LCA-Vision Inc. Q2 2008 Earnings Call Transcript

Executives

Patty Forsythe – VP of IR

Steve Straus – CEO

Mike Celebrezze – Interim CFO

Analysts

Ryan Daniels – William Blair

Erik Chiprich – BMO

Amy Chaplis [ph] – Jefferies & Co.

Anthony Vendetti –Maxim Group

Chris Cooley – FTN Midwest

Steve Willoughby – Cleveland Research

Kevin Ellich – RBC Capital Markets

Anthony Petrone – Maxim Group

LCA-Vision Inc. (LCAV) Q2 2008 Earnings Call Transcript July 29, 2008 10:00 AM ET

Operator

Good morning. My name is Felicia and I’ll be your conference operator today. At this time, I would like to welcome everyone to the LCA-Vision's second quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

Ms. Patty Forsythe, you may begin your conference.

Patty Forsythe

Thank you, operator. I would also like to thank everyone for joining us on today's call to discuss LCA-Vision's second quarter 2008 financial results. Joining me on the call are Steve Straus, LCA-Vision's Chief Executive Officer and Mike Celebrezze, LCA-Vision's 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 of today’s call that you limit your questions in order to provide an opportunity for others to participate.

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 any anticipated results. For a written description of those risks and uncertainties, please review our filings with the Securities and Exchange Commission. LCA-Vision disclaims any intention or obligations to update or revise any financial projections or forward-looking statements, whether as a result of new information, future events or otherwise. Please note that the content of this call contains time-sensitive information that is accurate only as of today, July 29, 2008.

I will now turn the call over to Steve Straus. Steve?

Steve Straus

Good morning and thank you for joining us to discuss LCA-Vision's financial and operational results for the 2008 second quarter. Before we begin, I’d like to mention that this is Patty Forsythe’s last call with us and we’d like to thank her for her nearly four years of service here at LCA-Vision. Patty has decided to return to the banking industry and has accepted an Investor Relations position at a local financial intuition and we wish her well.

We continue to feel the impact of eroding consumer confidence on consumer discretionary expending. As anticipated our year-over-year procedure volume was down 38% and we are reporting a net loss for the quarter. Our adjusted revenue declined 30% as a result of lower procedure volume, which was partially offset by a greater contribution from IntraLase. We are pleased to report that IntraLase is now available in 74 of our 77 LasikPlus Vision Centers and was utilized in 70% of procedures conducted in our centers in June.

Today, I would like to discuss our management team, Medical and Optometric Advisory Boards, LasikPlus surgeons and patient-care teams collaborate and diligently work to make decisions and institute programs aimed at increasing procedure volume that we believe will have an impact in the current economic climates.

As we stated in June, we’re taking a more grassroots approach to operation as all health care is delivered locally and our success will be achieved at a local LasikPlus Vision Center level.

Our revenue generating initiatives include, we have delegated more decision making to the local level, including setting market specific hours of operations and allocating funds to support local marketing and sales efforts.

Effective July 1, we implemented a simplified market specific pricing structure based on the results of testing we conducted in multiple LasikPlus markets earlier this year. We established local price points that we see as in keeping with the LasikPlus value proposition and accounts for local competition and other factors.

We believe we have felt some impact of this pricing structure and we began to see a slightly lower average price per-procedure towards the end of second quarter.

During the mid-April through June time period, we completed the first phase of our well-received employee service excellence and conversion training programs at all LasikPlus Vision Centers and international call centers. We discussed this initiative on the first the quarter call and while the sustainability of this trend is not yet certain, during June, we began to see modest improvement in pre-operative exam choice, patient conversion and treatment show rate.

Effective June 1, we modified our center level intensive compensation plan to further align our patient-care teams with center level growth objectives, and we further enhanced our LasikPlus.com web site with additional functionality tools and educational information.

I’d like to also comment on our net loss that we are reporting today by discussing the measures we are taking to reduce costs and minimize our use of cash. We continue to more closely align our stocking level with anticipated procedure volumes. We have based staff reductions on a careful and thorough analysis of company-wide operations that place patient experience and surgical outcomes at the forefront.

During the past few months, we have reduced our workforce by 25%, including a reduction in force last week. We expect to record a one-time severance charge of approximately $700,000 during the quarter ended September 30, 2008. Year-to-date staff reduction was expected to reduce our annualized labor expenses by $14.2 million.

In addition to the staff reduction, we have also initiated a company-wide freeze of salaries and eliminated a number of open positions.

We appreciate the dedication and commitment from our employees during these difficult times and we remain committed to providing a positive work environment for our employees and we’ll continue to investment in training and education for them.

In an effort to transition to a more variable cost structure, we are evolving towards a more flexible workforce by adding part-time personnel to replace open full-time positions where possible. On June 30, 2008, we had 109 part-time employees compared with 51 part-time employees on June 30, 2007.

In the third quarter, we are further reducing our national and local media expenditures. We expect to spend between $9 million and $10.5 million which represents a reduction of approximately 40% to 45% compared with the same quarter last year. We believe this reduction correlates with the current tightening we are seeing in discretionary consumer spending.

We also are announcing the departure of our Chief Marketing Officer and plan to conduct a search to fill this position. In reducing capital expenditures, we are halting 2008 new center openings after the third quarter, reducing the number of relocations to two for the remainder of the year and limiting new excimer laser purchases by moving under utilized lasers to centers opening in the third quarter.

We do not anticipate the need for additional investments in clinical or information technology during the middle of this year. Working capital is also being managed to minimize cash use.

Lastly, our Board of Directors has decided to suspend payment of quarterly dividends. We announced the opening of our 77 LasikPlus Vision Center in Nashville, Tennessee which is a new market for LCA-Vision. We have planned to open our 78th LasikPlus Vision Center late in the third quarter which will bring our new center openings for 2008 to 60 [ph].

We will continue to carefully analyze the performance of these LasikPlus Vision Center in each market reserve. As previously stated, we are committed to success at each LasikPlus Vision Center and we have no plan at this time to close any facility.

I’d now like to welcome Mike Celebrezze to our quarterly conference call to discuss our financial results. I’m delighted by Mike’s ability to aptly step into the senior financial position at LCA-Vision and to draw upon his experience for the company as well as with his past experience successfully dealing with cost control and cash management issues. Mike?

Mike Celebrezze

Thank you, Steve. Good morning. For the second quarter of 2008, revenue was $54.2 million compared with $59.7 million in the second quarter of 2007 and adjusted revenue was $49.2 million compared with $70.6 million. We performed 30,086 procedures in the second quarter of 2008 compared with 48,658 performed in the second quarter of 2007.

As Steve mentioned, the lower procedure volume is attributable to a decline in pre-operative consults and a decline in show rates for both of employment and procedures which we believe are primarily due to current economic uncertainty and other macroeconomic factors.

Same-store revenue decreased 28%, while adjusted same-store revenue increased 36%. There were 65 Vision Centers included in the same-store count. We reported an operating loss of $3 million for the quarter compared with operating income of $10 million in last year’s second quarter. The adjusted operating loss was $7.4 million compared with operating income of $10.9 million last year.

Medical and professional license fees for the second quarter of 2008 decreased 1.4% to $11.3 million from the second quarter of 2007. The decrease is primarily due to cost in physician fees associated with lower revenues. This was partially opted by higher license fees due to the IntraLace adoption this year and the impact of professional fees related to deferred revenue.

Direct cost decreased in the second quarter of 2008 by $4.5 million or 18.3% compared with the second quarter of 2007. This decrease was principally the result of lower procedure volumes.

General and administrative expenses increased by $284,000 or 5.3% in the second quarter of 2008 from the comparable quarter last year, primarily due to an increase in professional services and travel for our employee service excellence and conversion training program, and personnel cost related to the addition to our executive management team.

Marketing and advertising expenses decreased $248,000 in the second quarter of 2008 from the second quarter of 20007. Depreciation expense increased by $2.1 million in the three-month ended June 30, 2008 from the comparable time period last year, as a result of capital investment and new Vision Centers during the past year, purchases of IntraLase lasers and upgrade to Bausch & Lomb lasers.

Bad debt expense for the quarter was about 2.5% of revenue which is consistent with our estimates. As mentioned in our last call, we increased our down payment requirement on our internally financed procedures from $300 to $600 during April. Compared with the second quarter of last year, we have seen a reduction in internally financed procedures of about 1% to just below 10% of total revenue since we made that change.

Revenue financed by care of credit is holding steady in the mid 50% range. Income tax expense for the quarter was atypical, as it was impacted by the effect of tax rate credit of nearly 70%.

This change in the effective tax rate is due to report in net loss for the 2008 second quarter whereas we reported net income in the first quarter. With the expected annual earnings down, the impact of permanent items such tax-exempt interest will be a larger percentage of the total income. This had the impact of bringing our year-to-date tax rate down from 39% in the first quarter to 33.2% year-to-date with the accumulative adjustment booked in the second quarter.

It’s probably fair to estimate that our rate will remain at above 35% for the balance of year. One final note on taxes, we concluded the Federal IRS audit of 2006 with very minor adjustments, all of which had been accrued in the FIN 48 reserves.

For the quarter, we reported a net loss of $573,000 or $0.03 per share compared with net income of $7.4 million or $0.36 in the second quarter of 2007.

For the first six months of 2008, revenue was $133.7 million compared with $148.3 million last year. Our adjusted revenue was $123.2 million compared with $154.9 million. Procedure volume was 74, 245 this year compared with 107,759 for the first six months of 2007. Operating income was $7.5 million compared with $25.6 million. The adjusted operating loss was $2.0 million compared with operating income of $31.5 million last year.

Net income was $6.3 million or $0.34 per diluted share compared with net income of $18.3 million or $0.90 per share last year. We are providing adjusted revenue and operating income as a means of measuring performance that adjust for the non-cash impact of the accounting for separately priced extended warranties.

The reconciliation of revenue and operating income as reported in accordance with Generally Accepted Accounting Principles is provided on the last page of news release that we issued this morning.

Turning to cash flow, net cash provided by operating activities in the first six months of 2008 was $6.3 million. As of June 30, 2008, cash and investments totaled $67.9 million. During the second quarter of 2008 we borrowed $19.2 million to finance the majority of our interrelated 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 laser is consistent with our strategy to finance the acquisition of excimer lasers. At June 30, 2008, the loan balance was $18.6 million.

During the second quarter of 2008, cash and investments increased by $10 million. This increase included a net proceed after payment of $18 million from the bank loan we took out in April. The remaining $8 million of cash was used as follows: Account payable declined by $5 million to a very low level of $3.6 million at the end of June due to the timing of check bonds. We paid $2 million in federal income tax in the second quarter that was related to the first quarter profit where we paid a dividend of $1 million.

Net of these items, which are not expected to reoccur in this year’s third quarter, we were cash flow neutral for the second quarter. Cash flow for the third quarter of 2008 will largely depend on our earnings level.

We have been successful in our efforts to continue to reduce our auction rate security. As of today, we have $6.2 million in auction rate security, down from $18.3 million at December 31, 2007. All sales of auction rate securities have occurred at par.

Our focus for the balance of the year and into 2009 is on conserving our cash and investments. We are not providing financial guidance on specific earnings and cash flow projections, however we are tightly managing our expenses and cash disbursements as we weather this economic downturn.

As Steve mentioned, we are reducing marketing expenditures and have reduced headcounts in all areas. We are also minimizing other costs such as travel for example to improve financial performance. As Steve also said, we are cutting CapEx for the remainder of the year and have eliminated dividend this quarter to conserve cash. We have some room to improve working capital as well, mostly in accounts payable.

One last area I want to discuss is our effort to shift toward a more variable cost model. With making this type of shift, we’ll be better position to preserve more of our profit margins in a declining market. Our greatest opportunity to cut expenses is to migrate more toward a part-time workforce. As Steve mentioned, we are reporting progress in this area over the past year.

I will now turn the call back over to Steve.

Steve Straus

We remain 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 it becomes the hallmark of our LasikPlus friends. It is these values that are the foundation behind our achievement of a significant milestone at LCA-Vision.

Early this month, we were pleased to announce our performance of the one-millionth procedure at our LasikPlus Vision Center. VISC and IntraLase laser technology reduced (inaudible) procedure. We attribute this accomplishment to our company-wide ability to stay in step with evolving technology as we transform the lives of thousands of patients.

I would like to thank our LasikPlus employees and surgeons for their hard work and dedication to our company and for their commitment to treating more than 500,000 patients. We will be celebrating this achievement at LCA-Vision and in our LasikPlus Vision Centers throughout the month of August.

With these comments, we’d like to open the call to questions.

Questions-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Ryan Daniels from William Blair.

Ryan Daniels – William Blair

Hey, guys, I have one quick one and then a follow-up to that if I may. First off, can you give us a little more color on the workforce reduction and where it’s coming from? I guess thinking about what is the corporate level and call center level versus what portion the cuts are coming from the field.

Steve Straus

Sure, Ryan. This is Steve. As we mentioned in our opening comments, we've spent a lot of time thoroughly analyzing our workforce at the corporate level, at the national call center, and at each of our Vision Centers. We've worked with our field management team, our surgeons, as well as our Human Resources department and while we're not in the position to share the details of reduction in force in the three categories of corporate, call center and Vision Centers, the Vision Centers have the largest quantity of people employed by the company. So there was a little more on a percentage basis of the reductions coming out of the Vision Centers but, suffice it to say that there was a solid representative sampling of reductions in all three categories of corporate, call center and Vision Centers, and there were nothing from a departmental or a personal basis that was held sacred. So everything received the same scrutiny in our analysis and in the implantation of reductions.

Ryan Daniels – William Blair

Okay, that’s helpful. Then I guess one quick follow-up to that, what are your thoughts on kind of employee morale at the site level? It seems like a lot of the initiatives you’re making to drive growth or pushing more control of operations in marketing incentives to the site level at the same where you are cutting back site level staff and may be moving from full-time people who maybe more experienced to more part-time labor in filling up positions that are less experienced. So how do you guys look at that internally at the same time you are kind of pulling back on that staff, you are also giving that staff more responsibility to drive your growth?

Steve Straus

Sure. A number one, our major priority is to optimize the patient experience and the quality of outcomes and a very close second to that is providing a positive work environment for our employees in the call center, in the corporate level, as well as in our Vision Centers, and we’re evolving culturally to empower our Vision Center employees to make more decisions as close to the patient as possible, and I’m the first to admit that everybody in employed by the company wants to be busier, and especially those who have monthly bonus opportunities at the center level and that goes with the surgeons who are paid a percentage of revenue. So we are very sensitive and empathetic to those that have variable rate compensation tied to their performance month in and month out. And all of us as you as consumers are feeling the patient home as well, so we’re trying to do everything logically possible in a responsible way to make sure that we’re doing our very best to address real and perceived employee morale issues.

This millionth eye celebration is something that we’re kicking off internally this Friday, August 1. We’ve got some promotions, contests and lot of fun things for our employees and surgeons to involve with.

Also, we’re continuing to invest in our people, in training and development. We’ve also empowered them with their field management teams to determine the best hours to be woven in each market that we’re serving. We wanted to make sure that our hours of operation are both patient and employee friendly.

We’ve also empowered them to get more involved in sales and marketing initiatives at a local market grassroots level. We’ve talked about for quite awhile finally have been able to successfully implement our market level pricing and also we’re working with our employees to make sure that their monthly incentive bonuses are aligned with our performance objectives. So there are a lot of things that we have addressed and we’re continuing to address.

We’re working even more closely with our medical advisory board, our optometric advisory board, and also we have assembled a team of employees and surgeons, and have a good representative sampling of different positions around the country to make sure they’re being used as a sounding board and a source of new ideas.

So, until we perform at higher levels to the satisfaction of our shareholders, our employees and surgeons, we’re going to be very, very closely monitoring our employee morale and the key initiatives and investments that we’re making in the people that are serving our patients and the people in the call center and here in the corporate office that are supporting not only our patients but our Vision Center employees.

Ryan Daniels – William Blair

Okay, great. Thanks for a very helpful color, Steve. Thanks.

Operator

The next question comes from the line of Erik Chiprich of BMO.

Erik Chiprich – BMO

Hi, good morning. Thanks for taking the call. I just have a couple quick questions here on the pricing changes that you have talked about on the center level. I mean how many tiers does each center have of pricing now and can you talk a little bit about what maybe that pricing difference is now on those tiers versus what it was three months or six months ago?

Steve Straus

(inaudible) might celebrate it this year. Let me get back step back a little, we did the price tests for about four months where we tested different prices in different markets to see if it would drive more volume, it will be accepted by the Vision Center staff and how our patients would accept it and we got great knowledge from that.

We also did a detailed analysis of the different pricing that's available on each of our marketplaces, offered by our competition in those marketplaces. We took that analysis compared it against our converted (ph) rates in the existing markets to make some judgments as to whether we felt that pricing increases/decreases or staying the same could result in additional volume being pushed through our centers.

Word of the mouth is a great source for us. So the more volume we can push through, the more volume we’re going to get in the future, (inaudible) great volume. So we have selected different prices for the different markets. It’s not a static environment where we are studying the impact of those changes every month and if it is not helping to drive volume, we’ll make a decision as whether take the prices up, back up or maybe we can take them further down, again we will do more study. But, essentially, each market has one set of prices, so it is not each market has multiple price sheets. So, each market has been given one of two price sheets and one of three levels of discounting authority.

So each market has a goal for average price and each market has one price sheet from which to work and each price sheet has, of course, multiple prices, traditional, custom and so forth.

We have bundled IntraLase now. We used to have IntraLase as an add-on for an additional fee. We've now bundled the IntraLase into a procedure price and that seems to be better received by our workforce as well as our patients, so that's sort of how the pricing has gone.

Erik Chiprich – BMO

Got you and maybe if I can just push a little bit on drilling down. In these markets, we have to treat the pricing, I mean, you are saying is it $100 or $200, $300 difference per procedure that is helping to maybe get the patient in the door or any additional input you could provide on that side?

Steve Straus

Yes. I mean we have a range of prices and different markets have different prices. I will say that we would expect some modest price reduction. We didn’t see some price reduction in Q2 which you can observe that was based on the price test results of 17 markets. And so we expect that over the next few quarters, we’ll have some additional reduction in our average price, but no specific amount is being forecasted at this time.

We want to make sure that we have affordable pricing in our markets that were viewed as a value provider. We not going to be the low cost provider but we’re not going to be the high cost provider. We want to follow our mantra of being a value proposition and so that’s our objective.

Erik Chiprich – BMO

Okay. Thank you. I’ll jump back in queue.

Operator

Our next question comes from the line of Peter Bye of Jefferies & Co.

Amy Chaplis – Jefferies & Co.

This is Amy Chaplis [ph] for Peter Bye. I just have a quick question on your July procedures, how they are tracking?

Steve Straus

We do not provide mid-quarter information. So July is the first month of third quarter and when we report third quarter later this fall, we’ll provide that information on a quarterly basis.

Amy Chaplis – Jefferies & Co.

Sure. And stepping back to Q2, how did the market do? Did you guys maintain or gain or lose market share?

Steve Straus

As you know, this industry doesn’t have a proven scientific approach to accurately measure procedure volume. And we’re the first public company in the Laser Vision correction industry to report second quarter results and all data that we have or the analysts have or anybody involved in this sector is really anecdotal. There is some conjecture, there’s a little bit of fact involved, but we believe that the market was down significantly in the second quarter 2008 compared to second quarter 2007. This is a very fragmented industry, over two-thirds of the procedures still are being performed by independent surgeons, we believe the independents are being hurt the worst.

I admit in some markets we are under performing our expectations and in some of these underperforming markets, we could be losing a little bit of market share. But we believe that the category of Laser Vision correction in the United States for second quarter could be down by as much or slightly more than 30% using procedures as the metric and I’ll be curious to learn what the other team players, both on the provider and the technology side, report in the coming days.

Amy Chaplis – Jefferies & Co.

Sure, thanks. I have one more question, what would have to happen to occurred to re-step SG&A spend?

Steve Straus

What?

Amy Chaplis – Jefferies & Co.

What would have to occur to re-step SG&A spend?

Steve Straus

What do you mean re-step?

Amy Chaplis – Jefferies & Co.

To increase SG&A spend.

Steve Straus

I would envision that SG&A is going to come down a little bit. I mean we just announced that we had a reduction in force. So, when labor is the largest expense in the G&A section, so until the volume grows, we need to cut costs in other areas to try to improve our profit margin.

Amy Chaplis – Jefferies & Co.

All right. Thank you.

Operator

The next question comes from the line of Anthony Vendetti of Maxim Group.

Anthony Vendetti –Maxim Group

Thanks. When you said you are moving more towards a variable cost model and you announced this workforce reduction. Does that mean that the positions that are being employed, because you do pay them a monthly salary, does that mean that when employing new positions you are going to look at either reducing that monthly salary or adding more of the incentive on the actual procedures performed or potentially eliminating the employee model there?

Steve Straus

I understand two pieces to that question. Our Vision Center employees and our surgeons, as it relates to our Vision Center employees, we continue to be committed to providing a terrific workplace environment and to provide very attractive compensation plans to our Vision Center employees. That said, we are working with our field management and our Human Resources teams in collaboration with our surgeons to give as much flexibility into our staffing models and as Mike had mentioned, we want to continue to evolve to a more flexible workforce in each of our centers, meaning employing more part time people than we have in the past.

We think that is an attractive opportunity for several people that have skill sets in each of the positions that we have in our centers, but also it gives us a lot more flexibility to quickly adapt to providing the capacity of services at the right time per day, per week to meet the needs of the patients as come through each of our center doors.

As it relates to our surgeons, we have no intention of reducing their compensation plan. We have a very attractive plan that has stood the test of time and we’re going to continue to support and honor the existing compensation plans that we have it with our surgeons across the country.

Anthony Vendetti – Maxim Group

Okay. Out of the workforce reduction, can you talk about how many of those were position-related in terms of just actual numbers?

Steve Straus

When you look at our total surgeon complement in second quarter, it was reduced by three.

Anthony Vendetti –Maxim Group

Okay. And on Jim Brander, just a follow-up on the Jim Brander here, was his departure due to just the inability to generate – earn on the marketing ideas or some other reason why he left?

Steve Straus

Since Jim joined us in May 2007, he has quickly worked to bring together various components of our patient acquisition strategy under his leadership, including our customer call center, managed care, and our direct-to-consumer marketing group, and we have not been able to produce the yield or return on marketing dollar investments in recent quarters that we had planned on and we understand it’s a tough economic environment inside and outside our industry, and we are committed to our shareholders to make sure we optimize our efficiencies and effectiveness in our marketing investments.

Anthony Vendetti –Maxim Group

Is it fair to say then that his termination was the result of that? Are you looking for someone better for this position or – is that a fair assessment?

Steve Straus

We will find a new chief marketing officer that will lead us through the next generation of this company in each of our three patient acquisition efforts and stay tuned, the search is underway for Jim’s successor.

Anthony Vendetti –Maxim Group

Okay. Thank you.

Operator

Our next question comes from the line of Chris Cooley of FTN Midwest.

Chris Cooley – FTN Midwest

Thank you. Can you hear me okay?

Steve Straus

Yes.

Chris Cooley – FTN Midwest

Okay. Just two quick questions if I may, Steve. First, me like everyone else trying to drill down a little bit at the center level, could you maybe provide some color on the latitude at the center level, the operations folk, how they are allocating their marketing spend? I realize the medium and say L.A. is different from Omaha, Nebraska, or Milwaukee but help me kind of understand how at the center level you are kind of micromanaging or handling that component and does that now tie in to the center level comp structure? I have a follow-up on the loan loss provision. Thank you.

Steve Straus

Sure. Thanks for the fast question, Chris. Let me differentiate between advertising, marketing, and sales. The direct to consumer advertising initiatives that this company has employed for several years continues to be our cornerstone of patient acquisition. And the various advertising approaches we used in the variety of mediums available to us continue to be managed nationally with our marketing team experts. We’re working more closely to solicit ideas on creative messages and different approaches in our advertising that could work more effectively today than in the past to drive more patient volume to each of our centers.

When I think about marketing, we have allocated some dollars through our third quarter budgeting process to each of our centers and as I mentioned in my comments earlier, Chris, aggressive service initiatives, local marketing, staying close to your target audiences. This is how that industry was built from day one in ’95,’96,’97, and’98. We have some really talented, passionate, knowledgeable people and if they come up with some creative advertising ideas, we’re going to evaluate them and support them and test them in their markets.

Also, we’re giving them dollars to support their sales efforts and reaching out to different community audiences, employer audiences. So don’t confuse the notion that we’re empowering the Vision Center employees to manage their advertising budgets. We’re much more open to soliciting and accepting their ideas that we could employ on a national level with our director’s funds advertising but also, we’re empowering them to do a lot more work and aggressive service marketing and sales at the local level.

Chris Cooley – FTN Midwest Securities Corp

Okay, and then additionally, if I could just follow-up – a little surprised. Your loan loss position increased by about $1.2 million, it looks like, sequentially, and if I’m not mistaken, during the June quarter, you guys increased your mandatory deposit basically covering all the fixed costs, things around with the exception of customer of IntraLase procedures. And so, I’m just a little bit surprised, did you see further degradation and shall we say, those that actually filed for credit with you as opposed to care credit or is there something else in that number? I’m just trying to get behind it a little bit. Thank you.

Mike Celebrezze

Okay, it’s Mike again. Our current net expense for the quarter was not inconsistent with the first quarter. We reckon – it was a loss of 2.5% of revenue which is pretty consistent with what we’ve been projecting. So, the loans for doubtful accounts is impacted by the timing of write-offs as much as the accruals that we put into the reserve. So, I wouldn’t read too much into pages in the reserve as much as I would keep an eye on bad debt expense which is consistent from quarter to quarter for the last couple of quarters. So –

Chris Cooley – FTN Midwest Securities Corp

Mike, I can just push you on that a little bit. Didn’t you drop though your in-house finance sequentially from 12% to 10%? So, wouldn't that then imply a higher write-off within your base or is the timing that much of a lag? I thought most of them defaulted within the first 90 days?

Mike Celebrezze

I would not say that most of them defaulted in the first 90 days. We have programs that run as long as 36 months. So, let me just finish, the down payment that we increased was increased in June. So, that really didn’t have too much of an impact this quarter.

In terms of the exposure, we are continuing to get a lot pressure on the 36-month program. We’re reserving conservatively on that program but we’re watching it closely and we did take the deposit off for all programs. We’re taking other steps to make sure that we collect as much as we can of the receivable but still of course, very profitable business for us given our high profit margin on the procedure. But we haven’t really seen degradation, material degradation in the second quarter compared to the first quarter on the receivables. That’s not to say there’s no guarantee about the future. So we’re going to continue to monitor, continue to work it, continue to make the right decisions for the overall bottom line but we have not seen material changes in the second quarter.

Chris Cooley – FTN Midwest Securities Corp

Okay, thank you and then, if I could just give squeeze in one last round, and get back in queue. Any guidance that you’d provide at this level just in regards to maybe future IntraLase adoption, you’ve already ramped up to in excess of 70 this year and also where that trend just is, we’re kind of looking at the model in terms of mix. Thank you.

Steve Straus

As it relates to the IntraLase adoption, you’re familiar with the curve that we've experienced during the first six months of this year and for the month ended June, we’re at 70% and our commitment is to continue to put the best clinical technology in the hands of our surgeons and clinical staff in each of our centers and allow them to determine what combination of technology will provide the best experience and the best clinical results for each patient.

Because I believe that our IntraLase penetration as a percentage of all procedures that our surgeons perform will soon reflect the market. We believe, as do our surgeons, that it is a standard of care now in the industry to create a flap for the Lasik procedure and I would say you should expect our IntraLase penetration to soon reflect what’s happening in the industry on an average.

Chris Cooley – FTN Midwest Securities Corp

Thank you.

Operator

Our next question comes from the line of Steve Willoughby of Cleveland Research.

Steve Willoughby – Cleveland Research

Good morning. Thank you. Question regarding the reduction of marketing expenses, is that kind of across the board or that targeted any medium in particular? I’m thinking about as it relates to conversion rates.

Steve Straus

Sure. We, as you know, have a lot of analytical tools to measure our effectiveness of marketing spend by medium, by markets, by day, and we’re constantly adjusting with the help of our several strategic business partners in our marketing group and our marketing team to make sure that we’re getting the best return on each incremental marketing dollar spent but we don’t detail what mediums we’re using in aggregate or on a market level basis. I can tell you that we’re constantly shifting our resources of time, talent and money to the mediums that we’re getting the best return.

Also, it’s no secret that with the Olympics coming up, this coming week and the presidential election this fall, there’s a limited supply of broadcast media available. So, we’ve taken that into consideration for both of our third and fourth quarter medium spends and we’re going to continue to invest the right amount of dollars in the right medium and if we’re seeing something underperforming our month-to-month and quarter-to-quarter goals, we’re going to draw back and analyze that. And if we see something exceeding our expectations, we’re going to invest more money into those areas. So it’s a constant dynamic and fluid management of our marketing mediums and dollars behind with each.

Steve Willoughby – Cleveland Research

Okay, thank you. That’s all I have for now.

Operator

Your next question comes from Kevin Ellich of RBC Capital Markets