U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT.
For the transition period from __________ to __________
Commission file number 0-27610
LCA-Vision Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2882328
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7840 Montgomery Road, Cincinnati, Ohio 45236
(Address of principal executive offices)
(513) 792-9292
(Issuer's telephone number)
_________________________________________________________________
(Former name, former address and formal fiscal year, if changes
since last report.)
Check whether then issuer (1) filed all reports required to be filed
by Section 3 or 15(d) of the Exchange Act 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 filing requirements for
the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports to be
filed by sections 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
36,664,815 shares as of October 31, 1997.
Transitional Small Business Disclosure Format (check one):
Yes No X
LCA-VISION INC.
INDEX
Page No.
Facing Sheet 1
Index 2
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet,
September 30, 1997 3
Unaudited Condensed Consolidated
Statements of Operations for the Three and Nine
Months ended September 30, 1997 and 1996 4
Unaudited Condensed Consolidated Statements
of Cash Flows for the Nine Months ended September 30,
1997 and 1996 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information 16
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 18
<PAGE>
<TABLE>
LCA-VISION INC.
Condensed Consolidated Balance Sheet
September 30, 1997
(unaudited)
<CAPTION
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 6,863,300
Restricted cash and cash equivalents 4,000,000
Accounts receivable, net 2,188,000
Surgical supplies, prepaid expenses and other 1,741,300
-----------
Total current assets 14,792,600
Property and equipment, net 19,324,500
Investment in unconsolidated affiliates 251,500
Goodwill 12,071,900
Other assets 1,157,700
-----------
Total assets $ 47,598,200
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,132,100
Line of credit 6,908,500
Term loan 3,039,300
Accrued liabilities and other 3,962,600
Current portion of long-term debt 698,200
-----------
Total current liabilities 15,740,700
Long-term debt, net of current portion 1,468,200
Notes payable to shareholders 1,500,000
-----------
Total liabilities 18,708,900
Shareholders' equity
Preferred stock (Note 6) 2,521,700
Common stock - authorized 110,000,000
shares, $.001 par value; 36,664,816 shares
issued 96,000
Paid-in capital 36,375,700
Retained deficit (9,927,500)
Accrued preferred stock dividend (139,000)
Treasury stock - 10,909 shares (30,000)
Translation adjustment (7,600)
----------
Total Shareholders' equity 28,889,300
----------
Total liabilities and shareholders' equity $ 47,598,200
==========
</TABLE>
The Notes to Condensed Consolidated Financial
Statements are an integral part of this statement.
<PAGE>
<TABLE>
LCA-VISION INC.
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1997 and 1996
(unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net revenues:
Laser refractive eye surgery
centers $ 3,948,100 $ 925,500 $ 7,976,800 $ 2,604,500
Multi-specialty laser surgery
programs 657,300 1,053,900 2,142,400 3,598,600
Other 350,700 1,263,700 1,438,900 4,251,500
--------- ---------- ---------- ----------
Total net revenue 4,956,100 3,243,100 11,558,100 10,454,600
Direct operating expenses 2,711,400 1,641,600 7,123,800 4,994,400
General and administrative
expenses 2,901,600 1,931,500 6,309,800 6,132,900
Pre-opening expenses 162,600 87,400
Depreciation and amortization 611,100 387,000 1,443,100 1,169,400
Repositioning costs 1,100,000 1,100,000
--------- --------- --------- ---------
Operating (loss) (2,368,000) (717,000) (4,581,200) (1,929,500)
Equity in income (loss) of
unconsolidated affiliates 5,400 (230,000) (25,900) (734,400)
Interest expense (266,700) (198,700) (774,400) (541,200)
Interest income 10,100 17,100 45,000 65,100
Other 44,000 3,000 56,800 69,400
Gain on sale of investment of
unconsolidated affiliate 545,900
--------- --------- ---------- ----------
(Loss) before income taxes (2,575,200) (1,125,600) (5,279,700) (2,524,700)
Income taxes (6,000) (34,400) 55,600 43,100
----------- ----------- ----------- ----------
Net (loss) (2,569,200) (1,091,200) (5,335,300) (2,567,800)
Accrued dividend - Class B
preferred stock (45,000) (139,000)
----------- ---------- ---------- -----------
Amount applicable to
(loss) per common share $(2,614,200) $(1,091,200) $(5,474,300) $(2,567,800)
========== =========== =========== ===========
Net (loss) per common share $ (0.08) $ (0.06) $ (0.23) $ (0.13)
Average common shares
outstanding 30,976,290 19,617,878 23,390,639 19,617,845
</TABLE>
The Notes to Condensed Consolidated Financial Statements
are an integral part of this statement.
<TABLE>
LCA-VISION INC.
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows (used) by operating activities:
Net (loss) $(5,335,300) $(2,567,800)
Adjustments to reconcile net (loss) to net cash
used by operating activities:
Depreciation and amortization 1,443,100 1,169,400
Repositioning accrual 1,100,000
Equity in earnings of affiliates 25,900 734,400
Gain on sale of investment of affiliate (545,900)
Write down of intangible assets 106,800
(Gain) loss on property disposal 40,900 (21,200)
Other (70,900)
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable (900,600) (398,600)
Other current assets (154,300) 152,400
Increase (decrease) in:
Accounts payable 124,900 (187,900)
Other current liabilities 1,307,500 426,000
--------- ---------
Net cash (used) by operating activities (2,347,900) (1,203,300)
Cash flows from investing activities:
Cash acquired in business combination 10,006,600
Purchase of property and equipment (433,500) (3,304,100)
Investment in unconsolidated affiliates (69,800) (1,079,600)
Proceeds from sale of investment in affiliate 1,000,000
Other 29,100
---------- ----------
Net cash provided (used) by investing
activities 9,503,300 (3,354,600)
Cash flows from financing activities:
Proceeds from sales of common stock 50,500
Repayment of long-term debt and
capital lease obligations (3,597,400) (278,900)
Repayment of notes payable shareholders (354,100)
Borrowings under long-term debt and capital leases 3,080,000 1,457,600
Borrowings from bank line of credit 3,470,500 1,940,000
Other (19,700) 9,000
----------- ---------
Net cash from financing activities 2,983,900 2,773,600
----------- ---------
Increase (decrease) in cash 10,139,300 (1,784,300)
----------- ---------
Cash and cash equivalents, beginning of period 724,000 2,587,100
----------- ---------
Cash and cash equivalents, end of period $10,863,300 $ 802,800
=========== =========
</TABLE>
The Notes to Condensed Consolidated Financial
Statements are an integral part of this statement.
<PAGE>
LCA-VISION INC.
Notes to Condensed Consolidated Financial Statements
for the Three and Nine Months Ended September 30, 1997 and 1996
(unaudited)
1. Description of Business
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.
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 $6,390,800 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 (note 5).
Business
LCA-Vision is a leading developer and operator of free-standing
laser refractive eye surgery centers. The laser refractive eye
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") and laser in situ keratomileusis
("LASIK") for treatment of myopia (nearsightedness).
The Company also manages multi-specialty laser surgery programs at
13 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 programs of the surgical center
and its staff including doctors and for marketing programs of the
surgical center.
2. Acquisitions
a) Refractive Centers International, Inc.
On August 18, 1997, the Company purchased 100% of the issued and
outstanding common stock of Refractive Centers International, Inc.
("RCII"), a majority-owned subsidiary of Summit Technology, Inc.
("Summit") (the "Acquisition"). The Company issued 17,065,579 shares
of its common stock: 901,218 shares to individuals who held options
for RCII common stock and exercised them prior to the closing and
16,164,361 shares to Summit. Summit has announced it will distribute
9,000,000 of the shares to the holders of Summit's common stock upon
the Company preparing, filing and causing to become effective a
registration statement under the Securities Act of 1933 for such
shares.
The Acquisition agreement restricts Summit from owning or operating
laser vision correction centers for a period ending on the earlier
of (i) July 22, 2000, or (ii) the expiration of the Shareholders'
Agreement described below.
Summit and the Company have entered into a Registration Rights
Agreement (the "Registration Rights Agreement") pursuant to which
Summit has the right to demand that the Company register under the
Securities Act of 1933 the 7,164,361 shares of Company Common Stock
owned by Summit after giving effect to the Dividend (the "Remaining
Shares"), to enable Summit to sell such shares on any date after May
17, 1998. The Company intends to register Summit's Remaining Shares
under the Registration Rights Agreement immediately after this
resignation statement becomes effective. All expenses of such
registration, including but not limited to, printing, legal and
accounting expenses, filing fees and expenses, state "blue sky" law-related
fees and expenses and, subject to certain exceptions, the
reasonable expenses of Summit, will be borne by the Company.
The Registration Rights Agreement also contains a Right of First
Offer Upon Sale for Cash ("Right of First Offer") which provides,
among other things, that in the event Summit wishes to sell for cash
all or any part of the Remaining Shares, Summit must first offer to
sell the shares to the Company. The Registration Rights Agreement
also provides for the pricing, payment and closing terms under the
Right of First Offer as well as the Company's obligation to
indemnify Summit and the Selling Stockholders and Summit's
obligation to indemnify the Company relating to specified
liabilities arising from the registration statements. The term of
the Registration Rights Agreement ends when all remaining Shares
have been sold under the Registration Rights Agreement.
In connection with the Acquisition, the Company signed service
contracts with Summit for all Summit lasers owned or leased by the
company. These contracts each have a term of three years and require
fees of $80,000 per laser system for such three-year period. With
respect to up to five service contracts, if during the term of a
service contract the Company discontinues all use of the laser
system under the contract (except in connection with the closing of
a laser refractive eye surgery center), and does not replace the
laser system with any Summit excimer laser system, then the Company
may terminate the contract.
The Acquisition is being accounted for under the "purchase" method
of accounting, as described in Accounting Principles Board Opinion
No. 16 and the interpretations thereof, pursuant to which the assets
and liabilities of RCII will be adjusted to their respective fair
values and included with those of the Company as of August 18, 1997.
The results of operations of the Company subsequent to August 18,
1997 include the revenues and expenses of RCII; the historical
results of operations of the Company for periods prior to August 18,
1997 will not be restated.
Unaudited pro forma data as though the Company had acquired RCII at
the beginning of 1997 are set forth below:
September 30, 1997
3 months 9 months
Revenues $6,186,100 $16,240,100
Net loss (4,168,100) (11,790,500)
Loss per share (0.11) (0.32)
The fair value of the assets acquired consisted of $9,151,200,
$10,761,400, and $12,883,500 for working capital, equipment, and
goodwill, respectively.
The pro forma information does not purport to be indicative of
operating results which would have occurred had the acquisition of
RCII been made at the beginning of 1997 or indicative of results
which may occur in the future.
b) 938051 Ontario Inc.
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:
(i) dismissal of a patent infringement lawsuit filed against one of
the sellers, or (ii) settlement or final court determination of the
lawsuit. The lawsuit was settled in June 1997; however, the Company
has not yet received notification of dismissal from the seller.
The Company may also 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 ($124,200) has been
recorded as goodwill which is being amortized over 5 years.
3. Significant Accounting Policies
The September 30, 1997 and 1996 financial data are unaudited;
however, in the opinion of the Company, such data include all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the interim periods.
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 estimated.
Pre-opening Costs
Costs associated with the opening of a new laser vision correction
center are expensed during the first month of the center's
operation.
Investments in Unconsolidated Affiliates
The equity method is used for investments in laser vision correction
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.
Impact of Recently Issued Accounting Standards
Since December 1996 the Financial Accounting Standards Board has
issued the following Statements: No. 128, "Earnings per Share"; No.
129, "Disclosure of Information about Capital Structure"; No. 130,
"Reporting Comprehensive Income"; and No. 131 "Disclosures about
Segments of an Enterprise and Related Information".
Statement 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per Share",
and makes them comparable to international earnings per share
calculations. Statement 128 requires restatement of all prior-period
earnings per share data presented.
Statement 129 establishes standards for disclosing information about
an entity's capital structure. It does not change disclosure
requirements for entities that were previously subject to the
requirements of APB Opinion No. 10, "Omnibus Opinion - 1996"; APB
Opinion No. 15, "Earnings per Share"; and Statement No. 47,
"Disclosure of Long-Term Obligations".
Statement 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses). The Statement requires that an entity (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position.
Statement No. 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The statement supersedes
Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise" and amends Statement No. 94, "Consolidation of All
Majority-Owned Subsidiaries".
Statement 128 is effective for the year ended December 31, 1997; the
other statements are effective for fiscal years beginning after
December 15, 1997. The Company anticipates that the adoption of
these Statements will not have a material impact on its financial
disclosures or any previously reported information affected by these
Statements.
4. Credit Arrangements
On August 18, 1997, as required by the Acquisition agreement, the
Company entered into a new debt facility with its primary lender to
replace the Company's previous facility. The new facility consists
of an $8 million secured line of credit and a secured term loan in
the amount of $3,053,000. The secured line of credit and the term
loan mature on September 30, 1998 and bear interest as follows:
August 18, 1997 until February 28, 1998, 1% above the lender's prime
rate; February 28, 1998 until August 31, 1998, 3% above the lender's
prime rate; and August 31, 1998 until maturity, 6% above the
lender's prime rate. Interest on borrowings under the secured line
of credit is payable monthly. The term loan is payable in 14 monthly
installments of $13,750 plus interest with the unpaid principal due
at maturity.
The new facility requires the Company to maintain $4 million in cash
on deposit with the lender and is secured by a blanket lien on all
Company assets, including the Company's headquarters building. The
credit facility requires the Company to maintain (i) a debt to
tangible net worth ratio of less than 1.0:1.0, and (ii) maintain
tangible net worth of at least $15 million. The new facility also
restricts the Company's ability to pay dividends, issue stock, incur
indebtedness, enter into lease commitments or acquire capital
equipment with a purchase price in excess of $75,000 without the
consent of the lender.
5. Notes Payable - Shareholders
The notes payable - shareholders mature on September 25, 2005, and
bear interest at 6.91%. In two separate transactions in December
1996, the note holders converted $2,521,700 of their notes into
Class B preferred stock (note 6).
In connection with the Acquisition, the promissory notes were
amended to limit principal payments to 25% of the amount earnings
for the prior fiscal year exceed $1 million. Earnings for this
purpose are defined as income before taxes, amortization of goodwill
and depreciation, net of capital expenditures, for such fiscal year.
6. Preferred Stock
Preferred stock consists of: Class A, $.001 par value 1,688 shares
authorized, 1,688 shares issued ($67,500 aggregate liquidation
preference); Class B, $.001 par value, 7% dividend - First Interim
Series, 6 shares issued ($1,200,000 aggregate liquidation
preference), and Second Interim Series, 6.6 shares issued
($1,321,700 aggregate liquidation preference).
In connection with the Acquisition, the Company agreed to amend the
conversion price of the Company's Interim Series Class B Preferred
Stock. Each share of the Interim Series Class B Preferred Stock is
convertible into the number of common shares that results from
dividing $3.50 into the sum of $200,000 plus all accrued but unpaid
dividends on each such share at the time of conversion.
At September 30, 1997, dividends totaling $94,000 have been accrued
for the Class B interim series preferred shares and are unpaid.
7. Investments in Unconsolidated Affiliates
The Company sold its investment in Continuum Biomedical, Inc. which
had been accounted for using the equity method for $1,000,000 in the
first quarter of 1996. A gain of $545,900 was recorded.
8. Repositioning Accrual
Concurrent with the acquisition of RCII, the Company implemented a
program to close certain centers, both existing and acquired, and
reduce overhead costs. Included in the financial statements are
revenues of $168,400 and $414,200 for the three and nine months
ended September 30, 1997 and operating losses of $206,700 and
$343,400 for the same periods, respectively, for these centers. In
addition, the Company elected to write-off its investment in two of
its joint ventures as a result of their closing and to write-down
certain product inventory.
The Company recorded a repositioning accrual of $1,100,000, or $0.03
per share in the quarter ended September 30, 1997. Costs of $660,000
associated with restructuring RCII were recorded as part of the
purchase price.
9. Related Party Transactions
The Company's President is the principal stockholder majority owner
of The LCA Center for Surgery, Ltd. ("Surgery Center."). The Company
does not hold an investment in the Surgery Center. The Company has
leased to the Surgery Center, for a period of twenty (20) years at
an annual rental of $190,000, a portion of its headquarters building
located at 7840 Montgomery Road. In February 1997, the Company
agreed to forego rent in return for the Surgery Center providing to
the Company certain systems and processes for research and
development, for providing additional staffing, and for giving the
Company unlimited use of the leased premises for research, testing,
educational and other agreed purposes. The Company recorded rent
and administrative and marketing services income of $35,000 and
$134,500 for the nine months ended September 30, 1997 and 1996,
respectively. Included in accounts receivable at September 30, 1997
is $37,200 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. LCA-Vision recorded income of $18,000 for the nine months
ended March 31, 1997, for administrative and marketing services
provided to SCG. Included in accounts receivable at September 30,
1997, is $16,900 due from SCG.
The Company provided a $60,000 advance to a former 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 for one year
and in January 1997 the officer repaid $30,000 of the balance due by
exchanging 10,909 shares of the Company's common stock at the then
market value. At September 30, 1997, principal and interest
approximating $37,700 is included in accounts receivable. The
advance and accrued interest thereon was repaid on October 31, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results
of Operations.
Overview
LCA-Vision Inc. ("LCA-Vision" or the "Company") is a leading
developer and operator of free-standing laser refractive eye surgery
centers. The laser refractive eye 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 laser vision correction
surgeries performed in the Company's centers primarily include
photorefractive keratectomy ("PRK") and laser in situ keratomileusis
("LASIK") for treatment of myopia (nearsightedness).
The Company also manages multi-specialty laser surgery programs at
13 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 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 eye 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 vision correction
centers of investees; and miscellaneous sources. Miscellaneous
sources include product sales - lasers and laser surgery instruments
- - which the Company began phasing out effective December 31, 1996.
The Company classifies operating expenses as follows: (a) direct
operating expenses which include: (i) laser refractive eye surgery
centers -- labor, physician fees, Pillar Point royalty 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 vision correction
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 eye 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 eye surgery centers have been opened, the
Company's results of operations may not be indicative of future
results.
On August 18, 1997, the Company purchased 100% of the issued and
outstanding common stock of Refractive Centers International, Inc.
("RCII"), a majority-owned subsidiary of Summit Technology, Inc.
("Summit") (the "Acquisition") for 17,065,579 shares of its common
stock. The Acquisition is being accounted for under the "purchase"
method of accounting, as described in Accounting Principles Board
Opinion No. 16 and interpretations thereof, pursuant to which the
assets and liabilities of RCII will be adjusted to their respective
fair values and included with those of the Company as of August 18,
1997. The results of operations of the Company subsequent to August
18, 1997 include the revenues and expenses of RCII. Historical
information for the Company prior to August 18, 1997 will not be
restated to include that of RCII.
Laser Vision Correction Centers
The following table illustrates the growth of PRK and LASIK
procedures performed at the Company's laser refractive eye surgery
centers. The combined column includes procedures performed at the
investee laser refractive surgery centers. The Company records the
activity of its investee laser refractive eye surgery centers using
the equity method of accounting.
Historical Pro-forma
Wholly-owned Combined Wholly-owned Combined
1997 Q3 2,375 2,790 3,196 3,611
Q2 1,506 2,078 2,973 3,545
Q1 979 1,443 2,262 2,726
1996 Q4 745 1,089 1,789 2,133
Q3 596 864 1,257 1,525
Q2 790 1,054 1,155 1,419
Q1 532 613 548 629
Pro forma procedures include those performed at RCII centers prior
to their acquisition by the Company.
Multi-Specialty Laser Surgery Programs
The renewal of the Company's contracts with the hospital providers
is becoming increasingly difficult due to price pressures and the
lengthening of sales cycle. Hospital providers and other entities
are being driven to reduce costs and scale back their operations,
sometimes including the programs that the Company manages. The
Company's existing contracts provide positive cash flow; however,
the Company has decided to reduce its providing of this service due
to difficult environment. In addition, budget reductions at the
facilities have reduced the marketing and education programs, key
elements to a successful surgery program.
Results of Operations
Increases (decreases) by source of revenue for the three and nine
months ended September 30, 1997 compared to the same periods of 1996
are:
3 months ended 9 months ended
Laser refractive eye
surgery centers $3,022,600 $5,372,300
Multi-specialty laser
surgery programs (396,500) (1,456,200)
Other (1,093,000) (2,812,600)
----------- -----------
$1,533,000 $1,103,500
=========== ===========
Laser refractive eye surgery centers revenue increased due to more
centers being opened in 1997 and the growth in number of procedures
performed. Procedures performed at all centers for the three months
ended September 30, 1997 increased 44.0% as compared to the three
months ended March 31, 1997 (53.8% for wholly-owned centers) and
97.2% as compared to the comparable period of 1996. Procedures for
the nine months ended September 30, 1997 increased 111.2% compared
to the nine months ended September 30, 1996. Multi-specialty laser
surgery programs revenue declined as a result of the declining
number of facilities under contract. The lesser number of facilities
under contract together with cost reduction programs instituted by
healthcare providers negatively impacted the revenue from marketing
and education programs. In addition, revenue for the three and nine
months ended September 30, 1996 includes one-time income of $125,100
and $371,500, respectively, from the implementation of programs in
hospitals and laser refractive eye surgery centers of investees and
contract cancellation fees.
Management anticipates that the composition of future revenue will
change as more laser refractive eye surgery centers are developed
and as PRK and LASIK become more widely known and accepted by
ophthalmic physicians and their patients. As centers mature the
critical mass necessary for word-of-mouth referrals is attained and
procedure volume should increase. As of September 30, 1997, less
than half of the Company's wholly-owned centers have been open for
one year or longer. Revenues from hospital-based multi-specialty
centers will be less significant to the Company while revenues from
laser vision correction 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 increased $1,069,800 and $2,129,400 for
the three and nine months ended September 30, 1997, respectively,
compared to the comparable period in 1996. The increases in direct
operating expenses are primarily a result of the Company's expansion
into the laser refractive eye 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 increased $970,100 and $176,900
for the three and nine months ended September 30, 1997 compared to
the same periods 1996. The increases were primarily due to the
additional costs incurred as a result of the acquisition of RCII.
The cost controls instituted at the end of 1996 minimized the
increase for the nine months. In 1997, the Company has spent
approximately $470,000 for marketing and advertising programs to
educate and inform individuals about PRK and LASIK. Other expenses
such as telephone, legal, insurance, and repairs and maintenance
increases as the Company opens new laser vision correction centers.
Concurrent with the acquisition of RCII, the Company implemented a
program to close certain centers, both existing and acquired, and
reduce overhead costs. Included in the financial statements are
revenues of $168,400 and $414,200 for the three and nine months
ended September 30, 1997 and operating losses of $206,700 and
$343,400 for the same periods, respectively, for these centers. In
addition, the Company elected to write-off its investment in two of
its joint ventures as a result of their closing and to write-down
certain product inventory.
The Company recorded a repositioning accrual of $1,100,000, or $0.03
per share in the quarter ended September 30, 1997. Costs of $660,000
associated with restructuring RCII were recorded as part of the
purchase price.
Depreciation and amortization increased in 1997 compared to 1996 due
to the increase in property and equipment, primarily equipment for
the laser vision correction centers.
Interest expense increased primarily due to the increased borrowings
related to the capitalized leases for the lasers used to perform
laser vision correction, and borrowings under the line of credit to
fund current operating needs and capital equipment, offset by the
reduction in 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 in April, 1996 from the sale.
Liquidity and Capital Resources
The Company's principal capital requirements since late 1995 have
been to fund its expansion into laser refractive surgery - the
furnishing and equipment of centers, the development of marketing
and advertising programs, and the funding of operating losses.
Historically, the Company's principal sources of funds to finance
its capital requirements have been borrowings under its bank line of
credit, operating and capital leases, cash flow its multi-specialty
laser program contracts, and the sale of common stock to and
borrowings from its principal shareholders in the third quarter
1995.
In 1996 the Company rapidly expanded its number of laser refractive
eye surgery centers which resulted in a drain on earnings and cash
flow. The Company slowed its expansion in 1997 to concentrate on
making existing centers profitable and cash flow positive.
On August 18, 1997, the Company issued 17,065,579 shares of its
Common Stock for 100% of the issued and outstanding common stock of
RCII, a majority-owned subsidiary of Summit. At the time of the
acquisition, RCII owned and operated 19 laser refractive eye surgery
centers and had management service agreements with six "centers of
excellence" located at prestigious hospitals and university medical
centers. The acquisition agreement required RCII to have a minimum
cash balance of $10 million at closing.
Subsequent to the Acquisition, the Company has closed four of the
RCII laser refractive eye surgery centers. In addition, the Company
closed the RCII corporate office in Waltham, MA and terminated
certain administrative personnel. The responsibilities of the
Waltham staff have been re-assigned to field and company
headquarters personnel. The Company estimates this closure will
result in significant cost savings due to the elimination of
redundant general and administrative expenses and the consolidation
of marketing and advertising programs.
In connection with the Acquisition of RCII, the Company entered into
a new debt facility with its primary lender to replace the Company's
previous facility. The facility consists of an $8 million secured
line of credit ("Revolver") and a secured term loan ("Term Loan") in
the amount of $3.053 million. The Revolver and Term Loan bear
interest as follows: August 18, 1997 until February 28, 1998, 1%
above the lender's prime rate in effect from time to time ("Prime
Rate"); February 28, 1998 until August 31, 1998, 3% above the
lender's Prime Rate; and (iii) August 31, 1998 until September 30,
1998, 6% above the lender's Prime rate. September 30, 1998 is the
maturity date of the Revolver and Term Loan. The Term Loan is
payable in 14 monthly installments, due on the first day of each
calendar month, commencing September 1, 1997 and ending with a final
payment on September 30, 1998.
The Facility requires, among other things, that the Company maintain
a minimum tangible net worth and meet a debt coverage ratio. The
facility also restricts and/or prohibits certain transactions;
including but not limited to, additional borrowing, the issuance of
additional shares of capital stock, the payment of dividends and
capital expenditures greater than $75,000. The facility further
requires the Company to maintain $4,000,000 in cash on deposit with
the lender and is secured by a blanket lien in favor of the lender
on all Company assets, including the Company's headquarters
building.
In addition to cash to fund operations, the Company's primary on-going cash
requirements are those necessary to service debt,
including capital and operating leases. The company believes that
cash flow from laser refractive eye surgery centers as they mature,
the $10 million cash obtained via the acquisition of RCII, and the
availability of the Revolver will satisfy its operating cash and
debt service requirements for at least the next 12 months. The
Company believes that, with its improved liquidity and capital
position, it can obtain lease financing for significant capital
expenditures. However, there can be no assurance that the Company
will be able to replace its Facility, or on satisfactory terms, or
that the Company's Laser Refractive Surgery Centers can achieve a
positive cash flow.
Cautionary Statement under "Safe Harbor" Provisions of the
Securities Litigation Reform Act of 1995
Statements made in this report, the Company's press releases, oral
presentation, and other filings with the SEC, may contain
information about the Company's future business prospects. Some of
these statements may be considered "forward looking". These
statements are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth or implied
by such forward- looking statements.
Part II. Other Information
Item 1. Legal Proceedings.
The Company is a defendant in a case entitled Cabrini Development
Council, et al. V. LCA-Vision Inc., et al., Supreme Court of the
State of New York, County of New York. Various employees, officers,
directors and former directors of the Company are co-defendants. The
case was filed in October 1997 and arises out of the operations and
the termination of operations of a New York limited liability
company (the "LLC") which had been formed by the Company, the
plaintiff in the action and a New York professional corporation (the
"PC") owned by certain physicians, for the purpose of opening and
operating a Laser Refractive Surgery center or centers in New York
City. Business activities commenced in 1995, but were unprofitable.
After the LLC's resources were exhausted, the Company paid its
operating costs for a period of time. In August, 1997, after further
losses and after the parties were unable to come to a final
understanding as to their respective rights and obligations, the
operations of the LLC ceased.
In its complaint, the plaintiffs allege breaches of various
agreements entered into between them, the Company, and the PC
concerning the LLC and its operations, as well as alleged fraud and
alleged conversion of a business opportunity arising out of the
operation of a center in Mt. Kisco, New York, which the plaintiffs
claim constituted business of the LLC. The plaintiffs have demanded
on all of their causes of action compensatory damages which total
not less than $4.5 and punitive damages which total not less than $2
million, as well as the creation of a constructive trust over the
Company's operations for the benefit of the LLC. The Company, which
has not yet filed an answer, believes that the plaintiffs' claims
are without merit and intends to vigorously defend the action.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 Computation of Per Share Earnings (Loss)
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
(1) Form 8-K dated August 18, 1997, announcing the Company's
obtaining a new financing agreement from The Fifth Third Bank of
Cincinnati to replace its expired existing package.
(2) Form 8-K dated August 18, 1997, announcing the closing of the
acquisition of assets of Refractive Centers International, Inc., a
subsidiary of Summit Technology, Inc.
(3) Form 8-K/A dated August 18, 1997, amending the Form 8-K dated
August 18, 1997, to include the financial statements of the business
acquired and pro forma financial information as required by
Regulation S-X.
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
LCA-VISION INC.
Date November 14, 1997 /s/ Stephen N. Joffe
Stephen N. Joffe
President and Chief Executive
Officer
Date November 14, 1997 /s/ Larry P. Rapp
Larry P. Rapp
Chief Financial Officer
<PAGE>
Exhibit 11
<TABLE>
LCA-VISION INC.
Computation of Per Share Loss
For the Three and Nine Months Ended
September 30, 1997 and 1996
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary Per Share Loss
Net (loss) available for common
shareholders $(2,614,200) $(1,091,200) $(5,474,300) $(2,567,800)
Shares:
Weighted average number of
common shares outstanding 30,976,290 19,617,878 23,390,639 19,617,845
Additional shares assuming
exercise of
stock options (a) ----------- ----------- ----------- -----------
Average common shares and
equivalents as
adjusted 30,976,290 19,617,878 23,390,639 19,617,845
Net (loss) per common share $ (0.08) $ (0.06) $ (0.23) $ (0.13)
<FN>
(a) Net loss per share is based on average outstanding common shares.
Assuming exercise of options would be anti-dilutive as an
increase in the number of shares assumed to be outstanding
would further reduce the amount of the loss per share.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE LCA-VISION IN.C
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997, AND THE RELATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,863,300
<SECURITIES> 0
<RECEIVABLES> 2,288,200
<ALLOWANCES> 100,200
<INVENTORY> 164,600
<CURRENT-ASSETS> 14,792,600
<PP&E> 24,464,000
<DEPRECIATION> 5,139,500
<TOTAL-ASSETS> 46,937,500
<CURRENT-LIABILITIES> 15,740,700
<BONDS> 1,468,200
0
2,521,700
<COMMON> 96,000
<OTHER-SE> 26,271,600
<TOTAL-LIABILITY-AND-EQUITY> 46,937,500
<SALES> 16,500
<TOTAL-REVENUES> 11,558,100
<CGS> 10,000
<TOTAL-COSTS> 6,299,800
<OTHER-EXPENSES> 9,015,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 541,200
<INCOME-PRETAX> (5,279,700)
<INCOME-TAX> 55,600
<INCOME-CONTINUING> (5,335,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,335,300)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
