 3,094 | ||||||
Prepaid
expenses and other
|
704 | 880 | ||||||
Accounts
payable
|
(1,154 | ) | 146 | |||||
Deferred
revenue, net of professional fees
|
(2,966 | ) | (4,818 | ) | ||||
Accrued
liabilities and other
|
(769 | ) | 8,184 | |||||
Net
cash provided by operations
|
7,443 | 12,522 | ||||||
Cash
flow from investing activities:
|
||||||||
Purchases
of property and equipment
|
(144 | ) | (178 | ) | ||||
Proceeds
from sale of assets
|
1,234 | 20 | ||||||
Purchases
of investment securities
|
(203,256 | ) | (153,617 | ) | ||||
Proceeds
from sale of investment securities
|
200,313 | 153,900 | ||||||
Other,
net
|
(7 | ) | 34 | |||||
Net
cash (used in) provided by investing activities
|
(1,860 | ) | 159 | |||||
Cash
flow from financing activities:
|
||||||||
Principal
payments of capital lease obligations and loan
|
(3,094 | ) | (5,237 | ) | ||||
Shares
repurchased for treasury stock
|
(192 | ) | (36 | ) | ||||
Exercise
of stock options
|
13 | 2 | ||||||
Net
cash used in financing activities
|
(3,273 | ) | (5,271 | ) | ||||
Net
effect of exchange rate changes on cash and cash
equivalents
|
(56 | ) | 209 | |||||
Increase
in cash and cash equivalents
|
2,254 | 7,619 | ||||||
Cash
and cash equivalents at beginning of period
|
24,049 | 23,648 | ||||||
Cash
and cash equivalents at end of period
|
$ | 26,303 | $ | 31,267 |
The notes
to the Condensed Consolidated Financial Statements are an integral part of this
statement.
5
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
1. Description
of Business and Accounting Policies
Description
of Business
We are a
provider of fixed-site laser vision correction services at
our LasikPlus®
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 two suppliers for
fixed-site excimer lasers: Abbott Medical Optics (“AMO”) and Alcon,
Inc. (“Alcon”). Our vision centers are supported 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 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
June 30, 2010, we operated 62 LasikPlus®
fixed-site laser vision correction centers in the United
States. Included in the 62 vision centers are two vision centers
licensed to ophthalmologists who use our trademarks. Due to the
nature of our operations and organization, we operate in only one business
segment.
Basis
of Presentation
Our
Condensed Consolidated Financial Statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”) and, in
the opinion of management, include all adjustments necessary for a fair
presentation of our financial position, results of operations, and cash flows
for each period presented. The adjustments referred to above are of a
normal and recurring nature unless otherwise disclosed
herein. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to SEC rules and regulations.
We
derived the Condensed Consolidated Balance Sheet as of December 31, 2009 from
audited financial statements, but did not include all disclosures required by
U.S. generally accepted accounting principles (“U.S. GAAP”). These
Condensed Consolidated Financial Statements should be read in conjunction with
our 2009 Annual Report on Form 10-K. Operating results for the three
and six month periods ended June 30, 2010 are not necessarily indicative of the
results expected in subsequent quarters or for the year ending December 31,
2010.
Use
of Estimates
The
preparation of our Condensed Consolidated Financial Statements in conformity
with U.S. GAAP 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.
Reclassifications
We have
reclassified certain prior-period amounts in the Condensed Consolidated
Statements of Operations and Statements of Cash Flows to conform to current
period presentation. The reclassifications were not material to the Condensed
Consolidated Financial Statements.
6
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
2. Investments
Management
determines the appropriate classification of securities at the time of purchase
and reevaluates such designation as of each balance sheet
date. Currently, we classify all securities as
available-for-sale. We carry available-for-sale securities at fair
value, with temporary unrealized gains and losses, net of tax, reported in
accumulated 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. We include this
amortization in the caption “Net investment income” within the Condensed
Consolidated Statement of Operations. We also include in net
investment income realized gains and losses and declines in value determined to
be other-than-temporary. We base the cost of securities sold upon the
specific identification method. We include interest and dividends on
securities classified as available-for-sale in net investment
income.
We have
classified certain of our investments in auction rate securities as non-current
assets within the accompanying Condensed Consolidated Balance Sheets at June 30,
2010 and December 31, 2009. Short-term and long-term investments,
designated as available-for-sale, consist of the following (dollars in
thousands):
|
June 30,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
Short-term
investments:
|
||||||||
Corporate
obligations
|
$ | 20,486 | $ | 13,818 | ||||
U.S.
governmental notes and agencies
|
5,631 | 3,728 | ||||||
Municipal
securities
|
5,250 | 8,544 | ||||||
Auction
rate municipal debt
|
100 | 2,365 | ||||||
Total
short-term investments
|
31,467 | 28,455 | ||||||
Long-term
investments:
|
||||||||
Auction
rate municipal debt
|
$ | 970 | $ | 1,062 | ||||
Auction
rate preferred securities
|
1,011 | 1,028 | ||||||
Total
long-term investments
|
1,981 | 2,090 | ||||||
Total
investments
|
$ | 33,448 | $ | 30,545 |
The
following table shows the net carrying value (amortized cost) and estimated fair
value of debt and equity securities at June 30, 2010 by contractual maturity
(dollars in thousands). 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
|
|||||||
Due
in one year or less
|
$ | 30,324 | $ | 30,350 | ||||
Due
after one year through three years
|
1,005 | 1,017 | ||||||
Due
after three years
|
1,987 | 2,081 | ||||||
Total
investments
|
$ | 33,316 | $ | 33,448 |
7
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
The
following table summarizes unrealized gains and losses related to our
investments designated as available-for-sale (dollars in
thousands):
June 30, 2010
|
||||||||||||||||
Adjusted Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
Corporate
obligations
|
$ | 20,486 | $ | - | $ | - | $ | 20,486 | ||||||||
U.S.
governmental notes and agencies
|
5,631 | - | - | 5,631 | ||||||||||||
Municipal
securities
|
5,212 | 39 | (1 | ) | 5,250 | |||||||||||
Auction
rate municipal securities
|
1,010 | 60 | - | 1,070 | ||||||||||||
Auction
rate preferred securities
|
977 | 34 | - | 1,011 | ||||||||||||
Total
investments
|
$ | 33,316 | $ | 133 | $ | (1 | ) | $ | 33,448 |
December 31, 2009
|
||||||||||||||||
Adjusted
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
Corporate
obligations
|
$ | 13,818 | $ | - | $ | - | $ | 13,818 | ||||||||
U.
S. governmental notes and agencies
|
3,728 | - | - | 3,728 | ||||||||||||
Municipal
securities
|
8,459 | 85 | - | 8,544 | ||||||||||||
Equities
|
1,487 | 878 | - | 2,365 | ||||||||||||
Auction
rate municipal securities
|
1,010 | 52 | - | 1,062 | ||||||||||||
Auction
rate preferred securities
|
999 | 29 | - | 1,028 | ||||||||||||
Total
investments
|
$ | 29,501 | $ | 1,044 | $ | - | $ | 30,545 |
We
realized gains of $1.0 million and losses of $43,000 primarily on the sale of
our equity securities for the three months ended June 30, 2010 and realized
gains of $1.0 million and losses of $50,000 for the six months ended June 30,
2010. We had realized gains of $6,000 and no realized losses on the
sale of marketable securities for the three and six months ended June 30,
2009.
We
recognized unrealized gains of $133,000 and unrealized losses of $1,000 in
accumulated other comprehensive income during the three and six months ended
June 30, 2010. For the three and six months ended June 30, 2009, we
recognized unrealized gains of $861,000 and no unrealized losses. We
recognized $29,000, before tax, in other-than-temporary impairments to certain
of our auction rate securities during the three and six months ended June 30,
2009. There were no other-than-temporary impairments to auction rate
securities for the three and six months ended June 30, 2010. Given
the duration and extent of the decline in fair values associated with our equity
securities (comprised primarily of various equity mutual funds), we recognized
an other-than-temporary impairment of $336,000, before tax, during the three and
six months ended June 30, 2009. There were no other-than-temporary
impairment of our equity securities during the three and six months ended June
30, 2010. When evaluating investments for other-than-temporary
impairment, we review factors such as the length of time and extent to which
fair value has been below cost basis, the financial condition of the issuer of
the investment securities and any changes thereto, and our intent to sell, or
whether it is more-likely-than-not we would be required to sell the investment
before recovery of the investment’s amortized cost basis.
8
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
The
following table presents gross unrealized losses and fair values for those
investments that were in an unrealized loss position as of June 30, 2010,
aggregated by investment category and the length of time that the individual
securities have been in a continuous loss position (dollars in
thousands):
As of June 30, 2010
|
||||||||
Less than 12 Months
|
||||||||
Security Description
|
Fair Value
|
Unrealized
Losses
|
||||||
Municipal
securities
|
$ | 1,005 | $ | (1 | ) |
As of
June 30, 2010, we did not have any investments in marketable securities that
were in an unrealized loss position for 12 months or greater. As of
December 31, 2009, we did not have any investments in marketable securities that
were in an unrealized loss position.
Auction
Rate Securities
At June
30, 2010 and December 31, 2009, we held $2.3 million and $2.4 million par value,
respectively, of various auction rate securities. The assets
underlying the auction rate instruments are primarily municipal bonds, and
preferred closed end funds. Maturity dates for our auction rate
securities range from 2016 to 2036. In the first two quarters of
2010, $25,000 of the related securities was called at par by their
issuers. In the full year of 2009, $1.0 million of the securities
were called at par by their issuers and we redeemed an additional $2.3 million
in auction rate securities at 46.9% of original par value.
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 prior to June
30, 2010 as long-term. Auction rate municipal debt of $100,000 was redeemed in
July 2010 at par. At June 30, 2010, the fair value and par value of
our long-term auction rate instruments were $2.0 million and $2.2 million,
respectively.
3. Fair
Values of Financial Instruments
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset and liability in an orderly transaction
between market participants at the measurement date. U.S. GAAP
establishes a three-tier value hierarchy, which prioritizes the inputs used in
the valuation methodologies in measuring fair value:
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 fair
value hierarchy requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
9
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
The
following tables summarize fair value measurements by level at June 30,
2010 and December 31, 2009 for assets and liabilities measured at fair value on
a recurring basis (dollars in thousands):
Fair Value Measurements as of June 30, 2010 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
|
$ | 26,303 | $ | - | $ | - | $ | 26,303 | ||||||||
Investments
|
- | 31,467 | 1,981 | 33,448 | ||||||||||||
Total
|
$ | 26,303 | $ | 31,467 | $ | 1,981 | $ | 59,751 |
Fair Value Measurements as of December 31, 2009 Using
|
||||||||||||||||
Description
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
Total
|
||||||||||||
Assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 24,049 | $ | - | $ | - | $ | 24,049 | ||||||||
Investments
|
2,365 | 26,090 | 2,090 | 30,545 | ||||||||||||
Deferred
compensation assets
|
400 | - | - | 400 | ||||||||||||
Total
|
$ | 26,814 | $ | 26,090 | $ | 2,090 | $ | 54,994 | ||||||||
Liabilities:
|
||||||||||||||||
Deferred
compensation liabilities
|
$ | 400 | $ | - | $ | - | $ | 400 |
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 instruments are
classified in Level 3 because they are valued using a trinomial discount model
as there is insufficient observable auction rate market information available to
determine the fair value of these investments. The determination of the fair
value of the auction rate instruments employs assumptions included financial
standing of the issuer of the instruments, 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. We
previously maintained a self-directed deferred compensation plan structured as a
rabbi trust for certain highly compensated individuals. The
investment assets of the rabbi trust were valued using quoted market
prices. The related deferred compensation liability represented the
fair value of the participants’ investment elections, determined using quoted
market prices. The deferred compensation plan was terminated as of
December 31, 2009. Distributions were made to all participants in
January 2010.
10
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
The
following table sets forth a reconciliation of beginning and ending balances for
each major category for assets measured at fair value using significant
unobservable inputs (Level 3) (dollars in thousands):
For the Three Months
Ended
|
For the Six Months
Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Balance
at beginning of period
|
$ | 2,078 | $ | 3,155 | $ | 2,090 | $ | 3,126 | ||||||||
Assets
acquired
|
- | - | - | - | ||||||||||||
Assets
sold
|
- | (44 | ) | (22 | ) | (44 | ) | |||||||||
Transfers
in (out) of Level 3
|
(100 | ) | (258 | ) | (100 | ) | (258 | ) | ||||||||
Gains
included in other comprehensive loss
|
3 | 255 | 13 | 313 | ||||||||||||
Gains
(losses) included in earnings
|
- | - | - | (29 | ) | |||||||||||
Balance
as of June 30
|
$ | 1,981 | $ | 3,108 | $ | 1,981 | $ | 3,108 |
4. Assets
Held For Sale
We had
assets held for sale of $405,000 and $1.0 million at June 30, 2010 and December
31, 2009, respectively, comprised of excimer and femtosecond
lasers. During the three months ended March 31, 2010, we were able to
sell some of our excimer and femtosecond lasers held for sale with a combined
net book value of $626,000 for total cash proceeds of approximately $1.1 million
and notes receivable of $836,000, resulting in a gain of approximately $1.3
million, before tax. No assets were sold during the three months
ended June 30, 2010.
5. Income
Taxes
The
following table presents the components of our income tax benefit for the
following periods (dollars in thousands):
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Current:
|
||||||||||||||||
Federal
|
$ | (353 | ) | $ | (4,115 | ) | $ | (328 | ) | $ | (5,409 | ) | ||||
State
and local
|
21 | (1 | ) | 56 | (54 | ) | ||||||||||
Total
current
|
(332 | ) | (4,116 | ) | (272 | ) | (5,463 | ) | ||||||||
Deferred:
|
||||||||||||||||
Federal
|
$ | 322 | $ | 514 | $ | 322 | $ | 550 | ||||||||
State
and local
|
46 | (644 | ) | 46 | (815 | ) | ||||||||||
Total
deferred
|
368 | (130 | ) | 368 | (265 | ) | ||||||||||
Income
tax expense (benefit)
|
$ | 36 | $ | (4,246 | ) | $ | 96 | $ | (5,728 | ) | ||||||
Effective
income tax rate
|
0.9 | % | 38.1 | % | 2.0 | % | 37.1 | % |
Our
effective tax rate for the three and six month periods ended June 30, 2010 was
impacted by a full valuation allowance against all of our deferred tax assets,
net of deferred tax liabilities.
As of
June 30, 2010 and December 31, 2009, deferred tax assets net of deferred tax
liabilities totaled $15.5 million and $13.3 million, respectively, offset by
full valuation allowances. Due to the lack of positive evidence that
the deferred tax assets will be realized as required by U.S. GAAP, we were
unable to record tax benefits with respect to our losses in the United States
and state jurisdictions during the three and six month periods ended June 30,
2010. Income tax expense for the three and six month periods ended
June 30, 2010 includes interest on unrecognized tax benefits and state taxes in
certain jurisdictions.
11
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
At
December 31, 2009, we had recorded a tax refund receivable related to the tax
benefit of those federal and state net operating losses generated, where we
could carryback the net operating loss to prior tax years. In
the second quarter of 2010, we received our 2009 federal income tax
refund.
During
the three and six month periods ended June 30, 2010, there were no significant
changes to the liability for unrecognized tax benefits or potential interest and
penalties recorded as a component of income tax. The total amount of
unrecognized tax benefits at each of June 30, 2010 and December 31, 2009 was
approximately $555,000. It is reasonably possible that the amount of
the total unrecognized tax benefits may change in the next 12
months. However, we do not believe that any anticipated change will
be material to the Condensed Consolidated Financial Statements. In
2009, the Internal Revenue Service began an audit of our 2008 tax
year. Based on the early status of the audit and the protocol of
finalizing audits by the relevant authority, it is not possible to estimate the
impact of the changes, if any, to the previously recorded liability for
unrecognized tax benefits.
6. Per
Common Share Data
We
calculate basic earnings per common share data using the weighted average number
of common shares outstanding during the period. Diluted per share
data reflects the potential dilution that would occur if common stock
equivalents were exercised or converted to common stock but only to the extent
that they are considered dilutive to our earnings. The following
table is a reconciliation of basic and diluted per share data for the following
periods (dollars in thousands, except per share amounts):
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic Loss
|
||||||||||||||||
Net
loss
|
$ | (4,287 | ) | $ | (6,887 | ) | $ | (4,852 | ) | $ | (9,731 | ) | ||||
Weighted
average shares outstanding
|
18,678 | 18,590 | 18,656 | 18,576 | ||||||||||||
Basic
loss
|
$ | (0.23 | ) | $ | (0.37 | ) | $ | (0.26 | ) | $ | (0.52 | ) | ||||
Diluted Loss
|
||||||||||||||||
Net
loss
|
$ | (4,287 | ) | $ | (6,887 | ) | $ | (4,852 | ) | $ | (9,731 | ) | ||||
Weighted
average shares outstanding
|
18,678 | 18,590 | 18,656 | 18,576 | ||||||||||||
Effect
of dilutive securities
|
||||||||||||||||
Stock
options
|
- | - | - | - | ||||||||||||
Restricted
stock
|
- | - | - | - | ||||||||||||
Weighted
average common shares and potential dilutive shares
|
18,678 | 18,590 | 18,656 | 18,576 | ||||||||||||
Diluted
loss per common share
|
$ | (0.23 | ) | $ | (0.37 | ) | $ | (0.26 | ) | $ | (0.52 | ) |
For the
three and six month periods ended June 30, 2010 and 2009, we did not include
outstanding stock options and restricted stock awards having a grant price
greater than the average market price of the common shares for the period in the
computation of diluted earnings per share because the effect of these
share-based awards would be antidilutive. For the three and six
months ended June 30, 2010, the total number of outstanding options
and restricted stock awards that were antidilutive was 614,228 and 505,771,
respectively. We excluded all outstanding stock options and
restricted stock awards from the computation of our diluted earnings per share
because the effect of these share-based awards was antidilutive due to our net
loss.
12
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
7. 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 effect were
as follows for the following periods (dollars in thousands):
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock
options
|
$ | 24 | $ | 106 | $ | 11 | $ | 247 | ||||||||
Restricted
stock
|
402 | 470 | 591 | 321 | ||||||||||||
426 | 576 | 602 | 568 | |||||||||||||
Income
tax effect
|
165 | 242 | 233 | 231 | ||||||||||||
$ | 261 | $ | 334 | $ | 369 | $ | 337 |
Our
restricted stock unit awards include time-based awards that vest ratably over
three years and performance-based awards that will be issued only subject to
achievement of certain performance criteria. If this performance
criteria is met, the performance-based restricted stock units are subject to
three-year cliff vesting.
8. Consent
Revocation Expense
For the
six months ended June 30, 2009, we incurred $804,000 in expenses related to our
successful defense of a consent solicitation initiated by a dissident
stockholder group.
9. Impairment
Charges
In the
second quarter of 2010, we recorded an impairment charge to reduce the carrying
amount of long-lived assets by $87,000 for one vision center. This
impairment charge reflects our decision to close the vision
center. In the six months ended June 30, 2009, we recorded impairment
charges of $1.2 million. These charges were primarily for closed
centers and asset disposals. We assess the impairment of property and
equipment whenever events or circumstances indicate that the carrying value
might not be recoverable. We write down to fair value, which is
generally determined from estimated discounted cash flows for assets held for
use, recorded values of property and equipment that we do not expect to recover
through undiscounted future net cash flows. The use of discounted
cash flows represents a Level 3 fair value input under U.S. GAAP. The
closures of the vision centers do not qualify for classification as a
discontinued operation due to continuing cash flows. We will continue
to incur cash expenditures related to these vision centers in the form of future
facility lease payments, excimer laser lease payments and costs associated with
post-operative and post-surgical enhancements. For vision centers
where we will license an ophthalmologist to operate using our trademarks, we
will generate future cash in-flows in the form of license fees.
10. Restructuring
Charges
For the
three months ended June 30, 2010, we incurred a net restructuring charge of
$311,000, which consisted of contract termination costs associated with the
closure of one of our licensed facilities.
For the
six months ended June 30, 2010, we incurred a net restructuring charge of
$648,000. The charges were $271,000 for exit and disposal costs
associated with the closing of vision centers and $377,000 for contract
termination costs. Contract termination costs resulted primarily from
the closure of one of our licensed operations and the termination of the related
license agreement. Other exit and disposal costs incurred in 2010
were primarily expenses related to the closures of facilities and the relocation
of various medical equipment. We incurred restructuring charges
totaling $1.3 million for the six months ended June 30, 2009, which included
$725,000 of contract termination costs and $541,000 of employee separation
benefits.
13
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
At June
30, 2010 and December 31, 2009, we included restructuring reserves of $410,000
and $1.1 million, respectively, in “Accrued liabilities and other” in the
Condensed Consolidated Balance Sheets. Long-term restructuring
reserves were $401,000 and $267,000 at June 30, 2010 and December 31, 2009,
respectively, and were included in “Long-term rent obligations and
other.” The fair value measurements in all periods utilized
internal discounted cash flow analysis in determining fair value, which is a
Level 3 input under U.S. GAAP.
The
following table summarizes the restructuring reserve activities for the six
months ended June 30, 2010 (dollars in thousands):
Employee
|
Contract
|
|||||||||||
Separation
|
Termination
|
|||||||||||
Costs
|
Costs
|
Total
|
||||||||||
Balance
at December 31, 2009
|
$ | 237 | $ | 1,092 | $ | 1,329 | ||||||
Liabilities
recognized
|
4 | 333 | 337 | |||||||||
Utilized
|
(109 | ) | (889 | ) | (998 | ) | ||||||
Balance
at March 31, 2010
|
132 | 536 | 668 | |||||||||
Liabilities
recognized
|
- | 311 | 311 | |||||||||
Utilized
|
(89 | ) | (79 | ) | (168 | ) | ||||||
Balance
as of June 30, 2010
|
$ | 43 | $ | 768 | $ | 811 |
11. Debt
and Leasing Arrangements
Long-term
debt and capital lease obligations consist of (dollars in
thousands):
June 30,
2010
|
December 31,
2009
|
|||||||
Capitalized
lease obligations
|
$ | 30 | $ | 390 | ||||
Bank
loan
|
10,019 | 12,753 | ||||||
Total
long-term debt obligations
|
$ | 10,049 | $ | 13,143 | ||||
Debt
obligations maturing in one year
|
(3,696 | ) | (3,998 | ) | ||||
Long-term
obligations (less current portion)
|
$ | 6,353 | $ | 9,145 |
We use
capitalized lease obligations to finance purchases of some of our medical
equipment. The leases cover periods of 24 to 36 months from the date
the medical equipment is installed.
In April
2008, we entered into a five-year bank loan agreement for $19.2 million to
finance medical equipment at a fixed interest rate of 4.96%. The loan agreement
contains no financial covenants. Loan repayments increased
approximately $965,000 for the six months ended June 30, 2010 compared to the
same period in 2009 due primarily to early payoffs of excimer lasers that were
sold as a result of previously closed vision centers.
The
capital lease obligations and the bank loan are secured by certain medical
equipment.
The
estimated fair value of our long-term debt and capital lease obligations is $9.8
million based on the present value of the underlying cash flows discounted at
our incremental borrowing rate. Within the hierarchy of fair value
measurements, this is Level 3 fair value measurement.
14
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
12. Comprehensive
Income (Loss)
The
components of accumulated other comprehensive income consisted of the following
(dollars in thousands):
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Unrealized
investment gain, net of tax of $55 and $417
|
$ | 83 | $ | 626 | ||||
Foreign
currency translation adjustment
|
389 | 448 | ||||||
Accumulated
other comprehensive income
|
$ | 472 | $ | 1,074 |
The
components of comprehensive loss consisted of the following for the following
periods (dollars in thousands):
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss
|
$ | (4,287 | ) | $ | (6,887 | ) | $ | (4,852 | ) | $ | (9,731 | ) | ||||
Unrealized
investment (loss) gain, net of tax of ($411), $288, ($362) and
$308
|
(616 | ) | 342 | (544 | ) | 463 | ||||||||||
Foreign
currency translation
|
(187 | ) | 302 | (59 | ) | 220 | ||||||||||
Comprehensive
loss
|
$ | (5,090 | ) | $ | (6,243 | ) | $ | (5,455 | ) | $ | (9,048 | ) |
13. Commitments
and Contingencies
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 these
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. At June 30, 2010,
our insurance reserve balance was $8.1 million.
In
addition to these malpractice suits, 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
Information
included in this Quarterly Report on Form 10-Q contains forward-looking
statements that involve potential risks and uncertainties. Actual
results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed herein and those discussed in our Annual Report on Form 10-K
for the year ended December 31, 2009. Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as of
the date thereof.
The
Company files annual, quarterly and current reports, proxy statements and other
information with the SEC under the Exchange Act. These reports and
other information filed by the Company may be read and copied at the Public
Reference Room of the SEC, 100 F Street N.E., Washington, D.C. 20549.
Information may be obtained about the Public Reference Room by calling the SEC
at 1-800-SEC-0330. The SEC also maintains an internet site that
contains reports, proxy statements and other information about issuers, like us,
which file electronically with the SEC. The address of that site is
http://www.sec.gov.
The
financial results for the three and six months ended June 30, 2010 and 2009
referred to in this discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and the accompanying Notes in this Quarterly
Report on Form 10-Q. Results of interim periods may not be indicative
of the results for subsequent periods or the full year.
15
Overview
Key
financial highlights for the three months ended June 30, 2010 include (all
comparisons are with the same period of 2009):
·
|
Revenues
were $26.3 million compared with $31.7 million; adjusted revenues were
$24.7 million compared with $29.4
million.
|
·
|
Procedure
volume was 15,266 procedures (62 vision centers) compared with 17,864
procedures (71 vision centers) and 16,144 same-store
procedures.
|
·
|
Same-store
revenues (62 vision centers) decreased 9.2%; adjusted same-store revenues
decreased 7.3%.
|
·
|
Operating
loss was $5.4 million compared with operating loss of $11.8 million;
adjusted operating loss was $6.8 million compared with adjusted operating
loss of $13.9 million. The significant improvement in operating
loss and adjusted operating loss for the second quarter of 2010 reflected
the impact from the closure of under-performing vision centers, a
reduction in direct costs per vision center, and lower marketing and
general and administrative expenses. Included in the second
quarter of 2010 results was $0.4 million in restructuring and impairment
charges, compared with $1.6 million in restructuring and impairment
charges in the second quarter of
2009.
|
·
|
Net
loss was $4.3 million, or $0.23 per share, compared with net loss of $6.9
million, or $0.37 per share.
|
Key
financial highlights for the six months ended June 30, 2010 include (all
comparisons are with the same period of 2009):
·
|
Revenues
were $60.3 million compared with $79.6 million; adjusted revenues were
$57.0 million compared with $74.2
million.
|
·
|
Procedure
volume was 34,332 procedures compared with 45,723 procedures and 41,635
same-store procedures.
|
·
|
Operating
loss was $6.1 million compared with operating loss of $16.0 million;
adjusted operating loss was $9.0 million compared with adjusted operating
loss of $20.8 million. The $9.9 million improvement in
operating loss for the first half of 2010 was a result of the closure of
under-performing vision centers, lower direct costs per vision center,
lower marketing expense, lower general and administrative expense, and
less restructuring, impairment and consent revocation
charges. Direct costs per center were $70,000 per month for the
first half of 2010 compared with $80,000 per month for the same period of
2009. Marketing cost per eye decreased to $413 for the first
half of 2010 from $492 for the same period last
year.
|
·
|
Net
loss was $4.9 million, or $0.26 per share, compared with net loss of $9.7
million, or $0.52 per share.
|
·
|
Cash
and investments were $59.8 million at June 30, 2010, compared with $54.6
million as of December 31,
2009.
|
We derive
substantially all of our revenues from the delivery of laser vision correction
procedures performed in our U.S. vision centers. Our revenues,
therefore, depend on our volume of procedures, and are impacted by a number of
factors, including the following:
·
|
General
economic conditions and consumer confidence and discretionary spending
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,
and
|
·
|
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 acuity
programs, and
|
·
|
Our
mix of procedures among the different types of laser
technology.
|
16
Because
our revenues are a function of the number of laser vision correction procedures
performed and the pricing for these services, and many of our costs are fixed,
our vision centers have a relatively high degree of operating
leverage. As a result, our level of procedure volume can have a
significant impact on our level of profitability. The following table
details the number of laser vision correction procedures performed at our
consolidated vision centers.
2010
|
2009
|
|||||||
First
quarter
|
19,066 | 27,859 | ||||||
Second
Quarter
|
15,266 | 17,864 | ||||||
Third
Quarter
|
15,335 | |||||||
Fourth
Quarter
|
11,718 | |||||||
Year
|
34,332 | 72,776 |
Our
procedure volume and operating results have been severely affected by the
continued economic slowdown in the United States, resulting in a decline in
consumer confidence levels and a reduction in high-end discretionary
expenditures for many consumers. In response, in 2009 we reduced our
workforce so that our staffing levels would be appropriate for our anticipated
procedure volume. Since January 1, 2009, we have closed 13 vision
centers and converted two vision centers into licensed facilities. We have no
current plans to open vision centers in new markets until the economy
improves. We are leveraging consumer insights from extensive market
research conducted over the past several months in an effort to optimize our
marketing efforts.
We have
provided both adjusted revenues and operating losses as a means of measuring
performance that adjusts for the non-cash impact of accounting for separately
priced extended warranties which we offered prior to June 15,
2007. We believe the adjusted information better reflects operating
performance and therefore is more meaningful to investors. A
reconciliation of revenues and operating losses reported in accordance with U.S.
generally accepted accounting principles (“U.S. GAAP”) is provided below
(dollars in thousands).
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Reported
U.S. GAAP
|
$ | 26,290 | $ | 31,681 | $ | 60,303 | $ | 79,602 | ||||||||
Adjustments
|
||||||||||||||||
Amortization
of prior deferred revenue
|
(1,582 | ) | (2,294 | ) | (3,295 | ) | (5,353 | ) | ||||||||
Adjusted
revenues
|
$ | 24,708 | $ | 29,387 | $ | 57,008 | $ | 74,249 | ||||||||
Operating
Loss
|
||||||||||||||||
Reported
U.S. GAAP
|
$ | (5,396 | ) | $ | (11,814 | ) | $ | (6,077 | ) | $ | (15,989 | ) | ||||
Adjustments
|
||||||||||||||||
Amortization
of prior deferred revenue
|
(1,582 | ) | (2,294 | ) | (3,295 | ) | (5,353 | ) | ||||||||
Amortization
of prior professional fees
|
158 | 229 | 329 | 535 | ||||||||||||
Adjusted
operating loss
|
$ | (6,820 | ) | $ | (13,879 | ) | $ | (9,043 | ) | $ | (20,807 | ) |
17
Results
of Operations for the Three Months Ended June 30, 2010 Compared to the Same
Period in 2009
Revenues
In the
second quarter of 2010, revenues decreased by $5.4 million, or 17.0%, to $26.3
million from $31.7 million in the second quarter of 2009. Procedure
volume decreased 14.5% to 15,266 in the second quarter of 2010 from 17,864 in
the second quarter of 2009. The components of the revenue
change include (dollars in thousands):
Decrease
in revenue from lower procedure volume
|
$ | (4,274 | ) | |
Impact
from decrease in average selling price, before revenue
deferral
|
(405 | ) | ||
Change
in deferred revenue
|
(712 | ) | ||
Decrease
in revenues
|
$ | (5,391 | ) |
The
adjusted average reported revenue per procedure, which excludes the impact of
deferring revenue from separately priced extended warranties, decreased to
$1,619 in the second quarter of 2010 from $1,645 in the second quarter of 2009
and $1,694 in the first quarter of 2010. In an effort to
increase traffic at our vision centers, we offered a network-wide 15% discount
on procedure pricing in the second quarter of 2010.
We
experienced an increase in both appointment show rates and treatment show rates
in the second quarter of 2010 compared to the same period in 2009, as well as
over the first quarter of 2010. We attribute these improvements to
significant efforts to improve patient interactions, the second quarter price
discount promotion, and organizational effectiveness. Although
candidacy rates remained flat quarter over quarter, we have seen an increase in
conversion rates compared to second quarter of 2009 and first quarter of
2010. Patient activity in regards to inquiries remains down as a
result of economic and other factors which results in lower procedure volumes.
We believe this is due to the continued economic uncertainty and other
macroeconomic factors. Industry sources indicate that the entire
laser vision correction industry continues to be impacted
negatively.
Operating
costs and expenses
Our
operating costs and expenses include:
·
|
Medical
professional and license fees, including per procedure fees for the
ophthalmologists performing laser vision correction, and per procedure
license fees paid to certain equipment suppliers of our excimer and
femtosecond lasers,
|
·
|
Direct
costs of services, including the salary component of physician
compensation for certain physicians employed by us, staff, facility costs
of operating laser vision correction centers, equipment lease and
maintenance costs, surgical supplies, financing charges for third-party
patient financing, and other costs related to
revenues,
|
·
|
General
and administrative costs, including headquarters and call center staff
expense, and other overhead costs,
|
·
|
Marketing
and advertising costs, and
|
·
|
Depreciation
of equipment.
|
Medical
professional and license fees
Medical
professional and license fees in the second quarter of 2010 decreased by
$885,000, or 12.7%, from the second quarter of 2009. The decrease was
due to lower license fees of $471,000 and physician fees of $467,000 associated
with decreased procedure volumes, partially offset by an increase in our
enhancement expense. The amortization of the deferred medical
professional fees attributable to prior years was $158,000 in the second quarter
of 2010 and $229,000 in the second quarter of 2009.
Direct
costs of services
Direct
costs of services decreased $4.5 million, or 26.0%, in the second quarter of
2010 to $12.8 million from $17.3 million in the second quarter of
2009. Lower salaries, fringe benefits, and rent and utilities as a
result of closed vision centers and other cost reduction efforts drove much of
the decrease in direct costs of services this quarter compared to the same
period in 2009. This decrease was also the result of lower procedure
volumes, which caused lower laser maintenance costs, financing fees, and bad
debt expense.
18
General
and administrative
General
and administrative expenses in the second quarter of 2010 decreased by $809,000,
or 18.2%, from the second quarter of 2009, due primarily to workforce reductions
which resulted in reduced salaries and fringe benefits, and savings in contract
services, professional services, travel and entertainment, and stock-based
compensation expense.
Marketing
and advertising
Marketing
and advertising expenses in the second quarter of 2010 decreased by $3.2
million, or 33.3%, from the second quarter of 2009. These expenses
were 24.1% of revenues in the second quarter of 2010 compared to 29.9% during
the second quarter of 2009. Marketing cost per eye decreased to $415
for the second quarter of 2010 from $531 in the same period of
2009. In the second quarter of 2010, we reduced our marketing spend
levels to continue to align spending levels with consumer demand. We
are continuing to work to develop more efficient marketing techniques and expand
local initiatives as a means to attract customers. Our future
operating profitability will depend in large part on the success of our efforts
in this regard.
Impairment
charges
The
impairment charge in the second quarter of 2010 was $87,000 for impairment of
fixed assets in one vision center, which was the result of our decision to close
the Birmingham, Alabama vision center. In the three months ended June
30, 2009, we recorded impairment charges of $1.2 million. These
charges were primarily for closed centers and asset disposals.
Restructuring
charges
The net
restructuring charges in the second quarter of 2010 were $311,000, which
consisted of contract termination costs associated with the closure of our
Savannah, Georgia vision center. In the second quarter of 2009, net
restructuring charges were $351,000, primarily for employee separation benefits
for vision centers closed.
Non-operating
income and expenses
Net
investment income in the second quarter of 2010 increased $512,000, or
80.9%. This is due primarily to a $993,000 gain on the sale of
investments. Interest income decreased by $562,000, primarily due to
lower patient financing interest income of $214,000 on lower procedure volume
and lower investment income of $348,000 on lower yielding debt
investments.
Income
taxes
Due to
the lack of positive evidence that the deferred tax assets will be realized as
required by U.S. GAAP, we were unable to record tax benefits with respect to our
losses in the United States and state jurisdictions in the three months ended
June 30, 2010. Income tax expense for the three months ended June 30,
2010 includes the interest on unrecognized tax benefits and state taxes in
certain jurisdictions.
Results
of Operations for the Six Months Ended June 30, 2010 Compared to the Same Period
in 2009
Revenues
In the
six months ending June 30, 2010, revenues decreased by $19.3 million, or 24.2%,
to $60.3 million, from $79.6 million in the six months ended June 30,
2009. Procedure volume decreased 24.9% to 34,332 in the second
quarter of 2010 from 45,723 in the second quarter of 2009. For
vision centers open at least 12 months, procedure volume decreased by
approximately 17.5% in the six months ended June 30, 2010 to 34,332, as compared
to 41,635 in the six months ended June 30, 2009. The components of
the revenue change include (dollars in thousands):
Decrease
in revenue from lower procedure volume
|
$ | (18,498 | ) | |
Impact
from increase in average selling price, before revenue
deferral
|
1,257 | |||
Change
in deferred revenue
|
(2,058 | ) | ||
Decrease
in revenues
|
$ | (19,299 | ) |
The
adjusted average reported revenue per procedure, which excludes the impact of
deferring revenue from separately priced extended warranties, increased 2.2% to
$1,660 for the six months ended June 30, 2010 from $1,624 in the six months
ended June 30, 2009.
19
We
experienced increases in both appointment show rates and treatment show rates in
the six months ended June 30, 2010 compared to the same period in
2009. We attribute these improvements in operational metrics
primarily to patient acquisition and organizational effectiveness
measures. Although candidacy rates remained flat year over year, we
have seen an increase in conversion rates. Patient activity in
regards to inquiries remains down as a result of economic and other factors
which results in lower procedure volumes. We believe this is due to the
continued economic uncertainty and other macroeconomic
factors. Industry sources indicate that the entire laser vision
correction industry continues to be impacted negatively.
Medical
professional and license fees
Medical
professional and license fees in the six months ended June 30, 2010 decreased by
$3.3 million, or 18.7%, from the six months ended June 30, 2009. The
decrease was due to decreased license fees of $1.5 million and physician fees of
$1.8 million associated with decreased procedure volumes, partially offset by an
increase in our enhancement expense. The amortization of the deferred
medical professional fees attributable to prior years was $329,000 in the six
months ended June 30, 2010 and $535,000 in the same period of 2009.
Direct
costs of services
Direct
costs of services in the six months ended June 30, 2010 decreased $9.2 million,
or 26.2% to $25.9 million from $35.1 million in the same period of
2009. Lower salaries, fringe benefits, and incentives, as well as
rent and utilities, and travel and entertainment expense caused the decrease in
direct costs of services in the six months ended June 30, 2010 compared to the
same period in 2009. This decrease was also the result of lower
procedure volumes, which resulted in lower bad debt, financing fees, and laser
maintenance, partially offset by an increase in stock compensation
expense.
General
and administrative
General
and administrative expenses in the six months ended June 30, 2010 decreased by
$1.4 million, or 16.2%, from the six months ended June 30, 2009, due primarily
to workforce reductions which resulted in reduced salaries and fringe benefits,
and reductions in travel and entertainment, contract services, professional
services, and stock-based compensation expense.
Marketing
and advertising
Marketing
and advertising expenses in the six months ended June 30, 2010 decreased by $8.3
million, or 36.9%, from the six months ended June 30, 2009. These
expenses were 23.5% of revenues in the six months ended June 30, 2010, compared
to 28.3% during the six months ended June 30, 2009. In 2010, we
reduced our marketing spend levels to continue to align spending levels with
consumer demand. We believe the decrease in monetary expenditures
better aligns our spending with anticipated consumer demand. We are continuing
to work to develop more efficient marketing techniques and expand local
initiatives as a means to attract customers. Our future operating
profitability will depend in large part on the success of our efforts in this
regard.
Gain
on sale of assets
We sold
excimer and femtosecond lasers held for sale for a gain of approximately $1.3
million in the six months ended June 30, 2010. Gain on sale of assets
was minimal for the first six months of 2009.
Consent
revocation solicitation charges
In the
six months ended June 30, 2009, we incurred $804,000 in charges related to our
successful defense of a consent solicitation by a dissident stockholder
group.
Impairment
charges
The
impairment charge in the six months ended June 30, 2010 was $87,000 for the
impairment of fixed assets in one vision center, which was the result of our
decision to close the Birmingham, Alabama vision center. In the six
months ended June 30, 2009, we recorded impairment charges of $1.2
million. These charges were primarily for closed centers and asset
disposals.
Restructuring
charges
The net
restructuring charges in the six months ended June 30, 2010 were $648,000,
comprised primarily of contract termination costs associated with the closure of
certain of our laser vision centers. Also included in the charges
were other exit and disposal costs incurred in 2010 related to vacating leased
properties and relocating medical equipment. We incurred
restructuring charges totaling $1.3 million for the six months ended June 30,
2009, which included $725,000 of contract termination costs and $541,000 of
employee separation benefits.
20
Non-operating
income and expenses
Net
investment income in the six months ended June 30, 2010 increased $841,000, or
184.8%. This is due primarily to the gain on sale of investments of
$988,000 that occurred in the second quarter of 2010 and $365,000
other-than-temporary impairment of auction rate securities and equity
investments recognized in the second quarter of 2009. Patient
financing interest income declined $461,000 on lower procedure volume,
investment income declined by $205,000 on lower yielding debt investments, and
interest expense declined by $164,000.
Income
taxes
Due to
the lack of positive evidence that the deferred tax assets will be realized as
required by U.S. GAAP, we were unable to record tax benefits with respect to our
losses in the U.S. and state jurisdictions in the six months ended June 30,
2010. Income tax expense for the six months ended June 30, 2010
includes the interest on unrecognized tax benefits and state taxes in certain
jurisdictions.
Liquidity
and Capital Resources
At June
30, 2010, we held $57.8 million in cash and cash equivalents and short-term
investments, an increase of $5.3 million from $52.5 million at December 31,
2009. Our cash flows from operating, investing, and financing
activities, as reflected in the Condensed Consolidated Statements of Cash Flows,
are summarized as follows (dollars in thousands):
Six Months Ending
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
provided (used) by:
|
||||||||
Operating
activities
|
$ | 7,443 | $ | 12,522 | ||||
Investing
activities
|
(1,860 | ) | 159 | |||||
Financing
activities
|
(3,273 | ) | (5,271 | ) | ||||
Net
effect of exchange rate changes on cash and cash
equivalents
|
(56 | ) | 209 | |||||
Net
increase in cash and cash equivalents
|
$ | 2,254 | $ | 7,619 |
Cash
flows generated from operating activities declined to $7.4 million for the six
months ended June 30, 2010 compared to $12.5 million for the same period in
2009. This decrease was due primarily to $6.8 million received in the
first half of 2009 in connection with our revised laser contracts and $1.4
million in increased insurance payments in the first half of 2010 compared with
the same period in 2009. Cost control and cash conservation
efforts have provided significant reductions in our marketing spend, salary
expense, and laser maintenance, as well as all other discretionary areas which
have more than offset reductions in revenue. We continue to closely
manage working capital with particular focus on ensuring timely collection of
outstanding patient receivables and the management of our trade payable
obligations. Gross patient receivables decreased $1.7 million in the
six months ended June 30, 2010 as a result of lower procedure
volume. Our accounts payable significantly decreased at June 30,
2010, primarily due to a change in marketing vendors and timing of
invoices. At June 30, 2010, working capital (excluding debt due
within one year) amounted to $47.8 million compared to $54.3 million at December
31, 2009. Liquid assets (cash and cash equivalents, short-term
investments, and accounts receivable) amounted to 246.5% of current liabilities
at June 30, 2010, compared to 206.3% at December 31, 2009.
We
continue to offer our own sponsored patient financing. As of June 30, 2010, we
had $3.6 million in patient receivables, net of allowance for doubtful accounts,
which was a decrease of $1.8 million, or 33.4% from December 31,
2009. We continually monitor the allowance for doubtful accounts and
will adjust our lending criteria or require greater down payments if our
experience indicates that is necessary. However, our ability to
collect patient accounts depends, in part, on overall economic
conditions. Bad debt expense was 1.9% and 2.5% of revenue for the six
months ended June 30, 2010 and 2009, respectively. The decrease in
bad debt expense is attributable to improved collection experience within our
12-month and 18-month patient financing plans resulting from improvements to our
underwriting that were implemented last year including FICO scoring patients and
requiring varying down payments depending upon credit scores.
21
We had assets held for
sale of $405,000 and $1.0 million at June 30, 2010 and December 31, 2009,
respectively, related to unused excimer and femtosecond
lasers. During the six months ended June 30, 2010, we were able to
sell some of our excimer and femtosecond lasers held for sale with a combined
net book value of $626,000 for total cash proceeds of approximately $1.1 million
and notes receivable of $836,000, resulting in a gain of approximately $1.3
million before tax. We have collected $112,000 on the notes
receivable in the six months ended June 30, 2010.
In April
2008, we entered into a five-year loan agreement with PNC Equipment Finance, LLC
to finance the majority of the IntraLase units which we
purchased. The remaining unpaid balance on the bank loan was $10.0
million at June 30, 2010. The loan agreement contains no financial covenants
and, as with our capital lease obligations, is secured by certain medical
equipment. Loan repayments increased approximately $965,000 for the
six months ended June 30, 2010 compared to the same period in 2009 due primarily
to additional payoffs of excimer lasers that were sold.
At June
30, 2010 and December 31, 2009, we held $2.3 million and $2.4 million,
respectively, par value of various auction rate securities. The
assets underlying the auction rate instruments are primarily municipal bonds and
preferred closed end funds. Our auction rate instruments are not
currently liquid. Maturity dates for our auction rate securities
range from 2016 to 2036. In the first two quarters of 2010, $25,000
of the related securities was called at par by their issuers. In the
full year of 2009, $1.0 million of the securities were called at par by their
issuers and we redeemed an additional $2.3 million at 46.9% of original par
value. See Note 2 to Condensed Consolidated Financial Statements for
further information regarding our auction rate security
investments.
During
the six months ended June 30, 2010 we purchased $203.3 million of investment
securities and received proceeds from the sale of investment securities of
$200.3 million. The majority of our investment portfolio consists of
high-grade commercial paper and bonds with maturities of 30 days or less, which
resulted in increased purchasing and selling activity for the six months ended
June 30, 2010. Investing
activities for the six months ended June 30, 2010 included purchases of
investments in excess of proceeds from sales of investments of approximately
$2.9 million. This net investment was made from excess cash to
improve our investment income.
We have
not opened any new vision centers in 2010 or 2009. Capital
expenditures for the six months ended June 30, 2010 and 2009 were $144,000 and
$178,000, respectively. In January 2010, we closed our San Jose, CA
vision center. In July 2010, we announced the closing of our
Birmingham, AL vision center and our licensed operation in Savannah,
GA.
We
believe that cash flow from operations, available cash and short-term
investments provide sufficient cash reserves and liquidity to fund our working
capital needs, capital expenditures and debt and capital lease obligations for
at least the next 12 months. We are balancing cash conservation in
the current challenging economic environment against our longer-term objective
of managing to profitability and growth when the economy improves. As
a result of aggressive efforts to reduce costs, the number of procedures per
vision center required to reach breakeven is estimated at 95 per
month. We estimate the number of procedures companywide required for
breakeven cash flow, excluding any tax refunds and after capital expenditures
and debt service, to be approximately 85,000 per year. We believe
that we have sufficient cash and investments to fund our business beyond 2012 if
we perform at least 61,000 procedures annually. We performed 72,776 procedures
in 2009. There can be no assurance as to the number of procedures we
will perform in 2010.
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, 2009.
Item 3. Quantitative and
Qualitative Disclosure About Market Risk.
The
carrying values of financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable, approximate fair value because of the
short maturity of these instruments.
We record
short-term investments at fair value. Due to the short-term nature of
the investments in corporate bonds, municipal and U.S. Government bonds, we
believe there is little risk to the valuation of these 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
trinomial discount model. We are divesting all auction rate
securities as the market allows. There can be no assurance, however,
that the issuers of the auction rate securities that we hold will do so in
advance of their maturity or the restoration of a regularized auction
market.
22
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.
In
addition, because our capital leases and secured indebtedness are at fixed
rates, we have limited interest rate risk.
Item 4. Controls and
Procedures.
(a) Evaluation
of Disclosure Controls and Procedures
Under the
supervision of and with the participation of our management, including the
company's Chief Operating Officer (COO) and Chief Financial Officer (CFO), an
evaluation of the effectiveness of our disclosure controls and procedures was
performed as of June 30, 2010. Based on this evaluation, the COO and CFO
concluded that our 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 COO
and CFO, an evaluation of our internal control over financial reporting was
performed as of June 30, 2010. Based on this evaluation, management
concluded that there were no changes in our internal control over financial
reporting that occurred during the quarter ended June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II. OTHER INFORMATION.
Item 1. Legal
Proceedings
Not
applicable.
Item 1A. Risk
Factors
In
addition to the risk factors discussed in our Form 10-K and other filings with
the Securities and Exchange Commission, there are a number of other risks and
uncertainties from laser vision correction associated with our business,
including, without limitation, the successful execution of marketing strategies
cost effectively to drive patients to our vision centers; the impact of low
consumer confidence and discretionary spending; competition in the laser vision
correction industry; our ability to attract new patients; the possibility of
adverse outcomes or long-term side effects and negative publicity regarding
laser vision correction; our ability to operate profitable vision centers and
retain qualified personnel during periods of lower procedure volumes; 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 weak consumer credit
environment and our ability to manage credit risk related to consumer debt,
bankruptcies and other credit trends. Further, the FDA’s advisory
board on ophthalmic devises is currently reviewing concerns about post-LASIK
quality of life matters and the FDA has planned a major new study on LASIK
outcomes and quality of life that is expected to end in 2012. The FDA
or another agency could take legal or regulatory action against us or others in
the laser vision correction industry. The outcome of this review or
legal or regulatory action could potentially impact negatively the acceptance of
LASIK. In addition, the acceptance rate of new
technologies and our ability to implement successfully new
technologies on a national basis create additional risk.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Not
applicable.
Item 3. Defaults
Upon Senior Securities
Not
applicable.
23
Item 4. (Removed
and Reserved).
Item 5. Other
Information
Not
applicable.
Item
6. Exhibits
Exhibits
|
||
Number
|
Description
|
|
31.1
|
COO
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
|
24
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: July
27, 2010
|
/s/ David L. Thomas
|
David
L. Thomas
|
|
Chief
Operating Officer
|
|
Date: July
27, 2010
|
/s/ Michael J.
Celebrezze
|
Michael
J. Celebrezze
|
|
Senior
Vice President of Finance,
|
|
Chief
Financial Officer and Treasurer
|
25