SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-KSB
________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file
December 31, 1996 number 0-27610
LCA-VISION INC.
A Delaware Corporation I.R.S. Employer
Identification No. 11-2882328
7840 Montgomery Road, Cincinnati, Ohio 45236
Telephone Number (513) 792-9292
_________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
________________________
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained in this
form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
________________________
As of March 20, 1997 the latest practicable date, 19,599,234
shares of Common Stock were outstanding. The aggregate market
value of Common Stock held by non-affiliates was approximately
$9,005,085 at that date.
________________________
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the part of the Form 10-KSB into which the document
is incorporated: None
Transitional Small Business Disclosure Format (Check one):
Yes ____ No X
PART I
Item 1. Description of Business.
Background, History of Company
LCA-Vision Inc. (the "Company" or "LCA-Vision") was
incorporated in Delaware in 1987 under the name Kessef
Technologies Inc. In 1988, Kessef Technologies Inc., merged with
Maxoil Incorporated, a California corporation, under the charter
of Kessef Technologies, Inc. changing the name of the Company to
Maxoil Incorporated. Maxoil Incorporated formerly operated a
business developing, managing and syndicating oil and gas
investments and in 1988 had completed an initial public offering
issuing 1,500,000 shares of its common stock to the public. Since
December 31, 1993, Maxoil Incorporated had been an inactive, non-operational
corporation.
In July, 1995, Stephen N. Joffe, M.D. purchased a majority of
the outstanding shares of the common stock and preferred stock of
Maxoil Incorporated and amended the Certificate of Incorporation
to change the name to LCA-Vision Inc. and to effect a one-for-ten
reverse stock split. Dr. Joffe also moved the corporate
headquarters to 7840 Montgomery Road, Cincinnati, Ohio.
On August 31, 1995, LCA-Vision, through its wholly-owned
subsidiary, LCA Canada, Inc., acquired all of the stock of the
Toronto Laservision Centre, Inc., intending to operate it as a
wholly-owned subsidiary of the Company. On September 29, 1995,
Laser Centers of America, Inc., a Delaware corporation ("LCA")
founded by Stephen Joffe, merged into LCA-Vision. The shares of
LCA-Vision were quoted on Nasdaq's over-the-counter electronic
bulletin board under the symbol LCAV. On January 25, 1996, LCA-Vision Common
Stock began trading on the Nasdaq SmallCap Market.
Business Overview
LCA-Vision is a manager of laser and minimally invasive surgery
programs for hospitals and medical centers and is a leading
developer and operator of free-standing laser refractive eye
surgery centers in the U.S. and abroad.
In the mid-1980s, the Company pioneered the multi-specialty laser
surgery center business, and, during its successful 10 year
operating history, was involved in the implementation of over 80
hospital-based, multi-specialty surgery programs. Based on this
experience, the Company has developed an expertise in managing and
promoting new laser surgery techniques and technologies. The
Company continues to manage 26 hospital laser surgery programs on
a contract basis and has used the cash flow from these operations
to partially fund the expansion of its refractive eye surgery
business.
Since 1991, the Company has applied its laser operating expertise
to the field of refractive eye surgery and particularly to
photorefractive keratectomy, a procedure in which lasers are used
to permanently correct nearsightedness and other eye conditions.
The Company believes that it is one of the three largest operators
of free-standing refractive surgery centers in the U.S. As of
December 31, 1996, the Company had twelve refractive surgery
facilities in the U.S., two in Ontario, Canada (Toronto and Ft.
Erie) and one in Helsinki, Finland. In addition, the Company has
opened two new centers in January 1997 in Albany, New York and
Mountain View, California. In total, the Company currently
operates 17 laser vision correction centers.
Laser Refractive Surgery Centers
The laser refractive surgery centers operated by the Company
provide the facilities, equipment and support services necessary
for performing various corrective eye surgeries that employ state-of-the-art
laser technologies. Each center is equipped with one
or more laser systems in addition to corneal topography
instruments, ophthalmic examination equipment, computer systems
and standard office equipment. Each center is typically staffed
by a center director, an office administrator and a laser
technician. Ophthalmologists using the Company's facilities have
completed extensive FDA-mandated training sessions and have met
the qualification criteria of the Company.
The Company's laser refractive surgery centers operate under the
tradename LCA-Vision Laser Centers of Excellence . The surgeries
currently performed in the Company's centers primarily include PRK
for the treatment of nearsightedness. As new laser-based surgical
procedures are approved by the FDA, the Company will accommodate
the service requirements for these procedures as well.
By using the Company's facilities, physicians are able to
concentrate on treating patients and are freed from the financial
and management requirements associated with establishing and
operating a surgery center. Additionally, participating
physicians benefit from the Company's marketing skills and
programs (such as its toll-free 800 numbers) in terms of
identifying and capturing potential new patients. Finally, many
of the back office administrative and financial functions are
performed more efficiently in a centralized operation that can
leverage the volume of numerous individual facilities.
Since PRK is not generally reimbursable by third party payers, the
Company offers several financing alternatives. Customers can pay
for the procedure with cash, bank check, money order or credit
card. In addition, the Company offers a 90-days-same-as-cash
payment plan that has no application fee and a one hour credit
decision time. The plan, offered by an unaffiliated finance
company at a 14.9% interest rate for qualified applicants, allows
a customer to delay all payments for 90 days and then to pay a
fixed monthly amount based on the amount of the initial down
payment. The Company also offers information regarding
installment plans, insurance coverage, home equity loans and
payment through employer flexible benefit plan. The Company bears
no credit risk of any of these options.
The Company has had extensive experience with PRK, having operated
its laser refractive surgery center in Toronto since 1991.
Physicians have performed over 5,000 refractive surgeries,
primarily PRK, at this site alone and, since the approval of PRK
by the FDA, physicians have performed over 2,000 refractive
surgeries in the Company's U.S. centers. The results of a Company
study of the initial 1,150 procedures performed at its U.S.
centers indicated that, of those procedures with at least six
months of follow-up, 85% of the eyes were corrected to between
20/20 and 20/25 and 97% were corrected to at least 20/40.
Importantly, the Company is also able to gain experience with new
laser technologies and surgery techniques in its Toronto, Ft. Erie
and Helsinki centers in advance of their FDA approval in the U.S.
Toronto Laservision Centre, Inc.
The Toronto Laservision Centre, Inc. has been performing PRK
surgery in Toronto, Canada since 1991. Toronto differs from the
Company's U.S. centers in that its fixed costs are approximately
twice the level of a typical U.S. operation and its price per
procedure is slightly lower in U.S. dollar terms. It should be
noted that, following the FDA approval of PRK for use in the U.S.,
the number of U.S. patients referred to Toronto declined during
1996.
Expansion of U.S. Refractive Surgery Centers
The Company's only operating eye care center as of the third
quarter of 1995 was Toronto (which opened in 1991). Since that
time, the Company has successfully opened 16 additional eye care
centers.
The Company seeks to differentiate its centers in the
marketplace by providing locations and treatment environments that
meet patient and doctor preferences. Additionally, if the Company
enters a market with an existing laser system (either Summit or
VISX), it will typically install the other system if that system
better satisfies the needs of local opthalmologists.
The following table sets forth the total number of PRK and LASIK
procedures performed at each of the Company's facilities since
January 1, 1996.
FACILITY 1996 TOTAL Date Opened
_____________ __________ ___________
Baltimore 481 2/96
Cincinnati 423 12/95
Cleveland 266 1/96
Savannah 250 2/96
Toledo 192 4/96
New York City 151 12/95
Dayton 134 4/96
Charlotte 74 9/96
Buffalo 15 12/96
Westchester 12 7/96
Clearwater 10 11/96
Columbus 7 11/96
________
U.S.
Facilities 2,015
Toronto 1,489 8/91
Ft. Erie 53 11/96
Helsinki 63 10/96
________
All
Facilities 3,620
(1) Toronto results exclude 179, 157 and 41 referrals of U.S.
patients from another company for the first three quarters of
1996, respectively, that halted such referrals on July 31, 1996.
(2) Acquired.
The Company has now begun implementing its excimer ophthalmic
surgery centers in the U.S. using Summit and VISX lasers to
perform PRK on nearsighted patients. Both Summit and VISX lasers
are subject to a royalty fee of $250 per procedure performed (the
"Pillar Point Royalty"). The following table sets forth the
locations at which the Company uses various laser systems.
Summit VISX Nidek Chiron
__________ ________ ________ _______
Cincinnati Columbus Helsinki Toronto
New York City Mountain View
Cleveland Charlotte
Savannah Albany
Dayton St. Petersburg Sunrise LaserSight
_______ __________
Toledo Baltimore Toronto Baltimore
Westchester Toronto
Buffalo
Ft. Erie (Apex Plus)
Toronto (Apex Plus)
Currently, a total of 908 doctors have privileges and have been
credentialed at LCA-Vision centers. Of this total, 396 are
ophthalmologists and 512 are optometrists. Many of these
physicians have signed non-compete agreements with the Company
that limit their ability to perform PRK procedures at other
facilities for a period of two years.
Competition
As a leading provider of PRK, the Company competes with several
surgical and non-surgical treatments to correct refractive
disorders, including eyeglasses, contact lenses, other types of
refractive surgery (such as radial keratotomy), corneal implants
and other technologies currently under development. Eye care
services in the U.S., including PRK, 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 centers.
Refractive surgery center chains, such as the Company, are a
specialized type of multi-site eye care center that primarily
provide PRK.
Of the 16,500 ophthalmologists in the U.S., approximately 4,800
have completed the first phase of the FDA-mandated training
program required for excimer laser surgery and over 1,260 have
completed the second phase which certifies them to treat patients.
The Company believes that approximately 70% of all PRK procedures
are currently performed by an individual doctor or a small
unaffiliated practice group.
In addition to providing eyeglasses and contact lenses, retail
optical chains could potentially provide PRK. Certain chains have
entered the PRK market with limited success and have cut back
their involvement in the industry. Other retail optical chains
are not currently focusing on providing refractive surgery.
Among the refractive surgery center chains, the Company is the
third largest provider in terms of number of facilities after only
Summit (with approximately 20 centers) and Laser Vision Centers,
Inc. ("LVCI") (with approximately 20 centers). Summit is also one
of the two FDA-approved manufacturers of refractive lasers, and it
purchased Lens Express, a contact lens manufacturer and
distributor, in 1996. On January 31, 1997, however, Summit
announced its intention to either sell or spin-off its chain of
vision correction centers in order to better focus on its core
business of manufacturing laser equipment. Summit is listed on
the Nasdaq National Market under the symbol "BEAM." LVCI is a PRK
provider with centers in North America and Europe and is listed on
the Nasdaq National Market under the symbol "LVCI." Other
competing refractive surgery center chains include TLC The Laser
Center (which recently acquired the laser center operations of
20/20), Sight Resources Corp., Beacon Eye, Vista Technologies and
Global Vision.
Multi-Specialty Surgery Programs
In the mid-1980s, the Company pioneered the multi-specialty laser
surgery center business and, during its successful 10 year
operating history, has implemented over 80 such surgery programs
in the U.S., Canada and Asia. The Company has developed, over that
time frame, a national infrastructure which includes centralized
marketing, management and financial functions. The Company
believes that it is the only independent organization providing
these management services to the health care provider market.
Based on this unique experience, the Company has developed an
expertise in managing, marketing and promoting new laser surgery
techniques and technologies.
The Company continues to manage 26 multi-specialty surgery
programs at various medical facilities on a contract basis. These
facilities are located in eighteen states, primarily in the
Midwest and Southeast. The contracts with these facilities
generally range in duration from one to three years with options
to renew. The contract services are provided to the participating
hospitals on an exclusive basis within a defined market.
The type of laser or minimally-invasive surgery offered at any of
the hospitals which contract for the Company's services is
dependent upon the expertise of the professionals who utilize the
center and the needs of the specific hospital. Many surgical and
medical specialties currently and potentially will be able to
utilize lasers in their procedures. Among them are ophthalmology,
gynecology, otorhinolaryngology, gastroenterology, pulmonology,
urology, neurosurgery, general surgery, plastic surgery,
dermatology, vascular surgery, thoracic and cardiac surgery,
oncology, oral/maxillofacial, orthopedics, pediatric surgery,
podiatry, radiology, burns, traumatology, rheumatology, colo-rectal surgery and
sports medicine.
The Company structures its contractual arrangement with facilities
to match compensation with the value of the specific services it
provides. While the exact terms of the contracts often vary, the
basic structure is generally the same. The Company is paid a
fixed amount for the initial work performed to render a center
operational and then receives compensation to service a center on
an ongoing basis. For example, the Company receives fees for its
ongoing education program and advertising program. The Company
also is compensated for the success of the center, which creates
incentives to increase surgical volume or reduce surgical costs.
Under a contract tied to laser procedures, the Company is usually
paid a fixed amount for each laser surgical procedure performed in
the surgery center. Amounts specified per procedure vary from
contract to contract.
The renewal of the Company's contracts with the hospital providers
is becoming increasingly difficult due to increasing price
pressures and the lengthening of the sales cycle. Hospital
providers and other entities are being driven to cut costs and
scale back their operations, sometimes including the programs that
the Company manages. The Company's existing contracts, however,
provide significant positive cash flow which the Company is using
to partially fund the expansion of its refractive surgery
business. In addition, most of the corporate resources previously
engaged in the contract management business have been reassigned
to the refractive surgery business, which the Company believes has
much greater long-term potential.
Program Development Services
The Company has developed a unique set of skills relating to the
successful development and management of surgery programs for
health care providers such as hospitals and medical centers.
These skills are directly transferable to developing and operating
a refractive laser surgery center. These skills include (1)
designing the facility, (2) creating an education program, (3)
developing a marketing plan and patient referral system, (4)
providing ongoing employee training and (5) recruiting and
retaining an on-site center director.
Designing the Facility The Company assesses existing
configurations, available equipment and a facility's potential
case mix. The Company then provides specifications for any
required changes in layout and any additional equipment that will
be needed. Equipment required typically includes lasers, other
hardware and operating room accessories.
Creating an Education Program Concurrent with the design and
configuration of new centers, the Company creates and implements a
comprehensive education program for the center's physicians,
nurses and technicians. The training and education is conducted
by the Company's full-time employees as well as independent
faculty who are experts in the fields of laser surgery and other
newer surgical procedures. The instruction provided is a
combination of lectures and "hands-on" training and is designed
for both the physicians utilizing advanced surgical techniques and
the surgical technicians and nurses supporting them. The Company
is approved by both the Accreditation Council for Continuing
Medical Education and the Ohio Nurses Association to issue
continuing education credits to physicians and nurses,
respectively. The Company has provided 900 educational courses to
nearly 8,300 physicians and awarded almost 65,000 continuing
education credit hours. In addition, 145 courses were given to
3,300 registered nurses and support staff.
Developing a Marketing Plan and Patient Referral System The
Company's marketing and advertising program is designed to build
public awareness of the benefits of laser and advanced surgery
techniques as well as to build brand recognition of the Laser and
Advanced Surgery Centers of Excellence or LCA-Vision Laser
Centers of Excellence tradenames. The marketing and advertising
is provided by the Company's in-house staff and is tailored to the
demographics of the local market. Specialized materials include
television, radio and print media advertisements and literature
designed for each stage of a center's development. The
advertising campaign publicizes a toll-free telephone number which
services as the access point for potential patients. This system
has succeeded in increasing both laser procedures and overall
surgical volume.
Providing Ongoing Employee Training The Company continuously
monitors developments in lasers and advances in surgical
technology, and participating facilities continuously receive
updates on new procedures and technology. In addition, the
Company monitors medical regulatory developments that may impact
the operation of the centers and assists the client in ensuring
compliance with applicable governmental requirements. The Company
also assists in clinical studies and provides advanced ongoing
education for physicians and nurses.
Recruiting and Retaining an On-Site Center Director The Company
appoints a full-time center director whose primary duties include
assisting in physician recruitment, design and implementation of
education programs, advising the center on policies and
procedures, developing safety procedures, assisting in the
credentialing process for advanced surgical operations, attending
to staffing requirements and assisting hospital medical committees
that deal with the utilization of surgical equipment. The center
director is critical to the success of the overall program and is
usually an employee of the Company, though the health care
provider generally reimburses the Company for a portion of the
center director's salary.
Current Multi-Specialty Surgery Programs Under Contract
Facility Location
Advanced Surgery Center of Georgia Canton, GA
Advanced Surgery Facility-Trumbull Mem.
Hosp. Cortland, OH
Baptist Medical Center Montgomery, AL
Binghamton General Hospital Binghamton, NY
Cabrini Medical Center New York, NY
Candler Hospital Savannah, GA
Carraway Methodist Medical Center Birmingham, AL
Columbus-Cabrini Medical Center Chicago, IL
Good Samaritan Hospital and Health Center Cincinnati, OH
LCA-Center for Surgery Cincinnati, OH
The Medical Center of Central Georgia Macon, GA
Methodist Medical Center of Oak Ridge Oak Ridge, TN
Pendleton Memorial Methodist Hospital New Orleans, LA
St. Frances Cabrini Hospital Alexandria, LA
St. Francis Hospital of New Castle New Castle, PA
St. Francis Medical Center Pittsburgh, PA
St. Francis Surgery Center Cranberry Pittsburgh, PA
Saint Joseph Medical Center Joliet, IL
St. Mary's Medical Center Evansville, IN
St. Patrick's Hospital of Lake Charles Lake Charles,LA
St. Vincent's Hospital and Health Care
Center Indianapolis, IN
Sarasota Memorial Hospital Sarasota, FL
The Toledo Hospital Toledo, OH
Trumbull Memorial Hospital Warren, OH
Wausau Hospital Center Wausau, WI
Wilson Memorial Regional Hospital Johnson City, NY
Properties
Each of the Company's laser refractive surgery centers is located
in leased space. The laser refractive surgery centers are
generally located in professional office buildings. Substantially
all of the laser refractive surgery centers include laser surgery
rooms, private examination rooms, and large patient waiting areas.
The leased space ranges in size from approximately 2,000 to 6,700
square feet; with expiration dates ranging from October 1997 to
January 2003. As of March 20, 1997, the Company had 13 wholly-owned laser
refractive surgery centers. The following table
details the locations of the wholly-owned laser refractive surgery
centers by state or province:
California
Mt. View
Florida
Clearwater
New York
Albany
Buffalo
North Carolina
Charlotte
Ohio
Cincinnati
Cleveland
Columbus
Dayton
Toledo
Warren
Ontario, Canada
Ft. Erie
Toronto
Employees. As of December 31, 1996, the Company had 118
employees, of whom 86 employees were full-time. The personnel who
constitute the Company's independent faculty are doctors and other
healthcare professionals retained, when and as needed, as
independent contractors to assist with the education and training
provided by the Company to its clients. The Company retains its
faculty from a pool of doctors or other healthcare professionals
who have agreed to provide services to the Company on an
independent contractor basis.
Trademarks. The Company's trademarked names have not yet
been formally registered. Where the trademark symbol is used
herein, it is the Company's intention to claim a trademark on such
names under common law by using the "TM" symbol. The duration of
such trademarks under common law is the length of time the Company
continues to use them. At some point in the future, the Company
plans to formally register their trademarks with the U.S.
Trademark Office.
Item 3. Legal Proceedings.
Toronto Laser/Sight Centre was named as co-defendant in a
lawsuit, Sophie Nowogorski v. Dr. Herb Tanzer and Toronto
LaserSight Centre (Toronto Laservision Centre, Inc.), filed on
April 28, 1994 in the Ontario Court (General Division) by a former
patient of the Toronto LaserSight Centre claiming negligence,
breach of contract and/or assault and battery in connection with
excimer eye surgery performed on the plaintiff. The plaintiff
claimed general damages in the amount of $500,000 (Canadian). The
Company successfully defended against all of such claims and the
court dismissed the case without costs in December 1996. The suit
of VISX Incorporated v. Summit Technology Incorporated involves
allegations of patent infringement in Canada. VISX has alleged
that Summit manufactured and sold a laser system that infringed on
its patents. In addition, VISX added as defendants eight Canadian
users of these machines, one of which, Dr. Patricia Teal, was a
shareholder of The Eye Laser Center, which was acquired by LCA-Vision in
October 1996. Summit is aggressively defending its
innocence and the Canadian equivalent of the U.S. American Medical
Association is defending the physicians. LCA-Vision has not
signed a license agreement with VISX on behalf of the Summit laser
located in Ft. Erie and used by Dr. Teal. LCA-Vision has held in
escrow U.S. $64,000 (in the form of a letter of credit) of the
acquisition payment to the shareholders of The Eye Laser Center
for settlement of any judgment based upon the time of ownership
prior to LCA-Vision's acquisition.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's Common Stock is traded in the over-the-counter
market under the symbol "LCAV." On January 25, 1996, the Common
Stock commenced trading on the Nasdaq SmallCap Market. On March
20, 1997, there were approximately 482 holders of record of the
Company's Common Stock.
The following table sets forth, for the periods indicated, as
reported on Nasdaq, the range of high and low closing bids. These
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions. For the periods prior to June 30, 1995, there was
no active market for the Company's Common Stock and no trading
took place.
In June 1996 the Company effected a 1 for 4 reverse stock split.
The bid prices prior to the date of the split have been adjusted for
the split.
High Low
1995: Third Quarter $ 2.00 $ 1.00
Fourth Quarter 21.00 2.52
1996: First Quarter $22.00 $ 6.00
Second Quarter 11.50 3.625
Third Quarter 6.25 3.625
Fourth Quarter 4.375 2.25
Prior to September 29, 1995, the Company was a subchapter S
Corporation for tax purposes and periodically distributed S
Corporation dividends to its stockholders. Subsequently, the
Company has not paid any cash dividends and does not anticipate
doing so in the future.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
Overview
On September 29, 1995, LCA-Vision Inc. ("LCA-Vision" or the
"Company") merged with Laser Centers of America, Inc. ("LCA"). At
the time of the merger, two shareholders together owned
92% of the outstanding voting stock of LCA-Vision and 100% of
LCA's. The financial statements reflect the historical assets and
liabilities and results of operation of LCA prior to the
merger.
On August 31, 1995, the Company acquired the minority
interest of Toronto Laservision Centre (the "Centre") which
provides corrective eye surgery using laser technology. LCA
previously owned 67% of the Centre; however, it did not have
control of the activities or the business affairs of the Centre
and, accordingly, recorded its investment using the equity method
until August 31, 1995. The operations of the Centre since August
31, 1995, are included in the consolidated financial statements of
the Company.
LCA-Vision is a leading developer and operator of free-standing
laser refractive surgery centers and manages laser and minimally
invasive surgery programs for hospitals and medical centers.
The laser refractive surgery centers operated by the Company
provide the facilities, equipment and support services for
performing various corrective eye surgeries that employ
state-of-the-art laser technologies. The surgeries performed in
the Company's centers primarily include photorefractive
keratectomy ("PRK") for treatment of myopia (nearsightedness).
The Company manages 26 multi-specialty laser surgery programs at
various medical facilities on a contract basis. The Company
structures its contractual arrangements to match compensation
with the value of the specific services it provides. The Company
is generally paid on a fixed amount for the initial work performed
to render a center operational and then receives compensation to
service a center on an ongoing basis. Compensation is generally
fixed based on procedures performed; based on increased surgical
volume or reduced surgical costs; or a combination of such.
Contracts may also compensate the Company for conducting the
education and marketing programs of the surgical center and its
staff including doctors.
The Company derives its revenue from three primary sources: (i)
fees for surgeries performed at its laser refractive surgery
centers, (ii) contractual fees for managing multi-specialty laser
surgery programs, and (iii) fees for marketing and education
programs; management fees for operating laser refractive surgery
centers of investees; and miscellaneous sources. Miscellaneous
sources include product sales - lasers and laser surgery
instruments - which the Company is phasing out.
The Company classifies its operating expenses into the following
categories: (a) direct operating expenses which include: (i)
laser refractive surgery centers -- labor, physician fees, Pillar
Pointroyalty fees (a royalty fee paid to the manufacturers of the
FDA-approved lasers of $250 per procedure), facility rent and
utilities, and surgical supplies; (ii) multi-specialty laser
surgery programs - - labor; and (iii) other services and products
- -- labor and cost of products sold; (b) general and
administrative expenses which primarily include marketing program
costs, headquarters staff expenses and other overhead costs; (c)
center pre-opening expenses which include direct costs incurred
prior to opening a laser refractive surgery center; and (d)
depreciation and amortization.
Results of Operations
The Company's results of operations in any period are
significantly affected by the number of laser refractive surgery
centers opened and operating, the number of hospitals under
management contract, and the level of services contracted by
hospitals and others during such period. Given the limited period
of time that the laser refractive surgery centers have been
opened, the Company's results of operations may not be indicative
of future results.
The following table reflects the Company's expansion into laser
refractive surgery centers:
1996 1995 1994
Operating at beginning of period
Wholly-owned 2
Investees 1 1 1
Opened/acquired during period
Wholly-owned 8 2
Investees 4 1
Operating at end of period
Wholly-owned 10 2
Investees 5 1
In January 1997 the Company opened two wholly-owned laser
refractive surgery centers. The Company records the activity of
its investee laser refractive surgery centers using the equity
method of accounting.
Multi-specialty laser surgery programs under contract at December
31 were: 1996 -- 26, 1995 -- 38, and 1994 -- 43.
The following table shows the percentage of net revenue
represented by various expense categories reflected in the
Company's Consolidated Statement of Operations:
Year Ended December 31,
1996 1995 1994
Net revenue 100.0% 100.0% 100.0%
Direct operating expenses 56.2 43.8 43.1
General and administrative
expenses 53.3 46.2 39.1
Center pre-opening expenses 1.6
Depreciation and amortization 11.6 7.6 7.4
Operating profit (loss) (22.7) 2.4 10.4
The following table reflects the sources of consolidated net
revenue and consolidated direct operating expenses:
Year Ended December 31,
1996 1995 1994
Net Revenue
Laser refractive surgery centers 27.0%
Multi-specialty laser surgery
programs 33.9 48.5% 49.9%
Other 39.1 51.5 50.1
Total net revenue 100.0% 100.0% 100.0%
Direct Operating Expenses
Laser refractive surgery centers 51.1%
Multi-specialty laser surgery
programs 20.8 42.5% 41.2%
Other 28.2 57.5 58.8
Total direct operating
expenses 100.0% 100.0% 100.0%
Net revenue for 1996 was $13,759,838 which represents an increase
of $108,810 compared to 1995. Revenue in 1995 decreased
$3,280,807 compared to 1994.
1996 net revenue was positively impacted by the opening of laser
refractive surgery centers. This new source of revenue offset the
decline in marketing and education services provided to hospitals
and surgery centers. The decline in such revenue was due in part
to the decline in the number of contracts. In addition, the cost
reduction programs instituted by health care providers negatively
impacted their marketing and education expenditures. Revenue from
multi-specialty laser surgery programs declined as a result of the
decreasing number of facilities under contract.
The decrease in 1995 net revenue compared to 1994 is a direct
result of the reduction in facilities under contract.
Management anticipates that the composition of future revenue will
change as more laser eye surgery centers are developed and as the
photorefractive keratectomy ("PRK"), a procedure in which lasers
are used to permanently correct nearsightedness, becomes more
widely known and accepted by ophthalmic physicians and their
patients. Revenues from hospital-based multi-specialty centers
will be less significant to the Company while revenues from laser
eye surgery centers are expected to increase. The extent and
degree of the shift in the Company's future revenues are subject
to significant uncertainty.
Direct operating expenses were $7,732,171 in 1996 which represents
an increase of $1,751,514 compared to 1995. Direct operating
expenses in 1995 decreased $1,310,254 compared to 1994.
The increase in direct operating expenses is primarily a result of
the Company's expansion into the laser refractive surgery
business. Direct operating expenses comprise the significant
fixed costs of performing the procedure as well as the costs of
maintaining a facility. These costs will become a lesser
percentage of revenue as procedure volume increases. Direct
operating expenses related to the other sources of revenue are
more variable and fluctuate generally with the level of revenue.
General and administrative expenses were $7,327,036 in 1996 which
represents an increase of $1,022,125 compared to 1995. General
and administrative expenses in 1995 decreased $320,174 compared to
1994. In 1996, the Company spent approximately $2,000,000 for
marketing and advertising programs to educate and inform
individuals about PRK. Other expenses such as telephone, legal,
insurance, and repairs and maintenance increased as the Company
opened new refractive laser surgery centers.
Depreciation and amortization increased in 1996 compared to 1995
due to the increase in property and equipment, primarily equipment
for the refractive laser surgery centers.
Interest expense was $769,816 in 1996 which is an increase of
$460,352 compared to 1995. The increase is primarily a result of
the increased borrowings related to the capitalized leases for the
lasers, borrowings under the line of credit, and the loans from
the principal shareholders.
The $545,903 gain on the sale of investment in unconsolidated
affiliate is the difference between the net selling price and the
carrying value using the equity method of accounting for the
investment in Continuum Biomedical, Inc. This investment was sold
in the first quarter 1996 and the Company received proceeds of
$1,000,000 from the sale.
Liquidity and Capital Resources
The Company's principal capital requirements include working
capital for the financing of accounts receivable from its
multi-specialty laser surgery program contracts and the equipping
and furnishing, the continuing development of marketing programs,
and the funding of operating losses of its laser refractive
surgery centers. To date, the Company has funded its operations
largely from internally-generated funds, lease financing, and bank
borrowings.
The Company has an $8 million line of credit, expiring July 1,
1997, which it has used to maintain its existing businesses and to
expand its laser refractive surgery center business. Borrowings
under this line of credit were $3,438,000 at December 31, 1996.
The Company anticipates renewing the bank line of credit prior to
its expiration. There is, however, no assurance that the bank
will renew the line of credit or, if the line is renewed, on the
same terms and conditions.
At December 31, 1996, the Company had cash equivalents totaling
$724,026 and negative working capital of $3,186,842. The negative
working capital is primarily due to the use of the bank line of
credit to fund the expansion of the laser refractive surgery
centers and to fund their anticipated losses. Net cash used to
purchase property and equipment, excluding excimer lasers, and for
investment in and advances to unconsolidated affiliates, was
$4,559,711 in 1996. Cash used by operating activities for the
year 1996 was $969,338. Cash used in operating activities was
principally the funding of the anticipated operating losses of the
laser refractive surgery centers.
Capital of $100,000 was raised in 1996 through the sale of common
stock in private placement transactions. With the first year cost
of a laser refractive surgery center of approximately $1 million,
the Company has concluded that additional capital is necessary to
continue the rollout of new centers. On March 3, 1997, the
Company announced that it had engaged an investment banking firm
to arrange a $12 million private placement of equity securities
for the Company. The proceeds of this financing, when completed,
will be used for future rollouts of new laser refractive surgery
centers and for general corporate purposes. There is no assurance
that the financing will be completed.
Item 7. Financial Statements.
The consolidated financial statements for the year ended
December 31, 1996, are included in this Report on Form 10-KSB in
their entirety immediately following the signature pages hereto.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The following individuals serve as the Company's directors
and executive officers:
Stephen N. Joffe, age 53,B.S.C., M.B.Ch.B., M.D., F.R.C.S.
(Edin.), F.R.C.S. (Glasg.), F.C.S. (SA), F.A.C.S., is the
President of LCA-Vision. He was also the founder of LCAV, Inc.
and served as its Chairman of the Board and Chief Executive
Officer since its founding in 1985. He also founded Surgical
Laser Technologies Inc. in 1983 and served as its Chairman until
January 1990. In addition, Dr. Joffe is an Esteemed Professor of
Surgery at the University of Cincinnati Medical Center, a position
he has held since 1990. He was a full-time Professor of Surgery
at the University of Cincinnati Medical Center for nine years
prior to 1990. Dr. Joffe obtained his medical degree in 1967 from
the University of Witwatersand (South Africa), and was awarded a
post-doctorate degree in 1976. He has held faculty appointments
at the Universities of London, Glasgow and Cincinnati and holds
fellowships at the College of Surgeons of South Africa, the Royal
College of Surgeons in Edinburgh, the Royal College of Surgeons in
Glasgow, and the American College of Surgeons. Dr. Joffe led
development efforts in Nd:YAG laser surgical techniques,
established the International Nd:YAG Laser Society, and chaired
the first two meetings. He is senior editor of six textbooks on
lasers, co-author of Lasers in Medicine, author of over 180 papers
in scientific journals, contributor of chapters to 32 textbooks,
and presenter of over 200 papers before scientific societies in 20
countries throughout the world.
Judith A. Crist, age 53, R.N., M.A., has been Executive Vice
President of Operations since 1987. She previously held the
position of Director of Operating Room Services at Good Samaritan
Hospital, Cincinnati (1986 1987), Henry Ford Hospital, Detroit
(1984 1986) and Harper-Grace Hospital, Detroit (1982 1984). Her
prior experience includes positions as operating room staff nurse,
physician's assistant and operating room supervisor.
Larry P. Rapp, C.P.A., age 49, Chief Financial Officer, joined
LCA-Vision in April, 1996. He has over 20 years of financial
experience in publicly traded and privately held companies and
public accounting experience with Price Waterhouse. Prior to
joining LCA-Vision, he was a Principal with Sanctuary Financial
Group, Inc. which provided interim financial management to
entrepreneurial and turnaround companies (1994 1996). He held
various senior financial management positions with Weinberg
Capital Corporation (1989 1993), Animed, Inc. (1987 1989),
Omnicare, Inc. (1984 1987) and Rotek, Inc. (1983 1984). Mr. Rapp
received his B.S. in accounting from the University of Dayton.
Gregory A. Livingston, age 37, the Executive Vice President of
Planning and Program Development, is responsible for the design,
development, implementation and management of the excimer laser
surgery centers. Mr. Livingston previously held the position of
LCAV's Vice President, Marketing & Advertising, where he was
responsible for strategic development, account management,
creative development, public relations coordination, creative
production and staff management. His New York-based direct
marketing/advertising agency experience covers a broad range of
clients including health care, retail, packaged goods, insurance,
wine and spirits, mail order and publishing. As of the date of
this report, Mr. Livingston was no longer an executive officer or
full-time employee of the Company.
Sandra F. W. Joffe, age 53, has been Director, Treasurer and
Secretary of the Company since 1986. Ms. Joffe formerly was a
Director of Surgical Laser Technology Inc. from 1983 1986.
Previously, she had been a professional educator and involved in
fundraising for non-profit organizations. Ms. Joffe is the wife
of Stephen N. Joffe.
John C. Hassan, age 54, is President of Champion Printing, Inc.
Previously, he was Vice President, Marketing of the Drackett
Company, a division of Bristol-Meyers Squibb. He currently serves
as Treasurer of Printing Industries of Southern Ohio, and is a
board member of the Ohio Graphics Arts Health Fund, the Camargo
Club and serves on the United Way and Fine Arts campaigns. Mr.
Hassan received his undergraduate degree from Princeton and his
M.B.A. from Dartmouth College.
Craig P. R. Joffe, age 24, has been a director of the Company
since 1995. He is a graduate of Columbia University and is
currently studying at Harvard Law School. Mr. Joffe is the son of
Stephen N. Joffe.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
Item 10. Executive Compensation.
Summary
The following table summarizes, for the fiscal years
indicated, all annual compensation earned by or granted to the
Company's Chief Executive Officer and the only other executive
officers whose compensation exceeded $100,000 for all services
rendered to the Company in all capacities (the "named executives")
during the last fiscal year:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Name and Principal Securities All Other
Position Year Salary($) Bonus($) Underlying Compensation
Options(#) ($)
<S> <C> <C> <C> <C> <C>
Stephen N. Joffe, 1996 $198,000 -- -- $52,534(2)
President and Chief 1995 $547,032(1) -- -- $60,672(2)
Executive Officer 1994 $605,000(1) -- -- $51,919(2)
Judith A. Crist, 1996 $109,400 -- 200,750 shs. --
Executive Vice- 1995 $ 94,600 $25,594 -- --
President, Operations
Gregory A. Livingston 1996 $103,800 -- 135,750 shs. --
Executive Vice President of
Planning and Program Development
_________________
</TABLE>
(1) Dr. Joffe, as a stockholder of Laser Centers of America,
Inc. ("LCA"), an S corporation which merged into the Company on
September 29, 1995, received distributions from the Company.
These distributions were separate and discrete from the salary and
other compensation paid by the Company to Dr. Joffe and,
accordingly, the amounts set forth herein do not include S
corporation distributions. See "Certain Relationships and Related
Transactions" herein.
(2) Includes for 1994, 1995 and 1996, respectively, $4,678,
$5,845 and $5,845, which was a car allowance and $15,104, $14,139
and $778, which were term life insurance and long-term disability
premiums for insurance benefitting named executive. Also includes
for 1994, 1995, and 1996, respectively, $32,137, $40,688 and
$45,911 placed in a life insurance trust benefitting named
executive.
Stock Options
The following table sets forth information regarding stock
options granted to the named executives during 1996:
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Individual Grants
Number of % of Total
Securities Options
Underlying Granted to Exercise of
Options Employees in Base Price Expiration
Name Granted #(1) Fiscal Year ($/Sh.) Date
________________________ ____________ _____________ ___________ _________
<S> <C> <C> <C> <C>
Judith A. Crist 750 Less than 1% $5.25 1/1/06
200,000 10.2% $5.25 6/3/06
Gregory A. Livingston 750 Less than 1% $5.25 1/1/06
135,000 6.9% $5.25 6/3/06
</TABLE>
___________________________________
(1) The options granted January 1, 1996, first become exerciseable as
to 25% of the shares covered after the end of each of the first four years
after the date of grant and are exerciseable in full after the end of four
years. Options granted June 3, 1996, first become exercisable as to 20% of
the shares covered after the end of each of the first five years after
the date of grant and are exercisable in full after the end of
five years. The option exercise price is not adjustable over the
10-year term of the options except due to stock splits and similar
occurrences affecting all outstanding stock.
The following table sets forth information regarding stock
options exercised by the named executives during 1996 and the
value of unexercised in-the-money options held by the named
parties as of December 31, 1996:
<PAGE>
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<CAPTION>
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options at FY-End ($)
Options at FY-End (#)
Shares
Acquired Value
on Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
________________ ___________ _________ ____________ _____________ ___________ _____________
<S> <C> <C> <C> <C> <C>
Judith A. Crist 0 0 0 200,750 0 0
Gregory A. Livingston 0 0 0 135,750 0 0
</TABLE>
Director Compensation
The Company has no standard arrangements for compensation of
directors, except as provided in the LCA-Vision Directors'
Nondiscretionary Stock Option Plan (the "Directors' Plan"), and
all directors served and continue to serve without compensation
directly attributable to their services. There are no non-standard
compensation arrangements with directors of the Company.
The Directors' Plan provides that non-employee directors receive
an initial grant of an option to purchase 75,000 shares of common
stock upon their election to the Board and that thereafter,
following each annual meeting of stockholders they receive an
automatic grant of an option to purchase 1,250 shares of Common
Stock. All such options have an exercise price equal to the fair
market value on the date of grant.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Under Section 13(d) of the Securities Exchange Act of 1934
and the rules promulgated thereunder, a beneficial owner of a
security is any person who directly or indirectly has or shares
voting power or investment power over such security. Such
beneficial owner under this definition need not enjoy the economic
benefit of such securities. The following table sets forth
information with respect to the beneficial ownership of shares of
Common Stock and Preferred Stock as of March 20, 1997 of each
executive officer, each director, and each stockholder known to be
the beneficial owner of 5% or more of Common Stock, Class A
Preferred Stock, or Class B Preferred Stock and all officers and
directors as a group.
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percent
Title of Class Beneficial Owner(1) of Ownership of Class
<S> <C> <C> <C>
Common Stock Stephen N. Joffe, M.D. 17,731,912 shares owned 90.47%(2)
President and Director of record and
8750 Red Fox Lane beneficially(2)(3)
Cincinnati, Ohio 45243
Class A Stephen N. Joffe, M.D. 3,376 shares owned of 51%
Preferred Stock President and Director record and beneficially
8750 Red Fox Lane
Cincinnati, Ohio 45243
Class B
Preferred Stock Stephen N. Joffe, M.D. 11 shares of 87.30%
President and Director record and beneficially
8750 Red Fox Lane
Cincinnati, Ohio 45243
Common Stock Sandra F.W. Joffe 3,852,649 shares owned 19.66%
Secretary, Treasurer and Director of record and
8750 Red Fox Lane beneficially(3)
Cincinnati, Ohio 45243
Class B Sandra F.W. Joffe 1.6 shares of record 12.70%
Preferred Stock Secretary, Treasurer and Director and beneficially
8750 Red Fox Lane
Cincinnati, Ohio 45243
Common Stock Craig P.R. Joffe 2,500,313 shares owned
Director of record and beneficially (2) 12.76%
22 Bigelow Street #2B
Cambridge, MA 02139
Common Stock John C. Hassan 75,00 shares owned
Director of record and beneficially(5) .37%
7840 Montgomery Rd.
Cincinnati, OH 45236
Common Stock All directors and executive 18,248,537 shares owned
officers as a group (6 persons) of record beneficially (4) 90.81%
Class A All directors and executive 3,376 shares owned of 51%
Preferred Stock officers as a group (6 persons) record and beneficially
Class B All directors and executive 12.6 shares owned of 100%
Preferred Stock officers as a group (6 persons) record and beneficially
</TABLE>
(1) The persons named in the table have sole voting and
investment power with respect to all shares of common stock shown
as beneficially owned by them, subject to community property laws,
where applicable, and the information contained in other footnotes
to this table.
(2) Includes 5,000 shares which may be voted by Dr. Joffe as
proxy for Sandra F.W. Joffe and Craig P.R. Joffe. Sandra and
Craig Joffe's share totals set forth above include the shares
under proxy.
(3) Includes 1,000 shares which are held jointly by Dr. Joffe
and Sandra F.W. Joffe.
(4) Includes a total of 496,500 shares which may be acquired
upon the exercise of certain unexercised outstanding stock
options.
(5) Includes 75,000 shares of Common Stock which may be acquired upon the
exercise of certain unexercised stock options.
Item 12. Certain Relationships and Related Transactions.
Since January 1, 1995, the Company was a party, directly or
indirectly, to the following transactions with its current
directors, executive officers and principal stockholders
(including any of their associates or affiliates):
LCA previously was treated for federal income tax purposes as
an S corporation under Subchapter S of the Internal Revenue Code
of 1986, as amended (the "Code"). In 1995, prior to the merger
with and into LCA-Vision, LCA declared and paid to its two
stockholders distributions of $8,456,000, in cash, which
constituted payments to the stockholders of LCA's past earnings on
which those stockholders have already paid income taxes under
Subchapter S of the Code.
Prior to the merger of LCA into the Company, Dr. and Mrs.
Joffe, utilizing a portion of the proceeds of their S corporation
distribution from LCA, agreed to lend a total of $4,390,772 to the
Company, receiving in return, two long term promissory notes for
the principal amount plus interest at a rate of 6.91% per annum.
All sums due to Dr. and Mrs. Joffe under the promissory notes are
due and payable in full upon the maturity of the promissory notes,
September 26, 2005. Any or all amounts due under the promissory
notes may be prepaid at any time, without penalty. During 1995
and 1996, the Company repaid $15,003 and $354,097, respectively.
Dr. Joffe is the guarantor of approximately $11,080,000 in
bank loans to the Company, including a mortgage note in the amount
of $3,080,000 which remained outstanding at December 31, 1996, and
a working capital credit line of up to $8,000,000 on which
$3,438,000 had been drawn at December 31, 1996. To date, Dr.
Joffe has not been compensated for these personal guarantees.
In May 1995, the Company acquired a 45% interest in the
Surgery Center of Georgia, LLC, Atlanta, Georgia ("SCG"). The
transaction was funded entirely by borrowings by SCG. The Company
guaranteed a portion of SCG's debt. The Company's principal
stockholder acquired another 35% interest in SCG in a similar
fashion. In September 1995, the Company's 45% interest in SCG was
distributed to the principal stockholder. The Company remained as
a guarantor on approximately $2,200,000 of SCG's debt on a
temporary basis after the distribution, until the principal
stockholder arranged the elimination of the Company's guarantee
prior to the end of 1995.
Dr. Joffe is the principal stockholder and majority owner of
The LCA Center for Surgery, Ltd., Cincinnati, Ohio, an Ohio
limited liability company ("The Cincinnati Surgery Center"), which
was organized in September, 1995. The Company does not hold an
investment in the Cincinnati Surgery Center. The Company has
leased to The Cincinnati Surgery Center, for a period of 20 years
at an annual rental of $190,000, a portion of its office building
located at 7840 Montgomery Road and also will provide to The
Cincinnati Surgery Center accounting, management and
administrative services pursuant to an Administrative Services
Agreement for a fee of $5,000 per month.
LCA and Dr. Joffe previously owned all of the stock of LCA
Canada, Inc. ("LCA Canada") which owned 67% of the stock of the
Toronto Laservision Centre, Inc. (the "Centre"). LCA and Dr.
Joffe contributed their entire interest in LCA Canada to the
Company in exchange for nominal consideration. LCA-Vision renamed
the subsidiary LCA-Vision Canada, and on August 31, 1995 acquired
the remaining 33% of the stock of the Centre from certain
unaffiliated holders. Accordingly, the Centre is now a wholly-owned subsidiary
of the Company, through its subsidiary LCA-Vision
Canada.
In November and December, 1996, Dr. Joffe entered into debt
conversion transactions with the Company pursuant to which he
converted a total of $2,200,000 of the debt owed to him by the
Company into 11 shares of Interim Series Class B Preferred Stock.
Similarly, Mrs. Joffe converted a total of $321,672 of debt owed
to her into 1.6 shares of Interim Series Class B Preferred Stock.
Prior to July 1, 1997, the Interim Series Class B Preferred Stock
is automatically convertible into the same security, if any, which
may be issued to institutional investors in a private placement of
$10,000,000 or more, on the same terms and conditions as the
institutional investors. From and after July 1, 1997, the Interim
Series Class B Preferred Stock is convertible into Common Stock at
the then current market price of Common Stock, at the option of
the holders.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
3(i) Amended Certificate of Incorporation of
Registrant, including subsequent updates Note (a)
3(ii) Amended Bylaws of Registrant Note (a)
10(a) LCA-Vision Inc. 1995 Long-Term Stock
Incentive Plan Note (b)
10(b) LCA-Vision Inc. Directors' Non-Discretionary
Stock Option Plan Note (b)
10(c) LCA-Vision Inc. 401(k) Plan Note (a)
10(d) Form of Laser Lease with Prime Leasing,
Inc. Note (a)
10(e) The LCA Surgery Center Real Estate Lease Note (a)
10(f) Toronto LaserSight Centre Real Estate Lease Note (a)
10(g) Toronto LaserSight Centre Equipment Lease Note (a)
10(h) The LCA Surgery Center, Ltd. Administrative
Services Agreement Note (a)
11 Earnings Per Share Computation
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney Note (c)
27 Financial Data Schedule
NOTE REFERENCES:
(a) Incorporated by reference to the Company's
Registration Statement on Form 10-SB No. 0-27610, which became
effective on January 25, 1996.
(b) Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995.
(c) Contained on the first page of the signature pages
contained in this report.
(b) Reports on Form 8-K
On December 4, 1996 the Company filed a Current Report on
Form 8-K in which, under Item 5 hereof, the Company reported its
issuance of Interim Series Class B Preferred Stock and certain
Common Stock. A pro forma balance sheet showing the effects of
such issuances as of September 30, 1996 was included as an exhibit
to such Form 8-K.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, LCA-Vision Inc., the Registrant, has duly
caused this report on Form 10-KSB dated March 27, 1997 to be
signed on its behalf by the undersigned, thereunto duly
authorized.
LCA-Vision Inc.
Date: March 27, 1997 By: /s/ Stephen N. Joffe
____________________________ ____________________________
Stephen N. Joffe, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Larry P.
Rapp, his or her true and lawful attorney-in-fact and agent, with
full power of substitution, and with power to act alone, to sign
and execute on behalf of the undersigned any amendment or
amendments to this report on Form 10-KSB, and to perform any acts
necessary to be done in order to file such amendment or
amendments, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission
and each of the undersigned does hereby ratify and confirm all
that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive
Officer: Date:
/s/ Stephen N. Joffe President and April 22, 1997
____________________ Chief Executive
Officer
Principal Financial and
Accounting Officer:
/s/ Larry P. Rapp Chief Financial April 22, 1997
___________________ Officer
Directors:
Director
__________________
John C. Hassan
/s/ Stephen N. Joffe Director April 22, 1997
____________________
Stephen N. Joffe
/s/ Sandra F.W. Joffe Director April 22, 1997
____________________
Sandra F.W. Joffe
/s/ Craig P.R. Joffe Director April 22, 1997
____________________
Craig P.R. Joffe
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page Number
Description in this Report
Report of Independent Accountants F-1
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994 F-2
Consolidated Balance Sheets
as of December 31, 1996 and 1995 F-3
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
LCA-Vision Inc.
Cincinnati, Ohio
We have audited the accompanying consolidated balance sheets of
LCA-Vision Inc. and its subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material aspects, the consolidated financial
position of LCA-Vision Inc. and its subsidiaries as of December
31, 1996 and 1995 and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
March 18, 1997
<PAGE>
LCA-VISION INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<PAGE>
<TABLE>
Year Ended December 31,
_______________________
<CAPTION>
1996 1995 1994
____ ____ _____
<S> <C> <C> <C>
Net revenue $13,759,838 $13,651,028 $16,931,835
Direct operating expenses 7,732,171 5,980,657 7,290,911
General and administrative
expenses 7,327,036 6,304,911 6,625,085
Center pre-opening expenses 225,349
Depreciation and amortization 1,597,086 1,042,400 1,246,608
__________ _________ _________
Income (loss) from operations ( 3,121,804) 323,060 1,769,231
Equity in income (loss) from
unconsolidated affiliates ( 905,993) 40,377 107,535
Interest income 89,130 158,406 54,125
Interest expense ( 769,816) ( 309,464) ( 131,867)
Other income (expense) 105,674 10,390 ( 102,493)
Gain on sale of investment in
unconsolidated affiliate 545,903 __________ __________
Income (loss) before income tax ( 4,056,906) 222,769 1,696,531
Income tax expense ___________ ( 44,005) __________
Net income (loss) $( 4,056,906) $ 178,764 $ 1,696,531
_____________ ______________ ______________
_____________ ______________ ______________
(Loss) per share $ (0.21)
_____________
_____________
Weighted average number of
common shares outstanding 19,609,505
Pro forma income data (unaudited)
Net income as reported $ 178,764 $ 1,696,531
Provision for income taxes - pro forma ( 40,600) ( 645,000)
_____________ ____________ ____________
Pro forma net income $ 138,164 $ 1,051,531
_____________ _____________ ____________
_____________ _____________ ____________
Pro forma earnings per share $ .02 $ 1.05
_____________ _______________ ______________
_____________ _______________ ______________
Pro forma weighted average number of
common shares outstanding 5,659,208 1,000,000
The accompanying notes are an integral
part of this statement
LCA-VISION INC.
</TABLE><TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 724,026 $ 2,587,152
Accounts receivable, net 949,728 1,866,249
Inventory 245,000 675,195
Prepaid expenses and other 984,674 581,120
_______ _________
Total current assets 2,903,428 5,709,716
Property and equipment, net 9,455,518 6,207,065
Investment in affiliates 218,578 443,588
Long-term receivables 440,745 16,343
Other assets 692,175 1,149,197
Total assets $13,710,444 $13,525,909
========== ==========
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Note payable to bank $ 3,438,000
Accounts payable 782,973 $ 734,265
Accrued liabilities and other 1,045,770 1,344,867
Current portion of:
Long-term debt 184,632 129,214
Capital lease obligations 638,895 221,436
_________ __________
Total current liabilities 6,090,270 2,429,782
Long-term debt 4,465,155 7,537,954
Capitalized lease obligations 1,957,382 939,190
_________ _________
Total liabilities 12,512,807 10,906,926
Commitments and Contingencies
Shareholders' Equity
Preferred stock 2,521,679 7
Common stock 78,835 78,156
Additional paid-in capital 3,177,278 3,068,818
Retained (deficit) ( 4,592,214) ( 535,308)
Translation adjustment 12,059 7,310
__________ _____________
Total shareholders' equity 1,197,637 2,618,983
__________ _____________
Total liabilities and shareholders'
equity $13,710,444 $13,525,909
============ =============
The accompanying notes are an integral
part of this statement
/TABLE
<PAGE>
<TABLE>
LCA-VISION INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Class A Preferred Stock:
Beginning balance: 1,688; 1,688; and 0 outstanding $ 7 $ 7
Shares issued to effect merger: 1,688 shares ___________ _______________ ______________
$ 7
Ending balance: 1,688; 1,688; 1,688 outstanding $ 7 $ 7 $ 7
================ =============== ==============
Class B Preferred Stock:
Shares issued under shareholder debt conversion:
12.6 shares $ 2,521,672
____________
Ending balance: 12.6 outstanding $ 2,521,672
============
Common Stock: .001 par value,
110,000,000 shares authorized
Beginning balance: 19,538,977; 1,000,000;
1,000,000 outstanding $ 78,156 $ 4,000 $ 4,000
Shares issued to effect merger: 18,246,477 shares
Sale of shares: 44,444 and 292,500 shares 44 72,986
Other: 6,591 shares 635 1,170
______________
Ending balance: 19,590,012; 19,538,977;
1,000,000 outstanding $ 78,835 $ 78,156 $ 4,000
____________ _____________ _____________
____________ _____________ _____________
Additional Paid-in Capital
Beginning balance $ 3,068,818 $ 491,597 $ 471,702
Other 8,504 19,895
Shares issued to effect merger 2,229,155
Sale of shares 99,956 587,831
Distribution to shareholders ( 239,765) ______________
Ending balance $ 3,177,278 $3,068,818 $ 491,597
____________ _____________ _____________
____________ _____________ _____________
Retained Earnings (Deficit)
Beginning balance $( 535,308) $7,502,334 $6,907,573
Net income (loss) ( 4,056,906) 178,764 1,696,531
Distribution to shareholders (8,216,406) (1,101,770)
____________ ___________ ___________
Ending balance $( 4,592,214) $ (535,308) $7,502,334
============== ============ ===========
Foreign Currency Translation Adjustment
Beginning balance $ 7,310
Changes during the year 4,749 $ 7,310
______________ _____________
Ending balance $ 12,059 $ 7,310
============== ==============
The accompanying notes are an integral
part of this statement
</TABLE>
<TABLE>
LCA-VISION INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Year Ended December
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,056,906) $ 178,764 $ 1,696,531
Adjustments to reconcile net income (loss)
to net cash provided (used) in operating activities:
Depreciation and amortization 1,597,086 1,042,400 1,246,608
Equity in loss of unconsolidated affiliates 905,993
(Gain) loss on sale of investments ( 575,903) 63,102 33,688
(Gain) on disposal of equipment ( 53,546) ( 120,625) ( 60,565)
Provision for doubtful accounts receivable 144,591 153,312 ( 12,312)
Write off of intangibles 106,772 63,230
Changes in operating assets and liabilities
(Increase) decrease
Accounts receivable 1,044,285 147,688 1,356,589
Inventory 92,249 280,349 34,377
Prepaid and other ( 155,604) ( 158,899) ( 62,049)
Other assets 50,133 ( 146,604) ( 187,934)
Increase (decrease)
Accounts payable 48,708 346,623 ( 360,799)
Accrued liabilities and other ( 41,646) 393,346 218,537
___________ ___________ __________
Net cash provided (used) by operations ( 893,788) 2,242,686 3,902,671
Cash flows from investing activities:
Property and equipment additions (2,747,485) (1,818,126) ( 771,722)
Investment in unconsolidated affiliates (1,099,126)
Loans and advances to unconsolidated affiliates ( 713,100)
Acquisition of business ( 149,439) 66,858
Purchase of intangibles ( 40,536) ( 167,768) ( 26,612)
Proceeds from sales of equipment 132,676 338,849 236,403
Proceeds from sale of investment 1,000,000
____________ _____________ ___________
Net cash used by investing activities (3,617,010) (1,580,187) ( 561,931)
The accompanying notes are an integral
part of this statement
</TABLE>
<TABLE>
LCA-VISION INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
<CAPTION>
Year Ended December
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowing under line of credit $ 3,438,000 $( 345,105)
Proceeds from long-term notes payable 7,590,772
Repayment of long-term notes payable and
capitalized lease obligations ( 545,369) (1,943,749) ( 56,811)
Repayment of notes payable to shareholders ( 354,097) ( 15,003)
Proceeds from sale of common stock 100,000 2,891,149
Distribution to shareholders (8,456,171) ( 1,101,770)
Other 9,138 ( 3,656) ___________
___________ ___________ ___________
Net cash provided (used) by financing activities 2,647,672 63,342 ( 1,503,686)
___________ ___________ ___________
Net increase (decrease) in cash (1,863,126) 725,841 1,837,054
Cash at beginning of year 2,587,152 1,861,311 24,257
__________ __________ ___________
Cash at end of year $ 724,026 $ 2,587,152 $ 1,861,311
=========== =========== ============
Supplemental disclosures:
Interest paid $ 488,729
==========
Notes payable shareholders converted
to preferred stock $ 2,521,672
==========
Inventory sold for long-term notes receivable $ 247,946
==========
Capital lease obligations entered into $ 2,264,655 $( 971,700)
========== ============
Transfer of equipment under capital lease
to affiliate $ 485,850
==========
The accompanying notes are an integral
part of this statement
</TABLE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
On September 29, 1995, LCA-Vision Inc. ("LCA-Vision" or the
"Company") merged with Laser Centers of America, Inc. ("LCA"). At
the time of the merger, two shareholders together owned 92% of the
outstanding voting stock of LCA-Vision and 100% of LCA's. The
financial statements reflect the historical assets and liabilities
and results of operation of LCA prior to the merger. Shareholders'
equity was restated to reflect the capital structure of LCA-Vision
at the time of the merger.
Immediately prior to the merger, LCA distributed $6,390,772 to its
shareholders which represented a portion of the subchapter S
corporation earnings previously included in the taxable income of
its shareholders. The proceeds of the distribution were used by the
shareholders to acquire shares of LCA-Vision common stock for $2
million and to loan the remainder to LCA-Vision, receiving two
promissory notes.
Business
LCA-Vision is a leading developer and operator of free-standing
laser refractive surgery centers. The Company also manages laser
and minimally invasive surgery programs for hospitals and medical
centers.
The laser refractive surgery centers operated by the Company provide
the facilities, equipment and support services for performing
various corrective eye surgeries that employ state-of-the-art laser
technologies. The surgeries performed in the Company's centers
primarily include photorefractive keratectomy ("PRK") for treatment
of myopia (nearsightedness). As of December 31, 1996, the Company
had twelve laser refractive surgery facilities in the United States,
two in Ontario, Canada, and one in Helsinki, Finland. The Company
opened two centers in January 1997 -- Albany, New York and Mountain
View, California.
The Company manages 26 multi-specialty laser surgery programs at
various medical facilities on a contract basis. The Company
structures its contractual arrangements to match compensation with
the value of the specific services it provides. The Company is
generally paid on a fixed amount for the initial work performed to
render a center operational and then receives compensation to
service a center on an ongoing basis. Compensation is generally
fixed based on procedures performed; based on increased surgical
volume or reduced surgical costs; or a combination of such.
Contracts may also compensate the Company for conducting the
education and marketing programs of the surgical center and its
staff including doctors.
Principles of Presentation
The consolidated financial statements include the accounts of LCA-Vision Inc.,
a Delaware corporation, and its wholly-owned
subsidiaries after elimination of intercompany balances and
transactions. Certain reclassifications of prior year numbers have
been made to conform with the current presentation.
Stock Split
In June 1996, the shareholders approved a one-for-four reverse stock
split of the Company's common and preferred stock. The number of
shares and per share data in these consolidated financial statements
have been adjusted retroactively to give effect to these splits as
if they had occurred at the beginning of the earliest period
presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash includes cash on hand or in banks available for immediate
dispersal. Cash equivalents are short-term investments that have an
original maturity date of less than 90 days.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method which
recognizes the cost over the estimated useful lives of the
respective assets, or as to leasehold improvements, the term of the
related lease if less than the estimated useful life.
Per Share Data
Earnings per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding.
Common equivalent shares from Class B preferred stock (using the as-if
converted method) and from stock options (using the treasury
stock method) have been excluded from the 1996 computation because
their inclusion would be antidilutive.
Pro forma net income per share for the years ended December 31, 1995
and 1994 is based on 22,636,832 and 1,000,000 shares, respectively,
of common stock outstanding, reflecting the recapitalization for the
merger. The weighted average shares at December 31, 1995 includes
shares issued in conjunction with the merger, as outstanding for
three months.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including
cash and cash equivalents, trade receivables and payables,
approximates their fair value due to their short term maturities.
The fair values of the Company's long-term debt is estimated based
on comparison with similar issues or current rates offered to the
Company for debt of the same remaining maturities. The estimated
fair values of the Company's long-term debt approximates its fair
value.
Investments in Unconsolidated Affiliates
The equity method is used for investments in laser refractive
surgery centers in which the Company has 50% or less ownership.
These investments are recorded at the Company's initial investment,
increased or decreased by the Company's share of the center's
income or loss, less distributions received.
Pre-opening Costs
Costs associated with the opening of a new laser refractive surgery
center are expensed during the first month of the center's
operation.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. Credit risk associated with this concentration is
limited due to the number and geographic disperson of the accounts
and the overall stability of the hospital industry. Management
believes that adequate provision has been made for this credit risk.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addressed the accounting for long-lived assets
that are expected to be disposed of. The Company adopted Statement
121 in the first quarter of 1996 and the effect is not material to
the Company's operations or financial position taken as a whole.
Under SFAS No. 121, property and equipment of the Company are
reviewed for impairment whenever events or circumstances indicate
that the asset's undiscounted expected<PAGE>
cash flows are not sufficient to
recover its carrying amount. The Company measures an impairment loss
by comparing the fair value of the asset to its carrying amount. Fair value
of an asset is calculated as the present value of expected future cash flows.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB
Opinion No. 25, Accounting for Stock Issued to Employees, in
accounting for stock-based compensation issued to employees. The
Statement allows for a fair value-based method of accounting for
employee stock options and similar equity instruments. However, for
companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires
disclosure of the pro forma effect on net income and earnings per
share of its fair value-based accounting for those arrangements.
The Company adopted Statement No. 123 in the first quarter of 1996
and has elected to continue to account for stock-based compensation
arrangements under APB Opinion No. 25.
<PAGE>
<TABLE>
2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Receivables:
Trade receivables $ 1,049,964 $ 2,094,249
Allowance for doubtful accounts ( 100,236) 228,000)
____________ _____________
$ 949,728 $ 1,866,249
============ =============
Inventory:
Surgical lasers $ 210,000 $ 325,000
Surgical supplies 35,000 4,815
Product inventory 345,380
___________ _____________
$ 245,000 $ 675,195
============ ===============
In December 1996, the Company sold its products
inventory at book value ($247,946) and received a
two year note. The note bears interest
at 9.25% and requires monthly payments of interest
and principal.
Prepaid Expenses and Other:
Prepaid insurance $ 205,749 $ 33,873
Miscellaneous receivables 300,020 272,727
Other 478,905 274,520
___________ ____________
$ 984,674 $ 581,120
=========== ============
December 31,
1996 1995
Property and Equipment:
Land $ 375,000 $ 375,000
Building and improvements 4,929,192 4,034,233
Leasehold improvements 211,962 93,453
Furniture and fixtures 570,674 355,096
Equipment 2,966,836 2,078,907
Equipment held under capital leases 2,818,778 1,041,884
Vehicles 140,587 140,587
___________ _________
12,013,029 8,119,160
Accumulated depreciation and amortization ( 3,060,276) ( 1,956,998)
____________ ___________
8,952,753 6,162,162
Construction in progress 502,765 44,903
____________ ___________
$ 9,455,518 $ 6,207,065
============ ==========
Depreciation expense was $1,503,268; $884,886; and $965,342 in 1996, 1995 and
1994, respectively. Depreciation and amortization is provided based on the
following useful lives: building and improvements -- 5 to 31 years; furniture
and fixtures -- 5 to 7 years;
equipment --
5 years; and vehicles -- 5 years.
Other Assets
Deposits - lasers $ 262,500 $ 440,425
Equipment held for lease or resale, net 48,267 328,480
Advertising production materials, net 44,865 208,273
Goodwill, net 133,863 10,000
Other 202,680 162,019
__________ __________
$ 692,175 $ 1,149,197
========== ==========
Accrued Liabilities and Other
Accrued interest - shareholder notes $ 357,864 $ 77,458
Accrued wages 20,000 255,000
Deferred revenue 229,942 506,745
Other 437,964 505,664
__________ __________
$ 1,045,770 $ 1,344,867
</TABLE> ========== ==========
3. ACQUISITIONS
On October 28, 1996, the Company purchased the outstanding shares
of 938051 Ontario Inc. ("The Eye Laser Centre"). The terms of the
acquisition provided, among other things, for the Company to pay
$160,000 in cash and provide a letter of credit in the amount of
$64,000 to be held in escrow pending the earlier of the following:
(1) dismissal of a patent infringement lawsuit filed against one of
the sellers, or (2) settlement or final court determination of the
lawsuit. In addition, the Company may be required to issue
unregistered common stock with a total market value of $280,000 or
cash totaling $224,000 based on whether The Eye Laser Centre
achieves certain performance objectives. The acquisition of The Eye
Laser Centre has been accounted for using the purchase method of
accounting. The purchase price in excess of the net assets acquired
($124,175) has been recorded as goodwill which will be amortized
over 5 years.
On August 31, 1995, the Company acquired the minority interest (33%)
of Toronto Laservision Centre (1992), Inc. ("Centre") for
approximately $140,000. The Company previously owned 67% of the
Centre; however, it did not have control of the activities or the
business affairs of the Centre because of the terms of a
shareholders' agreement. Accordingly, the Company recorded its
investment in the Centre using the equity method until August 31,
1995, at which time the acquisition was accounted for as a purchase
and consolidated in the financial statements of the Company. The
Company recorded approximately $100,400 and $51,600 of equity in
income of the Centre for the eight months ended August 31, 1995 and
the year ended December 31, 1994, respectively.
4. FINANCING ARRANGEMENTS
Note Payable to Bank
The Company has an $8,000,000 line of credit with a bank which
matures on July 1, 1997. Interest on borrowings under the line of
credit is at the bank's prime rate (8.25% at December 31, 1996) plus
1%. Prior to February 1, 1997, interest on borrowings under the
line of credit was at the bank's prime rate less 1%. The weighted
average interest rate of borrowings under the line of credit during
1996 was 7.38%; there were no borrowings under the line of credit
during 1995. The assets of the Company serve as collateral for the
line of credit.
Long-Term Debt
Long term debt consists
of the following: December 31,
1996 1995
Mortgage and notes payable $ 3,149,787 $ 3,291,399
Notes payable - shareholders 1,500,000 4,375,769
__________ __________
4,649,787 7,667,168
Current portion ( 184,632) ( 129,214)
__________ __________
$ 4,465,155 $ 7,537,954
========== ===========
Mortgage and Notes Payable
During 1995, the Company refinanced the mortgage related to its
building. The bank loaned a total of $3,200,000, the proceeds of
which were used to repay the existing mortgage ($1,895,000) and
finance improvements to the property. On April 1, 1996, the
agreement converted to a seven year term loan with monthly principal
payments of $13,333 and a payment of $2,093,334 due April 1, 2003.
During the remaining term of the loan, the Company can fix the rate
of interest for one, three or five years based on United States
Treasury Notes with the same maturity plus 1.9%. The interest rate
in effect until April 1, 1997, is 7.7%.
The Company also has a note payable collateralized by certain laser
equipment. The note requires monthly payments of principal and
interest of $3,420 (Canadian) and bears interest at the Royal Bank
of Canada prime rate plus 1.75%.
Maturities of long-term debt for the five years subsequent to
December 31, 1996 are: 1997 -- $184,632; 1998 -- $187,010; 1999 --
$178,809; 2000 -- $160,000; and 2001 -- $160,000.
The Company's principal shareholder has guaranteed borrowings under
the line of credit and the mortgage note payable. These agreements
also require the principal shareholder to maintain ownership of at
least 50% of the common stock of the Company unless such change in
ownership results from a public offering of the Company's common
stock. The Company's loan agreements with its primary lender
contain a provision whereby the Company would be in default if, in
the Bank's reasonable opinion, an event occurs which has a material
adverse effect on the Company's financial condition of operations.
An entity owned by the Company's principal shareholder has loan
agreements with the Company's primary lender. The loan agreements
do not contain restrictive financial covenants but do provide that
an event of default occurring under the agreements with the entity
owned by the Company's principal shareholder is also a default under
the Company's loan agreement. Both entities were in compliance with
the provisions of the loan agreements at December 31, 1996.
Notes Payable - Shareholders
The notes payable - shareholders mature on September 25, 2005, and
bear interest at 6.91%. The promissory notes can be repaid, in
whole or in part, prior to maturity without penalty. In 1996, the
Company repaid $354,097 of the notes. In two separate transactions
in December 1996, the shareholders converted $2,521,672 of their
notes into Class B preferred stock (see note 5). At December 31,
1996, the Company owes the shareholders principal and interest
totaling $1,857,864.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company is an investor in four entities that own and operate
laser eyecare surgery centers:
Ownership
Percentage
__________
The Baltimore Laser Sight Center, Ltd. 45%
Excimer Associates LLC 40
The Georgia Laser Sight Center, Ltd. 33.3
Silmalaseri Oy 43
The Company has contracts to provide a variety of fee-based services
to the above companies except for Silmalaseri Oy.
Summary financial information for these investments reported on the
equity method of accounting is as follows:
1996
Financial Position:
Current assets $ 1,112,553
Total assets 2,188,924
Total liabilities 2,479,131
Members' (deficit) ( 290,207)
Operating Results:
Revenue $ 1,613,978
Net (loss) (2,610,097)
The Company's share of the losses of one of its investees exceeds
the carrying amount of the Company's investment and advances. The
Company has not provided for the additional losses. The Company
will not record its share of income for this investee until its
share of that net income equals the share of net losses not
recognized.
Revenue for management services performed for the investees was
$417,529 in 1996. The Company was reimbursed approximately
$1,613,000 for marketing services performed on behalf of the
investees. The Company wrote down the long term receivable due from
one of its investees. A charge to income of $272,355 was recorded
in 1996.
The Company sold its investment in Continuum Biomedical, Inc. which
had been accounted for using the equity method for $1,000,000,
resulting in a gain of $545,903. The gain was recorded in the first
quarter of 1996.
6. PREFERRED STOCK
In June 1996, the stockholders of the Company approved a decrease
to the number of authorized shares of Class A Preferred Stock from
10,000,000 shares to 1,688 shares. In addition, the stockholders
approved an additional class of preferred stock ("Class B Preferred
Stock"). The Company is authorized to issue up to 5,000,000 shares
of Class B Preferred Stock and the Board of Directors has discretion
to determine its terms without further stockholder approval. The
holders of the Class B Preferred Stock cannot be granted voting
rights superior to the voting rights of any other existing class of
stock authorized for issuance by the Company.
Preferred stock is comprised of:
December 31,
1996 1995
Class A, $.001 par value,
1,688 shares authorized,
1,688 shares issued ($67,510
aggregate liquidation preference) $ 7 $ 7
Class B, $.001 par value,
5,000,000 shares authorized,
7% dividend
First Interim Series,
6 shares issued ($1,200,000
aggregate liquidation preference) 1,200,000
Second Interim Series, 6.6 shares
issued ($1,321,672 aggregate
liquidation preference) 1,321,672 __________
$2,521,679 $ 7
========= ===========
The holders of the Class B interim series preferred stock have the
right to convert the preferred stock into common stock beginning
July 1, 1997. The conversion price is the average of the closing
bid prices of the Company's common stock for the 30-trading-day
period ending three (3) days prior to the date of conversion. The
shares are automatically converted into any class or series of
equity securities of the Company issued pursuant to a private
placement of equity securities effected on or before June 30, 1997
and with gross proceeds of at least $10,000,000. In the event of
a private placement that does not meet the above criteria, the
holders of the securities have the right to convert on a pro rata
basis. The conversion price is the price per share of the shares
issued in connection with the private placement.
7. INCOME TAXES
There is no provision or benefit for current income taxes in 1996
as a result of the operating losses. Income tax expense, current
for 1995 is comprised of: Federal - $10,500 and Foreign - $33,505.
Significant components of the Company's deferred tax assets and
liabilities are:
December 31,
1996 1995
Net operating loss carryforward $ 1,000,000 $ 90,800
Accounts receivable 17,000 24,500
Inventories 70,400 47,300
Marketable securities 138,400 138,400
Property and equipment 194,800 57,600
Notes payable to shareholders 143,200 31,000
Other 45,800 25,000
Equity investments 330,400 ( 109,800)
---------- ----------
Net deferred tax assets $ 1,940,000 $ 304,800
=========== ==========
Valuation allowance $(1,940,000) $ (304,800)
=========== ==========
The Company has recorded a valuation allowance against deferred tax
assets because there is no assurance that the Company can generate
taxable income sufficient to realize such.
At December 31, 1996, the Company had net operating loss
carryforwards for income tax purposes of approximately $2,500,000
which expire in 2010 and 2011.
Prior to the merger described in Note 1, the Company elected to be
taxed as a subchapter S corporation. Income tax liabilities, other
than certain state and local income taxes, were included in the tax
returns of the shareholders. The state and local income taxes
recorded by the Company as general and administrative expense prior
to the merger approximated $36,000 and $48,000 for 1995 and 1994,
respectively.
8. LEASES
The Company leases certain office space for its laser refractive
surgery centers under operating leases and its lasers under capital
lease arrangements.
Future minimum payments are:
Noncancellable
Capital Operating
Leases Leases
------- ----------------
1997 $ 754,514 $ 675,730
1998 689,471 647,500
1999 689,471 544,370
2000 668,570 538,370
2001 125,137 383,330
Thereafter 5,202
-------
2,932,365
Less amounts
representing interest ( 336,088)
----------
Capital lease obligations 2,596,277
Less current portion ( 638,895)
----------
$ 1,957,382
===========
9. BENEFIT PLANS
In December, 1995, the Company adopted the LCA-Vision Inc. 1995 Long
Term Stock Incentive Plan which permits the issuance of options,
stock appreciation rights ("SARs") or stock to employees and
independent contractors of the Company. This plan replaced the 1986
Incentive Stock Options Plan which was terminated and all
outstanding options were cancelled in connection with the merger
described in Note 1. The plan reserves a maximum of 2,500,000
shares of common stock to be subject to the plan and provides that
awards under the plan shall be determined by the committee of the
Board of Directors ("Committee") designated to administer the plan.
Under the terms of the plan, options granted may be either non-qualified or
incentive stock options and the exercise price may not
be less than the fair market value of a share on the date of grant.
The Committee determines when options shall be exercisable; however,
the options granted in 1996 generally become exercisable in
installments of 20% per year on each of the first through fifth
anniversaries of the grant date. The maximum term of any incentive
option is ten years. SARs may be granted in such form as the
Committee may determine. Stock awards may be granted only in
payment of incentive compensation.
Information regarding the 1995 Long Term Stock Incentive Plan
follows:
<PAGE>
Exercise Price
___________________
Number of Weighted
Shares Actual Average
__________ ________ _________
Options outstanding at
December 31, 1995 -0-
Granted 1,969,250 $2.25 - $5.25 4.92
Cancelled (178,125) $5.25
Options outstanding at
December 31, 1996 1,791,125 $2.25 - $5.25
==========
Exercisable at
December 31, 1996 334,113 $2.56 - $5.25 4.77
==========
Reserved for future option grants
at December 31, 1996 708,875
==========
<PAGE>
The Company also adopted the LCA-Vision Inc. Director's
Nondiscretionary Stock Option Plan which provides for the grant of
stock options to the Company's non-employee directors at the fair
market value of the Company's common stock at the date of grant.
Under this plan, non-employee directors are automatically granted an
option to purchase 75,000 shares of the Company's common stock upon
election or appointment to the Board and an option to purchase 1,250
of the Company's common stock at the time of every annual
organizational meeting of directors following the 1996 annual
meeting of shareholders. Such options become exercisable at the
rate of 20% per year at the end of each of the first five years
following issuance and the options terminate at the expiration of
the five-year period. A total of 1,250,000 shares are reserved for
issuance under this plan.
Options for 150,000 shares with an exercise price of $8.00 per share
were granted in accordance with the LCA-Vision Inc. Director's
Nondiscretionary Stock Option Plan during 1996. No options were
exercised or cancelled and 1,100,000 shares are reserved for future
option grants.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation", but applies
Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee option plans. The
weighted fair value of the options granted in 1996 was $4.15 per
share. Compensation expense was immaterial for 1996. If the
Company had elected to recognize compensation cost based on the fair
value at the grant dates for awards under those plans, consistent
with the method prescribed by SFAS No. 123, net loss and loss per
share would have changed to the following pro forma amounts:
Net (Loss) per
(Loss) Share
------ ----------
As reported $(4,056,906) $(0.21)
Pro forma $(4,862,631) $(0.25)
The fair value of Company stock options used to compute pro forma
net (loss) and (loss) per share disclosures was determined using the
Block-Scholes option-pricing model with the following weighted
average assumptions: dividend yield of 0%; expected volatility of
98%; risk free interest rates on the date of grant ranging from
5.34% to 6.82%; and an expected holding period of 5 years, the
vesting period of the options granted.
The Company has a savings plan ("Plan") under Internal Revenue Code
Section 401(k). All full time employees are covered by the Plan.
The Plan contains two elements -- employee salary contributions and
discretionary employer contributions. No discretionary employer
contributions were made in 1996, 1995 or 1994.
10. RELATED PARTY TRANSACTIONS
The Company's principal shareholder is the majority owner of the LCA
Center for Surgery, Ltd. ("Surgery, Ltd."). Surgery, Ltd. occupies
a portion of the Company's office building for which the Company
recorded income of $182,764 in 1996. The Company also provided
certain administrative and marketing services for which it recorded
income of $161,563. Included in accounts receivable at December 31,
1996 is $15,912 due from Surgery, Ltd.
In May 1995, LCA and its principal shareholder acquired 45% and 35%
ownership interests, respectively, in the Surgery Center of Georgia,
LLC ("SCG") in return for guarantees of certain debt of SCG. As
part of the merger and restructuring (see Note 1), LCA distributed
its interest in SCG in return for removal from the guarantees of
SCG's debt. The 1995 financial statements do not include any of the
operating results of SCG during the period LCA had an ownership
interest as it was not LCA-Vision's intent for SCG to be part of the
ongoing business of LCA-Vision following the merger. In 1996 LCA-Vision
recorded income of $59,044 for administrative and marketing
services provided to SCG. Included in accounts receivable at
December 31, 1996, is $90,495 due from SCG.
The Company provided a $60,000 advance to an officer in 1995. The
advance is supported by a promissory note due November 29, 1996,
with interest payable at 8.75%. The note was extended and at
December 31, 1996, principal and interest of $65,811 is included in
prepaid expenses and other. In January 1997, the officer repaid
$30,000 of the balance due by selling to the Company 10,909 shares
of its common stock at the then market value.
11. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks on
a claims-made basis. The lawsuit filed against the Toronto
Laservision Centre was dismissed without cost in 1996.
The Company has ordered, and taken delivery of, VISX excimer lasers
for five of its recently opened laser refractive surgery centers.
The total cost of these lasers is $2,625,000. The Company
anticipates obtaining lease financing for these lasers. The Company
has a commitment letter from a leasing agent for three of the lasers
and has obtained proposals for the remainder.
<PAGE>
Exhibit 11
LCA-VISION INC.
Computation of Per Share Earnings (Loss)
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Primary Earnings (Loss) Per
Share
Net income (loss) $ (4,056,906) $ 178,764 $ 1,696,531
Pro forma income tax expense $ (40,600) $ (645,000)
Pro forma net income (loss) $ (4,056,906) $ 138,164 $ 1,051,531
Shares:
Weighted average number of
common shares outstanding 19,609,505 5,659,208 1,000,000
Additional shares assuming
exercise of stock options (a)
Weighted average number of
common shares adjusted 9,609,505 5,659,208 1,000,000
Earnings (loss) per share $ (0.21) $ .02 $ 1.05
(a) Net loss per share is based on outstanding common shares.
Assuming exercise of options would be anti-dilutive since an
increase in the number of shares assumed to be outstanding would
reduce the amount of the loss per share.
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
LCA-Vision (Canada) Inc. Ontario, Canada
The Toronto Laservision Centre (1992) Inc. Ontario, Canada
Toronto Lasersight Centre
LCA-Vision (Ohio), Inc. Ohio
938051 Ontario, Inc. Ontario, Canada
<PAGE>
Exhibit 23
to
Form 10-KSB for 1996
Consent Of Independent Accounts
We consent to the incorporation by reference in the registration
statements of LCA-Vision Inc. on Form S-8 (File No. 333-07621) of
our report dated February 21, 1997 on our audits of the consolidated
financial statements of LCA-Vision Inc. as of December 31, 1996 and
1995, and for each of the three years in the period ended December
31, 1996, which report is included in this Annual Report on Form 10-KSB.
/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE LCA-VISION INC.
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996; AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED
INTOS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 724,026
<SECURITIES> 0
<RECEIVABLES> 1,049,964
<ALLOWANCES> (100,236)
<INVENTORY> 245,000
<CURRENT-ASSETS> 2,903,428
<PP&E> 12,515,794
<DEPRECIATION> (3,060,276)
<TOTAL-ASSETS> 13,710,444
<CURRENT-LIABILITIES> 6,090,270
<BONDS> 6,422,537
0
2,521,679
<COMMON> 78,835
<OTHER-SE> (1,402,877)
<TOTAL-LIABILITY-AND-EQUITY> 13,710,444
<SALES> 318,019
<TOTAL-REVENUES> 13,759,838
<CGS> 208,435
<TOTAL-COSTS> 7,732,171
<OTHER-EXPENSES> 9,149,471
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (769,816)
<INCOME-PRETAX> (4,056,906)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,056,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,056,906)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
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