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Table of Contents

 

 

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, 2011 September 30, 2011.

 

¨ 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

incorporation or organization)

 

(IRS Employer

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  x    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: 18,849,527 shares as of October 20, 2011.

 

 

 


Table of Contents

LCA-Vision Inc.

TABLE OF CONTENTS

 

Part I. FINANCIAL INFORMATION

     3   
Item 1.   Financial Statements      3   
  Condensed Consolidated Balance Sheets (Unaudited) September 30, 2011 and December 31, 2010      3   
 

Condensed Consolidated Statements of Operations (Unaudited) Three Months and Nine Months Ended
September 30, 2011 and 2010

     4   
  Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2011 and 2010      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      21   
Item 4.   Controls and Procedures      22   

Part II. OTHER INFORMATION

     23   
Item 1.   Legal Proceedings      23   
Item 1A.   Risk Factors      23   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      23   
Item 3.   Defaults Upon Senior Securities      23   
Item 4.   (Removed and Reserved)      23   
Item 5.   Other Information      23   
Item 6.   Exhibits      23   
  Signatures      24   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LCA-Vision Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

 

     September 30,
2011
    December 31,
2010
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 19,545      $ 19,350   

Short-term investments

     26,616        31,947   

Patient receivables, net of allowances of $1,124 and $1,392, respectively

     2,209        2,256   

Other accounts receivable, net

     1,385        1,867   

Prepaid expenses and other

     4,196        5,641   
  

 

 

   

 

 

 

Total current assets

     53,951        61,061   

Property and equipment

     72,235        72,286   

Accumulated depreciation and amortization

     (60,754     (57,322
  

 

 

   

 

 

 

Property and equipment, net

     11,481        14,964   

Long-term investments

     933        951   

Patient receivables, net of allowances of $595 and $330 respectively

     725        413   

Other assets

     2,036        3,092   
  

 

 

   

 

 

 

Total assets

   $ 69,126      $ 80,481   
  

 

 

   

 

 

 

Liabilities and Stockholders' Investment

    

Current liabilities

    

Accounts payable

   $ 6,799      $ 8,110   

Accrued liabilities and other

     13,947        12,266   

Deferred revenue

     2,981        4,376   

Debt obligations maturing within one year

     2,937        3,039   
  

 

 

   

 

 

 

Total current liabilities

     26,664        27,791   

Long-term rent obligations and other

     2,685        3,368   

Long-term debt obligations, less current portion

     1,784        4,245   

Insurance reserves

     7,183        7,406   

Deferred license fee

     2,044        3,065   

Deferred revenue

     1,433        3,476   

Stockholders' investment

    

Common stock ($.001 par value; 25,291,637 shares issued and 18,849,527 and 18,711,365 shares outstanding, respectively)

     25        25   

Contributed capital

     176,869        175,610   

Common stock in treasury, at cost (6,442,110 shares and 6,580,272 shares, respectively)

     (112,974     (114,033

Retained deficit

     (37,003     (31,134

Accumulated other comprehensive income

     416        662   
  

 

 

   

 

 

 

Total stockholders' investment

     27,333        31,130   
  

 

 

   

 

 

 

Total liabilities and stockholders' investment

   $ 69,126      $ 80,481   
  

 

 

   

 

 

 

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

 

3


Table of Contents

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,  
     2011     2010     2011     2010  

Revenues

   $ 21,790      $ 20,263      $ 78,489      $ 80,566   

Operating costs and expenses

        

Medical professional and license fees

     5,181        4,966        19,236        19,406   

Direct costs of services

     10,461        11,499        31,931        37,390   

General and administrative expenses

     3,586        3,336        10,577        10,768   

Marketing and advertising

     5,305        5,100        17,730        19,298   

Depreciation

     1,458        2,379        4,346        7,375   

Impairment charges

     —          1,608        —          1,694   

Restructuring charges

     —          145        56        794   
  

 

 

   

 

 

   

 

 

   

 

 

 
     25,991        29,033        83,876        96,725   

Gain on sale of assets

     99        266        498        1,577   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,102     (8,504     (4,889     (14,582

Net investment income and other

     334        103        492        1,424   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before taxes on income

     (3,768     (8,401     (4,397     (13,158

Income tax expense

     32        39        149        134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,800   $ (8,440   $ (4,546   $ (13,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share

        

Basic

   $ (0.20   $ (0.45   $ (0.24   $ (0.71

Diluted

   $ (0.20   $ (0.45   $ (0.24   $ (0.71

Weighted average shares outstanding

        

Basic

     18,838        18,703        18,798        18,672   

Diluted

     18,838        18,703        18,798        18,672   

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

 

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Table of Contents

LCA-Vision Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

     Nine months ended September 30,  
     2011     2010  

Cash flow from operating activities:

    

Net loss

   $ (4,546   $ (13,292

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation

     4,346        7,375   

Provision for loss on doubtful accounts

     554        1,333   

Loss (gain) on sale of investments

     9        (1,008

Impairment charges

     —          1,694   

Gain on sale of property and equipment

     (498     (1,577

Deferred income taxes

     —          377   

Stock-based compensation

     1,259        957   

Insurance reserve

     (223     (796

Changes in operating assets and liabilities:

    

Patient accounts receivable

     (754     1,311   

Other accounts receivable

     138        237   

Prepaid income taxes

     397        11,651   

Prepaid expenses and other

     499        1,385   

Accounts payable

     (1,311     543   

Deferred revenue, net of professional fees

     (3,094     (4,293

Accrued liabilities and other

     777        (1,284
  

 

 

   

 

 

 

Net cash (used in) provided by operations

     (2,447     4,613   

Cash flow from investing activities:

    

Purchases of property and equipment

     (869     (176

Proceeds from sale of assets

     1,252        1,721   

Purchases of investment securities

     (137,480     (328,120

Proceeds from sale of investment securities

     142,716        325,133   

Other

     (6     (34
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     5,613        (1,476

Cash flow from financing activities:

    

Principal payments of capital lease obligations and loan

     (2,563     (4,089

Shares repurchased for treasury stock

     (288     (192

Proceeds from exercise of stock options

     23        14   
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,828     (4,267

Net effect of exchange rate changes on cash and cash equivalents

     (143     82   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     195        (1,048

Cash and cash equivalents at beginning of period

     19,350        24,529   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 19,545      $ 23,481   
  

 

 

   

 

 

 

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

 

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Table of Contents

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-up care in-center. Most of our patients currently receive a procedure called LASIK, which we began performing in the United States in 1996.

As of September 30, 2011, we operated 53 LasikPlus® fixed-site laser vision correction centers in the United States. Included in the 53 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

We have prepared our Condensed Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) which, 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, 2010 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 2010 Annual Report on Form 10-K. Operating results for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results expected in subsequent quarters or for the year ending December 31, 2011.

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 Balance Sheets, 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.

 

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Table of Contents

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 and other” within the Condensed Consolidated Statement of Operations. We also include in “Net investment income and other” realized gains and losses on sales of securities and declines in value of securities 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.

The following table summarizes unrealized gains and losses related to our investments designated as available-for-sale (in thousands):

 

     September 30, 2011  
     Adjusted
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Corporate obligations

   $ 10,139       $ —         $ (2   $ 10,137   

U.S. Government notes

     16,604         2         (127     16,479   

Auction rate municipal securities

     903         30         —          933   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 27,646       $ 32       $ (129   $ 27,549   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2010  
     Adjusted
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Corporate obligations

   $ 18,492       $ 1       $ (1   $ 18,492   

U.S. Government notes

     11,585         —           (29     11,556   

Municipal securities

     1,006         2         —          1,008   

Auction rate municipal securities

     924         27         —          951   

Auction rate preferred securities

     891         —           —          891   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 32,898       $ 30       $ (30   $ 32,898   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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 September 30, 2011 and December 31, 2010, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

 

     September 30, 2011     December 31, 2010  
     Less than 12 Months     Less than 12 Months  
     Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
 

Corporate obligations

   $ 8,286       $ (2   $ 6,624       $ (1

U.S. Government notes

     15,554         (127     10,179         (29
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 23,840       $ (129   $ 16,803       $ (30
  

 

 

    

 

 

   

 

 

    

 

 

 

We realized gains of $8,000 and losses of $22,000, primarily on the sale of our debt securities for the three months ended September 30, 2011, and realized gains of $35,000 and losses of $44,000 for the nine months ended September 30, 2011. We had realized gains of $27,000 and no losses on the sale of 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.

There were no other-than-temporary impairments to our investment securities for the three and nine months ended September 30, 2011 and 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.

The following table shows the net carrying value (amortized cost) and estimated fair value of debt and equity securities at September 30, 2011 by contractual maturity (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

   $ 26,743       $ 26,616   

Due after one year through three years

     —           —     

Due after three years

     903         933   
  

 

 

    

 

 

 

Total investments

   $ 27,646       $ 27,549   
  

 

 

    

 

 

 

Auction Rate Securities

At September 30, 2011 and December 31, 2010, we held $1.1 million and $2.2 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 months ended September 30, 2011, $25,000 of auction rate securities were called at par by the issuer, resulting in a gain of $4,000. In the nine months ended September 30, 2011, we redeemed auction rate preferred securities with a par value of $1.1 million for $916,000.

 

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Table of Contents

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

As a result of failed auctions, our auction rate instruments are not currently liquid. Due to the continuation of the unstable credit environment, we believe that the recovery period for most of our auction rate instruments will exceed 12 months. Accordingly, we have classified the fair value of the auction rate instruments that were not redeemed prior to September 30, 2011 as long-term.

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.

The following tables summarize fair value measurements by level at September 30, 2011 and December 31, 2010 for assets and liabilities measured at fair value on a recurring basis (in thousands):

 

     Fair Value Measurements as of September 30, 2011 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

   $ 19,545       $ —         $ —         $ 19,545   

Investments

     —           26,616         933         27,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,545       $ 26,616       $ 933       $ 47,094   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

     Fair Value Measurements as of December 31, 2010 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

   $ 19,350       $ —         $ —         $ 19,350   

Investments

     891         31,056         951         32,898   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,241       $ 31,056       $ 951       $ 52,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. 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.

The following table presents the changes in Level 3 instruments for the three and nine months ended September 30, 2011 and 2010 (in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
             2011                     2010                      2011                     2010          

Balance at beginning of period

   $ 954      $ 1,981       $ 951      $ 2,090   

Assets sold

     (21     —           (21     (22

Transfers out of Level 3

     —          —           —          (100

Gains included in other comprehensive loss

     —          8         3        21   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance as of September 30

   $ 933      $ 1,989       $ 933      $ 1,989   
  

 

 

   

 

 

    

 

 

   

 

 

 

4. Assets Held For Sale

We had assets held for sale of $53,000 and $462,000 at September 30, 2011 and December 31, 2010, respectively, comprised of lasers and other equipment from closed vision centers. We include assets held for sale in the caption “Prepaid expenses and other” on the Condensed Consolidated Balance Sheets. During the nine months ended September 30, 2011, we were able to sell some of our assets held for sale with a combined net book value of $409,000 for total cash proceeds of approximately $774,000 resulting in a gain of approximately $365,000, before tax. During the nine months ended September 30, 2010, we sold some of our assets 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 $1.4 million, before tax.

 

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LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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,
 
         2011             2010             2011             2010      

Current:

        

Federal

   $ 7      $ 6      $ 18      $ (323

State and local

     25        24        131        80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Current

     32        30        149        (243
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred:

        

Federal

   $ —        $ 8      $ —        $ 330   

State and local

     —          1        —          47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Deferred

     —          9        —          377   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 32      $ 39      $ 149      $ 134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     0.9     0.5     3.4     1.0

Our effective tax rate for the three and nine month periods ended September 30, 2011 is impacted by a full valuation allowance against all of our deferred tax assets, net of deferred tax liabilities.

As of September 30, 2011 and December 31, 2010, deferred tax assets net of deferred tax liabilities totaled $24.2 million and $21.1 million, respectively, offset by full valuation allowances. We increased both the gross deferred tax asset and the associated valuation allowance by $3.1 million as a result of the increase of net operating loss carryforward based on our loss in the first nine months of 2011. Because it is not more-likely-than-not that we will realize our deferred tax assets, we have not recorded tax benefits in the United States and state jurisdictions during 2011. Income tax expense for the nine month periods ended September 30, 2011 and 2010 includes interest on unrecognized tax benefits and state taxes in certain jurisdictions.

During the three and nine month periods ended September 30, 2011, there was a $49,000 change 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, 2011 and December 31, 2010 was approximately $588,000 and $539,000, respectively. 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 January 2011, the Internal Revenue Service initiated a review of our 2009 corporate income tax return. After an initial review, the Internal Revenue Service has recommended to the Joint Committee on Taxation that the return be accepted as filed.

 

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LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Basic Loss

        

Net loss

   $ (3,800   $ (8,440   $ (4,546   $ (13,292

Weighted average shares outstanding

     18,838        18,703        18,798        18,672   

Basic loss per common share

   $ (0.20   $ (0.45   $ (0.24   $ (0.71

Diluted Loss

        

Net loss

   $ (3,800   $ (8,440   $ (4,546   $ (13,292

Weighted average shares outstanding

     18,838        18,703        18,798        18,672   

Effect of dilutive securities

        

Stock options

     —          —          —          —     

Restricted stock

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and potential dilutive shares

     18,838        18,703        18,798        18,672   

Diluted loss per common share

   $ (0.20   $ (0.45   $ (0.24   $ (0.71

For the three and nine month periods ended September 30, 2011 and 2010, 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, 2011, the total number of outstanding options and restricted stock awards that were antidilutive was 705,487 and 447,841, respectively. 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.

7. Stock-Based Compensation

We have stock incentive plans pursuant to 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 (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
         2011              2010              2011              2010      

Stock options

   $ 18       $ 18       $ 53       $ 29   

Restricted stock

     414         338         1,206         928   
  

 

 

    

 

 

    

 

 

    

 

 

 
     432         356         1,259         957   

Income tax effect

     166         272         486         505   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 266       $ 84       $ 773       $ 452   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

We estimate the fair value of stock options granted using the Black-Scholes option-pricing model. This model requires several assumptions, which we have developed and update based on historical trends and current market observations. The accuracy of these assumptions is critical to the estimate of fair value for these equity instruments.

Our restricted stock unit awards include both time-based awards that vest ratably over three years and restricted stock units that are tied to the achievement of certain financial targets and stock performance criteria and cliff-vest in three years. The financial targets include revenue and operating income measurements. Total stockholder return is considered a market condition and the fair value of those awards was calculated using a Monte Carlo simulation valuation model.

8. Restructuring and Impairment Charges

For the nine months ended September 30, 2011, we incurred net restructuring charges of $56,000. The restructuring charges consisted primarily of a change in estimate related to previously accrued lease termination costs and employee separation benefits. For the nine months ended September 30, 2010, we incurred a net restructuring charge of $794,000. The 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.

At September 30, 2011 and December 31 2010, we included short-term restructuring reserves of $1.4 million and $1.6 million, respectively, in “Accrued liabilities and other” in the Condensed Consolidated Balance Sheets. Long-term restructuring reserves were $1.3 million and $2.1 million at September 30, 2011 and December 31, 2010, respectively, and were included in “Long-term rent obligations and other.” Restructuring reserves declined due to payments during the nine month period. The fair value measurements in all periods utilized market prices of similar assets in determining fair value, which is a Level 2 input under U.S. GAAP.

The following table summarizes the restructuring reserve for the three and nine months ended September 30, 2011 (in thousands):

 

     Employee
Separation
Costs
    Contract
Termination
Costs
    Total  

Balance at December 31, 2010

   $ 107      $ 3,641      $ 3,748   

Liabilities recognized

     20        36        56   

Utilized

     (127     (427     (554
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

     —          3,250        3,250   

Liabilities recognized

     —          —          —     

Utilized

     —          (329     (329
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

   $ —        $ 2,921      $ 2,921   

Liabilities recognized

     —          —          —     

Utilized

     —          (270     (270
  

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011

   $ —        $ 2,651      $ 2,651   
  

 

 

   

 

 

   

 

 

 

For the three and nine months ended September 30, 2011, we incurred no 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 reflected primarily our decision to consolidate vision center operations in four markets and close vision centers in four additional underperforming markets in order to preserve cash. We also included in the impairment charge $164,000 related to certain assets held for use in one vision center. 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

 

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LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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.

9. Debt

Long-term debt obligations consist of (in thousands):

 

     September 30,
2011
    December 31,
2010
 

Bank loan

   $ 4,721      $ 7,284   

Debt obligations maturing within one year

     (2,937     (3,039
  

 

 

   

 

 

 

Long-term obligations (less current portion)

   $ 1,784      $ 4,245   
  

 

 

   

 

 

 

In April 2008, we entered into a five-year bank loan agreement for $19.2 million to finance medical equipment. The loan agreement provides for repayment in equal monthly installments over a five-year period at a fixed interest rate of 4.96%. Loan repayments totaling $2.6 million for the nine months ended September 30, 2011 reflect a decrease of approximately $1.5 million, compared to the same period in 2010, due primarily to repayment of loans for excimer lasers that we sold in 2011 relating to vision centers that we closed in 2010.

The estimated fair value of our long-term portion of debt obligations is $1.8 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 a Level 3 fair value measurement.

10. Comprehensive Income (Loss)

The components of accumulated other comprehensive income consisted of the following (in thousands):

 

     September 30,
2011
    December 31,
2010
 

Unrealized investment loss

   $ (97   $ —     

Foreign currency translation adjustment

     513        662   
  

 

 

   

 

 

 

Accumulated other comprehensive income

   $ 416      $ 662   
  

 

 

   

 

 

 

The components of comprehensive loss consisted of the following for the following periods (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Net loss

   $ (3,800   $ (8,440   $ (4,546   $ (13,292

Unrealized investment loss

     (54     (22     (97     (566

Foreign currency translation

     (258     143        (149     84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (4,112   $ (8,319   $ (4,792   $ (13,774
  

 

 

   

 

 

   

 

 

   

 

 

 

11. Commitments and Contingencies

Our business results in medical malpractice lawsuits. 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, 2011 and December 31, 2010, our insurance reserves balance was $7.2 million and $7.4 million, respectively.

 

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LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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, 2010. 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 Securities and Exchange Commission (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 a website (www.sec.gov) that contains reports, proxy and information statements and other information about issuers that we file electronically with the SEC.

The financial results for the three and nine months ended September 30, 2011 and 2010 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, 2011 include (all comparisons are with the same period of 2010):

 

   

Revenues increased 7.5% to $21.8 million compared with $20.3 million; adjusted revenues increased 10.5% to $20.8 million compared with $18.8 million.

 

   

Procedure volume was 12,444, compared with 11,497 procedures (60 vision centers) and 10,569 same-store procedures (53 vision centers), marking the fourth consecutive quarter of year-over-year growth in same-store procedures.

 

   

Same-store revenues increased 15.6%; adjusted same-store revenues increased 19.5%.

 

   

Operating loss decreased to $4.1 million from $8.5 million; adjusted operating loss decreased to $5.0 million from $9.8 million. The improvement in operating loss and adjusted operating loss reflects increased procedure volume and revenue, the closing of under-performing vision centers, and lower depreciation expense from assets that are now fully depreciated. The 2010 quarter included $1.8 million in impairment and restructuring charges. Marketing cost per eye was $426 compared with $444.

 

   

Net loss was $3.8 million, or $0.20 per share, compared with net loss of $8.4 million, or $0.45 per share.

 

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Key financial highlights for the nine months ended September 30, 2011 include (all comparisons are with the same period of 2010):

 

   

Revenues were $78.5 million compared with $80.6 million; adjusted revenues were $75.1 million compared with $75.8 million.

 

   

Procedure volume was 45,382, compared with 45,829 procedures and 41,920 same-store procedures.

 

   

Same-store revenues increased 5.4%; adjusted same-store revenues increased 7.7%.

 

   

Operating loss decreased to $4.9 million from $14.6 million; adjusted operating loss decreased to $8.0 million from $18.9 million. The improvement in operating loss and adjusted operating loss reflects increased same-store procedure volume, the closing of under-performing vision centers, lower marketing and advertising expense and lower depreciation expense. The year-to-date results of 2011 included $498,000 of gain on sales of assets from closed visions centers and $56,000 in impairment and restructuring charges. The year-to-date results of 2010 included $1.6 million of gain on sale of assets and $2.5 million in impairment and restructuring charges. Marketing cost per eye decreased to $391 from $421.

 

   

Net loss was $4.5 million, or $0.24 per share, compared with net loss of $13.3 million, or $0.71 per share.

 

   

Net cash used in operations was $2.4 million compared with net cash provided by operations of $4.6 million. The net cash provided by operations for 2010 included an $11.8 million tax refund. We are now in a net operating loss carryforward position and did not receive a tax refund in 2011.

 

   

Cash and investments totaled $47.1 million as of September 30, 2011, compared with $52.2 million as of December 31, 2010.

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 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.

 

     2011      2010  

First quarter

     18,857         19,066   

Second quarter

     14,081         15,266   

Third quarter

     12,444         11,497   

Fourth quarter

        10,891   
  

 

 

    

 

 

 

Year

     45,382         56,720   
  

 

 

    

 

 

 

Current economic conditions in the United States have resulted in a continued low consumer confidence level and cautious high-end discretionary spending for many consumers. That has continued to impact our procedure volume and operating results. In response, we have reduced our workforce since 2009 so that our staffing levels would be appropriate for our anticipated procedure volume. Since October 2008, we have closed 25 vision centers. We have no current plans to open new vision centers until the economy improves.

 

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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 (in thousands).

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Revenues

        

Reported U.S. GAAP

   $ 21,790      $ 20,263      $ 78,489      $ 80,566   

Adjustments

        

Amortization of prior deferred revenue

     (1,031     (1,475     (3,437     (4,770
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted revenues

   $ 20,759      $ 18,788      $ 75,052      $ 75,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Loss

        

Reported U.S. GAAP

   $ (4,102   $ (8,504   $ (4,889   $ (14,582

Adjustments

        

Amortization of prior deferred revenue

     (1,031     (1,475     (3,437     (4,770

Amortization of prior professional fees

     103        148        344        477   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating loss

   $ (5,030   $ (9,831   $ (7,982   $ (18,875
  

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations for the Three Months Ended September 30, 2011 Compared to the Same Period in 2010

Revenues

In the third quarter of 2011, revenues increased by $1.5 million, or 7.5%, to $21.8 million from $20.3 million in the third quarter of 2010. Procedure volume increased 8.2% to 12,444 in the third quarter of 2011 from 11,497 in the third quarter of 2010. The adjusted average reported revenue per procedure, which excludes the impact of deferring revenue from separately priced extended warranties, increased to $1,668 in the third quarter of 2011 from $1,634 in the third quarter of 2010 and $1,653 in the second quarter of 2011. The components of the revenue change include (in thousands):

 

Increase in revenue from same-store procedure growth

   $ 3,064   

Decrease in revenue from closed vision centers

     (1,517

Impact from increase in average selling price, adjusted for revenue deferral

     424   

Change in deferred revenue

     (444
  

 

 

 

Increase in revenues

   $ 1,527   
  

 

 

 

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.

 

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Medical professional and license fees

Medical professional and license fees in the third quarter of 2011, totaling $5.2 million, increased by $215,000, or 4.3%, from the third quarter of 2010. The increase was due to higher license fees and physician fees associated with increased procedure volume, offset by a decrease in our enhancement costs related to previously closed vision centers. The amortization of the deferred medical professional fees attributable to prior years was $103,000 in the third quarter of 2011 and $148,000 in the third quarter of 2010.

Direct costs of services

Direct costs of services decreased $1.0 million, or 9.0%, in the third quarter of 2011 to $10.5 million from $11.5 million in the third quarter of 2010. Our decision to close underperforming laser vision centers and other cost reduction efforts drove lower direct costs of services primarily in the areas of salaries, incentives and fringe benefits and rent and utility costs compared to the same period in 2010. In addition, favorable actuarial claim experience reduced our insurance costs by approximately $357,000 in the third quarter of 2011 compared to the same period in 2010.

General and administrative

General and administrative expenses increased in the third quarter of 2011 by $250,000, or 7.5%, from the third quarter of 2010, due to increases in salary costs of $153,000, incentive costs of $225,000 attributable to changes in estimates of ultimate year-end payouts, and professional services of $507,000 for additional tax services and planned spending for growth initiatives. Offsetting these increases was a reduction in sales tax costs of $424,000 resulting from the resolution of an outstanding state sales tax audit from the years 2004 through 2006 and reduced telecommunications expense of $110,000.

Marketing and advertising

Marketing and advertising expenses in the third quarter of 2011 increased by $205,000, or 4.0%, from the third quarter of 2010. These expenses were 24.3% of revenues in the third quarter of 2011, consistent with 25.2% of revenues in the third quarter of 2010. Marketing cost per eye decreased to $426 for the third quarter of 2011 from $444 in the same period of 2010. We adjust our marketing spend levels continuously 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.

Depreciation

Depreciation expense decreased in the third quarter of 2011 by approximately $921,000, or 38.7%, to $1.5 million, from $2.4 million in the third quarter of 2010. Due to reduced capital expenditures beginning in 2009 and impairment charges and disposals as a result of closed vision centers in 2009 and 2010, our depreciable base of assets has decreased.

Restructuring and impairment charges

There were no restructuring or impairment charges in the third quarter of 2011, compared to restructuring and impairment charges of $145,000 and $1.6 million, respectively, in the third quarter of 2010. Charges for 2010 were due primarily to costs to close multiple vision centers.

Gain on sale of assets

We sold lasers and other assets held for sale for a gain of approximately $99,000 in the three months ended September 30, 2011. Gain on sale of assets was $266,000 in the three months ended September 30, 2010.

Non-operating income and expenses

Net investment income in the third quarter of 2011 increased by $231,000 to $334,000. Interest income increased by $67,000, due primarily to slightly higher yields on interest-bearing securities in 2011. Patient financing income remained flat quarter over quarter. Interest expense was $162,000 lower in the third quarter of 2011 compared to the third quarter of 2010 due to a favorable state sales tax audit settlement and a lower debt balance in 2011. Net investment income also includes our final distribution from our Canadian joint venture for $42,000.

 

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Income taxes

Due to the lack of positive evidence that the deferred tax assets will be realized in future periods as required by U.S. GAAP, we did not record a tax benefit with respect to our losses in the United States and state jurisdictions in the three months ended September 30, 2011. Income tax expense for the three months ended September 30, 2011 includes the interest on unrecognized tax benefits and state taxes in certain jurisdictions.

Results of Operations for the Nine Months Ended September 30, 2011 Compared to the Same Period in 2010

Revenues

In the nine months ended September 30, 2011, revenues decreased by $2.1 million, or 2.6%, to $78.5 million, from $80.6 million in the nine months ended September 30, 2010. Total procedure volume decreased 1.0% to 45,382 in the first nine months of 2011 from 45,829 in the first nine months of 2010. For vision centers open at least 12 months, procedure volume increased by 8.3% in the nine months ended September 30, 2011 to 45,382, compared to 41,920 in the nine months ended September 30, 2010. The adjusted average reported revenue per procedure, which excludes the impact of deferring revenue from separately priced extended warranties, was relatively unchanged at $1,654 for the nine months ended September 30, 2011 and 2010. The components of the revenue change include (in thousands):

 

Increase in revenue from same-store procedure growth

   $ 5,726   

Decrease in revenue from closed vision centers

     (6,465

Impact from change in average selling price, adjusted for revenue deferral

     (5

Change in deferred revenue

     (1,333
  

 

 

 

Decrease in revenues

   $ (2,077
  

 

 

 

Medical professional and license fees

Medical professional and license fees in the nine months ended September 30, 2011, totaling $19.2 million, decreased by $170,000, or 0.9%, from $19.4 million during the nine months ended September 30, 2010. The decrease was due to decreased physician fees and license fees associated with decreased number of vision centers and procedure volumes as well as lower enhancement costs related to previously closed vision centers. The amortization of the deferred medical professional fees attributable to prior years was $344,000 in the nine months ended September 30, 2011 and $477,000 in the same period of 2010.

Direct costs of services

Direct costs of services in the nine months ended September 30, 2011 decreased $5.5 million, or 14.6%, to $31.9 million from $37.4 million in the same period of 2010. Salaries, fringe benefits, and incentives decreased by $1.6 million and rent and utilities decreased by $1.2 million primarily as a result of our decision to close underperforming vision centers in 2010. The decrease in direct costs of services was also the result of lower bad debt expense of $779,000 due to improved collection performance, lower financing fees of approximately $385,000 as a result of efforts to shift patients to financing programs with a lower cost, and lower insurance expense of $635,000 due to reductions in our premiums as a result of fewer vision centers and favorable actuarial claim experience.

General and administrative

General and administrative expenses decreased in the nine months ended September 30, 2011 by $191,000, or 1.8%, from the same period in 2010. During the 2011 period we recorded a $424,000 favorable adjustment to sales tax from the resolution of an outstanding state sales tax audit from the years 2004 through 2006. In addition, we reduced our telecommunications expense by $276,000 and contract services by $109,000. These savings were offset partially by increases to salaries and incentives of $323,000, stock compensation expense of $180,000 and professional fees of $369,000.

Marketing and advertising

Marketing and advertising expenses decreased in the nine months ended September 30, 2011 by $1.6 million, or 8.1%, from the nine months ended September 30, 2010. These expenses were 22.6% of revenues in the nine months ended September 30, 2011, compared to 24.0% during the nine months ended September 30, 2010. Marketing cost per eye decreased to $391 in the nine months ended September 30, 2011 compared with $421 in the same period of 2010. We adjust our marketing spend levels continuously 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.

 

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Depreciation

Depreciation expense decreased in the nine months ended September 30, 2011 by $3.0 million, or 41.1%, to $4.3 million from $7.4 million in the first nine months of 2010. Due to reduced capital expenditures beginning in 2009 and impairment charges and disposals as a result of closed vision centers in 2009 and 2010, our depreciable base of assets has decreased.

Restructuring and impairment charges

The net restructuring charges in the nine months ended September 30, 2011 were $56,000, comprised primarily of adjustments to previous estimates for laser contract termination costs for closed vision centers and additional severance costs. We incurred restructuring and impairment charges totaling $794,000 and $1.7 million, respectively, for the nine months ended September 30, 2010, comprised primarily of contract termination and asset impairment 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.

Gain on sale of assets

We sold lasers and other assets held for sale for a gain of approximately $498,000 in the nine months ended September 30, 2011. Gain on sale of assets was $1.6 million for the first nine months of 2010.

Non-operating income and expenses

Net investment income in the nine months ended September 30, 2011 decreased $932,000, or 65.5%, due primarily to the gain on sale of equity investments of $993,000 that occurred in the third quarter of 2010. Patient financing interest income declined $152,000 on lower accounts receivable, and interest expense declined by $193,000 due to a favorable state sales tax audit settlement and lower borrowing levels.

Income taxes

Due to the lack of positive evidence that the deferred tax assets will be realized as required by U.S. GAAP, we did not record a tax benefit in the United States and state jurisdictions in the nine months ended September 30, 2011. Income tax expense for the nine months ended September 30, 2011 and 2010 includes the interest on unrecognized tax benefits and state taxes in certain jurisdictions.

Liquidity and Capital Resources

At September 30, 2011, we held $46.2 million in cash and cash equivalents and short-term investments, a decrease of $5.1 million from $51.3 million at December 31, 2010. Our cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows, are summarized as follows (in thousands):

 

     Nine Months  Ending
September 30,
 
     2011     2010  

Cash provided by (used in):

    

Operating activities

   $ (2,447   $ 4,613   

Investing activities

     5,613        (1,476

Financing activities

     (2,828     (4,267

Net effect of exchange rate changes on cash and cash equivalents

     (143     82   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 195      $ (1,048
  

 

 

   

 

 

 

Cash flows used in operating activities were $2.4 million for the nine months ended September 30, 2011 compared to generated cash flows of $4.6 million for the same period in 2010. Cash from operations in the first nine months of 2010 included an $11.8 million tax refund. We did not receive a tax refund in 2011 because we are in a net operating loss carryforward position. Cost control and cash conservation efforts have continued to provide significant reductions in our marketing spend, and laser maintenance, as well as many other discretionary areas. 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. At September 30, 2011, working capital (excluding debt due within one year) amounted to $30.2 million compared to $36.3 million at December 31, 2010. Liquid assets (cash and cash equivalents, short-term investments and accounts receivable) amounted to 186.6% of current liabilities at September 30, 2011, compared to 199.4% at December 31, 2010.

 

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We believe that cash flow from operations, available cash and short-term investments will 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 as the economy improves. As a result of our aggressive efforts to reduce costs, we estimate the average number of procedures required companywide to reach breakeven cash flow, excluding any tax refunds and after capital expenditures and debt service, to be approximately 70,000 per year. There can be no assurance as to the number of procedures we will perform in 2011 or thereafter.

We continue to offer our own sponsored patient financing. As of September 30, 2011, we held $2.9 million in patient receivables, net of allowance for doubtful accounts, which was an increase of $265,000, or 9.9% from December 31, 2010. Our internal patient financing rates have increased because of continued investment in our “guaranteed financing” advertising campaign. 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.

During the nine months ended September 30, 2011, we purchased $137.5 million of investment securities and received proceeds from the sale of investment securities of $142.7 million. Our investment portfolio consists of high-grade commercial paper and government securities with maturities typically ranging from 30 to 90 days. The ongoing maturities and reinvestment result in the high level of purchasing and selling activity reflected in the Condensed Consolidated Statements of Cash Flows.

We had assets held for sale of $53,000 and $462,000 at September 30, 2011 and December 31, 2010, respectively, related to unused lasers and other equipment from our closed vision centers. During the nine months ended September 30, 2011, we sold some of our assets held for sale with a combined net book value of $409,000 for total cash proceeds of approximately $774,000, resulting in a gain of approximately $365,000, before tax.

At September 30, 2011 and December 31, 2010, we held $1.1 million and $2.2 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 nine months ended September 30, 2010, $125,000 of the related securities was called at par by their issuers. In the nine months ended September 30, 2011, we redeemed securities of $1.1 million for $916,000. See Note 2 to the Condensed Consolidated Financial Statements for further information regarding our auction rate security investments.

We have not opened any new vision centers in 2011 or 2010. Capital expenditures for the nine months ended September 30, 2011 and 2010 were $869,000 and $176,000, respectively. The increase in our capital expenditures is due, in large part, to renovations of existing vision centers. In April 2011, we closed our Naperville, IL vision center.

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, 2010.

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.

Long-term investments are comprised of auction rate securities that are currently failing auction. We record these investments 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 redeem them in advance of their maturity or a regularized auction market will be restored.

 

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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 secured indebtedness is at a fixed rate, 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, 2011. 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, 2011. 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, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION.

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

For a discussion of risk factors attributable to our business, refer to Part 1, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material changes to the risk factors disclosed in the Annual Report.

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

*101.INS

   XBRL Instance Document

*101.SCH

   XBRL Taxonomy Extension Schema Document

*101.CAL

   XBRL Taxonomy Extension Calculation Linkbase Document

*101.LAB

   XBRL Taxonomy Extension Label Linkbase Document

*101.PRE

   XBRL Taxonomy Extension Presentation Linkbase Document

 

  * Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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, 2011     

/s/ David L. Thomas

     David L. Thomas
     Chief Operating Officer
Date: October 26, 2011     

/s/ Michael J. Celebrezze

     Michael J. Celebrezze
    

Senior Vice President of Finance,

Chief Financial Officer and Treasurer

 

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