Attached files
file | filename |
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EX-32 - LCA VISION INC | v199722_ex32.htm |
EX-31.2 - LCA VISION INC | v199722_ex31-2.htm |
EX-31.1 - LCA VISION INC | v199722_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 September 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: 18,707,015 shares as of October 22,
2010
LCA-Vision
Inc.
|
||||
TABLE
OF CONTENTS
|
||||
Part
I.
|
FINANCIAL INFORMATION | |||
Item
1.
|
Financial
Statements
|
|||
Condensed
Consolidated Balance Sheets (Unaudited) September 30, 2010 and December
31, 2009
|
3
|
|||
Condensed
Consolidated Statements of Operations (Unaudited) Three Months and Nine
Months Ended September 30, 2010 and 2009
|
4
|
|||
Condensed
Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended
September 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
|
16
|
||
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
1A.
|
Risk
Factors
|
24
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
24
|
||
Item
4.
|
(Removed
and Reserved)
|
24
|
||
Item
5.
|
Other
Information
|
24
|
||
Item
6.
|
Exhibits
|
24
|
||
Signatures
|
25
|
2
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
LCA-Vision
Inc.
Condensed
Consolidated Balance Sheets (Unaudited)
(Dollars
in thousands)
September 30, 2010
|
December 31, 2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 22,929 | $ | 24,049 | ||||
Short-term
investments
|
31,450 | 28,455 | ||||||
Patient
receivables, net of allowance for doubtful accounts of $1,854 and
$1,645
|
2,286 | 4,562 | ||||||
Other
accounts receivable, net
|
2,290 | 2,002 | ||||||
Assets
held for sale
|
334 | 1,031 | ||||||
Prepaid
professional fees
|
482 | 615 | ||||||
Prepaid
income taxes
|
619 | 12,270 | ||||||
Deferred
compensation plan assets
|
- | 400 | ||||||
Prepaid
expenses and other
|
4,197 | 5,582 | ||||||
Total
current assets
|
64,587 | 78,966 | ||||||
Property
and equipment
|
77,278 | 79,993 | ||||||
Accumulated
depreciation and amortization
|
(60,177 | ) | (53,995 | ) | ||||
Property
and equipment, net
|
17,101 | 25,998 | ||||||
Long-term
investments
|
1,989 | 2,090 | ||||||
Patient
receivables, net of allowance for doubtful accounts of $435 and
$674
|
486 | 854 | ||||||
Investment
in unconsolidated businesses
|
106 | 137 | ||||||
Other
assets
|
3,534 | 4,590 | ||||||
Total
assets
|
$ | 87,803 | $ | 112,635 | ||||
Liabilities
and Stockholders' Investment
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 6,987 | $ | 6,504 | ||||
Accrued
liabilities and other
|
10,663 | 11,581 | ||||||
Deferred
revenue
|
4,818 | 6,151 | ||||||
Deferred
compensation liability
|
- | 400 | ||||||
Debt
obligations maturing in one year
|
3,278 | 3,998 | ||||||
Total
current liabilities
|
25,746 | 28,634 | ||||||
Long-term
rent obligations and other
|
2,069 | 2,395 | ||||||
Long-term
debt obligations (less current portion)
|
5,776 | 9,145 | ||||||
Insurance
reserves
|
8,358 | 9,154 | ||||||
Deferred
license fee
|
3,406 | 4,428 | ||||||
Deferred
revenue
|
4,415 | 7,852 | ||||||
Stockholders'
investment
|
||||||||
Common
stock ($.001 par value; 25,291,637 and 25,287,387 shares
and 18,707,015 and 18,619,185 shares issued and outstanding,
respectively)
|
25 | 25 | ||||||
Contributed
capital
|
175,296 | 174,325 | ||||||
Common
stock in treasury, at cost (6,584,622 shares and 6,668,202 shares,
respectively)
|
(114,066 | ) | (114,668 | ) | ||||
Retained
deficit
|
(23,815 | ) | (9,729 | ) | ||||
Accumulated
other comprehensive income
|
593 | 1,074 | ||||||
Total
stockholders' investment
|
38,033 | 51,027 | ||||||
Total
liabilities and stockholders' investment
|
$ | 87,803 | $ | 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 September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
- Laser refractive surgery
|
$ | 20,263 | $ | 27,646 | $ | 80,566 | $ | 107,248 | ||||||||
Operating
costs and expenses
|
||||||||||||||||
Medical
professional and license fees
|
4,966 | 5,887 | 19,406 | 23,649 | ||||||||||||
Direct
costs of services
|
11,499 | 15,206 | 37,390 | 50,291 | ||||||||||||
General
and administrative expenses
|
3,336 | 3,706 | 10,768 | 12,575 | ||||||||||||
Marketing
and advertising
|
5,100 | 5,498 | 19,298 | 28,009 | ||||||||||||
Depreciation
|
2,379 | 3,293 | 7,375 | 11,420 | ||||||||||||
Consent
revocation solicitation charges
|
- | - | - | 804 | ||||||||||||
Impairment
charges
|
1,608 | 4,415 | 1,694 | 5,604 | ||||||||||||
Restructuring
charges
|
145 | 8 | 794 | 1,274 | ||||||||||||
29,033 | 38,013 | 96,725 | 133,626 | |||||||||||||
Gain
on sale of assets
|
266 | 10 | 1,577 | 26 | ||||||||||||
Operating
loss
|
(8,504 | ) | (10,357 | ) | (14,582 | ) | (26,352 | ) | ||||||||
Equity
in earnings from unconsolidated businesses
|
- | 54 | 25 | 128 | ||||||||||||
Net
investment income
|
103 | 651 | 1,399 | 1,112 | ||||||||||||
Loss
before taxes on income
|
(8,401 | ) | (9,652 | ) | (13,158 | ) | (25,112 | ) | ||||||||
Income
tax expense
|
39 | 10,251 | 134 | 4,522 | ||||||||||||
Net
loss
|
$ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Loss
per common share
|
||||||||||||||||
Basic
|
$ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) | ||||
Diluted
|
$ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) | ||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Diluted
|
18,703 | 18,608 | 18,672 | 18,587 |
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)
Nine months ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
loss
|
$ | (13,292 | ) | $ | (29,634 | ) | ||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
7,375 | 11,420 | ||||||
Provision
for loss on doubtful accounts
|
1,333 | 2,771 | ||||||
(Gain)
loss on sale of investments
|
(1,008 | ) | 365 | |||||
Impairment
charges
|
1,694 | 5,604 | ||||||
Gain
on sale of assets
|
(1,577 | ) | (26 | ) | ||||
Non
cash restructuring charge
|
411 | 736 | ||||||
Deferred
income taxes
|
377 | 11,072 | ||||||
Stock-based
compensation
|
957 | 607 | ||||||
Insurance
reserve
|
(796 | ) | (123 | ) | ||||
Equity
in earnings of unconsolidated affiliates
|
(25 | ) | (128 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Patient
accounts receivable
|
1,584 | 2,474 | ||||||
Other
accounts receivable
|
(48 | ) | 82 | |||||
Prepaid
income taxes
|
11,651 | 2,047 | ||||||
Prepaid
expenses and other
|
1,385 | 118 | ||||||
Accounts
payable
|
483 | (856 | ) | |||||
Deferred
revenue, net of professional fees
|
(4,293 | ) | (6,552 | ) | ||||
Accrued
liabilities and other
|
(1,670 | ) | 7,816 | |||||
Net
cash provided by operations
|
4,541 | 7,793 | ||||||
Cash
flow from investing activities:
|
||||||||
Purchases
of property and equipment
|
(176 | ) | (182 | ) | ||||
Proceeds
from sale of assets
|
1,721 | 46 | ||||||
Purchases
of investment securities
|
(328,120 | ) | (242,429 | ) | ||||
Proceeds
from sale of investment securities
|
325,133 | 242,904 | ||||||
Other,
net
|
(34 | ) | (116 | ) | ||||
Net
cash (used in) provided by investing activities
|
(1,476 | ) | 223 | |||||
Cash
flow from financing activities:
|
||||||||
Principal
payments of capital lease obligations and loan
|
(4,089 | ) | (6,315 | ) | ||||
Shares
repurchased for treasury stock
|
(192 | ) | (36 | ) | ||||
Exercise
of stock options
|
14 | 18 | ||||||
Net
cash used in financing activities
|
(4,267 | ) | (6,333 | ) | ||||
Net
effect of exchange rate changes on cash and cash
equivalents
|
82 | 649 | ||||||
(Decrease)
increase in cash and cash equivalents
|
(1,120 | ) | 2,332 | |||||
Cash
and cash equivalents at beginning of period
|
24,049 | 23,648 | ||||||
Cash
and cash equivalents at end of period
|
$ | 22,929 | $ | 25,980 |
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
September 30, 2010, we operated 60 LasikPlus®
fixed-site laser vision correction centers in the United
States. Included in the 60 vision centers is one vision center
licensed to an ophthalmologist who uses 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 (“U.S. GAAP”) 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. 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 nine month periods ended
September 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 investment valuation,
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
September 30, 2010 and December 31, 2009. Short-term and long-term
investments, designated as available-for-sale, consist of the following (dollars
in thousands):
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Short-term
investments:
|
||||||||
Corporate
obligations
|
$ | 20,887 | $ | 13,818 | ||||
U.S.
Governmental notes and agencies
|
7,375 | 3,728 | ||||||
Municipal
securities
|
3,188 | 8,544 | ||||||
Auction
rate municipal debt
|
- | 2,365 | ||||||
Total
short-term investments
|
31,450 | 28,455 | ||||||
Long-term
investments:
|
||||||||
Auction
rate municipal debt
|
955 | 1,062 | ||||||
Auction
rate preferred securities
|
1,034 | 1,028 | ||||||
Total
long-term investments
|
1,989 | 2,090 | ||||||
Total
investments
|
$ | 33,439 | $ | 30,545 |
The
following table shows the net carrying value (amortized cost) and estimated fair
value of debt and equity securities at September 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
|
Estimated
|
|||||||
Cost
|
Fair
Value
|
|||||||
Due
in one year or less
|
$ | 31,438 | $ | 31,450 | ||||
Due
after one year through three years
|
- | - | ||||||
Due
after three years
|
1,901 | 1,989 | ||||||
Total
investments
|
$ | 33,339 | $ | 33,439 |
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):
September 30, 2010
|
||||||||||||||||
Adjusted
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
Corporate
obligations
|
$ | 20,887 | $ | - | $ | - | $ | 20,887 | ||||||||
U.S.
Governmental notes and agencies
|
7,375 | - | - | 7,375 | ||||||||||||
Municipal
securities
|
3,176 | 12 | - | 3,188 | ||||||||||||
Auction
rate municipal securities
|
924 | 31 | - | 955 | ||||||||||||
Auction
rate preferred securities
|
977 | 57 | - | 1,034 | ||||||||||||
Total
investments
|
$ | 33,339 | $ | 100 | $ | - | $ | 33,439 |
December 31, 2009
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Adjusted
|
Unrealized
|
Unrealized
|
||||||||||||||
Cost
|
Gains
|
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 $27,000 and no losses on the sale of our debt securities for
the three months ended September 30, 2010, and realized gains of $1.1 million
and losses of $50,000 for the nine months ended September 30,
2010. We had realized gains of $41,000 and $47,000, and no
realized losses, on the sale of marketable securities for the three and nine
months ended September 30, 2009, respectively.
We
recognized unrealized gains of $100,000 and no unrealized losses in accumulated
other comprehensive income as of September 30, 2010. For the three
and nine months ended September 30, 2010 we recorded reductions of accumulated
other comprehensive income related to changes in investments of $32,000 and
$943,000, net of tax of $10,000 and $377,000, respectively. The
change for the three months ended September 30, 2010 consists of transfers to
realized gains of $26,000 and unrealized losses of $6,000 in municipal
securities. The change for the nine months ended September 30, 2010
consists of transfers to realized gains of $41,000 and $877,000 for municipal
securities and equities, respectively, as well as unrealized losses of $25,000
in municipal securities. For the three and nine months ended
September 30, 2009, we recognized $1.3 million in unrealized gains and no
losses.
Given the
duration and extent of the decline in fair values associated with our equity
securities (comprised primarily of various equity mutual funds), and auction
rate securities, we recognized an other-than-temporary impairment of $365,000,
before tax, during the nine months ended September 30, 2009. These
equity securities were sold in April 2010. There were no
other-than-temporary impairments of our auction rate securities during the three
and nine months ended September 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)
Auction
Rate Securities
At
September 30, 2010 and December 31, 2009, we held $2.2 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 2030 to 2036. In the three and nine months
ended September 30, 2010, $100,000 and $125,000 of the related securities were
called at par by their issuers, respectively. For 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
September 30, 2010 as long-term. At September 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
September 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 September 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
|
$ | 22,929 | $ | - | $ | - | $ | 22,929 | ||||||||
Investments
|
- | 31,450 | 1,989 | 33,439 | ||||||||||||
Total
|
$ | 22,929 | $ | 31,450 | $ | 1,989 | $ | 56,368 |
Fair Value Measurements as of December 31, 2009 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
|
$ | 24,049 | $ | - | $ | - | $ | 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 liabilties
|
$ | 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 including 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 Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Balance
at beginning of period
|
$ | 1,981 | $ | 3,108 | $ | 2,090 | $ | 3,126 | ||||||||
Assets
acquired
|
- | - | - | - | ||||||||||||
Assets
sold
|
- | - | (22 | ) | (44 | ) | ||||||||||
Transfers
in (out) of Level 3
|
- | - | (100 | ) | (258 | ) | ||||||||||
Gains
included in other comprehensive income
|
8 | 109 | 21 | 422 | ||||||||||||
Losses
included in earnings
|
- | - | - | (29 | ) | |||||||||||
Balance
as of September 30
|
$ | 1,989 | $ | 3,217 | $ | 1,989 | $ | 3,217 |
4. Assets
Held For Sale
We had
assets held for sale of $334,000 and $1.0 million at September 30, 2010 and
December 31, 2009, respectively, comprised of excimer and femtosecond
lasers. During the nine months ended September 30, 2010, we sold some
of our excimer and femtosecond lasers held for sale with a combined net book
value of $651,000 for total cash proceeds of approximately $1.2 million and
notes receivable of $835,000, resulting in a gain of approximately $1.3 million,
before tax.
5. Income
Taxes
The
following table presents the components of our income tax expense for the
following periods (dollars in thousands):
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Current:
|
||||||||||||||||
Federal
|
$ | 6 | $ | (939 | ) | $ | (323 | ) | $ | (6,348 | ) | |||||
State
and local
|
24 | (147 | ) | 80 | (202 | ) | ||||||||||
Total
Current
|
30 | (1,086 | ) | (243 | ) | (6,550 | ) | |||||||||
Deferred:
|
||||||||||||||||
Federal
|
$ | 8 | $ | 10,760 | $ | 330 | $ | 11,310 | ||||||||
State
and local
|
1 | 577 | 47 | (238 | ) | |||||||||||
Total
Deferred
|
9 | 11,337 | 377 | 11,072 | ||||||||||||
Income
tax expense
|
$ | 39 | $ | 10,251 | $ | 134 | $ | 4,522 | ||||||||
Effective
income tax rate
|
0.5 | % | 106.2 | % | 1.0 | % | 18.0 | % |
Our
effective tax rate for the three and nine month periods ended September 30, 2010
was impacted by a full valuation allowance against all of our deferred tax
assets, net of deferred tax liabilities.
As of
September 30, 2010 and December 31, 2009, deferred tax assets net of deferred
tax liabilities totaled $19.0 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 nine month periods ended September
30, 2010. Income tax expense for the three and nine month periods
ended September 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. This
receivable was collected in June 2010.
During
the three and nine month periods ended September 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 September 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. During the three months ended September 30, 2010,
the 2008 audit was completed, and there were no audit adjustments.
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
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic Loss
|
||||||||||||||||
Net
loss
|
$ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Weighted
average shares outstanding
|
18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Basic
loss
|
$ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) | ||||
Diluted Loss
|
||||||||||||||||
Net
loss
|
$ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Weighted
average shares outstanding
|
18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Effect
of dilutive securities
|
||||||||||||||||
Stock
options
|
- | - | - | - | ||||||||||||
Restricted
stock
|
- | - | - | - | ||||||||||||
Weighted
average common shares and potential dilutive shares
|
18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Diluted
loss per common share
|
$ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) |
For the
three and nine month periods ended September 30, 2010 and 2009, 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. For the three and
nine months ended September 30, 2010, the total number of outstanding
options and restricted stock awards that were antidilutive was 541,643 and
635,463, respectively.
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
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock
options
|
$ | 18 | $ | (347 | ) | $ | 29 | $ | (100 | ) | ||||||
Restricted
stock
|
338 | 386 | 928 | 707 | ||||||||||||
356 | 39 | 957 | 607 | |||||||||||||
Income
tax effect
|
272 | 36 | 505 | 267 | ||||||||||||
$ | 84 | $ | 3 | $ | 452 | $ | 340 |
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
nine months ended September 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
three and nine months ended September 30, 2010, we recorded impairment charges
to reduce the carrying amount of long-lived assets by $1.6 million and $1.7
million, respectively. The impairment charge recognized during the
three months ended September 30, 2010 primarily reflects our October 2010
decision to consolidate vision center operations in four markets and close
vision centers in four additional underperforming markets by December 31, 2010
or early 2011 in order to preserve cash. Based on this evaluation, we
determined that leasehold improvements and other assets with a carrying amount
of $1.2 million were no longer
recoverable and were in fact impaired and were written down to their fair
value. Excimer lasers with a carrying amount of $1.2 million were
impaired and written down by $125,000 to their estimated fair
values. We adjusted the carrying value of the excimer lasers to their
fair value, which we determined based on estimated market prices of similar
assets. Because of deteriorating market conditions (i.e., rising
interest rates and less marketplace demand), it is reasonably possible that our
estimate of market prices of similar assets may change in the near term
resulting in the need to adjust our determination of fair value. The
fair value measurements utilized in our market prices of similar assets
represent Level 2 inputs under Accounting Standards Codification (“ASC”)
820.
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 the vision center
which we licensed to an ophthalmologist to operate using our trademarks, we will
generate future cash in-flows in the form of license fees.
The $1.6
million impairment charge recognized in the September 2010 quarter also included
$164,000 in impairment charges related to certain assets held for use in one
vision center. We wrote down these assets to an approximate fair
value based on estimated market prices of similar assets as a result of the
decline in the overall U.S. economy and weakening consumer confidence levels,
which have adversely impacted procedure volume levels. The fair value
measurements utilized in our discounted cash flow represent Level 3 inputs under
ASC 820.
13
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
10.
|
Restructuring
Charges
|
For the
three months ended September 30, 2010, we incurred a net restructuring charge of
$145,000, which consisted primarily of a change in estimate related to contract
termination costs associated with a previous closure of a center that we had
subleased to the ophthalmologist.
For the
nine months ended September 30, 2010, we incurred a net restructuring charge of
$794,000. The restructuring charges were $328,000 for exit and
disposal costs associated with the closing of vision centers and $466,000 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 nine months ended September
30, 2009, which included $1.1 million of center closure costs and $587,000 of
employee separation benefits partially offset by a benefit of $435,000 due to a
change in estimate to certain previously recognized contract termination costs
related to our vision centers closed in 2008 after successful negotiations with
lessors.
At
September 30, 2010, we included restructuring reserves of $470,000 in “Accrued
liabilities and other” in the Condensed Consolidated Balance Sheets, a decline
from $1.1 million at December 31, 2009 due to payments during the 9-month
period. Long-term restructuring reserves were $349,000 and
$267,000 at September 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 market prices of similar assets in determining fair
value, which is a Level 3 input under U.S. GAAP.
The
following table summarizes the restructuring reserve activities for the nine
months ended September 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 | 334 | 338 | |||||||||
Utilized
|
(109 | ) | (890 | ) | (999 | ) | ||||||
Balance
at March 31, 2010
|
132 | 536 | 668 | |||||||||
Liabilities
recognized
|
- | 311 | 311 | |||||||||
Utilized
|
(89 | ) | (79 | ) | (168 | ) | ||||||
Balance
at June 30, 2010
|
$ | 43 | $ | 768 | $ | 811 | ||||||
Liabilities
recognized
|
11 | 134 | 145 | |||||||||
Utilized
|
(47 | ) | (90 | ) | (137 | ) | ||||||
Balance
at September 30, 2010
|
$ | 7 | $ | 812 | $ | 819 |
11. Debt
and Leasing Arrangements
Long-term
debt and capital lease obligations consist of (dollars in
thousands):
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Capitalized
lease obligations
|
$ | 11 | $ | 390 | ||||
Bank
loan
|
9,043 | 12,753 | ||||||
Total
long-term debt obligations
|
$ | 9,054 | $ | 13,143 | ||||
Debt
obligations maturing in one year
|
(3,278 | ) | (3,998 | ) | ||||
Long-term
obligations (less current portion)
|
$ | 5,776 | $ | 9,145 |
14
LCA-Vision
Inc.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
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 $1.0 million for the nine months ended September 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 $9.0
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.
12. Comprehensive
Income (Loss)
The
components of accumulated other comprehensive income consisted of the following
(dollars in thousands):
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Unrealized
investment gain, net of tax of $40 and $417
|
$ | 60 | $ | 626 | ||||
Foreign
currency translation
|
533 | 448 | ||||||
Accumulated
other comprehensive income
|
$ | 593 | $ | 1,074 |
The
components of comprehensive loss consisted of the following for the following
periods (dollars in thousands):
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss
|
$ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Unrealized
investment (loss) gain, net of tax of ($10), $170, ($377) and
$478
|
(22 | ) | 255 | (566 | ) | 717 | ||||||||||
Foreign
currency translation
|
143 | 265 | 84 | 486 | ||||||||||||
Comprehensive
loss
|
$ | (8,319 | ) | $ | (19,383 | ) | $ | (13,774 | ) | $ | (28,431 | ) |
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 September 30,
2010, our insurance reserve balance was $8.4 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.
14. Subsequent
Events
In order
to preserve cash, we decided in October 2010 to consolidate four markets, close
an additional four underperforming vision centers and eliminate 8% of our
workforce. The elimination of these positions, which we communicated
to our employees subsequent to September 30, 2010, includes reductions from our
call center, corporate office, and from closing vision centers. We
estimate the fourth quarter 2010 restructuring charges will be approximately
$4.3 million, comprised of contract termination costs, closure
costs, and employee severance and benefits. This estimate,
which includes a full charge for all future rents, may change significantly
based on our ability to successfully negotiate lease buyouts with the landlords
or subleases of the vision centers planned for closure in the fourth
quarter. See Note 9 to the Condensed consolidated financial
statements for impairment charges recorded at September 30, 2010 and additional
restructuring charges anticipated in the fourth quarter 2010 as a result of
these decisions.
15
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.
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC under the Exchange Act. These reports and other
information filed by us 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 nine months ended September 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.
Overview
Key
financial highlights for the three months ended September 30, 2010 include (all
comparisons are with the corresponding period of 2009):
|
·
|
Revenues
were $20.3 million compared with $27.6 million; adjusted revenues were
$18.8 million compared with $25.7
million.
|
|
·
|
Procedure
volume was 11,497 procedures (62 vision centers) compared with 15,335
procedures (71 vision centers) and 14,068 same-store
procedures.
|
|
·
|
Same-store
revenues (62 vision centers) decreased 19.3%; adjusted same-store revenues
decreased 18.3%.
|
|
·
|
Operating
loss was $8.5 million compared with operating loss of $10.4 million;
adjusted operating loss was $9.8 million compared with adjusted operating
loss of $12.1 million. The reduction in operating loss and
adjusted operating loss for the third 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. Results for the third quarter of 2010
include $1.8 million in restructuring and impairment charges, compared
with $4.4 million in restructuring and impairment charges in the third
quarter of 2009.
|
|
·
|
Net
loss was $8.4 million, or $0.45 per share, compared with net loss of $19.9
million, or $1.07 per share.
|
Key
financial highlights for the nine months ended September 30, 2010 include (all
comparisons are with the same period of 2009):
|
·
|
Revenues
were $80.6 million compared with $107.2 million; adjusted revenues were
$75.8 million compared with $100
million.
|
|
·
|
Procedure
volume was 45,829 procedures compared with 61,058 procedures and 55,703
same-store procedures.
|
|
·
|
Operating
loss was $14.6 million compared with operating loss of $26.4 million;
adjusted operating loss was $18.9 million compared with adjusted operating
loss of $32.9 million. The reduction in operating loss and
adjusted operating loss was a result of closing 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 $67,000 per month for the first nine months of 2010 compared
with $76,000 per month for the same period of 2009. Marketing
cost per eye decreased to $421 for the first nine months of 2010 from $459
for the same period last year. Operating loss and adjusted
operating loss for the 2010 period included $2.5 million in impairment and
restructuring charges, whereas the 2009 period included $6.9 million in
impairment and restructuring charges and $804,000 in consent revocation
solicitation charges.
|
16
|
·
|
Net
loss was $13.3 million, or $0.71 per share, compared with net loss of
$29.6 million, or $1.59 per share.
|
|
·
|
Cash
and investments were $56.4 million at September 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.
|
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
|
11,497 | 15,335 | ||||||
Fourth
Quarter
|
11,718 | |||||||
Year
|
45,829 | 72,776 |
The
continued economic slowdown in the United States has severely impacted our
procedure volume and operating results, resulting in a decline in consumer
confidence levels and a reduction in high-end discretionary expenditures for
many consumers. In response, in 2009 and 2010 we reduced our
workforce so that our staffing levels would be appropriate for our anticipated
procedure volume. Since January 1, 2009, we have closed 15 vision
centers and converted one vision center into a licensed facility. In addition,
in October 2010, we announced the closure of eight more vision
centers. 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).
17
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Reported
U.S. GAAP
|
$ | 20,263 | $ | 27,646 | $ | 80,566 | $ | 107,248 | ||||||||
Adjustments:
|
||||||||||||||||
Amortization
of prior deferred revenue
|
(1,475 | ) | (1,927 | ) | (4,770 | ) | (7,280 | ) | ||||||||
Adjusted
revenues
|
$ | 18,788 | $ | 25,719 | $ | 75,796 | $ | 99,968 | ||||||||
Operating
Loss
|
||||||||||||||||
Reported
U.S. GAAP
|
$ | (8,504 | ) | $ | (10,357 | ) | $ | (14,582 | ) | $ | (26,352 | ) | ||||
Adjustments:
|
||||||||||||||||
Amortization
of prior deferred revenue
|
(1,475 | ) | (1,927 | ) | (4,770 | ) | (7,280 | ) | ||||||||
Amortization
of prior professional fees
|
148 | 193 | 477 | 728 | ||||||||||||
Adjusted
operating loss
|
$ | (9,831 | ) | $ | (12,091 | ) | $ | (18,875 | ) | $ | (32,904 | ) |
Results
of Operations for the Three Months Ended September 30, 2010 Compared to the Same
Period in 2009
Revenues
In the
third quarter of 2010, revenues decreased by $7.4 million, or 26.7%, to $20.3
million from $27.6 million in the third quarter of 2009. Procedure
volume decreased 25% to 11,497 in the third quarter of 2010 from 15,335 in the
third quarter of 2009. The components of the revenue change
include (dollars in thousands):
Decrease
in revenue from lower procedure volume
|
$ | (6,437 | ) | |
Impact
from decrease in average selling price, before revenue
deferral
|
(494 | ) | ||
Change
in deferred revenue
|
(452 | ) | ||
Decrease
in revenues
|
$ | (7,383 | ) |
The
adjusted average reported revenue per procedure, which excludes the impact of
deferring revenue from separately priced extended warranties, decreased to
$1,634 in the third quarter of 2010 from $1,677 in the third quarter of 2009 and
increased from $1,619 in the second quarter of 2010. In an
effort to increase traffic at our vision centers, we offered a network-wide 15%
discount on procedure pricing in part of the third and all of the second
quarters of 2010.
We
experienced an increase in both appointment show rates and treatment show rates
in the third quarter of 2010 compared to the same period in 2009. We
attribute these improvements to significant efforts to improve patient
interactions, the third quarter price discount promotion, and organizational
effectiveness. Candidacy rates declined slightly in the third quarter
of 2010 compared to the same period in 2009. We have seen an increase
in conversion rates compared to the third quarter of 2009. Patient
activity in regards to inquiries remains down as a result of economic
uncertainty and other macroeconomic factors which results in lower procedure
volumes. 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 and leasehold
improvements.
|
18
Medical
professional and license fees
Medical
professional and license fees in the third quarter of 2010 decreased by
$921,000, or 15.6%, from the third quarter of 2009. The decrease was
due to lower license fees of $235,000 and physician fees of $697,000 associated
with decreased procedure volumes, partially offset by a slight increase in our
enhancement expense. The amortization of the deferred medical
professional fees attributable to prior years was $148,000 in the third quarter
of 2010 and $193,000 in the third quarter of 2009.
Direct
costs of services
Direct
costs of services decreased $3.7 million, or 24.4%, in the third quarter of 2010
to $11.5 million from $15.2 million in the third 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.
General
and administrative
General
and administrative expenses in the third quarter of 2010 decreased by $370,000,
or 10%, from the third quarter of 2009, due primarily to workforce reductions
which resulted in reduced salaries and fringe benefits, and savings in
professional services.
Marketing
and advertising
Marketing
and advertising expenses in the third quarter of 2010 decreased by $398,000, or
7.2%, from the third quarter of 2009. These expenses were 25.2% of
revenues in the third quarter of 2010 compared to 19.9% during the third quarter
of 2009. Marketing cost per eye increased to $444 for the third
quarter of 2010 from $359 in the same period of 2009 primarily due to the
decreased procedure volume. In the third quarter of 2010, we
continued to reduce our marketing spend levels in an attempt 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 patients. 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 third quarter of 2010 was $1.6 million which reflects
our decision to consolidate vision center operations in four markets, and close
vision centers in four additional underperforming markets. In the
three months ended September 30, 2009, we recorded impairment charges of $4.4
million as a result of the closure of 10 underperforming vision
centers.
Restructuring
charges
The net
restructuring charges in the third quarter of 2010 were $145,000, which
consisted of a change in estimate for contract termination costs associated with
a previous closure of our San Jose, California vision center. The
ophthalmologist who had subleased the facility from us terminated the sublease
in the third quarter of 2010. In the third quarter of 2009, net
restructuring charges were $8,000, primarily for employee separation benefits
for vision centers closed. As part of our priority to conserve cash,
we anticipate recording additional restructuring charges during the fourth
quarter of 2010 for the consolidation of four markets (Houston, Texas; Dallas,
Texas; Atlanta, Georgia; and Chicago Illinois), the closure of an additional
four underperforming vision centers (San Diego, California; Ft. Lauderdale,
Florida; Raleigh, North Carolina; and Westbury, New York), and a workforce
reduction of 8%. The involuntary terminations include reductions from our
call center, corporate office and from closing vision centers. We estimate
the fourth quarter 2010 restructuring charges will be approximately $4.3
million, comprised of contract termination costs, closure costs, and
employee severance and benefits. This estimate, which includes a full
charge for all future rents, may change significantly based on our ability to
successfully negotiate lease buyouts with the landlords or subleases of the
vision centers planned for closure in the fourth quarter.
Non-operating
income and expenses
Net
investment income in the third quarter of 2010 decreased $548,000, or 84.2%, to
$103,000 from $651,000 in the third quarter of 2009. Interest income
decreased by $579,000, primarily due to lower patient financing interest income
of $183,000 on lower procedure volume and lower investment income of $396,000 on
lower yielding debt investments and market value adjustments previously recorded
for our deferred compensation plan that was terminated on December 31,
2009.
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
September 30, 2010. Income tax expense for the three months ended
September 30, 2010 includes the interest on unrecognized tax benefits and state
taxes in certain jurisdictions.
19
Results
of Operations for the Nine Months Ended September 30, 2010 Compared to the Same
Period in 2009
Revenues
In the
nine months ending September 30, 2010, revenues decreased by $26.7 million, or
24.9%, to $80.6 million, from $107.2 million in the nine months ended September
30, 2009. Procedure volume decreased 24.9% to 45,829 in the third
quarter of 2010 from 61,058 in the third quarter of 2009. For
vision centers open at least 12 months, procedure volume decreased by
approximately 17.7% in the nine months ended September 30, 2010 to 45,829, as
compared to 55,703 in the nine months ended September 30, 2009. The
components of the revenue change include (dollars in thousands):
Decrease
in revenue from lower procedure volume
|
$ | (24,934 | ) | |
Impact
from increase in average selling price, before revenue
deferral
|
762 | |||
Change
in deferred revenue
|
(2,510 | ) | ||
Decrease
in revenues
|
$ | (26,682 | ) |
The
adjusted average reported revenue per procedure, which excludes the impact of
deferring revenue from separately priced extended warranties, increased 1.0% to
$1,654 for the nine months ended September 30, 2010 from $1,637 in the nine
months ended September 30, 2009. During the past year, we have
revised our pricing strategy to reduce the number of pricing tiers which had the
effect of increasing average price.
We
experienced increases in both appointment show rates and treatment show rates in
the nine months ended September 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 declined slightly year over year,
we have seen an increase in conversion rates. Patient activity in
regards to inquiries remains down as a result of economic uncertainty and other
macroeconomic factors which results in lower procedure
volumes. 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 nine months ended September 30, 2010
decreased by $4.2 million, or 17.9%, from the nine months ended September 30,
2009. The decrease was due to decreased license fees of $1.7 million
and physician fees of $2.5 million associated with decreased procedure volumes,
partially offset by a $232,000 increase in our enhancement
expense. The amortization of the deferred medical professional fees
attributable to prior years was $477,000 in the nine months ended September 30,
2010, and $728,000 in the same period of 2009.
Direct
costs of services
Direct
costs of services in the nine months ended September 30, 2010 decreased $12.9
million, or 25.7%, to $37.4 million from $50.3 million in the same period of
2009. Lower salaries, fringe benefits, and incentives, as well as
rent and utilities, professional and contracted services, and travel and
entertainment expense caused the decrease in direct costs of services in the
nine months ended September 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, laser maintenance, state and
local taxes, and surgical supplies, partially offset by an increase in stock
compensation expense and insurance.
General
and administrative
General
and administrative expenses in the nine months ended September 30, 2010
decreased by $1.8 million, or 14.4%, from the nine months ended September 30,
2009, due primarily to workforce reductions which resulted in reduced salaries
and fringe benefits, and reductions in travel and entertainment, contract
services, and professional services, offset slightly by an increase in
stock-based compensation expense.
Marketing
and advertising
Marketing
and advertising expenses in the nine months ended September 30, 2010 decreased
by $8.7 million, or 31.1%, from the nine months ended September 30,
2009. These expenses were 24.0% of revenues in the nine months ended
September 30, 2010, compared to 26.1% during the nine months ended September 30,
2009. In 2010, we reduced our marketing spend levels in an attempt 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.
20
Gain
on sale of assets
We sold
excimer and femtosecond lasers held for sale for a gain of approximately $1.6
million in the nine months ended September 30, 2010. Gain on sale of
assets was minimal for the first nine months of 2009.
Consent
revocation solicitation charges
In the
nine months ended September 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 nine months ended September 30, 2010 was $1.7 million,
which reflects our decision to consolidate vision center operations in four
markets and close vision centers in four additional underperforming
markets. In the nine months ended September 30, 2009, we recorded
impairment charges of $5.6 million as a result of the closure of 10
underperforming vision centers.
Restructuring
charges
The net
restructuring charges in the nine months ended September 30, 2010 were $794,000,
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 nine months ended September
30, 2009, which included $1.1 million of center closure costs and $587,000 of
employee separation benefits, partially offset by a benefit of $435,000 due to a
change in estimate to certain previously recognized contract termination costs
related to our vision centers closed in 2008 after successful negotiations with
the lessors.
Non-operating
income and expenses
Net
investment income in the nine months ended September 30, 2010 increased
$287,000, or 25.8%, to $1.4 million from $1.1 million in the nine months ended
September 30, 2009. 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 third quarter of 2009. Patient
financing interest income declined $645,000 on lower procedure volume,
investment income declined by $601,000 on lower yielding debt investments, and
interest expense declined by $210,000.
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 nine months ended September
30, 2010. Income tax expense for the nine months ended September 30,
2010 includes the interest on unrecognized tax benefits and state taxes in
certain jurisdictions.
Liquidity
and Capital Resources
At
September 30, 2010, we held $54.4 million in cash and cash equivalents and
short-term investments, an increase of $1.9 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):
Nine Months Ending
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
provided (used) by:
|
||||||||
Operating
activities
|
$ | 4,541 | $ | 7,793 | ||||
Investing
activities
|
(1,476 | ) | 223 | |||||
Financing
activities
|
(4,267 | ) | (6,333 | ) | ||||
Net
effect of exchange rate changes on cash and cash
equivalents
|
82 | 649 | ||||||
Net
(decrease) increase in cash and cash equivalents
|
$ | (1,120 | ) | $ | 2,332 |
Cash
flows generated from operating activities declined to $4.5 million for the nine
months ended September 30, 2010 compared to $7.8 million for the same period in
2009. This decrease was due primarily to lower earnings in
2010. 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 offset a
portion of the reductions in revenue from 2009. We continue to manage
working capital closely with particular focus on ensuring timely collection of
outstanding patient receivables and the management of our trade payable
obligations. Gross patient receivables decreased $2.7 million in the
nine months ended September 30, 2010 as a result of lower procedure
volume. At September 30, 2010, working capital (excluding debt due
within one year) amounted to $42.1 million compared to $54.3 million at December
31, 2009. Liquid assets (cash and cash equivalents, short-term
investments, and accounts receivable) amounted to 229.0% of current liabilities
at September 30, 2010, compared to 206.3% at December 31, 2009.
21
We
continue to offer our own sponsored patient financing. As of September 30, 2010,
we had $2.8 million in patient receivables, net of allowance for doubtful
accounts, which was a decrease of $2.6 million, or 48.7% 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 1.7% and 2.6% of revenue for the
nine months ended September 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 standards that were implemented last year,
including analysis of FICO scores for patients and requiring varying down
payments depending upon credit scores.
During
the nine months ended September 30, 2010, we purchased $328.1 million of
investment securities and received proceeds from the sale of investment
securities of $325.1 million. The majority of our investment
portfolio consists of high-grade commercial paper and bonds with maturities of
30 days or less, which results in the high level of purchasing and selling
activity reflected on the cash flow statement.
We had
assets held for sale of $334,000 and $1.0 million at September 30, 2010 and
December 31, 2009, respectively, related to unused excimer and femtosecond
lasers from our closed vision centers. During the nine months ended
September 30, 2010, we sold some of our excimer and femtosecond lasers held for
sale with a combined net book value of $651,000 for total cash proceeds of
approximately $1.2 million and notes receivable of $835,000, resulting in a gain
of approximately $1.3 million before tax. We collected $258,000
on notes receivable from these sales in the nine months ended September 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 $9.1
million at September 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 $1.0
million for the nine months ended September 30, 2010 compared to the same period
in 2009 due primarily to additional payoffs of excimer lasers that were
sold.
At
September 30, 2010 and December 31, 2009, we held $2.2 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 2030 to 2036. In the first three quarters of 2010,
$125,000 of the related securities was called at par by their
issuers. In the full year of 2009, $1.0 million of the securities was
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.
We have
not opened any new vision centers in 2010 or 2009. Capital
expenditures for the nine months ended September 30, 2010 and 2009 were $176,000
and $182,000, respectively. To date in 2010, we closed three vision
centers and announced the closure of an additional eight vision
centers.
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 average number of
procedures required for each vision center 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 73,000 per
year. We believe that we have sufficient cash and investments to fund
our business beyond 2012 if we perform at least 52,000 procedures
annually. There can be no assurance as to the number of procedures we
will perform in 2010 or beyond.
22
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.
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 September 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 September 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 September 30, 2010
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
23
PART
II. OTHER INFORMATION.
Item 1. Legal
Proceedings
Not
applicable.
Item 1A. Risk
Factors
For a
discussion of the risk factors attributable to our business, refer to Part II,
Item 1a., “Risk Factors,” contained in our Annual Report on Form 10-K for the
year ended December 31, 2009.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
Not
applicable.
Item 3. Defaults
Upon Senior Securities
Not
applicable.
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: October
26, 2010
|
/s/ David L. Thomas
|
David
L. Thomas
|
|
Chief
Operating Officer
|
|
Date: October
26, 2010
|
/s/ Michael J.
Celebrezze
|
Michael
J. Celebrezze
|
|
Senior
Vice President of Finance,
|
|
Chief
Financial Officer and
Treasurer
|
25