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Article by DailyStocks_admin    (05-18-08 02:42 AM)

The Daily Magic Formula Stock for 05/18/2008 is LCA Vision Inc. According to the Magic Formula Investing Web Site, the ebit yield is 24% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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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.

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.

COMPENSATION

Non-employee directors receive an annual fee of $40,000, paid one-half in cash and one-half in shares of unrestricted common stock. Payments are made quarterly in arrears, pro-rated from the time that an individual first becomes a Director. In addition, in August 2007 each non-employee director received a Restricted Share Unit award having a value of $75,000. These Units were issued at the close of business on the date of the Company’s 2007 annual meeting of stockholders and pro-rated based upon the date upon which an individual first became a director. These Restricted Share Units will vest over a two-year period, at the rate of 50% a year on the anniversary date of award, contingent on the individual remaining a non-employee director on those dates. The Nominating and Governance Committee has recommended, and the Board of Directors has approved, a similar grant of Restricted Share Units for 2008. The chairman of the Audit Committee of the Board of Directors receives an annual cash payment of $10,000 and the Chairs of the Compensation Committee and Nominating and Governance Committee receive an annual cash payment of $5,000 each, payable quarterly. Finally, upon first becoming a non-employee Director, an individual receives a grant of 1,000 shares of Restricted Share Units which vests over a two-year period. In addition to the compensation to non-employee Directors listed above, Mr. E. Anthony Woods for his board service as non-executive Chairman of the Board received for 2007 an annualized fee of $225,000; $100,000 paid in cash and $125,000 paid on a quarterly basis in unrestricted shares of common stock. For 2008, this fee will be $125,000 in cash, paid quarterly.

Steven C. Straus, who was a director during 2007, did not receive any additional compensation for serving on the Board.

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.

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. The following table details the number of laser vision correction procedures performed at our consolidated vision centers during the last three fiscal years.

The average reported revenue per procedure, which includes the impact of deferred revenue from the sale of separately priced acuity programs, increased 4% to $1,290 in 2006 from $1,246 in 2005.

Operating Costs and Expenses

2007 Compared to 2006

Medical professional expenses increased by approximately $2,394,000, or 8.8%, in 2007 from 2006 as a result of increased revenues from higher procedure volumes. As a result of deferring revenues associated with the sale of separately priced acuity programs, the associated medical professional fee is also deferred. The deferrals of medical professional fees were $2,005,000 in 2007 and $3,854,00 in 2006. These deferrals were offset by the amortization of the prepaid medical professional fee attributable to prior years of $2,807,000 in 2007 and $2,054,000 in 2006. License fees increased by $1,342,000, or 8%, with approximately 4% of the increase due to higher procedure volume and approximately 4% from per procedure fees associated with the IntraLase femtosecond lasers that were added to our service offering in 2007.

Direct costs of services include the salary component of physician compensation for certain physicians employed by us, staffing, equipment, medical supplies, finance charges and facility costs of operating laser vision correction centers. These direct costs increased in 2007 by $19,811,000, or 25.5%, compared to 2006. Of this amount, $14,331,000 was a result of 13 additional vision centers in operation in 2007. The remaining increase resulted from $5,820,000 of increased bad debt expense partially offset by $340,000 in cost savings at existing centers.

Bad debt expense increased in 2007 as compared to 2006 for three primary reasons: (1) we financed a higher percent of total revenues in 2007; (2) the mix of patient financing shifted to a greater use of 36-month financing from 12-month financing, with the longer term receivables having increased credit risk; and (3) adverse changes in recent collection rates with our patient financing program given the downturn in the U.S. economy. The future value of revenues we finance and our ability to collect on such financings will depend on a number of factors, including the consumer credit environment and our ability to manage credit risk related to consumer debt, bankruptcies and other credit trends. The allowance for doubtful accounts has been increased to appropriately reflect the increase in credit loss exposure.

General and administrative expenses increased by $1,501,000, or 7.1%, in 2007 as compared to 2006. Of this amount, $487,000 was due to increase in professional service fees and $997,000 was for sales tax principally related to purchases of direct mailing lists.

Marketing and advertising expenses increased by $18,498,000, or 38.6%, in 2007 from 2006. During 2007, these expenses represented 22.7% of revenue, compared with 20.1% during 2006. The increase resulted primarily from additional spending in existing markets to continue to drive patient traffic, spending related to the opening of new vision centers and continued investment in marketing research and program development. We are continuing to work to develop more efficient marketing techniques. Our future operating margins will depend in large part on the success of these efforts.

Depreciation expense increased by $2,756,000 in 2007 from 2006, primarily as a result of depreciation of capitalized expenditures at our new vision centers that opened in 2007, purchases of IntraLase lasers and capital improvements to Bausch & Lomb lasers.

Net investment income decreased by $229,000, or 3.7%, in 2007 from 2006 due to a decrease in investment income of $1,049,000 as a result of a decline in investment holdings used for our share buyback program, partially offset by a $820,000 increase in income from patient financing charges.

Other expense increased by $580,000 in 2007 from 2006. This change resulted mostly from loss on abandonment of building improvements at our headquarters office building that is undergoing renovations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations for the Three Months Ended March 31, 2008 and 2007

Revenues
In the first quarter of 2008, revenues increased by $905,000, or 1.1%, to $79,568,000 from $78,663,000 in the first quarter of 2007. Procedure volume of 44,159 decreased 25% from 59,101 in the first quarter of 2007. For vision centers open at least 12 months, procedure volume decreased by approximately 33% in the first quarter of 2008 to 39,809 compared to 59,101 in the first quarter of 2007. This decrease was partially offset by an increase in the average selling price.

The average reported revenue per procedure, which includes the impact of deferring revenue from separately priced extended warranties as well as some price increases related to the adoption of IntraLase technology, increased 35.4% to $1,802 in the first quarter of 2008 from $1,331 in the first quarter of 2007. IntraLase is now operational in 73 of our 76 vision centers.

We have seen a decline in both appointment show rates and treatment show rates. Our research indicates that, while patient activity remains robust in regards to inquiries, there is hesitancy on the part of consumers to proceed with treatment at this time. We believe this primarily is due to the current economic uncertainty and other macroeconomic factors.

Medical professional and license fees
Medical professional and license fees increased by $786,000, or 6%, in the first quarter of 2008 from the first quarter of 2007. This increase was primarily due to deferred medical fees and laser license fees, partially offset by lower physician fees associated with lower revenues. As a result of deferring revenue associated with separately priced extended warranties, $1,212,000 of medical professional fees were deferred in the first quarter of 2007. The amortization of the deferred medical professional fees attributable to prior years was $560,000 in the first quarter of 2008 and $650,000 in the first quarter of 2007.

Direct costs of services
Direct costs of services include the salary component of physician compensation for certain physicians employed by us, staffing, equipment, financing charges, medical supplies, facility costs of operating laser vision correction centers and bad debt expense. Direct costs of services increased in the first quarter of 2008 by $261,000, or 1%, over the first quarter of 2007. This increase was principally the result of severance costs as well as increases in professional liability insurance, rent and utilities, and bad debt, partially offset by decreases in stock-based compensation expense, surgical supplies, employee incentives and laser rent.

Bad debt expense increased by $620,000 in the first quarter of 2008, as compared to the first quarter of 2007 for three reasons: (1) a higher percentage of total revenues were financed by us in 2008; (2) the mix of patient financing shifted to a greater use of 36-month financing from 12-month financing, with the longer term receivables having increased credit risk; and (3) adverse changes in collection rates with our patient financing program given the downturn in the U.S. economy.

The future value of revenues we finance and our ability to collect on such financings will depend on a number of factors, including the consumer credit environment and our ability to manage credit risk related to consumer debt, bankruptcies and other credit trends. The allowance for doubtful accounts has been increased to appropriately reflect the increase in credit loss exposure. We have recently re-evaluated and increased the down payment associated with our financing programs to respond to the increased levels of risk associated with the portfolio.

General and administrative
General and administrative expenses increased by $174,000, or 3%, in the first quarter of 2008 from the first quarter of 2007. This was primarily due to severance costs as well as to an increase in professional services, salaries and fringe benefits, partially offset by a decrease in stock-based compensation and travel and entertainment expenses.

In the first quarter of 2008, we reduced our workforce by 16%. The resulting cost of $456,000, impacting both direct costs of services and general and administrative expenses, includes severance costs for salaries, payroll taxes, and benefit continuation. These costs were substantially paid before March 31, 2008.

Marketing and advertising expenses
Marketing and advertising expenses increased by $2,806,000, or 16%, in the first quarter of 2008 from the first quarter of 2007. The increase resulted primarily from additional spending in existing markets, spending related to opening 15 new vision centers since March 2007 and investment in marketing research and program development. We are continuing to work to develop revised, more efficient marketing techniques. Our future operating margins will depend in large part on the success of our efforts in this regard.

Depreciation expense
Depreciation expense increased by $1,950,000 in the first quarter of 2008 from the first quarter of 2007 as a result of capital investments in new vision centers over the past year, purchase of IntraLase lasers and capital improvements to Bausch & Lomb lasers.

Non-operating income and expenses
Net investment income in the first quarter of 2008 decreased $875,000, or 54%, due to a decrease in investment income of $1,151,000 as a result of a decline in investment holdings used for our share buyback program in 2007, partially offset by a $308,000 increase in income from patient financing charges.

Income tax rate increased from 36.8% of pre-tax income during the first quarter of 2007 to 39% of pre-tax income during the first quarter of 2008. In the first quarter 2007, the effective tax rate was lower than the first quarter 2008 due to the application of FAS 123(R) to the disqualifying dispositions of incentive stock options, which produced a tax benefit in 2007.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments totaled $47,261,000 as of March 31, 2008, down from $60,148,000 at December 31, 2007. Net cash provided by operating activities in the first three months of 2008 was $9,406,000, as compared to $30,156,000 for the corresponding period in the prior year. The decrease in cash provided by operating activities from 2007 to 2008 resulted from lower earnings and uses of working capital.

Long-term investments total $10,477,000 as of March 31, 2008, up from $2,250,000 at December 31, 2008. These assets are comprised of auction rate securities that are currently failing auctions. The auction rate securities have maturity dates ranging from 2016 to 2036. As of December 31, 2007, the Company had $18,300,000 of auction rate securities, $8,950,000 of which had been redeemed by March 31, 2008 and another $1,125,000 of which was redeemed in April 2008. During the quarter $2,725,000 of auction rate securities were acquired. These investments are being reported at fair value which is estimated at 95.7% of amortized cost calculated using a discounted cash flow valuation model.

At March 31, 2008, the corporate and municipal bonds included in our available-for-sale security portfolio included $12,075,000 in amortized cost of auction rate instruments that pay a floating rate of interest set periodically through a Dutch Auction process typically held every 7, 28 or 35 days. Rates are determined by the credit quality of the issuer, supply and demand of a particular issue, frequency of the rate reset and any tax benefits associated with the security. The securities have historically traded at par and are callable at par at the option of the issuer. Interest is typically paid at the end of each auction period. At March 31, 2008, the majority of our auction rate instruments were investment grade and some were backed by monoline insurance companies. Until January 2008, the auction rate securities market was highly liquid. Beginning in January 2008, certain of our auction rate instruments “failed,” meaning that there was insufficient demand to sell all of the securities that holders desired to sell at auction. The immediate effect of a failed auction is that holders cannot sell the securities at auction and the interest rate on the security generally resets to a maximum auction rate.

At March 31, 2008, there was insufficient observable auction rate market information available to determine the fair value of most of our auction rate security investments. Therefore, we estimated fair value using a discounted cash flow model employing assumptions that market participants would use in their estimates of fair value. Certain of these assumptions included credit quality, final stated maturities, estimates of the probability of the issue being called prior to final maturity, 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. Based on this analysis, we recorded a temporary unrealized loss of $473,000, or $284,000 on an after-tax basis, related to our auction rate instruments as of March 31, 2008. We believe these temporary unrealized losses, recorded as a component of accumulated other comprehensive income with stockholders’ investment, can be attributed to fair value fluctuations in an unstable credit environment.

We currently have no reason to believe that any of the underlying issuers of our auction rate instruments are presently at risk of default. We have continued to receive interest payments on the auction rate instruments in accordance with their stated terms. Since March 31, 2008, $1,125,000 of our auction rate instruments have been redeemed and these were classified as short term investments. We believe that we will ultimately be able to liquidate the remainder of our auction rate instruments without significant loss. However, as a result of the failed auctions and excluding those securities redeemed subsequent to March 31, 2008, our auction rate instruments are not currently liquid. We have the intent and ability to hold the auction rate securities for a sufficient period of time to allow for recovery of the principal amounts invested.

Due to this recent change and 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 subsequent to March 31, 2008 as long-term. The fair value and par value of our long-term auction rate instruments is $10,477,000 and $10,950,000 at March 31, 2008, respectively. Every 1% change in the discount rate or 12-month extension in the duration of the redemption period would impact the internal valuation model by approximately $150,000.

As of March 31, 2008, we had approximately $18,984,000 in patient accounts receivable, net of our allowance for doubtful accounts, which was an increase of approximately $1,716,000 since December 31, 2007. Gross patient accounts receivable increased $2,554,000 since December 31, 2007, primarily as a result of an increase in the number of patients financed by us. At the same time, the allowance for doubtful accounts increased by $838,000 from $5,117,000 to $5,955,000.

Prepaid taxes decreased from $6,391,000 at December 31, 2007 to $173,000 at March 31, 2008. This decrease occurred primarily as a result of receiving the refund of previously paid taxes due to a change in tax accounting methods for deferred revenue.

Deferred compensation plan assets and liabilities both declined from December 31, 2007 to March 31, 2008. This decline was primarily attributable to participant withdrawals.

As of March 31, 2008, accounts payable decreased to $8,393,000 from $10,396,000 at December 31, 2007. This decrease was the result of timing of payment processing.

On August 21, 2007, our Board of Directors authorized a share repurchase plan under which the Company is authorized to purchase up to $50,000,000 of its common stock. Through March 31, 2008, the Company had repurchased 588,408 shares of its common stock at an average price of $16.99 per share for a total cost of approximately $10,000,000. No shares were repurchased under this program during the first quarter of 2008.

In the first quarter of 2008, the Board of Directors declared a dividend to common stockholders of $0.18 per share, which resulted in a cash payment of approximately $3,335,000.

Our costs associated with the opening of a new vision center primarily consist of capital expenditures, including the purchase or lease of lasers, diagnostic equipment and office equipment, rent 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 $1,000,000 and $1,500,000. Actual costs will vary from vision center to vision center based upon the market, the number of lasers purchased or leased for the vision center, the site of the vision center and the level of leasehold improvements required, among other variables. Our capital expenditures consist primarily of investments incurred in connection with the opening of new vision centers and equipment purchases or upgrades at existing facilities.

Year-to-date, we have opened four new vision centers in the following cities: Savannah, GA; Des Moines, IA; Tulsa, OK and Woodbridge, NJ. We currently have additional facilities under development. Capital expenditures through March 31, 2008 were $9,330,000, which were comprised primarily of the costs to open new vision centers and purchases of IntraLase lasers.


The ability to fund our marketing and advertising program, planned capital expenditures and new vision center rollouts depends on our future performance, which, to a certain extent, is subject to general economic, competitive, legislative, regulatory and other factors, some of which are beyond our control. Based upon our current level of operations and anticipated revenue, we believe that cash flow from operations and available cash and short-term investments should provide sufficient cash reserves and liquidity to fund our working capital needs and our capital expenditures.

On April 24, 2008, we entered into a loan agreement with PNC Equipment Finance, LLC to finance the majority of the IntraLase units purchased by us. At closing, we drew $19,184,000 on the loan facility with monthly payments over a five-year period at a fixed interest rate of 4.96%. We have typically financed our laser purchases with capital leases provided by the vendors and these are reflected in our Balance Sheet and Statement of Cash Flows. The IntraLase purchases were made with cash at the time of purchase and this loan transaction will free-up that capital to be used in the business for other purposes. Until the funds are used in operations, they will be added to our investment portfolio.

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