U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[ X ]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2003.
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT.
For the transition period from __________ to __________
Commission file number0-27610
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 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,846,718 shares as of November 12, 2003.
1
#
LCA-Vision Inc.
INDEX
Facing Sheet
1
Index
2
Part I.
Financial Information
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002
3
Condensed Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 2003 and 2002
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
15
Item 4.
Controls and Procedures
15
Part II.
Other Information
16
Item 1.
Legal Proceedings
16
Item 2.
Changes in Securities and Use of Proceeds
16
Item 3.
Defaults Upon Senior Securities
16
Item 4.
Submission of Matters to a Vote of Security Holders
16
Item 5.
Other Information
16
Item 6.
Exhibits and Reports on Form 8-K
16
Signatures
17
2
LCA-Vision Inc. | |||
Condensed Consolidated Balance Sheets | |||
(Dollars in thousands except per share data) | |||
| |||
Assets | September 30, 2003 (1) | December 31, 2002 | |
Current Assets | |||
Cash and cash equivalents | $ 25,260 | $ 18,298 | |
Accounts receivable, net | 2,426 | 393 | |
Receivables from vendors | 506 | 337 | |
Prepaid expenses, inventory and other | 1,012 | 1,462 | |
Total current assets | 29,204 | 20,490 | |
Accounts receivable noncurrent, net | 601 | - | |
Property and Equipment | 40,550 | 37,301 | |
Accumulated depreciation and amortization | (23,664) | (18,868) | |
Property and equipment, net | 16,886 | 18,433 | |
Goodwill, net | 275 | 275 | |
Deferred compensation plan assets | 379 | 127 | |
Investment in unconsolidated businesses | 394 | 263 | |
Other assets | 442 | 408 | |
Total assets | $ 48,181 | $ 39,996 | |
Liabilities and Shareholders' Investment | |||
Current liabilities | |||
Accounts payable | $ 1,639 | $ 3,855 | |
Accrued liabilities and other | 5,434 | 3,605 | |
Debt maturing in one year | - | 10 | |
Total current liabilities | 7,073 | 7,470 | |
Deferred compensation liability | 376 | 129 | |
Insurance reserve | 1,384 | 55 | |
Minority equity interest | 446 | 230 | |
Shareholders' investment | |||
Common stock ($0.01 par value; 13,169,923 and 13,110,306 shares and | |||
10,802,726 and 10,743,109 shares issued and outstanding, respectively) | 13 | 13 | |
Contributed capital | 91,800 | 91,474 | |
Warrants | 1,982 | 1,982 | |
Notes receivable from shareholders | (225) | (1,532) | |
Common stock in treasury, at cost ( 2,367,197 shares and 2,367,197 shares) | (15,462) | (15,462) | |
Accumulated deficit | (39,270) | (44,338) | |
Foreign currency translation adjustment | 64 | (25) | |
Total shareholders' investment | 38,902 | 32,112 | |
Total liabilities and shareholders' investment | $ 48,181 | $ 39,996 | |
(1) Unaudited | |||
The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. |
3
LCA-Vision Inc. | |||||||
Condensed Consolidated Statements of Income | |||||||
(Dollars in thousands except per share data) | |||||||
Three months ended | Nine months ended | ||||||
September 30, | September 30, | ||||||
2003(1) | 2002(1) | 2003(1) | 2002(1) | ||||
Revenues -- Laser refractive surgery | 20,455 | 13,462 | 60,661 | 48,538 | |||
Operating costs and expenses | |||||||
Medical professional and license fees | 3,873 | 2,465 | 11,846 | 9,791 | |||
Direct costs of services | 8,365 | 7,341 | 23,982 | 22,127 | |||
General and administrative expenses | 2,062 | 1,994 | 6,073 | 6,454 | |||
Marketing and advertising | 3,034 | 2,968 | 9,164 | 10,179 | |||
Depreciation and amortization | 1,653 | 1,508 | 4,692 | 4,458 | |||
Special charges (benefit) | - | - | - | (174) | |||
Operating income (loss) | 1,468 | (2,814) | 4,904 | (4,297) | |||
Equity in earnings from unconsolidated businesses | 39 | 23 | 245 | 228 | |||
Minority equity interest | (64) | (44) | (215) | (157) | |||
Interest expense | (17) | (1) | (17) | (3) | |||
Investment income (loss) | 172 | (170) | 280 | 110 | |||
Other income (expense) | - | (11) | 52 | (3) | |||
Litigation settlement | - | 2,282 | - | 2 ,282 | |||
Income (loss) before taxes on income | 1,598 | (735) | 5,249 | (1,840) | |||
Income tax expense | 81 | 75 | 181 | 98 | |||
Net income (loss) | $ 1,517 | $ (810) | $ 5,068 | $ (1,938) | |||
Income (loss) per common share | |||||||
Basic | $ 0.14 | $ (0.08) | $ 0.47 | $ (0.18) | |||
Diluted | $ 0.14 | $ (0.08) | $ 0.47 | $ (0.18) | |||
Weighted average shares outstanding | |||||||
Basic | 10,771 | 10,741 | 10,753 | 10,866 | |||
Diluted | 11,044 | 10,741 | 10,856 | 10,866 | |||
(1) Unaudited | |||||||
The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. |
4
LCA-Vision Inc. | |||
Condensed Consolidated Statements of Cash Flow | |||
(Dollars in thousands except per share data) | |||
Nine months ended September 30, | |||
2003(1) | 2002(1) | ||
Cash flow from operating activities: | |||
Net income (loss) | $ 5,068 | $ (1,938) | |
Adjustments to reconcile net income to net cash provided by operating activities | |||
Depreciation and amortization | 4,692 | 4,458 | |
Amortization of warrant | - | 510 | |
Provision for loss on doubtful accounts | 1,155 | 81 | |
Deferred compensation | 247 | - | |
Insurance reserve | 1,329 | - | |
Equity in earnings of unconsolidated affiliates | (245) | (228) | |
Special charges (benefit) | - | (174) | |
Other, net | (2) | 3 | |
Changes in assets and liabilities: | |||
Accounts receivable | (3,789) | 29 | |
Receivable from vendor | (169) | (39) | |
Prepaid expenses, inventory and other | 450 | 960 | |
Accounts payable | (2,216) | (239) | |
Accrued liabilities and other | 1,830 | 862 | |
Net cash provided by operations | 8,350 | 4,285 | |
Cash flow from investing activities: | |||
Purchase of property and equipment | (3,251) | (986) | |
Proceeds from sale of property and equipment | 2 | 8 | |
Deferred compensation plan | (252) | - | |
Other, net | 376 | (114) | |
Net cash used by investing activities | (3,125) | (1,092) | |
Cash flows from financing activities: | |||
Principal payments of long-term notes, debt and capital lease obligations | (10) | (16) | |
Loan payment made by shareholders | 1,329 | - | |
Loans to shareholders | (22) | (33) | |
Shares repurchased for treasury stock | - | (2,449) | |
Exercise of stock options and warrants | 326 | 234 | |
Distribution from (to) minority equity investees | 114 | 183 | |
|
| ||
Net cash provided by (used by) financing activities | 1,737 | (2,081) | |
Increase in cash and cash equivalents | 6,962 | 1,112 | |
Cash and cash equivalents at beginning of period | 18,298 | 16,609 | |
Cash and cash equivalents at end of period | $ 25,260 | $ 17,721 | |
(1) Unaudited | |||
The notes to the Consolidated Condensed Financial Statements are an integral part of this statement. |
5
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements
for the Three and Nine Months Ended September 30, 2003 and 2002
1.
Summary of Significant Accounting Policies
This filing includes condensed consolidated Balance Sheets as of September 30, 2003 and December 31, 2002; condensed consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002; and condensed consolidated Statements of Cash Flow for the nine months ended September 30, 2003 and 2002. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim period reported. We suggest that these financial statements be read together with the financial statements and notes in our annual report on Form 10-K.
About Our Company
We are a leading developer and operator of fixed-site laser visioncorrection centers under the brand name LasikPlus. Our vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employs advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. We currently utilize fixed-site excimer lasers manufactured by Bausch & Lomb, VISX and Alcon. Our vision centers are supported mainly by full-time credentialed board-certified ophthalmologists, optometrists and other health care professionals. The ophthalmologists perform the laser vision correction procedures in our vision centers, and either ophthalmologists or optometrists generally carry out the pre-procedure evaluations and post-procedure follow-ups in-center as well. We have performed over 300,000 laser vision correction procedures in our vision cente rs, in the United States and Canada, since 1991.
We currently operate 37 laser vision correction centers, including34 wholly-owned vision centers located in large metropolitan markets throughout the United States, two joint ventures in Canada and one joint venture in Europe. We recently announced the opening of our newest LasikPlus vision center in Las Vegas.
Consolidation Policy
We use the consolidation method to report our investment in our subsidiaries and other companies when we own a majority of the voting stock of the subsidiary. In addition, we consolidate the results of operations of professional corporations with which we contract to provide the services of ophthalmologists or optometrists at our vision centers, in accordance with EITF 97-2,Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual Management Agreements. Prior to September 2002, our contractual management arrangements did not permit consolidation of our relationships with professional corporations pursuant to EITF 97-2 because we did not maintain a “controlling financial interest” in the professional corporations. Beginning in September 2002, we began a process of renewing our agreements with the professional corporations and opening new vision c enters with agreements that meet the “controlling financial interest” criteria of EITF 97-2.
As a result of the FASB’s issuance of FIN 46,Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, in January 2003, we have evaluated the contractual management arrangements entered into with professional corporations after January 1, 2003 and have determined that consolidation of these entities is appropriate under the FIN 46 guidance. With respect to the three remaining professional corporations with which we had a contractual management arrangement prior to January 1, 2003, we have determined that we should consolidate these entities under the FIN 46 guidance beginning July 1, 2003, which we do not believe will have a material impact on our consolidated financial statement. Our condensed consolidated financial statements include the accounts of:
▪
LCA-Vision Inc.
▪
LCA-Vision (Canada) Inc. and Subsidiaries
▪
The Baltimore Laser Sight Center, Ltd
▪
Columbus Eye Associates, Inc. (effective September 1, 2002)
▪
LasikPlus Medical Associates, Inc. (effective January 1, 2003)
▪
LasikPlus Medical Associates, S.C. (effective March 1, 2003)
▪
Lasik Insurance Company Ltd.
▪
LasikPlus Medical Associates, P.C. (effective July 1, 2003)
6
▪
LasikPlus Medical Associates, P.A. (effective July 1, 2003)
▪
Capital Region Vision Laser Associates, P.C. (effective July 1, 2003)
Equity Method
We use the equity method to report investments in businesses where we hold a 20% to 50% voting interest, giving us the ability to exercise significant influence, but not control, over operating and financial policies. Under the equity method we report:
▪
our interest in the entity as an investment in our Condensed Consolidated Balance Sheets
▪
our percentage share of the earnings (losses) in our Condensed Consolidated Statements of Operations
We own 43% of Silmalaseri Oy and 50% of both Cole LCA Vision LLC (through June 30, 2002) and Eyemed LCA Vision LLC and report our investments under the equity method.
Allowance for Doubtful Accounts
We provide patient financing to some of our customers, including those who could not otherwise obtain third-party financing. The terms of the financing require the patient to pay an up-front fee which is intended to cover some or all of our variable costs, and the remainder is deducted automatically from the patient’s checking account over a period of 12 to 36 months. We began our patient financing program in May, 2002. As a result of a recent expansion of this program, we are currently exposed to more credit risk than we have experienced in the past. Based upon our own experience with patient financing and based upon the credit experience of centers who provide financing to customers similar to ours, we have established bad debt reserves as of September 30, 2003 of $1,386,000 against accounts receivable of $4,413,000. To the extent that our actual bad debt write-offs are greater than our estimated bad debt reserve, i t would adversely impact our results of operations and cash flows and to the extent that our actual bad debt write-offs are less than our estimated bad debt reserve, it would favorably impact our results of operations and cash flows.
Goodwilland Other Intangible Assets
Goodwill is the excess of the acquisition cost of the businesses over the fair value of the identifiable net assets acquired. Through December 31, 2002, we amortized goodwill using the straight-line method over the estimated useful life. The Company adopted Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. SFAS No. 142 discontinued the amortization of goodwill and requires companies to perform an annual impairment test of goodwill. Application of the non-amortization provision of the SFAS No. 142 resulted in a decrease in annual operating expenses of $76,000. The impairment tests of goodwill as of December 31, 2002 indicated that the Company currently has no goodwill impairment.
Captive Insurance Company Reserves
Effective December 18, 2002, we established a captive insurance company to provide professional liability insurance coverage for claims brought against us after December 17, 2002. In addition, our captive insurance company's charter allows it to provide professional liability insurance for our doctors, some of whom are currently insured by the captive. Our captive insurance company is managed by an independent insurance consulting and management firm, and it is capitalized and funded by us based on actuarial studies performed by an affiliate of the consulting and management firm. For the year ending December 17, 2003, our captive insurance company purchased excess liability coverage for 80% of our losses in the year in excess of $1,000,000 per occurrence, up to $11,000,000. Our captive insurance company is responsible for 20% of our aggregate losses in excess of $1,000,000 per claim, up to $11,000,000. Under that arrangement, th e coverage providers’ obligation arises only after our captive pays the first $1,000,000 of any loss and the coverage providers are only obligated to pay an aggregate of $8,000,000 in a given policy year. These excess liability coverage policies are currently up for renewal, and our management may elect to purchase similar, less, more or no excess liability coverage depending on the premiums quoted, among other factors. A number of claims covered by our captive insurance company are now pending. The financial statements of the captive insurance company are consolidated with our financial statements since it is a wholly-owned enterprise. As of September 30, 2003, we recorded an insurance reserve amount of $1,384,000, which primarily represents an actuarially determined estimate of claims incurred but not yet reported. To the extent that our actual claim experience is greater than our estimated insurance reserve, it would adversely impact our results of operations and cash fl ows and to the extent that our actual claim experience is less than our estimated insurance reserve, it would favorably impact our results of operations and cash flows.
7
Income Taxes
As a result of our operating loss during the third quarter of 2001 and throughout 2002, and continuing uncertainties regarding the general economic conditions in the United States and the impact on our ongoing operations, we continue to record a full valuation reserve for deferred tax assets. This reserve was established according to the requirements of SFAS No. 109 “Accounting for Income Taxes.” Favorable changes in our operating profitability, as a result of improved general economic conditions in the United States or otherwise, could impact our determination as to whether reduction, in whole or in part, to the valuation reserve is necessary in the future. To the extent that such a reduction in the valuation reserve is necessary, an income tax benefit would be recorded in the consolidated statement of operations, which would favorably impact our results of operations. In addition, future taxable income may be absorbed by t he net operating loss carryforward that we maintain, which would favorably impact our results of operations and cash flows. During the nine months ended September 30, 2003, we applied approximately $4,725,000 of our net operating losses against our taxable income for the period, which resulted in reduced federal income tax expenses and tax payments of approximately $1,654,000. The valuation reserve and net operating loss carryforward was $17,118,000 and $44,040,000, respectively, as of September 30, 2003.
Consolidation
We use the consolidation method to report our investment in our subsidiaries and other companies when we own a majority of the voting stock of the subsidiary. In addition, we consolidate the results of operations of professional corporations with which we contract to provide the services of ophthalmologists or optometrists at our vision centers, in accordance with EITF 97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual Management Arrangements. Prior to September 2002, our contractual management arrangements did not permit consolidation of our relationships with professional corporations pursuant to EITF 97-2 because we did not maintain a “controlling financial interest” in the professional corporations. Beginning in September 2002, we began a process of renewing our agreements with the professional corporations and opening new vision centers with agreements that meet the “controlling financial interest” criteria of EITF 97-2.
As a result of the FASB’s issuance of FIN 46,Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,in January 2003, we have evaluated the contractual management arrangements entered into with professional corporations after January 1, 2003 and have determined that consolidation of these entities is appropriate under the FIN 46 guidance. With respect to the three remaining professional corporations with which we had a contractual management arrangement prior to January 1, 2003, we have determined that we should consolidate these entities under the FIN 46 guidance beginning July 1, 2003, which we do not believe will have a material impact on our consolidated financial statements. If modifications are made to existing management agreements, or if new agreements are made under different terms than existing management agreements, then the financial statements of the professional corporations may not be consolidated in the future.
Use of Estimates
Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may differ significantly from management’s expectations. These estimates and assumptions affect various matters including:
▪
Allowance for doubtful accounts – patient financing
▪
Deferred income taxes – valuation allowance
▪
Loss reserves – insurance captive
8
Per Share Data
Basic per share data is income (loss) applicable to common shares divided by the weighted average common shares outstanding. Diluted per share data is income (loss) applicable to common shares divided by the weighted average common shares outstanding plus the potential issuance of common shares if stock options or warrants were exercised or convertible preferred stock were converted into common stock.
Following is a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2003 and 2002 (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | ||||
September 30, | September 30, | ||||
2003 | 2002 | 2003 | 2002 | ||
Basic earnings: | |||||
Net income (loss) | $ 1,517 | $ (810) | $ 5,068 | $ (1,938) | |
Weighted average shares outstanding | 10,771 | 10,741 | 10,753 | 10,866 | |
Basic earnings (loss) per share | $ 0.14 | $ (0.08) | $ 0.47 | $ (0.18) | |
Diluted earnings: | |||||
Net income (loss) | $ 1,517 | $ (810) | $ 5,068 | $ (1,938) | |
Weighted average shares outstanding | 10,771 | 10,741 | 10,753 | 10,866 | |
Effect of dilutive securities | |||||
Stock options | 273 | - | 103 | - | |
Weighted average common shares and potential dilutive shares | 11,044 | 10,741 | 10,856 | 10,866 | |
Diluted earnings (loss) per share | $ 0.14 | $ (0.08) | $ 0.47 | $ (0.18) |
Stock-Based Compensation
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," was issued. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires more prominent and more frequent disclosures in the financial statements of the effects of stock-based compensation. The provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002.
We apply APB No. 25 and related interpretations utilizing the intrinsic value method in accounting for our stock option plans. We have adopted the disclosure-only provisions of SFAS No. 123. We recognize no compensation expense for our stock options granted to employees or directors. Compensation expense for options granted to non-employees in each of the three quarters ended September 30, 2002 and 2003 was immaterial. If we had elected to recognize compensation expense based on the fair value at the grant dates consistent with the provisions of SFAS No. 123, net income and income per share would have been changed to the pro forma amounts indicated below (dollars in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | |||||
September 30, | September 30, | |||||
2003 | 2002 | 2003 | 2002 | |||
Net income (loss) | As reported | $ 1,517 | $ ( 810) | $ 5,068 | $ (1,938) | |
Pro forma | 1,275 | (1,286) |
| 4,365 | (3,447) | |
Basic per share income (loss) | As reported | $ 0.14 | $ (0.08) |
| $ 0.47 | $ (0.18) |
Pro forma | 0.12 | (0.12) | 0.41 | (0.32) | ||
Diluted per share income (loss) | As reported | $ 0.14 | $ (0.08) | $ 0.47 | $ (0.18) | |
Pro forma | 0.12 | (0.12) | 0.40 | (0.32) |
9
Shareholders' Investment
No material changes from the Company’s most recent Form 10-K.
Segment Information
We operate in one segment: laser refractive surgery.
Commitments and Contingencies
None.
Internet
The Company’s website is www.lasikplus.com. The Company makes available free of charge through a link provided at such website its Forms 10-K, 10-Q and 8-K, as well as any amendments thereto. Such reports are available as soon as reasonably practicable after they are filed or furnished to the Securities and Exchange Commission. To obtain a copy of Form 10-K by mail, please send a request to Investor Relations at LCA-Vision Inc., 7840 Montgomery Road, Cincinnati, Ohio 45236.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect our results, refer to the Overview and financial statement line item discussions set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
"MD&A" is an analysis of our operating results for the three and nine months ended September 30, 2003 and 2002 and our financial condition as of September 30, 2003. It explains why our revenues and costs changed and our overall financial condition, among other matters.
Overview
We are a leading developer and operator of fixed-site laser vision correction centers under the brand name LasikPlus. Our vision centers provide the facilities, equipment and support services for performing laser vision correction that employs advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. We currently utilize fixed-site excimer lasers manufactured by Bausch & Lomb, VISX and Alcon. Substantially all of our revenues currently are derived from LASIK procedures performed in our US vision centers. In July 1999, we began converting our vision centers to closed access facilities from open access facilities in order to obtain increased control over the quality of care we provide to our patients and greater operational growth and control of our business.
Our operating costs and expenses include:
≫
medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction and the license fees per procedure paid to VISX, Bausch & Lomb and Alcon,
≫
direct costs of services, including center rent and utilities, equipment lease and maintenance costs, surgical supplies, center staff expense and costs related to other revenues,
≫
general and administrative costs, including headquarters staff expense and other overhead costs,
≫
marketing and advertising costs, and
≫
depreciation of equipment.
Our centers have a relatively high degree of operating leverage due to the fact that many of our costs are fixed in nature. As a result, our level of procedure volume can have a significant impact on our level of profitability.
10
Revenues
We derived substantially all of our revenues for the last three years from the delivery of LASIK laser vision correction services.
Our revenues in any period are primarily a function of the number of laser vision correction procedures performed and the pricing for such services.
Our revenues are impacted by a number of factors, including the following:
≫
our ability to generate customers through our arrangements with managed care companies, direct to consumer advertising and word of mouth referrals,
≫
our mix of procedures among the different types of laser technology used by us,
≫
new center openings and our ability to increase procedure volume at existing centers,
≫
the availability of patient financing,
≫
general economic conditions and consumer confidence levels,
≫
the continued growth and increased acceptance of LASIK, and
≫
the effect of competition and discounting practices in our industry.
Certain states prohibit us from practicing medicine, employing ophthalmologists to practice medicine on our behalf or employing optometrists to render optometry services on our behalf. In those states, we may contract with professional corporations to provide these services. Beginning in September 2002, we started a process to amend our management agreements with professional corporations. The new management agreements provide us with financial and operational control of the professional corporations. Therefore, we now consolidate the financial results for those professional corporations under the new management agreements in accordance with EITF 97-2. This change is not expected to have a material impact on our operating income (loss), as the increase in revenue resulting from consolidation of these professional corporations is offset by a corresponding increase in medical professional fees.
The following table details the number of laser vision correction procedures performed at our consolidated vision centers.
2003 | 2002 | |
Q1 | 17,028 | 17,592 |
Q2 | 16,432 | 14,797 |
Q3 | 15,965 | 12,511 |
Q4 |
| 12,204 |
Year | 57,104 |
We believe that improved marketing and advertising effectiveness, together with third-party patient financing, and our own patient financing plan helped to grow procedure volume in the first nine months of 2003 over the first nine months of 2002.
In the first nine months of 2003, revenues increased by $12,123,000 from $48,538,000 in the first nine months of 2002 to $60,661,000 in the first nine months of 2003. Improved pricing contributed an increase of $7,231,000 in the first nine months of 2003 as compared to the first nine months of 2002. Higher procedure volumes contributed an increase of $4,892,000 in revenue in the first nine months of 2003 compared to the first nine months of 2002.
We have raised our average price per procedure over the last ten quarters. Our average price per procedure has increased from $877 in the fourth quarter of 2000 to $1,281 in the quarter ended September 30, 2003. In the third quarter of 2003, we utilized the newest custom laser vision correction technology from Alcon in five of our markets, and we upgraded our VISX lasers in all our markets to perform custom procedures. LASIK procedures using custom ablation accounted for 7% of the third quarter procedure volume, and over 9% of third quarter revenues. We now offer LASIK using custom ablation in all of our markets and believe we can charge higher prices for this more advanced technology.
11
Expenses
Medical professional and license fees
Medical professional expenses increased by $1,036,000 from the third quarter of 2002, approximately $504,000 of this increase was due to the consolidation of the Professional Corporations in 2003, and approximately $532,000 of this increase was due to higher revenues. License fees were higher from third quarter 2002 by $372,000. This is primarily the result of increased costs due to higher volume of $529,000 and increase in enhancement expenses of $167,000. These increases are partially offset by purchasing rebates from suppliers of $324,000.
Direct costs of services
Direct costs of services include the salary component of physician compensation, staffing, equipment, medical supplies, and facility costs of operating laser vision correction centers. These direct costs increased in the third quarter of 2003 by $1,024,000 over the third quarter of 2002, largely because of an increase in provision for bad debt on patient financing of $453,000, financing fees of $348,000 related to third party patient financing and salaries and benefits of $287,000. Medical supplies increased by $104,000 in the third quarter of 2003 from the third quarter of 2002 primarily due to higher procedure volume. These cost increases were partially offset by a reduction in lease expense of $175,000 relating to assets purchased in the fourth quarter of 2002 that had been on operating leases.
General and administrative
General and administrative expenses increased by $68,000 in the third quarter of 2003 from the third quarter of 2002. Increases in insurance, salaries/benefits and contracted services of $328,000 were partially offset by a decrease of $157,000 in state and local taxes and elimination of $159,000 in warrant compensation expense.
Marketing and advertising expenses
Marketing and advertising expenses increased by $66,000 in the third quarter of 2003 from the third quarter of 2002. Compared to the second quarter of 2003, marketing and advertising expenditures decreased by $121,000.
Depreciation and amortization
Depreciation and amortization increased by $145,000 in the third quarter of 2003 from the third quarter of 2002, primarily as a result of laser upgrades and the acquisition of diagnostic equipment to support custom Lasik and the purchase of diagnostic and surgical equipment in the fourth quarter of 2002 that previously had been leased.
Non-operating income and expenses
Investment income in the third quarter of 2003 increased $342,000 and $102,000, respectively, compared to the third quarter of 2002 and second quarter of 2003. This is primarily the result of higher interest rates on our invested cash and higher average amounts of cash and cash equivalents.
Other
In August 2002, a settlement of $2,282,000 was received from the Pillar Point Partners’ class-action litigation. Pillar Point Partners – a joint venture formed in 1995 by laser manufacturers VISX Inc. and Summit Technology Inc., now a subsidiary of Alcon Corporation – collected per-use royalties from all laser vision correction providers using their equipment. Last year, the manufacturers agreed to settle the various lawsuits for $37.8 million. Pillar Point was dissolved in July 1998, after the Federal Trade Commission filed an administrative complaint challenging the partnerships’ existence.
Income Taxes
Income tax expense of $81,000 was recorded in the third quarter of 2003 primarily due to foreign income tax liabilities.
Liquidity and Capital Resources
Net cash provided by operating activities in the first nine months of 2003 was $8,350,000 which exceeded cash expenditures in investing activities. This resulted in an increase in cash and cash equivalents to $25,260,000 as of September 30, 2003, which is an increase of 9% from $23,090,000 as of June 30, 2003 and an increase of 38% from $18,298,000 as of December 31, 2002.
12
During the second quarter of 2000, the directors initiated a program to encourage additional direct stock ownership by senior management of the company. The Company offered loans to nine key managers and directors for the purpose of purchasing shares in the open market. Each loan is a personal obligation of the borrower, and is evidenced by a promissory note. The interest rate on the notes is prime less one and one-half percent. The notes have a maximum term of three years, and contain provisions for early repayment. A total of $1,541,000 has been loaned under this program. The current balance of the loans effective September 30, 2003 is $225,000.
We maintain a $10,000,000 revolving credit facility with The Provident Bank (“Provident”). In addition to the revolving credit facility, the company has a discretionary credit line of $10,000,000 to fund acquisitions. Both of these credit arrangements expire July 31, 2004.
As of December 31, 2002, we had net operating loss carryforwards for federal income tax purposes of $48,765,000. These expire in varying amounts from 2007 until 2022. Approximately $18,000,000 of federal net operating loss carryforwards and $15,750,000 state net operating loss carryforwards were acquired through an acquisition consummated by us in 1997. Our ability to use these acquired net operating loss carryforwards is limited to approximately $2,500,000 per year under Code Section 382 of the Internal Revenue Code. Because we cannot be certain we will realize the full benefit of these loss carryforwards, we have established a valuation reserve equal in amount to the loss carryforwards.
During the nine months ended September 30, 2003, we applied approximately $4,725,000 of our net operating losses against our taxable income for the period, which resulted in reduced federal income tax expenses and tax payments of $1,654,000. The valuation reserve and net operating loss carryforward was $17,118,000 and $44,040,000 as of September 30, 2003.
In December 2002, we purchased medical equipment that was being previously leased for $672,000. We anticipate that this will result in a reduction in leased equipment expense of $734,000 and an increase in depreciation expense of $224,000 in 2003 as compared to 2002.
Our costs associated with the opening of a new center generally consist of capital expenditures such as the purchase or lease of lasers, diagnostic equipment, office equipment and leasehold improvements. In addition, we typically incur other startup expenses and pre-opening advertising expenses. Generally, we estimate the costs associated with opening a new center to be between $1.0 million and $1.5 million. Actual costs will vary from center to center based upon the location of the market, the number of lasers purchased for the center, the site of the center and the level of leasehold improvements required. Our capital expenditures consist primarily of investments incurred in connection with the opening of new centers and equipment purchases or upgrades at existing facilities.
In January 2003, we opened a new center in Cleveland, Ohio and in June 2003, we opened a new center in Indianapolis, Indiana. We recently announced the opening of our newest vision center in Las Vegas. We recently upgraded our VISX lasers and diagnostic equipment to enable us to offer custom ablation in all our markets. In addition, we are currently upgrading our Bausch & Lomb lasers to offer their recently approved Zyoptix™ custom technology. We estimate the cost of our laser and equipment upgrades and center expansion plans by year-end 2003 to be approximately $4,000,000 to $6,000,000. The planned capital expenditures for the fourth quarter are expected to be funded by cash flow from operations in combination with cash and cash equivalents on hand.
We recently expanded the use of our own sponsored patient financing. As of September 30, 2003, we had $3.0 million in accounts receivable, which is an increase of $2.6 million since December 31, 2002. Further growth in accounts receivable is expected over the balance of 2003 and beyond.
Our consolidated cash and cash equivalents includes $0.5 million of cash maintained by our consolidated captive insurance company pursuant to statutory requirements as of September 30, 2003. These funds are not available for general corporate purposes. We expect cash reserves in our captive insurance company to grow over time.
The ability to fund our marketing and advertising program, planned capital expenditures and new center rollouts depends on our future performance, which, to a certain extent, is subject to general economic, competitive, legislative, regulatory and other factors that are beyond our control. Based upon our current level of operations and anticipated revenue growth, we currently believe that cash flow from operations, available cash and short-term investments, available borrowing under the credit facility from Provident Bank should be adequate to meet these needs for at least the next 12 months.
13
Critical Accounting Policies
In January 2002, the SEC issued FR-60 recommending that companies expand their disclosures related to critical accounting policies. Significant accounting policies are disclosed in Note 1 of the financial statements, and critical accounting policies are discussed in the following paragraphs.
Allowance for Doubtful Accounts
We provide patient financing to some of our customers, including those who could not otherwise obtain third-party financing. The terms of the financing require the patient to pay an up-front fee which is intended to cover some or all of our variable costs, and the remainder is deducted automatically from the patient’s checking account over a period of 12 to 36 months. We began our patient financing program in May, 2002. As a result of a recent expansion of this program, we are currently exposed to more credit risk than we have experienced in the past. Based upon our own experience with patient financing and based upon the credit experience of centers who provide financing to customers similar to ours, we have established bad debt reserves as of September 30, 2003 of $1,386,000 against accounts receivable of $4,413,000. To the extent that our actual bad debt write-offs are greater than our estimated bad debt reserve, i t would adversely impact our results of operations and cash flows and to the extent that our actual bad debt write-offs are less than our estimated bad debt reserve, it would favorably impact our results of operations and cash flows.
Captive Insurance Company Reserves
Effective December 18, 2002, we established a captive insurance company to provide professional liability insurance coverage for claims brought against us after December 17, 2002. In addition, our captive insurance company's charter allows it to provide professional liability insurance for our doctors, some of whom are currently insured by the captive. Our captive insurance company is managed by an independent insurance consulting and management firm, and it is capitalized and funded by us based on actuarial studies performed by an affiliate of the consulting and management firm. For the year ending December 31, 2003, our captive insurance company purchased excess liability coverage for 80% of our aggregate losses in a given policy year in excess of $1,000,000, up to $11,000,000. Our captive insurance company is responsible for 20% of our aggregate losses in excess of $1,000,000 per claim, up to $11,000,000. Under that arrangeme nt, the coverage providers’ obligation arises only after our captive pays the first $1,000,000 of any loss and the coverage providers are only obligated to pay an aggregate of $8,000,000 in a given policy year. Our management may elect to purchase similar, less, more or no excess liability coverage when such policies come up for renewal depending on premiums quoted, among other factors. A number of claims covered by our captive insurance company are now pending. The financial statements of the captive insurance company are consolidated with our financial statements since it is a wholly-owned enterprise. As of September 30, 2003, we recorded an insurance reserve amount of $1,384,000, which primarily represents an actuarially determined estimate of claims incurred but not yet reported. To the extent that our actual claim experience is greater than our estimated insurance reserve, it would adversely impact our results of operations and cash flows and to the extent that our act ual claim experience is less than our estimated insurance reserve, it would favorably impact our results of operations and cash flows.
Income Taxes
As a result of our operating loss during the third quarter of 2001 and throughout 2002, and continuing uncertainties regarding the general economic conditions in the United States and the impact on our ongoing operations, we continue to record a full valuation reserve for deferred tax assets. This reserve was established according to the requirements of SFAS No. 109 “Accounting for Income Taxes.” Favorable changes in our operating profitability, as a result of improved general economic conditions in the United States or otherwise, could impact our determination as to whether reduction, in whole or in part, to the valuation reserve is necessary in the future. To the extent that such a reduction in the valuation reserve is necessary, an income tax benefit would be recorded in the consolidated statement of operations, which would favorably impact our results of operations. In addition, future taxable income may be absorbed by t he net operating loss carryforward that we maintain, which would favorably impact our results of operations and cash flows. During the nine months ended September 30, 2003, we applied approximately $4,725,000 of our net operating losses against our taxable income for the period, which resulted in reduced federal income tax expenses and tax payments of approximately $1,654,000. The valuation reserve and net operating loss carryforward was $17,118,000 and $44,040,000, respectively, as of September 30, 2003.
14
Consolidation
We use the consolidation method to report our investment in our subsidiaries and other companies when we own a majority of the voting stock of the subsidiary. In addition, we consolidate the results of operations of professional corporations with which we contract to provide the services of ophthalmologists or optometrists at our vision centers, in accordance with EITF 97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual Management Arrangements. Prior to September 2002, our contractual management arrangements did not permit consolidation of our relationships with professional corporations pursuant to EITF 97-2 because we did not maintain a “controlling financial interest” in the professional corporations. Beginning in September 2002, we began a process of renewing our agreements with the professional corporations and opening new vision centers with agreements that meet the “controlling financial interest” criteria of EITF 97-2.
As a result of the FASB’s issuance of FIN 46,Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,in January 2003, we have evaluated the contractual management arrangements entered into with professional corporations after January 1, 2003 and have determined that consolidation of these entities is appropriate under the FIN 46 guidance. With respect to the three remaining professional corporations with which we had a contractual management arrangement prior to January 1, 2003, we have determined that we should consolidate these entities under the FIN 46 guidance beginning July 1, 2003, which we do not believe will have a material impact on our consolidated financial statements. If modifications are made to existing management agreements, or if new agreements are made under different terms than existing management agreements, then the financial statements of the professional corporations may not be consolidated in the future.
Factors That May Affect Future Results and Market Price of Stock
For a detailed discussion of factors that may affect our future results, please refer to the Company's most recent Form 10-K and the Form S-3 (File No. 333-109034), among our other public filings. No material new risks have developed since these filings.
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 have historically had very low exposure to changes in foreign currency exchange rates, and as such, have not used derivative financial instruments to manage foreign currency fluctuation risk.
Item 4. Controls and Procedures
(a)
Disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures that are designed to ensure that information relating to the Company required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms. Based upon this evaluation, these officers have concluded that as of September 30, 2003, the Company’s disclosure controls and procedures are adequate.
(b)
Changes in internal control over financial reporting. During this period, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
15
Part II.
Other Information
Item 1.
Legal Proceedings
None
Item 2.
Changes in Securities and Use of Proceeds.
None
Item 3.
Defaults upon Senior Securities.
None
Item 4.
Submission of Matters to a Vote of Security Holders
None
Item 5.
Other Information.
None
Item 6.
Exhibits and Reports on Form 8-K.
(a)
Exhibits
Number
Description
31.1
CEO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
31.2
CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
32
CEO/CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(a)
Reports on Form 8-K
1)
Form 8-K, dated July 14, 2003, containing a press release announcing that effective August 1, Kevin Hassey is joining the Company as president.
2)
Form 8-K, dated July 15, 2003, containing a press release announcing that the Company will release 2003 second quarter financial results before market open on Wednesday, July 23, 2003.
3)
Form 8-K, dated July 23, 2003, containing a press release reporting the Company’s net income for the second quarter ended June 30, 2003.
4)
Form 8-K, dated August 12, 2003, containing a press release announcing that the Company expects to complete the installation of wavefront analyzers to provide the LasikPlus custom laser vision correction procedure in all of its U.S. markets by August 29, 2003.
5)
Form 8-K, dated August 25, 2003, containing a press release announcing that the Company signed an agreement with OptiCare Eye Health Network.
6)
Form 8-K, dated September 23, 2003, containing a press release announcing the filing of a Registration Statement with the Securities and Exchange Commission relating to the proposed public offering of 3,000,000 shares of common stock.
7)
Form 8-K, dated October 7, 2003, containing a press release announcing the Company will release 2003 third quarter financial results before market open on Wednesday, October 22, 2003.
8)
Form 8-K, dated October 21, 2003, containing a press release announcing that the Company will open its 34th LasikPlus facility in the U.S. on October 28 in Las Vegas.
9)
Form 8-K, dated October 22, 2003, containing a press release reporting the Company’s net income for the three months ended September 30, 2003.
16
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
LCA-VISION INC.
Date November 13, 2003
/s/ Stephen N. Joffe
Stephen N. Joffe
President and Chief Executive Officer
Date November 13, 2003
/s/ Alan Buckey
Alan Buckey
Chief Financial Officer
17
Exhibit 31.1
CEO CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Stephen N. Joffe, certify that:
1.
I have reviewed this report on Form 10-Q of LCA-Vision Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial report; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting
Date: November 13, 2003
/s/ Stephen N. Joffe
Stephen N. Joffe
18
Exhibit 31.2
CFO CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Alan H. Buckey, certify that:
1.
I have reviewed this report on Form 10-Q of LCA-Vision Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
c.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial report; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting
Date: November 13, 2003
/s/ Alan H. Buckey
Alan H. Buckey
19
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of LCA-Vision Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Stephen N. Joffe, Chief Executive Officer, and Alan Buckey, Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Stephen N. Joffe
/s/ Alan Buckey
Stephen N. Joffe
Alan Buckey
Chief Executive Officer
Chief Financial Officer
20