March 2,
2009
Mr. Jason
McCandless Ms. Janny Jiang
Glass,
Lewis & Co., LLC
One
Sansome Street
Suite
3300
San
Francisco, CA 94104
Dear Mr.
McCandless and Ms. Jiang:
We have
reviewed the Proxy Paper that you issued regarding LCA-Vision, Inc. (“LCAV” or
“the Company”). We are writing to you now to bring to your attention certain
facts concerning the 2007 restatement of which you may not have been aware of at
the time you were researching and assessing the LCAV situation. We believe these
facts and circumstances put the restatement in a different light than the
description in your Proxy Paper, and that your view of the restatement may have
been different had you been aware of them.
We
believe that your characterization of the restatement in the Proxy Paper implies
that the Securities and Exchange Commission (“SEC”) forced LCAV to do the
restatement. This, however, was not the case.
Two of
the large four accounting firms in the United States had signed off on the
Company’s accounting for deferred revenues for years without question or
comment. In 2007, the Company received a comment letter from the SEC as part of
its customary three-year review cycle of the Company’s disclosure documents,
which requested more detail regarding the accounting for deferred revenue for
separately priced extended warranties (“Deferred Revenue Accounting”), an
extremely specialized subject. The Company provided full documentation regarding
the Deferred Revenue Accounting, which it forwarded first to the local office of
its outside auditors for review prior to submitting it to the SEC. That local
office, which had worked closely with the Company when the Company initially
instituted the Deferred Revenue Accounting to ensure it complied with all
applicable accounting rules, approved the documentation prior to submitting it
to the revenue recognition expert in its National Office. The expert in revenue
recognition at the National Office felt that the Deferred Revenue Accounting was
not appropriate. As a result, the
Company
voluntarily
made the necessary restatements. It is important to note that the
Company’s reported cash provided by operations did not change.
Since
changing to the new method for deferred revenue, the Company has reported both
revenue and operating income according to generally accepted accounting
principles (GAAP) and a nonGAAP adjusted revenue and operating income which
backs out the effect of the amortization of deferred revenues.
In other words, the Company
continues to disclose its financial results based on the Deferred Revenue
Accounting.
We
believe that most investors and virtually all of the sell side analysts that
follow the Company use the Deferred Revenue Accounting in their valuation
models. As the Company itself notes in its earnings releases:
LCA-Vision
is providing both adjusted revenue and operating income as a means of measuring
performance that adjusts for the non-cash impact of accounting for separately
priced extended warranties. A reconciliation of revenue and operating income
(loss) as reported in accordance with U. S. Generally Accepted Accounting
Principles (GAAP) is provided at the end of this news release. Management
believes the adjusted information better reflects operating performance and,
therefore, is more meaningful to investors.
We would
also like to bring to your attention that (i) each of the Company’s
current Chief
Executive Officer and Chief
Financial Officer
signed off on the 2006 financial statements that were
included as part of the restatement and (ii) John Hassan, the Company’s current
Chair of the Audit Committee, has held this position for a number of years,
including all of the years that were included as part of the restatement. Mr.
Hassan, who does not have a CPA license, signed off on these financial
statements.
On a
separate note, your Proxy Paper states that if the LCA-Vision Full Value
Committee were successful, Dr. Stephen Joffe would serve as Chairman of LCAV and
Craig Joffe would serve as Chief Executive Officer. We have disclosed, however,
that if the LCA-Vision Full Value Committee is successful in its efforts, Dr.
Joffe will resume the position of Chief Executive Officer and Craig Joffe will
resume the position of Chief Operating Officer, positions each of them has
successfully held in the past.
We would
very much welcome the opportunity to discuss these and other matters included in
your Proxy Paper at your convenience.
Sincerely,
The
LCA-Vision Full Value Committee