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Article by DailyStocks_admin    (12-29-08 04:48 AM)

Filed with the SEC from Dec 18 to Dec 24:

LCA-Vision (LCAV)
A former interim CEO of LCAV, Craig P.R. Joffe, sent a letter to the company demanding to inspect a complete list of holders of its common stock, showing the name, address and number of shares registered for each such holder. He also wants to inspect that data in electronic form. Joffe; his father, former Chairman Stephen Joffe; and former CFO Alan Buckey have formed an ownership group which holds 2,115,320 shares (11.4%).

BUSINESS OVERVIEW

Background and History of Company

LCA-Vision Inc. (the Company or LCA-Vision) is a leading provider of fixed-site laser vision correction services at our Lasik Plus 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. Our vision centers are supported by independent, board-certified ophthalmologists and credentialed optometrists, as well as other health care professionals. The ophthalmologists perform the laser vision correction procedures in our vision centers, and either ophthalmologists or optometrists conduct pre-procedure evaluations and post-operative follow-ups in-center. We have performed over 930,000 laser vision correction procedures in our vision centers in the United States and Canada since 1991. Most of our patients receive a procedure called LASIK, which we began performing in the United States in 1997.

As of December 31, 2007, we operated 72 Lasik Plus fixed-site laser vision correction centers generally located in larger metropolitan markets in the United States. We also have a joint venture in Canada.

The Company derives all of its operating revenues from laser refractive surgery, our only operating segment. Financial information concerning revenues, profit and loss and total assets are contained in “Item 8. Financial Statements and Supplementary Data” under “Consolidated Balance Sheets” and “Consolidated Statements of Operations.” See Note 1 of the “Notes to Consolidated Financial Statements” for financial information by geographic area.

Laser Vision Correction Procedures

Laser vision correction procedures are designed to reshape the outer layers of the cornea to help correct refractive vision disorders by changing its curvature with an excimer laser, which may reduce the need for wearing corrective lenses such as glasses and contact lenses. Prior to the laser vision correction procedure, an assessment is made of the patient’s candidacy for the treatment and the correction required to program the excimer laser. The software of the excimer laser then calculates the number of pulses needed to achieve the intended correction using a specially developed algorithm. A speculum is inserted to prevent blinking and topical anesthetic eye drops are applied. The patient reclines in a chair, eyes focused on a fixed target, while the ophthalmologist positions the patient’s cornea for the procedure. The excimer laser emits energy in a series of pulses, with each pulse typically lasting only a fraction of a second. High-energy ultraviolet light produced by the excimer laser creates a ‘‘non-thermal’’ ablation to remove corneal tissue and reshape the cornea. The amount of tissue removed depends upon the degree of the vision disorder being corrected. Following the procedure, the front surface of the eye is flatter when corrected for nearsightedness, and steeper when corrected for farsightedness. A series of patient follow-up visits is scheduled with an optometrist or ophthalmologist to monitor the corneal healing process, to check that there are no complications and to test the correction achieved by the procedure. The typical procedure takes 15 to 30 minutes from set-up to completion.

We currently use four suppliers for fixed-site excimer lasers: Bausch & Lomb, Advanced Medical Optics, Alcon and Wavelight. We also utilize the IntraLase femtosecond laser supplied by Advanced Medical Optics in most of our vision centers.

We provide primarily two types of procedures in our vision centers:

PRK and Surface Ablation . PRK has been approved by the U.S. Food and Drug Administration (FDA) for commercial use in the United States since 1995. In PRK procedures, the ophthalmologist removes the thin layer of cells covering the outer surface of the cornea (the epithelium) in order to apply the excimer laser pulses directly to the surface of the cornea. Following the PRK procedure, a contact lens bandage is placed on the eye to protect it. The patient may experience discomfort and blurred vision until the epithelium heals, which can take several days or longer. The doctor generally will prescribe certain topical pharmaceuticals for use by the patient post-procedure to assist in alleviating discomfort, minimizing infection and helping to promote corneal healing.

Although a patient generally experiences substantial improvement in clarity of vision within a few days following the procedure, it can take several months for the full benefits of the PRK procedure to be realized. Some patients elect to have one eye treated in one visit and the second eye treated at a later date. Some ophthalmologists also perform Epi-LASIK or LASEK, in which a portion of the surface tissue is lifted from the eye prior to laser treatment and then replaced.

LASIK . In 1997, we began performing LASIK, which now accounts for the majority of our laser vision procedures in the United States. In LASIK procedures, an automated microsurgical instrument called a microkeratome or a femtosecond laser is typically used to create a thin flap, which remains hinged to the eye. The corneal flap is then laid back and excimer laser pulses are applied to the exposed surface of the cornea to treat the eye according to the patient’s prescription. The corneal flap is then folded back to its original position and inspected to ensure that it remains secured in position by the natural suction of the cornea. Since the surface layer of the cornea remains intact with LASIK, a bandage contact lens is normally not required and the patient typically experiences little discomfort. LASIK often has the advantage of more rapid recovery than PRK, with most patients seeing well enough to drive a car the next day and enjoying shorter recovery periods. The LASIK procedure generally allows an ophthalmologist to treat both eyes of a patient during the same visit and produces prompt results, frequently enabling patients to see well postoperatively almost immediately. LASIK technology was expanded in 2003 to include wavefront-guided technology, a system that customizes the procedures based on higher order aberrations of certain patients. In 2007, we adopted IntraLase technology, a femtosecond laser that can be used in place of a microkeratome.

The Laser Vision Correction Market

More than 170 million Americans, or approximately 50% of the U.S. population, require eyeglasses or contact lenses to correct common vision problems. Most people seeking vision correction suffer from one or more refractive vision disorders, which often result from improper curvature of the cornea as related to the size and shape of the eye. If the cornea’s curvature is not precisely correct, it cannot properly focus the light passing through it onto the retina, and the viewer will see a blurred image. Three common refractive vision disorders are:




Myopia (nearsightedness)—images are focused in front of the retina, resulting in the blurred perception of distant objects



Hyperopia (farsightedness)—images are focused behind the retina, resulting in the blurred perception of near objects



Astigmatism—images are not focused on any point due to the varying curvature of the eye along different axes

Since the FDA approved the first laser to perform laser vision correction procedures in the United States in 1995, industry sources estimate that approximately 6.2 million patients have been treated. Laser vision correction is currently one of the most widely performed elective surgical procedures in the United States, with an estimated 1.4 million laser vision correction procedures performed in 2007 . It is estimated that the potential market for laser vision correction procedures in the United States is approximately 120 million procedures, according to some industry reports on the U.S. refractive market. Laser vision correction is typically a private pay procedure performed on an outpatient basis.

Our Business Strategy

Our business strategy is to provide quality laser vision correction services at an affordable price. We operate our vision centers as closed-access facilities, where we are responsible for marketing and patient acquisition and contract with independent ophthalmologists for their services.

We intend to grow our business through increased penetration in our current markets and expansion into new markets. Key elements of our business strategy include:




Recruiting and retaining independent, board certified ophthalmologists and credentialed optometrists



Providing patients with a “Continuum of Care”



Opening and operating new laser vision correction centers



Providing attractive patient financing alternatives



Nurturing relationships with leading managed care providers in the United States to source additional patients



Developing and implementing innovative marketing campaigns

Recruiting and retaining independent, board certified ophthalmologists and credentialed optometrists. We generally focus our recruiting efforts on leading independent ophthalmologists and optometrists with a reputation for providing quality eye care within their respective markets and with experience in laser vision correction procedures. Our ophthalmologists have completed extensive FDA-mandated training and also have met our qualification criteria, which includes a review of state licensure, board certification, malpractice insurance and surgical experience.

Providing patients with a “Continuum of Care.” We strive to achieve high patient satisfaction and have established a ‘‘Continuum of Care’’ program, the goal of which is to achieve the level of visual correction agreed to by the patient and physician. This program begins with our initial contact with the prospective patient. Our call center personnel are trained to answer questions regarding procedures and generally have access both to a physician to address more difficult inquiries and to past patients who can relate procedure experience. Once in the vision center, potential patients can receive a free eye evaluation with the local vision center’s independent ophthalmologist or optometrist to determine their candidacy for laser vision correction as well as a consultation focused on educating the patient on vision correction procedures, how the procedure may help correct the patient’s specific refractive vision disorder and what results the patient may expect after the procedure. Additionally, our vision centers are designed to create a patient-friendly environment and reduce any anxiety associated with getting laser vision correction. We schedule post-surgical follow-ups with patients who have received the procedure to monitor results and provide enhancements to those patients who do not receive the desired correction in the initial procedure. The vast majority of our treated patients who respond to our customer satisfaction surveys indicate that they are satisfied with the care they received in our vision centers.

Opening and operating new laser vision correction centers. We plan to continue to expand our business primarily through the development of new vision centers in attractive new markets and within existing markets. In evaluating new and current markets for opening a laser vision correction center, we consider a number of factors, including population demographics and competition, among other variables. We also typically interview local ophthalmologists and optometrists. We target geographic markets which we believe have the potential to generate break-even procedure volume within the first six months of opening. We have developed what we believe to be relatively cost-efficient standardized vision center designs to be used in building each new vision center to effectively manage patient flow and physician and staff productivity.

Providing attractive patient financing alternatives. Because laser vision correction procedures are elective and generally not reimbursable by third party payers, including governmental programs such as Medicare and Medicaid , we currently offer patients several financing alternatives. We work closely with an unaffiliated finance company that offers multiple payment plans to qualifying customers. These payment plans typically provide for payments over a 12-month to 60-month period. We bear no credit risk for loans made under this program. For patients not qualifying for these plans, we also currently offer our own direct financing to customers under which we charge an up-front fee, with the remaining balance paid by the customer in installments over a period of 12 to 36 months.

Nurturing relationships with leading managed care providers in the United States to source additional patients. With an increasing number of employers adding vision services to their employee benefit packages, we continue to nurture, develop and grow relationships with managed care organizations, through which we offer discounted rates to plan participants. The plan participant, and not the managed care organization, is currently responsible for the payment of our fees under these arrangements. We currently have agreements with seven of the nation’s eight largest managed care providers.

Developing and implementing innovative direct marketing campaigns. Our marketing programs seek to reinforce the Lasik Plus brand name in addition to raising awareness concerning laser vision correction and promoting our vision centers and the experience of our independent ophthalmologists. In each market, we target a specific demographic group of potential patients through the use of print media, radio, internet, television and direct mail campaigns, among other strategies. In most advertisements, prospective patients are provided a web site address and a toll-free number to contact us. Our call center representatives answer initial questions potential patients may have, and attempt to schedule eye evaluation appointments with the local vision center to determine whether the prospective patient is a candidate for laser vision correction.

Competition

Laser vision correction, whether performed at one of our vision centers or elsewhere, is an alternative to several surgical and non-surgical treatments to correct refractive vision disorders, including eyeglasses, contact lenses, other types of refractive surgery, intraocular lenses and corneal implants. In addition, other technologies may ultimately prove to be more attractive and effective to consumers than current laser vision correction technology.

We face competition from other providers of laser vision correction. Eye care services in the United States are delivered through a fragmented system of local providers, including individual or small groups of opticians, optometrists and ophthalmologists, and chains of retail optical stores and multi-site eye care vision centers. Industry sources estimate that such local providers represent over 50% of the laser vision correction market. Corporate laser vision correction providers, such as ourselves, are a specialized type of provider, operating multi-site eye care centers that primarily provide laser vision correction. Among the laser vision correction providers, we believe we are the largest provider in terms of number of procedures performed in fixed-site vision centers in the United States based on total company 2007 volume.

In most of our markets, we compete with other laser vision correction center chains. These include TLC Vision Corporation, which also is a public company, as well as with hospitals, surgical clinics, national and local operators of vision centers and ophthalmology practices, among others, that have purchased or rent their own lasers. We believe the market is likely to become progressively more competitive as it matures.

In the past, certain competitors have utilized deeply-discounted pricing in an effort to generate procedural volume. This practice has caused periods of intense price competition in our industry. As a result, we have lowered our prices in the past in order to remain competitive. We currently face competitors offering discounted prices, including large chains of laser vision correction centers, in some geographic markets where we conduct business. It is possible that our business could be materially adversely affected in the future by discounting practices of competitors, including from both a price and volume perspective.

Employees

As of February 11, 2008, we had approximately 784 employees, 695 of whom were full-time. None of our employees are subject to a collective bargaining agreement nor have we experienced any work stoppages. We believe our relations with our employees are good.

Trademarks

Not all of the names we use for our products and services have been registered with the United States Patent and Trademark Office. Where we use the “TM” (trademark) symbol, it is our intention to claim trademark rights on those names under common law. The duration of such trademarks under common law is the length of time we continue to use them.

Suppliers of Equipment and Financing Services

We are not directly involved in the research, development or manufacture of ophthalmic laser systems, diagnostic equipment, microkeratomes or microkeratome blades. There are several companies - including Bausch & Lomb, Advanced Medical Optics, Alcon and Wavelight, the four suppliers we currently use - whose excimer laser systems have been approved by the FDA for commercial sale in the United States. We currently rely primarily on Bausch & Lomb, Advanced Medical Optics, and McKesson to provide us with patient interface kits, microkeratomes, microkeratome blades and other disposable items required in LASIK procedures.

A significant percentage of our patients finance some or all of the cost of their procedure. We work closely with an unaffiliated finance company that offers multiple payment plans to qualifying customers. We bear no credit risk for loans made under this program. We also currently offer our own direct financing to certain of our customers who do not qualify for the third-party financing. We bear the credit risk of our financing program.

Government Regulation

Our operations are subject to extensive federal, state and local laws, rules and regulations affecting the healthcare industry and the delivery of healthcare. Some of these include laws and regulations, which vary significantly from state to state, prohibiting unlawful rebates and division of fees, and limiting the manner in which prospective patients may be solicited. Furthermore, contractual arrangements with hospitals, surgery centers, ophthalmologists and optometrists, among others, are extensively regulated by state and federal laws, some of which may be applicable to our business operations.

Failure to comply with applicable FDA requirements could subject excimer or femtosecond laser manufacturers and us to enforcement action, including product seizures, recalls, withdrawal of approvals and civil and criminal penalties, any one or more of which could have a material adverse effect on our business, financial condition and results of operations. In addition, clearance or approvals could be withdrawn in some circumstances. Failure by us or our principal suppliers to comply with regulatory requirements, or any adverse regulatory action, could result in us being named as a party in ensuing litigation or in a limitation on or prohibition of our use of excimer lasers, financing programs, or other necessary services to our business, which in turn would have a material adverse effect on our business, financial condition or results of operations. Discovery of problems, violations of current laws or future legislative or administrative action in the United States or elsewhere may adversely affect the ability of our suppliers and partners to obtain or maintain appropriate regulatory approval. Furthermore, the failure of Advanced Medical Optics, Bausch & Lomb, Alcon or Wavelight or any other manufacturers or suppliers that supply or may supply excimer lasers, diagnostic or other equipment or necessary services to us to comply with applicable federal, state, or foreign regulatory requirements, or any adverse regulatory action against such business suppliers and partners, could limit the supply of lasers or limit our ability to use the lasers.

The following is a more detailed description of certain laws and regulations that affect our operations.

Restrictions on medical devices

In the United States, the FDA regulates the uses, manufacturing, labeling, distribution and marketing of medical devices, including excimer and femtosecond lasers, microkeratomes and certain other equipment we use in laser vision correction surgery.

Once FDA approval is obtained, medical device manufacturers are subject to continuing FDA obligations. For example, the FDA requires that medical devices be manufactured in accordance with its Quality System Regulations. In essence, this means that medical devices must be manufactured and records must be maintained in a prescribed manner with respect to production, testing and control activities. In addition, the FDA sometimes imposes restrictions and requirements regarding the labeling and promotion of medical devices with which we must comply.

Non-compliance with FDA requirements could subject manufacturers to enforcement action, including:




Product seizures



Recalls



Withdrawal of approvals



Civil and criminal penalties

Non-compliance by us could subject us to civil and criminal penalties. Any such enforcement action could have a material adverse effect on our business, financial condition and results of operations.

The use of an excimer laser to treat both eyes on the same day (bilateral treatment) has not been approved by the FDA. The FDA has stated that it considers the use of the excimer laser for bilateral treatment to be a practice of medicine decision, which the FDA is not authorized to regulate. Ophthalmologists, including those practicing in our vision centers, widely perform bilateral treatment in an exercise of professional judgment in connection with the practice of medicine. There can be no assurance that the FDA will not seek to challenge this practice in the future. Should the FDA choose to regulate this aspect of the use of excimer lasers in the future, any potential resulting inconvenience to patients could discourage potential patients from having laser vision correction, potentially having a material adverse effect on our business, financial condition and results of operations by decreasing the total number of procedures we perform.

To authorize new uses of medical devices, manufacturers are required to obtain a supplemental FDA authorization. Obtaining these authorizations is time consuming and expensive, and we cannot be sure that manufacturers of the devices we use will be able to obtain any such additional FDA authorizations. Further, later discovery of problems with the medical devices we use may result in restrictions on use of the devices or enforcement action against the manufacturers, including withdrawal of devices from the market. Changes in legislation or regulation could affect whether and how we can use the devices. These and other regulatory actions could limit the supply of devices we use or our ability to use them, which could have a material adverse effect on our business, financial condition and results of operations.

Federal and state laws on “kickbacks” and physician referrals

Because laser vision correction procedures currently are not reimbursable by Medicare, Medicaid or other governmental health programs, we do not believe numerous federal health care laws that frequently apply to health care providers’ business operations (such as the federal Anti-Kickback and “Stark” Physician Self-Referral statutes) are currently applicable to us. Any changes in the reimbursement and coverage rules for these governmental health programs may cause our services to be subject to such federal laws. Although we do not anticipate such changes in the near future, we cannot predict this with any degree of certainty. Some states have enacted statutes, similar to the federal Anti-Kickback and Stark statutes , that are applicable to our operations because they cover all referrals of patients regardless of the payer or type of health care service provided. These state laws vary significantly in their scope and penalties for violations. Although we have endeavored to structure our business operations to be in material compliance with such state laws, authorities in those states could determine that our business practices are in violation of their laws. This could have a material adverse effect on our business, financial condition and results of operations.

Advertising restrictions

Our business is heavily dependent on advertising, which is subject to regulation by the Federal Trade Commission (FTC). In 2002 the FTC conducted an extensive review of our advertising practices. Following this review, the FTC concluded that certain of our past advertisements contained claims that were not properly substantiated. We elected to voluntarily settle with the FTC. In July 2003, the FTC formally entered a Complaint and an Agreement Containing Consent Order in which we agreed, among other things, that we would not represent in our advertising that our LASIK surgery services eliminate the need for glasses and contacts for life, pose significantly less risk to patients’ eye health than wearing glasses or contacts or eliminate the risk of glare and haloing, unless, at the time made, we possess and rely upon competent and reliable scientific evidence that substantiates the representation. No monetary penalties were imposed on us. Although we consented to this order in 2003, we cannot be certain that this order will not be perceived negatively, and thus restrict our ability to effectively generate demand for our laser vision correction services.

In addition, the laws of many states restrict certain advertising practices by and on behalf of physicians and optometrists. Many states do not offer clear guidance on the bounds of acceptable advertising practices or on the limits of advertising provided by management companies on behalf of physicians and optometrists. Although we have endeavored to structure our advertising practices to be in material compliance with such state laws, authorities in those states could determine that our advertising practices are in violation of those laws.

Fee-splitting

Many states prohibit professionals (including ophthalmologists and optometrists) from paying a portion of a professional fee to another individual unless that individual is an employee or partner in the same professional practice. Violation of a state’s fee-splitting prohibition may result in civil or criminal fines, as well as loss of licensing privileges of the physician participating in such arrangements . Many states do not offer clear guidance on what relationships constitute fee-splitting, particularly in the context of providing management services for doctors. Although we have endeavored to structure our business operations in material compliance with these laws, state authorities could find that fee-splitting prohibitions apply to our business practices in their states. If any aspect of our operations were found to violate fee-splitting laws or regulations, this could have a material adverse effect on our business, financial condition and results of operations.

Corporate practice of medicine and optometry

The laws of many states prohibit business corporations, such as us, from practicing medicine and employing or engaging physicians to practice medicine. Some states prohibit business corporations from practicing optometry or employing or engaging optometrists to practice optometry. Such laws preclude companies that are not owned entirely by eye care professionals from:




Employing eye care professionals



Controlling clinical decision making



Engaging in other activities that are deemed to constitute the practice of optometry or ophthalmology

This prohibition is generally referred to as the prohibition against the corporate practice of medicine or optometry. Violation of this prohibition may result in civil or criminal fines, as well as sanctions imposed against the professional through licensing proceedings. Although we have endeavored to structure our contractual relationships to be in material compliance with these laws, if any aspect of our operations were found to violate state corporate practice of medicine or optometry prohibitions, this could have a material adverse effect on our business, financial condition and results of operations.

Facility licensure and certificates of need

State Departments of Health may require us to obtain licenses in the various states in which we have or acquire laser vision correction centers or other business operations. We believe that we have obtained the necessary material licensure in states where licensure is required and that we are not required to obtain licenses in other states. However, not all of the regulations governing the need for licensure are clear and there is little guidance available regarding certain interpretative issues. Therefore, it is possible that a state regulatory authority could determine that we are improperly conducting business operations without a license in that state . This could subject us to significant fines or penalties, result in our being required to cease operations in that state or otherwise have a material adverse effect on our business, financial condition and results of operations. While we currently have no reason to believe that we will be unable to obtain necessary licenses without unreasonable expense or delay, there can be no assurance that we will be able to obtain any required licensure.

Some states require permission by the State Department of Health in the form of a Certificate of Need (CON) prior to the construction or modification of an ambulatory care facility or the purchase of certain medical equipment in excess of a certain amount. We believe that we have obtained the necessary CONs in states where a CON is required. However, not all of the regulations governing the need for CONs are clear and there is little guidance regarding certain interpretive issues. Therefore, it is possible that a state regulatory authority could determine that we are improperly conducting business operations without a CON in that state . There can be no assurance that we will be able to acquire a CON in all states where it is required, or that our failure or inability to obtain a CON in markets into which we believe we could otherwise be successful expanding will not have a material adverse effect on our business, financial condition and results of operations.


MANAGEMENT DISCUSSION FROM LATEST 10K

You should read the following discussion and analysis in conjunction with ‘‘Item 6. Selected Financial Data’’ above and with the financial statements and related notes included in “Item 8. Financial Statements and Supplemental Data” of this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could contribute to such differences include, but are not limited to, those discussed in “Item 1A. Risk Factors.”

Results of Operations

Revenues

We derived all of our revenues from laser vision correction procedures performed in our U.S. vision centers. Our revenues are impacted by a number of factors, including the following:



General economic conditions and consumer confidence levels



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



New vision center openings and our ability to increase procedure volume at existing vision centers



The availability of patient financing



The continued growth and increased acceptance of laser vision correction



The effect of competition and discounting practices in our industry



Deferred revenue from the sale, prior to June 15, 2007, of separately priced extended acuity plans

We expect the U.S. economy, including its impact on consumer spending habits and our industry, to continue to be challenging throughout 2008, and we estimate that industry procedure volume could decline by more than 10%, which we expect will negatively affect our revenues. In response, during January 2008, we reduced our workforce throughout the United States by approximately 16% so that our staffing levels would be appropriate for expected procedure volume. Related expense of approximately $500,000 will be reflected in results for the first quarter of 2008. We remain committed to selectively investing in our national expansion by opening vision centers in new markets, and relocating and renovating existing vision centers. We are leveraging consumer insights from extensive market research conducted over the past several months to optimize our marketing efforts, as well as to refine our strategies of convenience and affordability. We continue to focus on delivering a satisfying experience and high quality outcome at an affordable price to every patient who visits our Lasik Plu s vision centers.

We offer our patients extended acuity programs. Prior to June 15, 2007, these programs were separately priced and included a no-acuity plan, a one-year acuity plan, and a lifetime acuity plan. Under applicable accounting rules, 100% of revenues from the sale of the extended acuity program are to be deferred and recognized over the life of the contract on a straight-line basis unless sufficient experience exists to indicate that the costs to provide the service will be incurred other than on a straight-line basis. We believe we have sufficient experience to support recognition on other than a straight-line basis. Accordingly, we have deferred these revenues and are recognizing them over the period in which the future costs of performing the enhancement procedures are expected to be incurred. For programs that included one-year and lifetime options but did not include a no-acuity option, costs associated with the sale of the lifetime acuity plan begin after the expiration of the one-year acuity plan included in the base price. Accordingly, we deferred 100% of all revenues associated with the sale of the lifetime acuity plan and are recognizing them beginning one year after the initial surgery date. For programs that included a no-acuity option in addition to the one-year and lifetime options, all revenues from the sale of the one-year and lifetime acuity plans were deferred and are being recognized in proportion to the total costs expected to be incurred, beginning immediately following the initial surgical procedure.

Effective June 15, 2007, we changed our pricing model and no longer offer separately priced acuity options. For substantially all patients, participation in the Company’s lifetime acuity program is now included in the base surgical price. Under this pricing model, no warranty-related revenue deferrals have occurred or will occur for procedures performed after June 15, 2007. Revenue previously deferred from the sale of the separately priced acuity programs will be recognized in the future over a seven year period.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments totaled $60,148,000 as of December 31, 2007, down from $95,232,000 at December 31, 2006. Net cash provided by operating activities in 2007 was $54,979,000. Proceeds from the exercise of stock options totaled $3,499,000. Repurchase of shares for treasury stock amounted to $44,940,000.

During the second quarter of 2006, the Company, with guidance from the Board of Directors, adopted a new investment policy for the company’s liquid assets. The objectives of the policy are to maintain adequate liquidity, to provide safety of principal, to maximize the after-tax rate of return, and to maintain a well-diversified portfolio. This policy places limitations on maturity, acceptable credit ratings, authorized securities, and credit concentration.

We had capital expenditures of $28,864,000 and $9,656,000 in 2007 and 2006, respectively, which consisted primarily of investments incurred in connection with the opening of new vision centers, capital expenditures related to a new Customer Call and Data Center, and equipment purchases or upgrades at existing facilities.

Our costs associated with the opening of a new vision 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 vision center to be between $1,200,000 and $1,500,000. Actual costs vary from vision center to vision center based upon the location of the market, the number of lasers purchased or leased for the vision center, the site of the vision center, the cost of grand opening marketing and the level of leasehold improvements required.

The investment in our new Customer Call and Data Center totaled $4,227,000 in 2007. Laser and equipment upgrades and vision center expansions resulted in capital expenditures of $24,637,000 in 2007 and $9,656,000 in 2006, which were funded by cash flow from operations in both years. The increases in 2007 over 2006 related to the addition of IntraLase femtosecond lasers in 45 centers and upgrades to all Bausch & Lomb lasers, as well as increased expenditures as three more centers were added in 2007 compared with 2006.

We continue to offer our own sponsored patient financing. As of December 31, 2007, we had $17,268,000 in patient receivables, net of allowance for doubtful accounts, which was an increase of $3,825,000, or 28.5%, since December 31, 2006, compared to growth in revenue of 22.5%. 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.

Other assets include $500,000 of cash maintained by our consolidated captive insurance company pursuant to statutory requirements as of December 31, 2007. These funds are not available for general corporate purposes.

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 capital lease obligations. Liquid assets (cash, cash equivalents, short-term investments and patient and other accounts receivable) amounted to 166% of current liabilities at December 31, 2007, compared to 279% at December 31, 2006.

Critical Accounting Estimates

Patient Receivables

We provide patient financing to certain 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 and the remainder is deducted over a period of 12 to 36 months. Accounts receivable for patients that we finance for a period of 12 months or less are recorded at the undiscounted total expected payments less an estimated allowance for doubtful accounts. For patients we finance with an initial term over 12 months, we record the present value of expected payments less an estimated allowance for doubtful accounts using a 17.5% discount rate. The discount rate assumption is based upon current market rates charged by other providers of unsecured credit to similar customers. Interest income is recorded over the term of the payment program.

Allowance for Doubtful Accounts

As a result of an expansion of the amount of patient financing provided in 2007, we are exposed to increased credit risk than we have experienced in the past. Based upon our own experience with patient financing, we have established an allowance for doubtful accounts as of December 31, 2007 of $5,117,000 against patient receivables of $22,385,000, compared to an allowance of $2,842,000 against patient receivables of $16,285,000 at December 31, 2006. Our policy is to reserve for all receivables that remain open past financial maturity date and to provide reserves for receivables prior to the maturity date to bring receivables net of reserves down to the estimated net realizable value based on historical collectibility rates and recent default activity. To the extent that our actual allowance for doubtful account write-offs are greater than our estimated bad debt reserve, it would adversely impact our results of operations and cash flows. To the extent that our actual allowance for doubtful account write-offs are less than our estimated bad debt reserve, it would favorably impact our results of operations and cash flows.

Insurance Reserves

We maintain 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, none of whom are currently insured by the captive. 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. The financial statements of the captive insurance company are consolidated with our financial statements since it is a wholly-owned enterprise. As of December 31, 2007, we maintained insurance reserves of $8,493,000, which primarily represent an actuarially determined estimate of future costs associated with claims filed as well as claims incurred but not yet reported. This represents an increase in the reserve of $2,330,000 from $6,163,000 at December 31, 2006. The loss reserves developed by our actuaries are determined by comparing our historical claim experience to comparable insurance industry experience.

Accrued Enhancement Expense

Effective June 15, 2007, participation in our lifetime acuity program is included in the base surgical price for substantially all of our patients. Under the lifetime acuity program, we provide post-surgical enhancements free of charge should the patient not achieve the desired visual correction during the initial procedure. Under the revised pricing structure, we account for the lifetime acuity program as a warranty obligation under the provisions of Financial Accounting Standards Board (FASB) Statement No. 5 (SFAS 5), Accounting for Contingencies . Accordingly, the costs expected to be incurred to satisfy the obligation are accrued as a liability and direct cost of service at the point of sale given our ability to reasonably estimate such costs based on historical trends and the satisfaction of all other revenue recognition criteria.

We record the post-surgical enhancement accrual based on our best estimate of the number and associated cost of the procedures to be performed. Each month, we review the enhancement accrual and consider factors such as procedure cost and historical procedure volume when determining the appropriateness of the recorded balance.

Deferred Revenues

We offer our patients extended acuity programs. Prior to June 15, 2007, these programs were separately priced and included a no-acuity plan, a one-year acuity plan, and a lifetime acuity plan. Under applicable accounting rules, 100% of revenues from the sale of the extended acuity program are to be deferred and recognized over the life of the contract on a straight-line basis unless sufficient experience exists to indicate that the costs to provide the service will be incurred other than on a straight-line basis. We believe we have sufficient experience to support recognition on other than a straight-line basis. Accordingly, we have deferred these revenues and are recognizing them over the period in which the future costs of performing the enhancement procedures are expected to be incurred. For programs that included one-year and lifetime options but did not include a no-acuity option, costs associated with the sale of the lifetime acuity plan begin after the expiration of the one-year acuity plan included in the base price. Accordingly, we deferred 100% of all revenues associated with the sale of the lifetime acuity plan and are recognizing them beginning one year after the initial surgery date. For programs that included a no-acuity option in addition to the one-year and lifetime options, all revenues from the sale of the one-year and lifetime acuity plans were deferred and are being recognized in proportion to the total costs expected to be incurred, beginning immediately following the initial surgical procedure.

Effective June 15, 2007, we changed our pricing model and no longer offer separately priced acuity options. For substantially all patients, participation in the Company’s lifetime acuity program now is included in the base surgical price. Under this pricing model, no warranty-related revenue deferrals have occurred or will occur for procedures performed after June 15, 2007. Revenue previously deferred from the sale of the separately priced acuity programs will be recognized in the future over a seven year period.

Consolidation

We use the consolidation method to report our investment in majority-owned subsidiaries and other companies that are not considered variable interest entities (VIEs) and in all VIEs for which we are considered the primary beneficiary. 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 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual Management Agreements . Investments in joint ventures and 20% to 50% owned affiliates where we have the ability to exert significant influence are accounted for by the equity method.

Recent Accounting Pronouncements

See Note 1 of the “Notes to Consolidated Financial Statements” for information regarding the Company’s adoption or planned adoption of recent accounting pronouncements.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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. These forward-looking statements are based on information available to us as of the date hereof. Actual results could differ materially from those stated or implied in such forward-looking statements due to risks and uncertainties associated with our business, including, without limitation, those concerning economic, political and sociological conditions; the acceptance rate of new technology, and our ability to successfully implement new technology on a national basis; market acceptance of our services; the successful execution of marketing strategies to cost effectively drive patients to our vision centers; competition in the laser vision correction industry; an inability to attract new patients; the possibility of long-term side effects and adverse publicity regarding laser vision correction; operational and management instability; legal or regulatory action against us or others in the laser vision correction industry; our ability to profitably operate vision centers and retain qualified personnel during periods of lower procedure volumes; the relatively high fixed cost structure of our business; the continued availability of non-recourse third-party financing for our patients on terms similar to what we have paid historically; and the future value of revenues financed by us and our ability to collect on such financings which will depend on a number of factors, including the worsening consumer credit environment and our ability to manage credit risk related to consumer debt, bankruptcies and other credit trends. In addition, an ongoing FDA study about post-Lasik quality of life matters could potentially impact negatively the acceptance of Lasik. Except to the extent required under the federal securities laws and the rules and regulations promulgated by the Securities and Exchange Commission, we assume no obligation to update the information included herein, whether as a result of new information, future events or circumstances, or otherwise. In addition to the information given herein, please refer to “Item 1A. Risk Factors” in this report and our annual report on Form 10-K for the fiscal year ended December 31, 2007 for a discussion of important factors that could affect our results.

The following discussion and analysis of the Company's financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and the accompanying Notes included in this Quarterly Report.

Overview

We are a leading provider of fixed-site laser vision correction centers at our Lasik Plus vision centers. Our vision centers provide the staff, facilities, equipment and support services for performing vision correction procedures that employ advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism.

We derive all of our revenues from the delivery of laser vision correction services performed in our U.S. vision centers. Our revenues therefore depend on our volume of procedures, which is impacted by a number of factors, including the following:


General economic conditions and consumer confidence 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




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 extended warranties




Our mix of procedures among the different types of laser technology

Our operating costs and expenses include:




Medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction and license fees per procedure paid to certain equipment suppliers of our excimer lasers




Direct costs of services, including center rent and utilities, equipment lease and maintenance costs, surgical supplies, center staff expense, finance charges for third-party patient financing and costs related to other revenues




General and administrative costs, including headquarters staff expense and other overhead costs




Marketing and advertising costs




Depreciation of equipment

Our revenues are primarily a function of the number of laser vision correction procedures performed and the pricing for these services. Our vision 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. As indicated below, we have experienced significant declines in levels of procedure volume during the first nine months of 2008, primarily during the three months ended September 30, 2008. We believe this is due to the occurrence of a number of factors cited in the first paragraph of this Item 2 as risks and uncertainties associated with our business. These factors include the effect of deteriorating U.S. economic conditions on consumer spending habits, the inability of our marketing strategies to drive procedure volume in the current economic environment and, perhaps, an increase in consumer concern about laser vision correction resulting from the ongoing FDA study. We expect these conditions will continue to adversely affect our procedure volume and our revenues for at least the balance of 2008.

Prior to June 15, 2007, we offered our patients separately priced acuity programs. These programs included a no-acuity plan, a one-year acuity plan, and a lifetime acuity plan. Under applicable accounting rules, 100% of revenues from the sale of an extended acuity program are to be deferred and recognized over the life of the contract on a straight-line basis unless sufficient experience exists to indicate that the costs to provide the service will be incurred other than on a straight-line basis. We believe we have sufficient experience to support recognition on other than a straight-line basis. Accordingly, we have deferred these revenues and are recognizing them over the period in which the future costs of performing the enhancement procedures are expected to be incurred. For programs that included one-year and lifetime options but did not include a no-acuity option, costs associated with the sale of the lifetime acuity plan begin after the expiration of the one-year acuity plan included in the base price. Accordingly, we deferred 100% of all revenues associated with the sale of the lifetime acuity plan and are recognizing them beginning one year after the initial surgery date. For programs that included a no-acuity option in addition to the one-year and lifetime options, all revenues from the sale of the one-year and lifetime acuity plans were deferred and are being recognized in proportion to the total costs expected to be incurred, beginning immediately following the initial surgical procedure.

In addition to the deferral of revenues under FTB 90-1, we also have deferred a portion of our costs of service related to professional fees paid to the attending surgeon when a procedure is performed. These costs total 10% of the revenue. The physician receives no incremental fee for an enhancement procedure. Accordingly, a portion of the professional fee paid to the physician relates to the future enhancement procedures to be performed and qualifies for deferral under FTB 90-1 as a direct and incremental cost of the warranty contract. We use the same historical experience to amortize deferred revenue and deferred professional fees.

Results of Operations for the Three Months Ended September 30, 2008 and 2007

We have seen a decline in appointments and in the show rates for both appointments and treatments. We believe this is primarily due to the current economic uncertainty and other macroeconomic factors. Particularly, we believe that tightening consumer discretionary spending has negatively impacted our volume.

The average reported revenue per procedure, which includes the impact of taking into income deferred revenue from separately priced extended warranties as well as some price increases related to the adoption of IntraLase technology, increased 4.0% to $1,741 in the third quarter of 2008 from $1,674 in the third quarter of 2007. IntraLase is now operational in most of our vision centers.

Effective July 1, 2008, we implemented a simplified market-specific pricing structure based on the results of four months of earlier testing in multiple markets. The revised structure, which was intended to drive procedure volume while maintaining acceptable margins, establishes local price points that take into account market competition and other factors. When excluding the impact of deferred revenue, the revised pricing structure has resulted in a $100 decline in average price per procedure when compared with the second quarter of 2008. The price reduction benefited conversion in some markets but not all markets where price was reduced. We will continue to monitor the relationship between price and conversion and make adjustments to price where we believe revenue can be maximized.

CONF CALL

Jody Cain

This is Jody Cain with Lippert/Heilshorn and Associates. Thank you for participating in today’s LCA-Vision call, for the third quarter of 2008 financial results. Joining me from LCA-Vision are Steve Straus, Chief Executive Officer; and Mike Celebrezze, Interim Chief Financial Officer.

We have allotted one hour for today’s call, and with that in mind we ask that during the Q-&-A portion professional investors limit questions to one, with one follow-up in order to provide an opportunity for other participants.

I would like to remind listeners that comments made during this call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from those anticipated results.

For a list of descriptions of those risks and uncertainties, please review LCA-Vision’s filings with the Securities and Exchange Commission. Please note that the content of this call contains time-sensitive information that is accurate only as of the date, October 28, 2002. LCA-Vision disclaims any intention or obligation to update or revise financial projections of forward-looking statements, whether as to results of new information, further events or otherwise.

With that, I’d like to turn the call over to Steve Straus. Steve?

Steve Straus

Thank you, Jody. Good morning to everyone. Thank you for joining us to discuss LCA-Vision’s financial and operational results for the 2008 third quarter. As you know, we pre-announced certain third-quarter business metrics on October 2nd and the results we are recording today are in line with that announcement.

Appointment volume at LasikPlus Vision Centers declined during the third quarter, resulting in a 52% decrease in total volume compared with the prior year. We did see modest sequential quarter improvement in appointment show rates, conversion rates and treatment show rates. We attribute these improvements for our business initiatives aimed at driving procedure volume that we discussed at our last quarter’s conference call.

During the third quarter we reported a $100 decline in our average per-procedure price excluding the impact of deferred revenue, compared with the second quarter of this year. This decline is related to the rollout of market level pricing in July, which was intended to drive procedure volume while maintaining acceptable margin. This pricing program has produced mixed results with favorable changes in conversion in some markets and less effect on conversion in other markets.

We have modified pricing in markets where we found demand to be relatively unaffected by price, and we expect this will result in an overall increase in average price per procedure in coming periods. We will monitor the relationship between price and conversion in each market on a monthly basis and make adjustments as appropriate to maximize revenue.

In the third quarter, we reduced our marketing expenditures to $8.3 million, a decrease of 46% compared to the 2008 second quarter, as we aligned marketing expense with the current tightening we are seeing in discretionary consumer spending. The resulting benefit was a more efficient marketing expenditure with cost per procedure savings of 25% to $386 compared to $514 in the 2008 second quarter.

As previously discussed, we are evaluating all aspects of our business on an ongoing basis. Marketing was an important function in reaching our objective of increasing the number of scheduled appointments, improving appointment show rates and conversion rates and ultimately driving our procedure volume. Developing a comprehensive, integrated plan that delivers a compelling value proposition to our targeted patient universe was essential to our success.

Following a detailed analysis of marketing practices, we consolidated our external marketing activities earlier this month under a single agency, T. Bresner and Associates. This firm has proven success and relevant industry experience to act as a central command center to coordinating on marketing programs and leveraging the best of both our specialist agency partners and our internal marketing core competencies. T. Bresner and Associates is charged with developing a detailed, integrated marketing plan and overseeing that plan’s implementation. We have already kicked off this relationship as a market research project.

This new marketing structure is expected to assist in improving procedure volume at each LasikPlus Vision Center with a goal of continuing to improve our marketing spending per procedure over time. We expect marketing expenses for the fourth quarter of 2008 will be in the $8 million to $9 million range.

During the third quarter we opened new LasikPlus Vision Centers in Nashville, Tennessee and Arlington, Texas, bringing our new center openings in 2008 to six, which is in line with our 2008 guidance of opening six to 10 Vision Centers. We also relocated existing centers in Raleigh, North Carolina and Orlando, Florida, to better facilities. Based on our previously announced plans to reduce capital expenditures, we have halted plans for additional center openings and relocations.

After carefully analyzing the performance of our Vision Center in Boise, Idaho, we decided to close this facility this month, following one year of operation. We also recently converted our Vision Center in Alpharetta, Georgia to a pre-op and post-op facility with actual procedures being performed at three other nearby LasikPlus Vision Centers in the Greater Atlanta area.

These decisions were based on a number of factors that included an evaluation of the anticipated timing of improvement in procedure volume and the extent of that improvement as well as the costs associated with closing a center. As previously stated, we continue to analyze operations each month at all LasikPlus Vision Centers.

I would now like to turn the call over to Mike Celebrezze to discuss our financial results in greater detail.

Mike Celebrezze

Thank you, Steve. Good morning, everyone. We are providing both GAAP and adjusted revenue and operating income as a means of measuring performance. The adjusted results account for the non-cash impact of the accounting for (inaudible) price extended warranty. A reconciliation of revenue and operating income as reported in accordance with GAAP is provided at the end of the news release we issued this morning.

For the third quarter of 2008 revenue was $37.4 million compared with $74.6 million in the third quarter of 2007 and adjusted revenue for this year’s third quarter was $33 million compared with adjusted revenue of $66.9 million for the third quarter of 2007. We performed 21,484 procedures compared with 44,547 performed in the third quarter of 2007. We attribute the lower procedure volume to a decline in preoperative appointment bookings, which we believe is primarily due to economic uncertainty and various macroeconomic factors.

As Steve mentioned, we did show a slight sequential quarter improvement in appointment show rates, conversion rates and treatment show rates in this year’s third quarter. Same-store revenue decreased 52.4%, while adjusted same-store revenue decreased 53.5%. There are 68 Vision Centers included in the same-store count.

We reported an operating loss of $6.2 million for the quarter compared with operating income of $14.1 million in last year’s third quarter. The adjusted operating loss was $10.1 million compared with adjusted operating income of $7.2 million last year. Medical, professional and license fees for the third quarter of 2008 decreased by $4.1 million or 34% from the third quarter of 2007, the decrease is primarily due to cost and physician fees associated with lower revenue.

This was partially offset by higher license fees due to the IntraLase adoption this year and the impact of professional fees related to deferred revenue. IntraLase was used in about three-fourths of all procedures performed during this year’s third quarter.

Direct costs decreased in the quarter by $5.6 million or 24% compared with the prior year. This decrease was principally the result of cost reductions made as a result of lower procedure volumes. New center costs in the third quarter of 2008 were $1.5 million. We recorded a severance charge of $812,000 associated with a 25% reduction in work force during the third quarter. As Steve mentioned, we closed our Boise Vision Center this month, and during this year’s fourth quarter we'll take a one-time charge of approximately $600,000 related to this closure.

General and administrative expenses increased by $232,000 or 5% in the third quarter of 2008 from the comparable quarter last year, primarily due to an increase in professional services and rent and utility expense. Marketing and advertising expenses decreased by $8.9 million or 52% in the third quarter of 2008 from the third quarter of 2007, as we worked to better align our spending with consumer demand.

Depreciation expense increased by $1.5 million in the three months ended September 30, 2008 from the comparable period last year as a result of capital investment in new Vision Centers during the past years, expenditures at our national call center and data center, the purchase of IntraLase lasers and upgrades to Bausch & Lomb lasers.

We recorded a net investment loss of $724,000 in the third quarter of 2008 compared with net investment income of $1.5 million in the 2007 third quarter. The $2.2 million decline was due to an other than temporary impairment on investments of $1.1 million, which is the recorded loss related to auction rate securities, a decrease in investment income of $1.3 million as a result of a decline in investment holdings that we used for our share buyback program in 2007, declining deferred compensation asset values relating to changing market conditions and lower investment balances and a shift of some investments from taxable and tax-exempt bonds to US Treasury money market that earn a lower rate of interest but are safer.

Income tax benefit for the 2008 third quarter was 30.2% of the pre-tax loss compared with income tax expense of 36.8% of the pre-tax income during the third quarter of 2007. The decrease in effective rates resulted primarily from the nondeductibility of the loss on investments recorded in the 2008 third quarter. Since the loss is not deductible until we have capital gains, the taxable loss was less than the book loss, which reduced the tax benefit rate.

For the quarter we reported a net loss of $4.7 million or $0.25 per share compared with net income of $10 million or $0.51 in the third quarter of 2007. For the first nine months of 2008 revenue was $171 million compared with $223 million last year, while adjusted revenue was $156 million compared with adjusted revenue of $222 million in the first nine months of 2007. Procedure volume was 95,729 this year compared with 152,316 for the first nine months of 2007.

Operating income was $1.4 million compared with $39.7 million. The adjusted operating loss was $12.1 million compared with adjusted operating income of $38.7 million last year. Net income was $1.6 million or $0.09 per diluted share compared with net income of $28.4 million or $1.41 per share last year.

As of September 30, 2008, cash and investments totaled $67.1 million compared with $67.9 million as of June 30, 2008, and $62.4 million as of December 31st, 2007. During the first nine months of 2008, cash and investments increased by $4.7 million. This increase included the net proceeds after payment of $18 million from the bank loan we took out in April.

Net cash provided by operating activities in the first nine months of 2008 was $9.9 million compared with $38.8 million in the comparable period last year, as a result of lower earnings and a $12.4 million reduction in deferred revenues between 2007 and 2008. Long-term investments totaled $4.4 million as of September 30, 2008.

These assets are comprised of auction rate securities. We have been successful in our efforts to continue to reduce our exposure to auction rate securities. As of today, we have $5.7 million in par value of auction rate securities, down from $18.3 million at December 31, 2007. All of our auction rate security redemptions to date have been made at par.

At the end of September, we retained a consultant to determine the fair value of the remaining auction rate securities. Based on that valuation, $2.3 million of par value of auction rate securities were deemed to have other than temporary impairments, and we have taken a $1.1 million pre-tax loss on these investments against earnings.

Auction rate securities with a par value of $3.4 million were deemed to have temporary impairment, and we have recorded a temporary unrealized loss of $220,000 or $132,000 on an after-tax basis, related to these investments as a component of other comprehensive income on the balance sheet. These write-downs were partially offset by the reversal of a temporary unrealized loss of $473,000 or $284,000 on an after-tax basis recorded in the second quarter of 2008.

Due to the continuation of the unstable credit environment, we believe the recovery period for auction rate instruments will exceed 12 months. Because of that, we have classified the fair value of the auction rate instruments that have not been redeemed since September 30, 2008, as long-term. The fair value of the Company’s long-term auction rate instruments was $4.4 million at September 30, 2008.

As of September 30, 2008, we had approximately $14.4 million in patient receivables net of allowance for doubtful accounts. Gross patient receivables decreased $4.1 million since December 31, 2007, primarily a result of a decrease in procedure volume. At the same time, the allowance for doubtful accounts decreased by $1.2 million from $5.1 million to $3.9 million, as a result of sending uncollected balances to collections earlier in the process.

Other accounts receivable decreased by $2.3 million as of September 30, 2008, from $5.9 million as of December 31, 2007, primarily due to the reduction in vendor rebates as a result of converting some purchases to everyday discounting rather than gross pricing subject to future rebates.

Accounts payable declined to $8.1 million as of September 30, 2008, from $10.4 million as of December 31, 2007. The December balance included open invoices related to the IntraLase purchases, while September did not have any large capital purchase invoices pending.

Prepaid taxes decreased to $2.9 million as of September 30, 2008, primarily the result of receiving a refund of previously paid taxes early in the current year due to a change in tax accounting methods for deferred revenues.

During the second quarter of 2008 we borrowed $19.2 million to finance the majority of our IntraLase placements. Monthly payments will be spread over a five-year period at a fixed interest rate of 4.96%. The decision to finance the IntraLase lasers was consistent with our strategy to finance the acquisition of excimer lasers. As of September 30, 2008, the loan balance was $17.8 million.

Finally, we did not pay a dividend during the third quarter of 2008.

As discussed on last quarter's call, our focus for the balance of 2008 and into 2009 is on conserving our cash and investments. While we are not providing financial guidance on specific earnings and cash flow projections, our cost control and cash conservation measures are having the desired results as we continue to take actions that we believe are prudent given the current economic environment. Among these, during the third quarter we reduced headcount in the Vision Centers, national call center and corporate office.

We also reduced marketing expense significantly and are reducing costs in all other discretionary areas. Capital expenditures have been minimized by halting new center expansions and relocations as well as dividend payments for the time being. Working capital is also being closely managed. During the third quarter we adjusted payment terms with most vendors to 30 days and generated $4.5 million of cash to accounts payable.

Internally, financed patient accounts receivable continue to be a focus area as well. Consistent with the rest of the credit market, collection patterns have shown deterioration over the past year. In response, we have implemented new procedures, including increasing the down payment requirement on our internally financed procedures from $300 to $600 in April. We have seen a small reduction in the percentage of internally-financed procedures since we made that change.

We're carefully monitoring our collection rate in order to ensure the adequacy of our allowance for doubtful accounts and that the collectibility of our revenue is reasonably assured. We continue to reserve about 2.5% of revenue. Revenue financed by Care Credit is holding steady in the mid-50% range. Cash flow in the fourth quarter and beyond will largely be depended on the level of procedure volume and changes to working capital.

I will now turn the call back over to Steve.

Steve Straus

Before opening the call to questions, I would like to comment on a couple of new activities that we believe will continue to differentiate LasikPlus. First, we're delighted that LCA-Vision has been named as a network laser vision provider for the new insured LASIK program underwritten by the nationally known, A-minus rated insurance carrier Standard Security Life Insurance Company of New York.

The benefit provides members cover by sponsoring health plans, a one-time allowance from the insurance company of up to $600 for covered laser vision correction procedures. Insured members can maximize their savings on laser vision correction by an extra 15% by choosing to have procedures performed within our network.

Beginning this quarter, this benefit is being made available to health care plans, employer groups, and labor unions. Procedure cost is a major factor in a patient's decision-making process, and to our knowledge this is the first offering of its kind for laser vision correction services.

We believe this innovative product that reduces procedure cost, coupled with our in-network discount and our attractive financing plan will make laser vision correction an affordable procedure, and it makes LasikPlus the affordable brand. I'd also like to announce that LCA-Vision has partnered with noted optometrist, Dr. Paul Karpecki, President and founding partner of Visionary Consultants, Inc. Dr. Karpecki is well-known and highly respected within the optometrist community, and he will be collaborating with us on optometric strategies as well as using his established relationships with vendors and leaders within the optometric, ophthalmic and refractive surgery communities to advance LasikPlus Vision Centers and LCA-Vision initiatives.

We are delighted that he has developed an association with LCA-Vision and LasikPlus. In closing, we’re committed to our strategic and operating plans as well as building upon positive patient experiences, exceptional clinical outcomes and advanced diagnostic and surgical technology that have become the hallmark of the LasikPlus brand.

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