U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2010.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT. |
For the transition period from __________ to __________
Commission file number 0-27610
LCA-Vision Inc.
(Exact name of registrant as specified in its charter)
Delaware | 11-2882328 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) |
7840 Montgomery Road, Cincinnati, Ohio 45236 |
(Address of principal executive offices) |
(513) 792-9292
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer | ¨ | Accelerated filer x | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 18,707,015 shares as of October 22, 2010
LCA-Vision Inc. | ||||
TABLE OF CONTENTS | ||||
Part I. | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | |||
Condensed Consolidated Balance Sheets (Unaudited) September 30, 2010 and December 31, 2009 | 3 | |||
Condensed Consolidated Statements of Operations (Unaudited) Three Months and Nine Months Ended September 30, 2010 and 2009 | 4 | |||
Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2010 and 2009 | 5 | |||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 6 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 | ||
Item 4. | Controls and Procedures | 23 | ||
Part II. | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 24 | ||
Item 1A. | Risk Factors | 24 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 | ||
Item 3. | Defaults Upon Senior Securities | 24 | ||
Item 4. | (Removed and Reserved) | 24 | ||
Item 5. | Other Information | 24 | ||
Item 6. | Exhibits | 24 | ||
Signatures | 25 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LCA-Vision Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
September 30, 2010 | December 31, 2009 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 22,929 | $ | 24,049 | ||||
Short-term investments | 31,450 | 28,455 | ||||||
Patient receivables, net of allowance for doubtful accounts of $1,854 and $1,645 | 2,286 | 4,562 | ||||||
Other accounts receivable, net | 2,290 | 2,002 | ||||||
Assets held for sale | 334 | 1,031 | ||||||
Prepaid professional fees | 482 | 615 | ||||||
Prepaid income taxes | 619 | 12,270 | ||||||
Deferred compensation plan assets | - | 400 | ||||||
Prepaid expenses and other | 4,197 | 5,582 | ||||||
Total current assets | 64,587 | 78,966 | ||||||
Property and equipment | 77,278 | 79,993 | ||||||
Accumulated depreciation and amortization | (60,177 | ) | (53,995 | ) | ||||
Property and equipment, net | 17,101 | 25,998 | ||||||
Long-term investments | 1,989 | 2,090 | ||||||
Patient receivables, net of allowance for doubtful accounts of $435 and $674 | 486 | 854 | ||||||
Investment in unconsolidated businesses | 106 | 137 | ||||||
Other assets | 3,534 | 4,590 | ||||||
Total assets | $ | 87,803 | $ | 112,635 | ||||
Liabilities and Stockholders' Investment | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 6,987 | $ | 6,504 | ||||
Accrued liabilities and other | 10,663 | 11,581 | ||||||
Deferred revenue | 4,818 | 6,151 | ||||||
Deferred compensation liability | - | 400 | ||||||
Debt obligations maturing in one year | 3,278 | 3,998 | ||||||
Total current liabilities | 25,746 | 28,634 | ||||||
Long-term rent obligations and other | 2,069 | 2,395 | ||||||
Long-term debt obligations (less current portion) | 5,776 | 9,145 | ||||||
Insurance reserves | 8,358 | 9,154 | ||||||
Deferred license fee | 3,406 | 4,428 | ||||||
Deferred revenue | 4,415 | 7,852 | ||||||
Stockholders' investment | ||||||||
Common stock ($.001 par value; 25,291,637 and 25,287,387 shares and 18,707,015 and 18,619,185 shares issued and outstanding, respectively) | 25 | 25 | ||||||
Contributed capital | 175,296 | 174,325 | ||||||
Common stock in treasury, at cost (6,584,622 shares and 6,668,202 shares, respectively) | (114,066 | ) | (114,668 | ) | ||||
Retained deficit | (23,815 | ) | (9,729 | ) | ||||
Accumulated other comprehensive income | 593 | 1,074 | ||||||
Total stockholders' investment | 38,033 | 51,027 | ||||||
Total liabilities and stockholders' investment | $ | 87,803 | $ | 112,635 |
The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
3
LCA-Vision Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues - Laser refractive surgery | $ | 20,263 | $ | 27,646 | $ | 80,566 | $ | 107,248 | ||||||||
Operating costs and expenses | ||||||||||||||||
Medical professional and license fees | 4,966 | 5,887 | 19,406 | 23,649 | ||||||||||||
Direct costs of services | 11,499 | 15,206 | 37,390 | 50,291 | ||||||||||||
General and administrative expenses | 3,336 | 3,706 | 10,768 | 12,575 | ||||||||||||
Marketing and advertising | 5,100 | 5,498 | 19,298 | 28,009 | ||||||||||||
Depreciation | 2,379 | 3,293 | 7,375 | 11,420 | ||||||||||||
Consent revocation solicitation charges | - | - | - | 804 | ||||||||||||
Impairment charges | 1,608 | 4,415 | 1,694 | 5,604 | ||||||||||||
Restructuring charges | 145 | 8 | 794 | 1,274 | ||||||||||||
29,033 | 38,013 | 96,725 | 133,626 | |||||||||||||
Gain on sale of assets | 266 | 10 | 1,577 | 26 | ||||||||||||
Operating loss | (8,504 | ) | (10,357 | ) | (14,582 | ) | (26,352 | ) | ||||||||
Equity in earnings from unconsolidated businesses | - | 54 | 25 | 128 | ||||||||||||
Net investment income | 103 | 651 | 1,399 | 1,112 | ||||||||||||
Loss before taxes on income | (8,401 | ) | (9,652 | ) | (13,158 | ) | (25,112 | ) | ||||||||
Income tax expense | 39 | 10,251 | 134 | 4,522 | ||||||||||||
Net loss | $ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Loss per common share | ||||||||||||||||
Basic | $ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) | ||||
Diluted | $ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) | ||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Diluted | 18,703 | 18,608 | 18,672 | 18,587 |
The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
4
LCA-Vision Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Nine months ended September 30, | ||||||||
2010 | 2009 | |||||||
Cash flow from operating activities: | ||||||||
Net loss | $ | (13,292 | ) | $ | (29,634 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 7,375 | 11,420 | ||||||
Provision for loss on doubtful accounts | 1,333 | 2,771 | ||||||
(Gain) loss on sale of investments | (1,008 | ) | 365 | |||||
Impairment charges | 1,694 | 5,604 | ||||||
Gain on sale of assets | (1,577 | ) | (26 | ) | ||||
Non cash restructuring charge | 411 | 736 | ||||||
Deferred income taxes | 377 | 11,072 | ||||||
Stock-based compensation | 957 | 607 | ||||||
Insurance reserve | (796 | ) | (123 | ) | ||||
Equity in earnings of unconsolidated affiliates | (25 | ) | (128 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Patient accounts receivable | 1,584 | 2,474 | ||||||
Other accounts receivable | (48 | ) | 82 | |||||
Prepaid income taxes | 11,651 | 2,047 | ||||||
Prepaid expenses and other | 1,385 | 118 | ||||||
Accounts payable | 483 | (856 | ) | |||||
Deferred revenue, net of professional fees | (4,293 | ) | (6,552 | ) | ||||
Accrued liabilities and other | (1,670 | ) | 7,816 | |||||
Net cash provided by operations | 4,541 | 7,793 | ||||||
Cash flow from investing activities: | ||||||||
Purchases of property and equipment | (176 | ) | (182 | ) | ||||
Proceeds from sale of assets | 1,721 | 46 | ||||||
Purchases of investment securities | (328,120 | ) | (242,429 | ) | ||||
Proceeds from sale of investment securities | 325,133 | 242,904 | ||||||
Other, net | (34 | ) | (116 | ) | ||||
Net cash (used in) provided by investing activities | (1,476 | ) | 223 | |||||
Cash flow from financing activities: | ||||||||
Principal payments of capital lease obligations and loan | (4,089 | ) | (6,315 | ) | ||||
Shares repurchased for treasury stock | (192 | ) | (36 | ) | ||||
Exercise of stock options | 14 | 18 | ||||||
Net cash used in financing activities | (4,267 | ) | (6,333 | ) | ||||
Net effect of exchange rate changes on cash and cash equivalents | 82 | 649 | ||||||
(Decrease) increase in cash and cash equivalents | (1,120 | ) | 2,332 | |||||
Cash and cash equivalents at beginning of period | 24,049 | 23,648 | ||||||
Cash and cash equivalents at end of period | $ | 22,929 | $ | 25,980 |
The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
5
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Description of Business and Accounting Policies
Description of Business
We are a provider of fixed-site laser vision correction services at our LasikPlus® vision centers. Our vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employ advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. We currently use two suppliers for fixed-site excimer lasers: Abbott Medical Optics (“AMO”) and Alcon, Inc. (“Alcon”). Our vision centers are supported by independent, board-certified ophthalmologists and credentialed optometrists, as well as other healthcare professionals. The ophthalmologists perform the laser vision correction procedures in our vision centers, and ophthalmologists or optometrists conduct pre-procedure evaluations and post-operative follow-ups in-center. Most of our patients currently receive a procedure called LASIK, which we began performing in the United States in 1997.
As of September 30, 2010, we operated 60 LasikPlus® fixed-site laser vision correction centers in the United States. Included in the 60 vision centers is one vision center licensed to an ophthalmologist who uses our trademarks. Due to the nature of our operations and organization, we operate in only one business segment.
Basis of Presentation
Our Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair presentation of our financial position, results of operations, and cash flows for each period presented. The adjustments referred to above are of a normal and recurring nature unless otherwise disclosed herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules and regulations.
We derived the Condensed Consolidated Balance Sheet as of December 31, 2009 from audited financial statements, but did not include all disclosures required by U.S. GAAP. These Condensed Consolidated Financial Statements should be read in conjunction with our 2009 Annual Report on Form 10-K. Operating results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results expected in subsequent quarters or for the year ending December 31, 2010.
Use of Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include investment valuation, patient financing receivables and reserves, insurance reserves, income taxes and enhancement accruals. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
Reclassifications
We have reclassified certain prior-period amounts in the Condensed Consolidated Statements of Operations and Statements of Cash Flows to conform to current period presentation. The reclassifications were not material to the Condensed Consolidated Financial Statements.
6
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Investments
Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, we classify all securities as available-for-sale. We carry available-for-sale securities at fair value, with temporary unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ investment. The amortized cost of debt securities in this category reflects amortization of premiums and accretion of discounts to maturity computed under the effective interest method. We include this amortization in the caption “Net investment income” within the Condensed Consolidated Statement of Operations. We also include in net investment income realized gains and losses and declines in value determined to be other-than-temporary. We base the cost of securities sold upon the specific identification method. We include interest and dividends on securities classified as available-for-sale in net investment income.
We have classified certain of our investments in auction rate securities as non-current assets within the accompanying Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009. Short-term and long-term investments, designated as available-for-sale, consist of the following (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Short-term investments: | ||||||||
Corporate obligations | $ | 20,887 | $ | 13,818 | ||||
U.S. Governmental notes and agencies | 7,375 | 3,728 | ||||||
Municipal securities | 3,188 | 8,544 | ||||||
Auction rate municipal debt | - | 2,365 | ||||||
Total short-term investments | 31,450 | 28,455 | ||||||
Long-term investments: | ||||||||
Auction rate municipal debt | 955 | 1,062 | ||||||
Auction rate preferred securities | 1,034 | 1,028 | ||||||
Total long-term investments | 1,989 | 2,090 | ||||||
Total investments | $ | 33,439 | $ | 30,545 |
The following table shows the net carrying value (amortized cost) and estimated fair value of debt and equity securities at September 30, 2010 by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because the issuers of the securities may have the right or obligation to prepay obligations without prepayment penalties.
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
Due in one year or less | $ | 31,438 | $ | 31,450 | ||||
Due after one year through three years | - | - | ||||||
Due after three years | 1,901 | 1,989 | ||||||
Total investments | $ | 33,339 | $ | 33,439 |
7
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes unrealized gains and losses related to our investments designated as available-for-sale (dollars in thousands):
September 30, 2010 | ||||||||||||||||
Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Corporate obligations | $ | 20,887 | $ | - | $ | - | $ | 20,887 | ||||||||
U.S. Governmental notes and agencies | 7,375 | - | - | 7,375 | ||||||||||||
Municipal securities | 3,176 | 12 | - | 3,188 | ||||||||||||
Auction rate municipal securities | 924 | 31 | - | 955 | ||||||||||||
Auction rate preferred securities | 977 | 57 | - | 1,034 | ||||||||||||
Total investments | $ | 33,339 | $ | 100 | $ | - | $ | 33,439 |
December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Adjusted | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Corporate obligations | $ | 13,818 | $ | - | $ | - | 13,818 | |||||||||
U.S. Governmental notes and agencies | 3,728 | - | - | 3,728 | ||||||||||||
Municipal securities | 8,459 | 85 | - | 8,544 | ||||||||||||
Equities | 1,487 | 878 | - | 2,365 | ||||||||||||
Auction rate municipal securities | 1,010 | 52 | - | 1,062 | ||||||||||||
Auction rate preferred securities | 999 | 29 | - | 1,028 | ||||||||||||
Total investments | $ | 29,501 | $ | 1,044 | $ | - | $ | 30,545 |
We realized gains of $27,000 and no losses on the sale of our debt securities for the three months ended September 30, 2010, and realized gains of $1.1 million and losses of $50,000 for the nine months ended September 30, 2010. We had realized gains of $41,000 and $47,000, and no realized losses, on the sale of marketable securities for the three and nine months ended September 30, 2009, respectively.
We recognized unrealized gains of $100,000 and no unrealized losses in accumulated other comprehensive income as of September 30, 2010. For the three and nine months ended September 30, 2010 we recorded reductions of accumulated other comprehensive income related to changes in investments of $32,000 and $943,000, net of tax of $10,000 and $377,000, respectively. The change for the three months ended September 30, 2010 consists of transfers to realized gains of $26,000 and unrealized losses of $6,000 in municipal securities. The change for the nine months ended September 30, 2010 consists of transfers to realized gains of $41,000 and $877,000 for municipal securities and equities, respectively, as well as unrealized losses of $25,000 in municipal securities. For the three and nine months ended September 30, 2009, we recognized $1.3 million in unrealized gains and no losses.
Given the duration and extent of the decline in fair values associated with our equity securities (comprised primarily of various equity mutual funds), and auction rate securities, we recognized an other-than-temporary impairment of $365,000, before tax, during the nine months ended September 30, 2009. These equity securities were sold in April 2010. There were no other-than-temporary impairments of our auction rate securities during the three and nine months ended September 30, 2010. When evaluating investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer of the investment securities and any changes thereto, and our intent to sell, or whether it is more-likely-than-not we would be required to sell the investment before recovery of the investment’s amortized cost basis.
8
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Auction Rate Securities
At September 30, 2010 and December 31, 2009, we held $2.2 million and $2.4 million par value, respectively, of various auction rate securities. The assets underlying the auction rate instruments are primarily municipal bonds and preferred closed end funds. Maturity dates for our auction rate securities range from 2030 to 2036. In the three and nine months ended September 30, 2010, $100,000 and $125,000 of the related securities were called at par by their issuers, respectively. For the full year of 2009, $1.0 million of the securities were called at par by their issuers and we redeemed an additional $2.3 million in auction rate securities at 46.9% of original par value.
Our auction rate instruments are not currently liquid. Due to the continuation of the unstable credit environment, we believe the recovery period for our auction rate instruments will exceed 12 months. Accordingly, we have classified the fair value of the auction rate instruments that have not been redeemed prior to September 30, 2010 as long-term. At September 30, 2010, the fair value and par value of our long-term auction rate instruments were $2.0 million and $2.2 million, respectively.
3. Fair Values of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level Input: | Input Definition: | |
Level 1 | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. | |
Level 2 | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. | |
Level 3 | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
9
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables summarize fair value measurements by level at September 30, 2010 and December 31, 2009 for assets and liabilities measured at fair value on a recurring basis (dollars in thousands):
Fair Value Measurements as of September 30, 2010 Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 22,929 | $ | - | $ | - | $ | 22,929 | ||||||||
Investments | - | 31,450 | 1,989 | 33,439 | ||||||||||||
Total | $ | 22,929 | $ | 31,450 | $ | 1,989 | $ | 56,368 |
Fair Value Measurements as of December 31, 2009 Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 24,049 | $ | - | $ | - | $ | 24,049 | ||||||||
Investments | 2,365 | 26,090 | 2,090 | 30,545 | ||||||||||||
Deferred compensation assets | 400 | - | - | 400 | ||||||||||||
Total | $ | 26,814 | $ | 26,090 | $ | 2,090 | $ | 54,994 | ||||||||
Liabilities: | ||||||||||||||||
Deferred compensation liabilties | $ | 400 | $ | - | $ | - | $ | 400 |
Cash and cash equivalents are comprised of either bank deposits or amounts invested in money market funds, the fair value of which is based on quoted market prices. The fair values of some investment securities included within our investment portfolio are based on quoted market prices from various stock and bond exchanges. Certain of our debt securities are classified at fair value utilizing Level 2 inputs. For these securities, fair value is measured using observable market data that includes dealer quotes, live trading levels, trade execution data, credit information and the bond’s terms and conditions. The fair values of our auction rate instruments are classified in Level 3 because they are valued using a trinomial discount model as there is insufficient observable auction rate market information available to determine the fair value of these investments. The determination of the fair value of the auction rate instruments employs assumptions including financial standing of the issuer of the instruments, final stated maturities, estimates of the probability of the issue being called prior to final maturity, estimates of the probability of defaults and recoveries, expected changes in interest rates paid on the securities, interest rates paid on similar instruments, and an estimated illiquidity discount due to extended redemption periods. We previously maintained a self-directed deferred compensation plan structured as a rabbi trust for certain highly compensated individuals. The investment assets of the rabbi trust were valued using quoted market prices. The related deferred compensation liability represented the fair value of the participants’ investment elections, determined using quoted market prices. The deferred compensation plan was terminated as of December 31, 2009. Distributions were made to all participants in January 2010.
10
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table sets forth a reconciliation of beginning and ending balances for each major category for assets measured at fair value using significant unobservable inputs (Level 3) (dollars in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance at beginning of period | $ | 1,981 | $ | 3,108 | $ | 2,090 | $ | 3,126 | ||||||||
Assets acquired | - | - | - | - | ||||||||||||
Assets sold | - | - | (22 | ) | (44 | ) | ||||||||||
Transfers in (out) of Level 3 | - | - | (100 | ) | (258 | ) | ||||||||||
Gains included in other comprehensive income | 8 | 109 | 21 | 422 | ||||||||||||
Losses included in earnings | - | - | - | (29 | ) | |||||||||||
Balance as of September 30 | $ | 1,989 | $ | 3,217 | $ | 1,989 | $ | 3,217 |
4. Assets Held For Sale
We had assets held for sale of $334,000 and $1.0 million at September 30, 2010 and December 31, 2009, respectively, comprised of excimer and femtosecond lasers. During the nine months ended September 30, 2010, we sold some of our excimer and femtosecond lasers held for sale with a combined net book value of $651,000 for total cash proceeds of approximately $1.2 million and notes receivable of $835,000, resulting in a gain of approximately $1.3 million, before tax.
5. Income Taxes
The following table presents the components of our income tax expense for the following periods (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Current: | ||||||||||||||||
Federal | $ | 6 | $ | (939 | ) | $ | (323 | ) | $ | (6,348 | ) | |||||
State and local | 24 | (147 | ) | 80 | (202 | ) | ||||||||||
Total Current | 30 | (1,086 | ) | (243 | ) | (6,550 | ) | |||||||||
Deferred: | �� | |||||||||||||||
Federal | $ | 8 | $ | 10,760 | $ | 330 | $ | 11,310 | ||||||||
State and local | 1 | 577 | 47 | (238 | ) | |||||||||||
Total Deferred | 9 | 11,337 | 377 | 11,072 | ||||||||||||
Income tax expense | $ | 39 | $ | 10,251 | $ | 134 | $ | 4,522 | ||||||||
Effective income tax rate | 0.5 | % | 106.2 | % | 1.0 | % | 18.0 | % |
Our effective tax rate for the three and nine month periods ended September 30, 2010 was impacted by a full valuation allowance against all of our deferred tax assets, net of deferred tax liabilities.
As of September 30, 2010 and December 31, 2009, deferred tax assets net of deferred tax liabilities totaled $19.0 million and $13.3 million, respectively, offset by full valuation allowances. Due to the lack of positive evidence that the deferred tax assets will be realized as required by U.S. GAAP, we were unable to record tax benefits with respect to our losses in the United States and state jurisdictions during the three and nine month periods ended September 30, 2010. Income tax expense for the three and nine month periods ended September 30, 2010 includes interest on unrecognized tax benefits and state taxes in certain jurisdictions.
11
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
At December 31, 2009, we had recorded a tax refund receivable related to the tax benefit of those federal and state net operating losses generated, where we could carryback the net operating loss to prior tax years. This receivable was collected in June 2010.
During the three and nine month periods ended September 30, 2010, there were no significant changes to the liability for unrecognized tax benefits or potential interest and penalties recorded as a component of income tax. The total amount of unrecognized tax benefits at each of September 30, 2010 and December 31, 2009 was approximately $555,000. It is reasonably possible that the amount of the total unrecognized tax benefits may change in the next 12 months. However, we do not believe that any anticipated change will be material to the Condensed Consolidated Financial Statements. In 2009, the Internal Revenue Service began an audit of our 2008 tax year. During the three months ended September 30, 2010, the 2008 audit was completed, and there were no audit adjustments.
6. Per Common Share Data
We calculate basic earnings per common share data using the weighted average number of common shares outstanding during the period. Diluted per share data reflects the potential dilution that would occur if common stock equivalents were exercised or converted to common stock but only to the extent that they are considered dilutive to our earnings. The following table is a reconciliation of basic and diluted per share data for the following periods (dollars in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic Loss | ||||||||||||||||
Net loss | $ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Weighted average shares outstanding | 18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Basic loss | $ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) | ||||
Diluted Loss | ||||||||||||||||
Net loss | $ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Weighted average shares outstanding | 18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Effect of dilutive securities | ||||||||||||||||
Stock options | - | - | - | - | ||||||||||||
Restricted stock | - | - | - | - | ||||||||||||
Weighted average common shares and potential dilutive shares | 18,703 | 18,608 | 18,672 | 18,587 | ||||||||||||
Diluted loss per common share | $ | (0.45 | ) | $ | (1.07 | ) | $ | (0.71 | ) | $ | (1.59 | ) |
For the three and nine month periods ended September 30, 2010 and 2009, we excluded all outstanding stock options and restricted stock awards from the computation of our diluted earnings per share because the effect of these share-based awards was antidilutive due to our net loss. For the three and nine months ended September 30, 2010, the total number of outstanding options and restricted stock awards that were antidilutive was 541,643 and 635,463, respectively.
12
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. Stock-Based Compensation
We have four stock incentive plans through which employees and directors have been or are granted stock-based compensation. We recognize compensation expense for the grant date fair value of stock-based awards over the applicable vesting period. The components of our pre-tax stock-based compensation expense, net of forfeitures, and associated income tax effect were as follows for the following periods (dollars in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Stock options | $ | 18 | $ | (347 | ) | $ | 29 | $ | (100 | ) | ||||||
Restricted stock | 338 | 386 | 928 | 707 | ||||||||||||
356 | 39 | 957 | 607 | |||||||||||||
Income tax effect | 272 | 36 | 505 | 267 | ||||||||||||
$ | 84 | $ | 3 | $ | 452 | $ | 340 |
Our restricted stock unit awards include time-based awards that vest ratably over three years and performance-based awards that will be issued only subject to achievement of certain performance criteria. If this performance criteria is met, the performance-based restricted stock units are subject to three-year cliff vesting.
8. | Consent Revocation Expense |
For the nine months ended September 30, 2009, we incurred $804,000 in expenses related to our successful defense of a consent solicitation initiated by a dissident stockholder group.
9. | Impairment Charges |
In the three and nine months ended September 30, 2010, we recorded impairment charges to reduce the carrying amount of long-lived assets by $1.6 million and $1.7 million, respectively. The impairment charge recognized during the three months ended September 30, 2010 primarily reflects our October 2010 decision to consolidate vision center operations in four markets and close vision centers in four additional underperforming markets by December 31, 2010 or early 2011 in order to preserve cash. Based on this evaluation, we determined that leasehold improvements and other assets with a carrying amount of $1.2 million were no longer recoverable and were in fact impaired and were written down to their fair value. Excimer lasers with a carrying amount of $1.2 million were impaired and written down by $125,000 to their estimated fair values. We adjusted the carrying value of the excimer lasers to their fair value, which we determined based on estimated market prices of similar assets. Because of deteriorating market conditions (i.e., rising interest rates and less marketplace demand), it is reasonably possible that our estimate of market prices of similar assets may change in the near term resulting in the need to adjust our determination of fair value. The fair value measurements utilized in our market prices of similar assets represent Level 2 inputs under Accounting Standards Codification (“ASC”) 820.
The closures of the vision centers do not qualify for classification as a discontinued operation due to continuing cash flows. We will continue to incur cash expenditures related to these vision centers in the form of future facility lease payments, excimer laser lease payments and costs associated with post-operative and post-surgical enhancements. For the vision center which we licensed to an ophthalmologist to operate using our trademarks, we will generate future cash in-flows in the form of license fees.
The $1.6 million impairment charge recognized in the September 2010 quarter also included $164,000 in impairment charges related to certain assets held for use in one vision center. We wrote down these assets to an approximate fair value based on estimated market prices of similar assets as a result of the decline in the overall U.S. economy and weakening consumer confidence levels, which have adversely impacted procedure volume levels. The fair value measurements utilized in our discounted cash flow represent Level 3 inputs under ASC 820.
13
LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
10. | Restructuring Charges |
For the three months ended September 30, 2010, we incurred a net restructuring charge of $145,000, which consisted primarily of a change in estimate related to contract termination costs associated with a previous closure of a center that we had subleased to the ophthalmologist.
For the nine months ended September 30, 2010, we incurred a net restructuring charge of $794,000. The restructuring charges were $328,000 for exit and disposal costs associated with the closing of vision centers and $466,000 for contract termination costs. Contract termination costs resulted primarily from the closure of one of our licensed operations and the termination of the related license agreement. Other exit and disposal costs incurred in 2010 were primarily expenses related to the closures of facilities and the relocation of various medical equipment. We incurred restructuring charges totaling $1.3 million for the nine months ended September 30, 2009, which included $1.1 million of center closure costs and $587,000 of employee separation benefits partially offset by a benefit of $435,000 due to a change in estimate to certain previously recognized contract termination costs related to our vision centers closed in 2008 after successful negotiations with lessors.
At September 30, 2010, we included restructuring reserves of $470,000 in “Accrued liabilities and other” in the Condensed Consolidated Balance Sheets, a decline from $1.1 million at December 31, 2009 due to payments during the 9-month period. Long-term restructuring reserves were $349,000 and $267,000 at September 30, 2010 and December 31, 2009, respectively, and were included in “Long-term rent obligations and other.” The fair value measurements in all periods utilized market prices of similar assets in determining fair value, which is a Level 3 input under U.S. GAAP.
The following table summarizes the restructuring reserve activities for the nine months ended September 30, 2010 (dollars in thousands):
Employee | Contract | |||||||||||
Separation | Termination | |||||||||||
Costs | Costs | Total | ||||||||||
Balance at December 31, 2009 | $ | 237 | $ | 1,092 | $ | 1,329 | ||||||
Liabilities recognized | 4 | 334 | 338 | |||||||||
Utilized | (109 | ) | (890 | ) | (999 | ) | ||||||
Balance at March 31, 2010 | 132 | 536 | 668 | |||||||||
Liabilities recognized | - | 311 | 311 | |||||||||
Utilized | (89 | ) | (79 | ) | (168 | ) | ||||||
Balance at June 30, 2010 | $ | 43 | $ | 768 | $ | 811 | ||||||
Liabilities recognized | 11 | 134 | 145 | |||||||||
Utilized | (47 | ) | (90 | ) | (137 | ) | ||||||
Balance at September 30, 2010 | $ | 7 | $ | 812 | $ | 819 |
11. Debt and Leasing Arrangements
Long-term debt and capital lease obligations consist of (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Capitalized lease obligations | $ | 11 | $ | 390 | ||||
Bank loan | 9,043 | 12,753 | ||||||
Total long-term debt obligations | $ | 9,054 | $ | 13,143 | ||||
Debt obligations maturing in one year | (3,278 | ) | (3,998 | ) | ||||
Long-term obligations (less current portion) | $ | 5,776 | $ | 9,145 |
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LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
We use capitalized lease obligations to finance purchases of some of our medical equipment. The leases cover periods of 24 to 36 months from the date the medical equipment is installed.
In April 2008, we entered into a five-year bank loan agreement for $19.2 million to finance medical equipment at a fixed interest rate of 4.96%. The loan agreement contains no financial covenants. Loan repayments increased approximately $1.0 million for the nine months ended September 30, 2010 compared to the same period in 2009 due primarily to early payoffs of excimer lasers that were sold as a result of previously closed vision centers.
The capital lease obligations and the bank loan are secured by certain medical equipment.
The estimated fair value of our long-term debt and capital lease obligations is $9.0 million based on the present value of the underlying cash flows discounted at our incremental borrowing rate. Within the hierarchy of fair value measurements, this is Level 3 fair value measurement.
12. Comprehensive Income (Loss)
The components of accumulated other comprehensive income consisted of the following (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Unrealized investment gain, net of tax of $40 and $417 | $ | 60 | $ | 626 | ||||
Foreign currency translation | 533 | 448 | ||||||
Accumulated other comprehensive income | $ | 593 | $ | 1,074 |
The components of comprehensive loss consisted of the following for the following periods (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss | $ | (8,440 | ) | $ | (19,903 | ) | $ | (13,292 | ) | $ | (29,634 | ) | ||||
Unrealized investment (loss) gain, net of tax of ($10), $170, ($377) and $478 | (22 | ) | 255 | (566 | ) | 717 | ||||||||||
Foreign currency translation | 143 | 265 | 84 | 486 | ||||||||||||
Comprehensive loss | $ | (8,319 | ) | $ | (19,383 | ) | $ | (13,774 | ) | $ | (28,431 | ) |
13. Commitments and Contingencies
Our business results in medical malpractice lawsuits. Claims reported to us prior to December 18, 2002 were generally covered by external insurance policies and to date have not had a material financial impact on our business other than the cost of insurance and our deductibles under these policies. Effective in December 2002, we established a captive insurance company to provide coverage for claims brought against us after December 17, 2002. We use the captive insurance company for both primary insurance and excess liability coverage. A number of claims are now pending with our captive insurance company. At September 30, 2010, our insurance reserve balance was $8.4 million.
In addition to these malpractice suits, we are periodically subject to various other claims and lawsuits. We believe that none of these other claims or lawsuits to which we are currently subject, individually or in the aggregate, will have a material adverse effect on our business, financial position, results of operations, or cash flows.
14. Subsequent Events
In order to preserve cash, we decided in October 2010 to consolidate four markets, close an additional four underperforming vision centers and eliminate 8% of our workforce. The elimination of these positions, which we communicated to our employees subsequent to September 30, 2010, includes reductions from our call center, corporate office, and from closing vision centers. We estimate the fourth quarter 2010 restructuring charges will be approximately $4.3 million, comprised of contract termination costs, closure costs, and employee severance and benefits. This estimate, which includes a full charge for all future rents, may change significantly based on our ability to successfully negotiate lease buyouts with the landlords or subleases of the vision centers planned for closure in the fourth quarter. See Note 9 to the Condensed consolidated financial statements for impairment charges recorded at September 30, 2010 and additional restructuring charges anticipated in the fourth quarter 2010 as a result of these decisions.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Information included in this Quarterly Report on Form 10-Q contains forward-looking statements that involve potential risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date thereof.
We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. These reports and other information filed by us may be read and copied at the Public Reference Room of the SEC, 100 F Street N.E., Washington, D.C. 20549. Information may be obtained about the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy statements and other information about issuers, like us, which file electronically with the SEC. The address of that site is http://www.sec.gov.
The financial results for the three and nine months ended September 30, 2010 and 2009 referred to in this discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes in this Quarterly Report on Form 10-Q. Results of interim periods may not be indicative of the results for subsequent periods or the full year.
Overview
Key financial highlights for the three months ended September 30, 2010 include (all comparisons are with the corresponding period of 2009):
· | Revenues were $20.3 million compared with $27.6 million; adjusted revenues were $18.8 million compared with $25.7 million. |
· | Procedure volume was 11,497 procedures (62 vision centers) compared with 15,335 procedures (71 vision centers) and 14,068 same-store procedures. |
· | Same-store revenues (62 vision centers) decreased 19.3%; adjusted same-store revenues decreased 18.3%. |
· | Operating loss was $8.5 million compared with operating loss of $10.4 million; adjusted operating loss was $9.8 million compared with adjusted operating loss of $12.1 million. The reduction in operating loss and adjusted operating loss for the third quarter of 2010 reflected the impact from the closure of under-performing vision centers, a reduction in direct costs per vision center, and lower marketing and general and administrative expenses. Results for the third quarter of 2010 include $1.8 million in restructuring and impairment charges, compared with $4.4 million in restructuring and impairment charges in the third quarter of 2009. |
· | Net loss was $8.4 million, or $0.45 per share, compared with net loss of $19.9 million, or $1.07 per share. |
Key financial highlights for the nine months ended September 30, 2010 include (all comparisons are with the same period of 2009):
· | Revenues were $80.6 million compared with $107.2 million; adjusted revenues were $75.8 million compared with $100 million. |
· | Procedure volume was 45,829 procedures compared with 61,058 procedures and 55,703 same-store procedures. |
· | Operating loss was $14.6 million compared with operating loss of $26.4 million; adjusted operating loss was $18.9 million compared with adjusted operating loss of $32.9 million. The reduction in operating loss and adjusted operating loss was a result of closing under-performing vision centers, lower direct costs per vision center, lower marketing expense, lower general and administrative expense, and less restructuring, impairment and consent revocation charges. Direct costs per center were $67,000 per month for the first nine months of 2010 compared with $76,000 per month for the same period of 2009. Marketing cost per eye decreased to $421 for the first nine months of 2010 from $459 for the same period last year. Operating loss and adjusted operating loss for the 2010 period included $2.5 million in impairment and restructuring charges, whereas the 2009 period included $6.9 million in impairment and restructuring charges and $804,000 in consent revocation solicitation charges. |
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· | Net loss was $13.3 million, or $0.71 per share, compared with net loss of $29.6 million, or $1.59 per share. |
· | Cash and investments were $56.4 million at September 30, 2010, compared with $54.6 million as of December 31, 2009. |
We derive substantially all of our revenues from the delivery of laser vision correction procedures performed in our U.S. vision centers. Our revenues, therefore, depend on our volume of procedures, and are impacted by a number of factors, including the following:
· | General economic conditions and consumer confidence and discretionary spending levels, |
· | Our ability to generate customers through our arrangements with managed care companies, direct-to-consumer advertising, and word-of-mouth referrals, |
· | The availability of patient financing, |
· | The level of consumer acceptance of laser vision correction, and |
· | The effect of competition and discounting practices in our industry. |
Other factors that may impact our revenues include:
· | Deferred revenue from the sale, prior to June 15, 2007, of separately priced acuity programs, and |
· | Our mix of procedures among the different types of laser technology. |
Because our revenues are a function of the number of laser vision correction procedures performed and the pricing for these services, and many of our costs are fixed, our vision centers have a relatively high degree of operating leverage. As a result, our level of procedure volume can have a significant impact on our level of profitability. The following table details the number of laser vision correction procedures performed at our consolidated vision centers.
2010 | 2009 | |||||||
First quarter | 19,066 | 27,859 | ||||||
Second Quarter | 15,266 | 17,864 | ||||||
Third Quarter | 11,497 | 15,335 | ||||||
Fourth Quarter | 11,718 | |||||||
Year | 45,829 | 72,776 |
The continued economic slowdown in the United States has severely impacted our procedure volume and operating results, resulting in a decline in consumer confidence levels and a reduction in high-end discretionary expenditures for many consumers. In response, in 2009 and 2010 we reduced our workforce so that our staffing levels would be appropriate for our anticipated procedure volume. Since January 1, 2009, we have closed 15 vision centers and converted one vision center into a licensed facility. In addition, in October 2010, we announced the closure of eight more vision centers. We have no current plans to open vision centers in new markets until the economy improves. We are leveraging consumer insights from extensive market research conducted over the past several months in an effort to optimize our marketing efforts.
We have provided both adjusted revenues and operating losses as a means of measuring performance that adjusts for the non-cash impact of accounting for separately priced extended warranties which we offered prior to June 15, 2007. We believe the adjusted information better reflects operating performance and therefore is more meaningful to investors. A reconciliation of revenues and operating losses reported in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) is provided below (dollars in thousands).
17
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues | ||||||||||||||||
Reported U.S. GAAP | $ | 20,263 | $ | 27,646 | $ | 80,566 | $ | 107,248 | ||||||||
Adjustments: | ||||||||||||||||
Amortization of prior deferred revenue | (1,475 | ) | (1,927 | ) | (4,770 | ) | (7,280 | ) | ||||||||
Adjusted revenues | $ | 18,788 | $ | 25,719 | $ | 75,796 | $ | 99,968 | ||||||||
Operating Loss | ||||||||||||||||
Reported U.S. GAAP | $ | (8,504 | ) | $ | (10,357 | ) | $ | (14,582 | ) | $ | (26,352 | ) | ||||
Adjustments: | ||||||||||||||||
Amortization of prior deferred revenue | (1,475 | ) | (1,927 | ) | (4,770 | ) | (7,280 | ) | ||||||||
Amortization of prior professional fees | 148 | 193 | 477 | 728 | ||||||||||||
Adjusted operating loss | $ | (9,831 | ) | $ | (12,091 | ) | $ | (18,875 | ) | $ | (32,904 | ) |
Results of Operations for the Three Months Ended September 30, 2010 Compared to the Same Period in 2009
Revenues
In the third quarter of 2010, revenues decreased by $7.4 million, or 26.7%, to $20.3 million from $27.6 million in the third quarter of 2009. Procedure volume decreased 25% to 11,497 in the third quarter of 2010 from 15,335 in the third quarter of 2009. The components of the revenue change include (dollars in thousands):
Decrease in revenue from lower procedure volume | $ | (6,437 | ) | |
Impact from decrease in average selling price, before revenue deferral | (494 | ) | ||
Change in deferred revenue | (452 | ) | ||
Decrease in revenues | $ | (7,383 | ) |
The adjusted average reported revenue per procedure, which excludes the impact of deferring revenue from separately priced extended warranties, decreased to $1,634 in the third quarter of 2010 from $1,677 in the third quarter of 2009 and increased from $1,619 in the second quarter of 2010. In an effort to increase traffic at our vision centers, we offered a network-wide 15% discount on procedure pricing in part of the third and all of the second quarters of 2010.
We experienced an increase in both appointment show rates and treatment show rates in the third quarter of 2010 compared to the same period in 2009. We attribute these improvements to significant efforts to improve patient interactions, the third quarter price discount promotion, and organizational effectiveness. Candidacy rates declined slightly in the third quarter of 2010 compared to the same period in 2009. We have seen an increase in conversion rates compared to the third quarter of 2009. Patient activity in regards to inquiries remains down as a result of economic uncertainty and other macroeconomic factors which results in lower procedure volumes. Industry sources indicate that the entire laser vision correction industry continues to be impacted negatively.
Operating costs and expenses
Our operating costs and expenses include:
· | Medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction, and per procedure license fees paid to certain equipment suppliers of our excimer and femtosecond lasers, |
· | Direct costs of services, including the salary component of physician compensation for certain physicians employed by us, staff, facility costs of operating laser vision correction centers, equipment lease and maintenance costs, surgical supplies, financing charges for third-party patient financing, and other costs related to revenues, |
· | General and administrative costs, including headquarters and call center staff expense, and other overhead costs, |
· | Marketing and advertising costs, and |
· | Depreciation of equipment and leasehold improvements. |
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Medical professional and license fees
Medical professional and license fees in the third quarter of 2010 decreased by $921,000, or 15.6%, from the third quarter of 2009. The decrease was due to lower license fees of $235,000 and physician fees of $697,000 associated with decreased procedure volumes, partially offset by a slight increase in our enhancement expense. The amortization of the deferred medical professional fees attributable to prior years was $148,000 in the third quarter of 2010 and $193,000 in the third quarter of 2009.
Direct costs of services
Direct costs of services decreased $3.7 million, or 24.4%, in the third quarter of 2010 to $11.5 million from $15.2 million in the third quarter of 2009. Lower salaries, fringe benefits, and rent and utilities as a result of closed vision centers and other cost reduction efforts drove much of the decrease in direct costs of services this quarter compared to the same period in 2009. This decrease was also the result of lower procedure volumes, which caused lower laser maintenance costs, financing fees, and bad debt expense.
General and administrative
General and administrative expenses in the third quarter of 2010 decreased by $370,000, or 10%, from the third quarter of 2009, due primarily to workforce reductions which resulted in reduced salaries and fringe benefits, and savings in professional services.
Marketing and advertising
Marketing and advertising expenses in the third quarter of 2010 decreased by $398,000, or 7.2%, from the third quarter of 2009. These expenses were 25.2% of revenues in the third quarter of 2010 compared to 19.9% during the third quarter of 2009. Marketing cost per eye increased to $444 for the third quarter of 2010 from $359 in the same period of 2009 primarily due to the decreased procedure volume. In the third quarter of 2010, we continued to reduce our marketing spend levels in an attempt to align spending levels with consumer demand. We are continuing to work to develop more efficient marketing techniques and expand local initiatives as a means to attract patients. Our future operating profitability will depend in large part on the success of our efforts in this regard.
Impairment charges
The impairment charge in the third quarter of 2010 was $1.6 million which reflects our decision to consolidate vision center operations in four markets, and close vision centers in four additional underperforming markets. In the three months ended September 30, 2009, we recorded impairment charges of $4.4 million as a result of the closure of 10 underperforming vision centers.
Restructuring charges
The net restructuring charges in the third quarter of 2010 were $145,000, which consisted of a change in estimate for contract termination costs associated with a previous closure of our San Jose, California vision center. The ophthalmologist who had subleased the facility from us terminated the sublease in the third quarter of 2010. In the third quarter of 2009, net restructuring charges were $8,000, primarily for employee separation benefits for vision centers closed. As part of our priority to conserve cash, we anticipate recording additional restructuring charges during the fourth quarter of 2010 for the consolidation of four markets (Houston, Texas; Dallas, Texas; Atlanta, Georgia; and Chicago Illinois), the closure of an additional four underperforming vision centers (San Diego, California; Ft. Lauderdale, Florida; Raleigh, North Carolina; and Westbury, New York), and a workforce reduction of 8%. The involuntary terminations include reductions from our call center, corporate office and from closing vision centers. We estimate the fourth quarter 2010 restructuring charges will be approximately $4.3 million, comprised of contract termination costs, closure costs, and employee severance and benefits. This estimate, which includes a full charge for all future rents, may change significantly based on our ability to successfully negotiate lease buyouts with the landlords or subleases of the vision centers planned for closure in the fourth quarter.
Non-operating income and expenses
Net investment income in the third quarter of 2010 decreased $548,000, or 84.2%, to $103,000 from $651,000 in the third quarter of 2009. Interest income decreased by $579,000, primarily due to lower patient financing interest income of $183,000 on lower procedure volume and lower investment income of $396,000 on lower yielding debt investments and market value adjustments previously recorded for our deferred compensation plan that was terminated on December 31, 2009.
Income taxes
Due to the lack of positive evidence that the deferred tax assets will be realized as required by U.S. GAAP, we were unable to record tax benefits with respect to our losses in the United States and state jurisdictions in the three months ended September 30, 2010. Income tax expense for the three months ended September 30, 2010 includes the interest on unrecognized tax benefits and state taxes in certain jurisdictions.
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Results of Operations for the Nine Months Ended September 30, 2010 Compared to the Same Period in 2009
Revenues
In the nine months ending September 30, 2010, revenues decreased by $26.7 million, or 24.9%, to $80.6 million, from $107.2 million in the nine months ended September 30, 2009. Procedure volume decreased 24.9% to 45,829 in the third quarter of 2010 from 61,058 in the third quarter of 2009. For vision centers open at least 12 months, procedure volume decreased by approximately 17.7% in the nine months ended September 30, 2010 to 45,829, as compared to 55,703 in the nine months ended September 30, 2009. The components of the revenue change include (dollars in thousands):
Decrease in revenue from lower procedure volume | $ | (24,934 | ) | |
Impact from increase in average selling price, before revenue deferral | 762 | |||
Change in deferred revenue | (2,510 | ) | ||
Decrease in revenues | $ | (26,682 | ) |
The adjusted average reported revenue per procedure, which excludes the impact of deferring revenue from separately priced extended warranties, increased 1.0% to $1,654 for the nine months ended September 30, 2010 from $1,637 in the nine months ended September 30, 2009. During the past year, we have revised our pricing strategy to reduce the number of pricing tiers which had the effect of increasing average price.
We experienced increases in both appointment show rates and treatment show rates in the nine months ended September 30, 2010 compared to the same period in 2009. We attribute these improvements in operational metrics primarily to patient acquisition and organizational effectiveness measures. Although candidacy rates declined slightly year over year, we have seen an increase in conversion rates. Patient activity in regards to inquiries remains down as a result of economic uncertainty and other macroeconomic factors which results in lower procedure volumes. Industry sources indicate that the entire laser vision correction industry continues to be impacted negatively.
Medical professional and license fees
Medical professional and license fees in the nine months ended September 30, 2010 decreased by $4.2 million, or 17.9%, from the nine months ended September 30, 2009. The decrease was due to decreased license fees of $1.7 million and physician fees of $2.5 million associated with decreased procedure volumes, partially offset by a $232,000 increase in our enhancement expense. The amortization of the deferred medical professional fees attributable to prior years was $477,000 in the nine months ended September 30, 2010, and $728,000 in the same period of 2009.
Direct costs of services
Direct costs of services in the nine months ended September 30, 2010 decreased $12.9 million, or 25.7%, to $37.4 million from $50.3 million in the same period of 2009. Lower salaries, fringe benefits, and incentives, as well as rent and utilities, professional and contracted services, and travel and entertainment expense caused the decrease in direct costs of services in the nine months ended September 30, 2010 compared to the same period in 2009. This decrease was also the result of lower procedure volumes, which resulted in lower bad debt, financing fees, laser maintenance, state and local taxes, and surgical supplies, partially offset by an increase in stock compensation expense and insurance.
General and administrative
General and administrative expenses in the nine months ended September 30, 2010 decreased by $1.8 million, or 14.4%, from the nine months ended September 30, 2009, due primarily to workforce reductions which resulted in reduced salaries and fringe benefits, and reductions in travel and entertainment, contract services, and professional services, offset slightly by an increase in stock-based compensation expense.
Marketing and advertising
Marketing and advertising expenses in the nine months ended September 30, 2010 decreased by $8.7 million, or 31.1%, from the nine months ended September 30, 2009. These expenses were 24.0% of revenues in the nine months ended September 30, 2010, compared to 26.1% during the nine months ended September 30, 2009. In 2010, we reduced our marketing spend levels in an attempt to continue to align spending levels with consumer demand. We are continuing to work to develop more efficient marketing techniques and expand local initiatives as a means to attract customers. Our future operating profitability will depend in large part on the success of our efforts in this regard.
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Gain on sale of assets
We sold excimer and femtosecond lasers held for sale for a gain of approximately $1.6 million in the nine months ended September 30, 2010. Gain on sale of assets was minimal for the first nine months of 2009.
Consent revocation solicitation charges
In the nine months ended September 30, 2009, we incurred $804,000 in charges related to our successful defense of a consent solicitation by a dissident stockholder group.
Impairment charges
The impairment charge in the nine months ended September 30, 2010 was $1.7 million, which reflects our decision to consolidate vision center operations in four markets and close vision centers in four additional underperforming markets. In the nine months ended September 30, 2009, we recorded impairment charges of $5.6 million as a result of the closure of 10 underperforming vision centers.
Restructuring charges
The net restructuring charges in the nine months ended September 30, 2010 were $794,000, comprised primarily of contract termination costs associated with the closure of certain of our laser vision centers. Also included in the charges were other exit and disposal costs incurred in 2010 related to vacating leased properties and relocating medical equipment. We incurred restructuring charges totaling $1.3 million for the nine months ended September 30, 2009, which included $1.1 million of center closure costs and $587,000 of employee separation benefits, partially offset by a benefit of $435,000 due to a change in estimate to certain previously recognized contract termination costs related to our vision centers closed in 2008 after successful negotiations with the lessors.
Non-operating income and expenses
Net investment income in the nine months ended September 30, 2010 increased $287,000, or 25.8%, to $1.4 million from $1.1 million in the nine months ended September 30, 2009. This is due primarily to the gain on sale of investments of $988,000 that occurred in the second quarter of 2010 and $365,000 other-than-temporary impairment of auction rate securities and equity investments recognized in the third quarter of 2009. Patient financing interest income declined $645,000 on lower procedure volume, investment income declined by $601,000 on lower yielding debt investments, and interest expense declined by $210,000.
Income taxes
Due to the lack of positive evidence that the deferred tax assets will be realized as required by U.S. GAAP, we were unable to record tax benefits with respect to our losses in the U.S. and state jurisdictions in the nine months ended September 30, 2010. Income tax expense for the nine months ended September 30, 2010 includes the interest on unrecognized tax benefits and state taxes in certain jurisdictions.
Liquidity and Capital Resources
At September 30, 2010, we held $54.4 million in cash and cash equivalents and short-term investments, an increase of $1.9 million from $52.5 million at December 31, 2009. Our cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows, are summarized as follows (dollars in thousands):
Nine Months Ending | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash provided (used) by: | ||||||||
Operating activities | $ | 4,541 | $ | 7,793 | ||||
Investing activities | (1,476 | ) | 223 | |||||
Financing activities | (4,267 | ) | (6,333 | ) | ||||
Net effect of exchange rate changes on cash and cash equivalents | 82 | 649 | ||||||
Net (decrease) increase in cash and cash equivalents | $ | (1,120 | ) | $ | 2,332 |
Cash flows generated from operating activities declined to $4.5 million for the nine months ended September 30, 2010 compared to $7.8 million for the same period in 2009. This decrease was due primarily to lower earnings in 2010. Cost control and cash conservation efforts have provided significant reductions in our marketing spend, salary expense, and laser maintenance, as well as all other discretionary areas which have offset a portion of the reductions in revenue from 2009. We continue to manage working capital closely with particular focus on ensuring timely collection of outstanding patient receivables and the management of our trade payable obligations. Gross patient receivables decreased $2.7 million in the nine months ended September 30, 2010 as a result of lower procedure volume. At September 30, 2010, working capital (excluding debt due within one year) amounted to $42.1 million compared to $54.3 million at December 31, 2009. Liquid assets (cash and cash equivalents, short-term investments, and accounts receivable) amounted to 229.0% of current liabilities at September 30, 2010, compared to 206.3% at December 31, 2009.
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We continue to offer our own sponsored patient financing. As of September 30, 2010, we had $2.8 million in patient receivables, net of allowance for doubtful accounts, which was a decrease of $2.6 million, or 48.7% from December 31, 2009. We continually monitor the allowance for doubtful accounts and will adjust our lending criteria or require greater down payments if our experience indicates that is necessary. However, our ability to collect patient accounts depends, in part, on overall economic conditions. Bad debt expense was 1.7% and 2.6% of revenue for the nine months ended September 30, 2010 and 2009, respectively. The decrease in bad debt expense is attributable to improved collection experience within our 12-month and 18-month patient financing plans resulting from improvements to our underwriting standards that were implemented last year, including analysis of FICO scores for patients and requiring varying down payments depending upon credit scores.
During the nine months ended September 30, 2010, we purchased $328.1 million of investment securities and received proceeds from the sale of investment securities of $325.1 million. The majority of our investment portfolio consists of high-grade commercial paper and bonds with maturities of 30 days or less, which results in the high level of purchasing and selling activity reflected on the cash flow statement.
We had assets held for sale of $334,000 and $1.0 million at September 30, 2010 and December 31, 2009, respectively, related to unused excimer and femtosecond lasers from our closed vision centers. During the nine months ended September 30, 2010, we sold some of our excimer and femtosecond lasers held for sale with a combined net book value of $651,000 for total cash proceeds of approximately $1.2 million and notes receivable of $835,000, resulting in a gain of approximately $1.3 million before tax. We collected $258,000 on notes receivable from these sales in the nine months ended September 30, 2010.
In April 2008, we entered into a five-year loan agreement with PNC Equipment Finance, LLC to finance the majority of the IntraLase units which we purchased. The remaining unpaid balance on the bank loan was $9.1 million at September 30, 2010. The loan agreement contains no financial covenants and, as with our capital lease obligations, is secured by certain medical equipment. Loan repayments increased approximately $1.0 million for the nine months ended September 30, 2010 compared to the same period in 2009 due primarily to additional payoffs of excimer lasers that were sold.
At September 30, 2010 and December 31, 2009, we held $2.2 million and $2.4 million, respectively, par value of various auction rate securities. The assets underlying the auction rate instruments are primarily municipal bonds and preferred closed end funds. Our auction rate instruments are not currently liquid. Maturity dates for our auction rate securities range from 2030 to 2036. In the first three quarters of 2010, $125,000 of the related securities was called at par by their issuers. In the full year of 2009, $1.0 million of the securities was called at par by their issuers and we redeemed an additional $2.3 million at 46.9% of original par value. See Note 2 to Condensed Consolidated Financial Statements for further information regarding our auction rate security investments.
We have not opened any new vision centers in 2010 or 2009. Capital expenditures for the nine months ended September 30, 2010 and 2009 were $176,000 and $182,000, respectively. To date in 2010, we closed three vision centers and announced the closure of an additional eight vision centers.
We believe that cash flow from operations, available cash and short-term investments provide sufficient cash reserves and liquidity to fund our working capital needs, capital expenditures and debt and capital lease obligations for at least the next 12 months. We are balancing cash conservation in the current challenging economic environment against our longer-term objective of managing to profitability and growth when the economy improves. As a result of aggressive efforts to reduce costs, the average number of procedures required for each vision center to reach breakeven is estimated at 95 per month. We estimate the number of procedures companywide required for breakeven cash flow, excluding any tax refunds and after capital expenditures and debt service, to be approximately 73,000 per year. We believe that we have sufficient cash and investments to fund our business beyond 2012 if we perform at least 52,000 procedures annually. There can be no assurance as to the number of procedures we will perform in 2010 or beyond.
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Critical Accounting Estimates
There have been no material changes in the critical accounting policies described in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The carrying values of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of the short maturity of these instruments.
We record short-term investments at fair value. Due to the short-term nature of the investments in corporate bonds, municipal and U.S. Government bonds, we believe there is little risk to the valuation of these debt securities. The investments in equity securities carry more market risk.
Long-term investments include auction rate securities that are currently failing auction. These investments are recorded at fair value using a trinomial discount model. We are divesting all auction rate securities as the market allows. There can be no assurance, however, that the issuers of the auction rate securities that we hold will do so in advance of their maturity or the restoration of a regularized auction market.
We have a low exposure to changes in foreign currency exchange rates and, as such, have not used derivative financial instruments to manage foreign currency fluctuation risk.
In addition, because our capital leases and secured indebtedness are at fixed rates, we have limited interest rate risk.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including the company's Chief Operating Officer (COO) and Chief Financial Officer (CFO), an evaluation of the effectiveness of our disclosure controls and procedures was performed as of September 30, 2010. Based on this evaluation, the COO and CFO concluded that our disclosure controls and procedures are effective to ensure that material information is (1) accumulated and communicated to our management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
(b) Changes in Internal Control over Financial Reporting
Under the supervision of and with the participation of our management, including the COO and CFO, an evaluation of our internal control over financial reporting was performed as of September 30, 2010. Based on this evaluation, management concluded that there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION.
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
For a discussion of the risk factors attributable to our business, refer to Part II, Item 1a., “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits | ||
Number | Description | |
31.1 | COO Certification under Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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, 2010 | /s/ David L. Thomas |
David L. Thomas | |
Chief Operating Officer | |
Date: October 26, 2010 | /s/ Michael J. Celebrezze |
Michael J. Celebrezze | |
Senior Vice President of Finance, | |
Chief Financial Officer and Treasurer |
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