SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10KSB
________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number 0-27610
December 31, 1997
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 SB 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 10KSB or any
amendment to this Form 10KSB. [ X ]
________________________
As of March 9, 1998 the latest practicable date, 36,664,815 shares
of Common Stock were outstanding. The aggregate market value of
Common Stock held by nonaffiliates was approximately $14,140,444
at that date.
________________________
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the part of the Form 10KSB into which the document
is incorporated: Portions of the Registrant's Proxy Statement for
its 1998 Annual Meeting of stockholders to be filed on or prior to
April 21, 1998, are incorporated by reference into Part III of
this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one):
Yes ____ No X
PART I
Item 1. Description of Business.
Background and 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.
On August 18, 1997 (the "Closing"), pursuant to an Acquisition
Agreement ("Acquisition Agreement") by and among the Company,
Summit Technology, Inc. ("Summit") and Refractive Centers
International, Inc. ("RCII") dated July 23, 1997, the Company
purchased all of the outstanding shares of RCII. The Company at
Closing purchased from Summit 5,000,000 shares of RCII's common
stock, par value $.01 in exchange for 16,164,361 newly-issued
shares of Company common stock. Prior to the Closing, 19
individuals had held options for 312,500 shares of RCII common
stock, 278,767 of which were exercisable at Closing. These
individuals exercised their options prior to Closing and the
Company also purchased all 278,767 shares of RCII common stock
owned by them in exchange for 901,218 newly-issued shares of
Company Common Stock. As a result of these transactions, the
Company in the aggregate issued 17,065,579 shares of Company
Common Stock and came to own 100% of the issued and outstanding
shares of RCII common stock. RCII is operated as a wholly-owned
subsidiary of the Company.
<PAGE>
Business Overview
LCA-Vision is a leading developer and operator of free-standing
laser refractive eye surgery centers in the U.S. The Company's
centers (the "Centers") offer laser refractive eye surgery
procedures for treatment of nearsightedness and other eye
conditions. They include photorefractive keratectomy ("PRK") and
laser in situ keratomileusis ("LASIK") (PRK and LASIK are referred
to collectively as "Laser Refractive Surgery").
The Company also manages laser and minimally invasive surgery
programs for hospitals and medical centers on a contract basis at
13 locations. The cash flow from these operations has been used to
partially fund the expansion of the laser refractive surgery
operations.
Laser Refractive Surgery Centers
The Laser Refractive Surgery Centers operated by the Company
provide the facilities, equipment and support services necessary
for physicians to perform various corrective eye surgeries that
employ state-of-the-art laser technologies. Each Center is
equipped with one or more excimer laser systems in addition to
corneal topography instruments, ophthalmic examination equipment,
computer systems and standard office equipment. Physicians who
have completed extensive FDA-mandated training sessions and have
met the Company's qualification criteria, use the Company's
facilities to perform Laser Refractive Surgery on an out-patient
basis.
The most common procedures performed at the Centers are PRK
(photorefractive keratectomy) and LASIK (laser in situ
keratomileusis) to treat nearsightedness. PRK is an outpatient
procedure performed with an excimer laser to treat
nearsightedness, whereby submicron layers of tissue are ablated
(removed) from the surface of the cornea in a computer-assisted,
predetermined pattern to reshape the cornea. LASIK is an advanced
outpatient procedure to treat nearsightedness, also using an
excimer laser. As new laser-based surgical procedures are approved
by the FDA, the Company plans to accommodate the service
requirements for these procedures as well, to the extent feasible
at that time.
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.
Operation of Centers
The operations of the Company generally consist of providing to
credentialed physicians fully-equipped and staffed laser surgery
centers, which these physicians use to perform Laser Refractive
Surgery and other ophthalmic procedures. The Company also provides
management services, including billing and marketing functions,
and educational programs. The Company is compensated for a
physician's use of the Company's Centers and support services.
Summit and VISX lasers are subject to a royalty fee of $250 per
procedure performed in the U.S.
By using the Company's facilities, physicians are able to
concentrate on treating patients and are free 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 administrative and
financial functions are performed more efficiently and cost-effectively in a
centralized operation.
Because Laser Refractive Surgery is not generally reimbursable by
third-party payors, the Company offers several financing
alternatives. Customers can pay for the procedure with cash, bank
check, money order or credit card. The Company also offers
information regarding installment plans, insurance coverage, home
equity loans and payment through employer flexible benefit plans.
The Company bears minimal or no credit risk for any of these
options.
Marketing
The Company's marketing program adopts a two-pronged approach to
promoting Laser Refractive Surgery. It is designed to advertise
Laser Refractive Surgery directly to consumers through television,
print, media and direct marketing. In addition, Company personnel
work directly with ophthalmologists to increase the number of
credentialed physicians who are knowledgeable about and use the
Company's Centers to perform Laser Refractive Surgery.
The Company seeks to differentiate its centers in the marketplace
by providing locations and treatment environments that meet
patient and doctor preferences. Additionally, in keeping with past
practice, as the Company enters a market with an existing laser
system (produced by competitors Summit or VISX), it typically will
install the other system if that system better satisfies the needs
of local ophthalmologists. The Company utilizes both Summit and
VISX lasers at its U.S. Laser Refractive Surgery centers and one
each of Nidek, Chiron and Sunrise at its non-U.S. Laser Refractive
Surgery centers.
Competition
Laser Refractive Surgery, whether performed at a Company Center or
elsewhere, 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) and corneal implants. In addition, other technologies
currently under development may ultimately prove to be more
attractive to consumers than Laser Refractive Surgery.
The Company further faces competition from other providers of
Laser Refractive Surgery. Eye care services in the U.S., including
Laser Refractive Surgery, 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. Laser Refractive
Surgery chains, such as the Company, are a specialized type of
multi-site eye care center that primarily provide Laser Refractive
Surgery. Among the Laser Refractive Surgery center chains, the
Company believes it is one of the largest providers in terms of
number of facilities, followed by Laser Vision Centers, Inc., TLC-The Laser
Center Inc. and Sight Resource Corp.
In addition to competition from other chains of Laser Refractive
Surgery centers, the Company faces competition from hospitals,
clinics and private ophthalmologists who practice in the same
geographic area as one of the Centers. Furthermore, retail optical
chains could potentially provide Laser Refractive Surgery. Certain
chains have entered the Laser Refractive Surgery market.
Management believes they have had limited success and have cut
back their involvement in the industry. Other retail optical
chains are not currently focusing on providing Laser Refractive
Surgery.
Employees
As of December 31, 1997, the Company had 156 employees, of whom
122 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.
Reliance on Suppliers of Laser Equipment
The Company is not directly involved in the research, development
or manufacture of ophthalmic laser systems, and is dependent on
unrelated manufacturers for its supply of ophthalmic lasers. There
are two companies, Summit and VISX, Inc. ("VISX") whose excimer
laser systems have been approved by the FDA for commercial sale in
the U.S. If Summit and/or VISX were for any reason to discontinue
commercial sale of ophthalmic lasers in the U.S., the Company
would be limited in its ability to operate new and existing Laser
Refractive Surgery centers.
Government Regulation
The Company and its operations are subject to extensive federal,
state and local laws, rules and regulations affecting the health
care industry and the delivery of health care. These include laws
and regulations, which vary significantly from state to state,
prohibiting unlawful rebates and division of fees, and limiting
the manner in which prospective patients may be solicited.
Furthermore, contractual arrangements with hospitals, surgery
centers, ophthalmologists and optometrists, among others, are
extensively regulated by state and federal law.
Failure to comply with applicable FDA requirements could subject
excimer laser manufacturers and the Company to enforcement action,
including product seizures, recalls, withdrawal of approvals and
civil and criminal penalties, any one or more of which could have
a material adverse affect on the Company's business, financial
condition and results of operations. In addition, clearance or
approvals could be withdrawn in appropriate circumstances. Failure
of the Company or its principal suppliers to comply with
regulatory requirements, or any adverse regulatory action, could
result in a limitation on or prohibition of the Company's use of
excimer lasers which in turn would have a material adverse effect
on the Company's business, financial condition and results of
operations. Discovery of problems, violations of current laws or
future legislative or administrative action in the United States
or elsewhere may adversely affect the manufacturers' ability to
obtain regulatory approval of laser equipment. Furthermore, the
failure of VISX, Summit or any other manufacturers that supply or
may supply excimer lasers to the Company to comply with applicable
federal, state, or foreign regulatory requirements, or any adverse
regulatory action against such manufacturers, could limit the
supply of lasers or limit the ability of the Company to use the
lasers.
Item 2. Properties
The Company's corporate headquarters and one of its Laser
Refractive Surgery Centers are located in a 32,547 sq. ft. office
building the Company owns in Cincinnati, Ohio. All of the
Company's other 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 September 30, 1998
to December 31, 2004. The Company considers all of its centers to
be well-suited to its present and currently anticipated future
requirements. However, the Company does not believe that any of
the leases is material to the operation of the Company. The
following table describes the locations of the wholly-owned Laser
Refractive Surgery Centers by state or country:
Aggregate Annual
Location Leased/Owned Lease Payment
Agoura Hills, CA Leased $43,500
Concord, CA Leased 50,973
Costa Mesa, CA Leased 52,628
Glendale, CA Leased 69,618
Mountain View, CA Leased 45,036
San Bernardino, CA Leased 61,068
San Francisco, CA Leased 55,648
San Jose, CA Leased 53,235
Torrance, CA Leased 55,706
Helsinki, Finland Leased --------
Clearwater, FL Leased 47,367
Plantation, FL Leased 51,990
Schaumburg, IL Leased 45,684
Vernon Hills, IL Leased 54,440
Annapolis, MD Leased 22,403
Baltimore, MD Leased 93,621
Bethesda, MD Leased 52,867
Edina, MN Leased 32,289
Charlotte, NC Leased 62,042
Albany, NY Leased 58,625
Amherst, NY Leased 67,248
Centerville, OH Leased 50,676
Cincinnati, OH Owned -------
Columbus, OH Leased 27,136
Holland, OH Leased 82,522
Worthington, OH Leased 38,625
Ft. Erie, Ontario, Canada Leased 6,891
Willowdale, Ontario, Canada Leased 35,000
Falls Church, VA Leased 52,477
(1) Annapolis, Baltimore and Helsinki are leased through joint
ventures. The rent for the Helsinki center is included in the
monthly administration fee charged by the manager which is one of
the investors.
The above table does not include the locations or annual rent for
the centers closed. The Company is actively pursuing subtenants
for each of these locations.
Item 3. Litigation
The Company is a defendant in a case entitled Cabrini Development
Council, et al. vs LCA-Vision Inc., et al., which was commenced in
October, 1997 in the Supreme Court of New York, County of New York
and subsequently removed to the United States District Court for
the Southern District of New York, in November, 1997. Various
employees, officers, directors and former directors of the Company
are co-defendants. The case arises out of the operations and the
termination of operations of 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 a s 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 $4,500 and punitive damages
which total not less than $2,000, as well as the creation of a
constructive trust over the Company's operations for the benefit
of the LLC. The Company believes that the plaintiffs' claims are
without merit and intends to vigorously defend the action. It has
made a motion to dismiss the complaint on various grounds. In
response, the plaintiffs filed a motion for leave to amend the
complaint. The Company has opposed such motion and cross-moved for
attorneys' fees incurred by the Company in opposing the
plaintiffs' motion. These motions have not yet been ruled on by
the court.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's Common Stock is listed on the Nasdaq SmallCap Market
under the symbol "LCAV." On March 9, 1998, there were
approximately 3,386 holders of record of the Company's Common
Stock.
The following table sets forth, for the periods indicated, as
reported on the Nasdaq SmallCap Market, the range of high and low
closing prices. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
In June 1996 the Company effected a 1 for 4 reverse stock split.
The closing prices prior to the date of the split have been
adjusted for the split.
High Low
1996: First Quarter $22.000 $ 6.000
Second Quarter 11.500 3.625
Third Quarter 6.250 3.625
Fourth Quarter 4.375 2.250
1997: First Quarter $ 6.875 $ 2.375
Second Quarter 7.125 2.688
Third Quarter 3.875 2.750
Fourth Quarter 3.625 1.000
The Company did not pay any cash dividends during 1996 and 1997
and does not anticipate doing so in the future. The Company's loan
agreement with its principal lender prohibits the Company from
declaring or paying any dividend or distributions, except stock
dividends, on its capital stock.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
This Annual Report on Form 10-KSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of important
factors. For a discussion of important factors that could affect
the Company's results, refer to the Overview and financial
statement line item discussions set forth in Management's
Discussion and Analysis or Plan of Operation.
Overview (dollars in thousands, except where noted)
LCAVision Inc. ("LCA-Vision" or the "Company") is a leading
developer and operator of freestanding 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 stateoftheart 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 multispecialty 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 multispecialty 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 phased out effective December 31,
1996.
Management anticipates that the composition of future revenue will
change as PRK and LASIK become 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 vision correction centers are
expected to increase.
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 FDAapproved lasers of
$250 per procedure), facility rent and utilities, and surgical
supplies; (ii) multispecialty 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 preopening 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.
(the "Acquisition") for 17,065,579 shares of its common stock. The
Acquisition was accounted for under the "purchase" method of
accounting, as described in Accounting Principles Board Opinion
No. 16 and interpretations thereof. The results of operations of
the Company subsequent to August 18, 1997 include the revenues and
expenses of RCII. RCII had revenues of $2,565 and net loss of
$(1,882) for the period August 18 to December 31, 1997.
Sources of Revenues
Sources of revenues for the years 1997, 1996 and 1995 follow:
1997 1996 1995
Laser refractive eye surgery centers $12,917 $3,715 $---
Growth rate 248% N/A
Multi-specialty surgery programs 3,064 4,665 6,621
Growth rate -34% -30%
Other 1,613 5,380 7,030
Growth rate -70% -23%
Total 17,594 13,760 13,651
The extent of the shift in the Company's future revenues is
dependent on the number of laser vision correction procedures.
Laser refractive surgery centers
Laser refractive surgery center revenue increased due to more
centers being opened in 1997 and the growth in the number of
procedures performed, including those applicable to RCII.
The following table illustrates the growth of laser vision
correction procedures performed at the Company's centers.
Historical Pro Forma
Wholly- Combined Wholly- Combined
owned owned
1997
Q4 2,888 3,296 2,888 3,296
Q3 2,375 2,790 3,196 3,611
Q2 1,506 2,078 2,973 3,543
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. Combined procedures include
those performed at investee centers. The Company records the
results of its investee centers using the equity method.
The growth and profitability of the Company are predicated on
increases in procedure volume. Industry sources estimate that
70,000 procedures were performed in the U.S. in 1996 and that
300,000 to 350,000 procedures will be performed in 1998. As more
people have the procedure performed the critical mass for word-of-mouth
referrals is attained and, together with marketing and
advertising, should result in increased procedure volume.
Multi-specialty surgery programs
At December 31, 1997, the Company manages multi-specialty laser
surgery programs at 13 medical facilities on a contract basis. At
December 31, 1996 the Company had contracts at 26 medical
facilities. 1996 revenue also includes one-time revenue of $725
from the implementation of programs in hospitals and investee
laser refractive surgery centers and contract cancellation fees.
The renewal of the Company's contracts with the hospital providers
has become increasingly difficult due to price pressures and the
lengthening of sales cycle. Hospital providers and other entities
are being driven to reduce costs and scaleback 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.
Expenses
Direct operating expenses increased compared to 1996. The increase
of direct operating expenses is 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. Certain of 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 $1,567 compared to
1996. The increase was primarily due to additional costs incurred
as a result of the acquisition of RCII. The cost controls
instituted at the end of 1996 minimized the increase for 1997. In
1997, the Company spent approximately $1,259 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 increase 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 1997 financial statements
are revenues of $414 and operating losses of $343 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 in connection with
these decisions. Costs of $620 associated with restructuring RCII
were also recorded as part of the purchase price. These costs
relate primarily to rent for closed centers and severance costs.
Costs of $899 were charged against these accruals in 1997.
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 acquired from Summit.
Interest expense increased primarily due to the increased
borrowings under the line of credit to fund current operating
needs and capital equipment, offset by the reduction in loans from
the principal shareholders.
In the first quarter of 1996 the Company sold its investment in
Continuum Biomedical, Inc., an investment accounted for using the
equity method of accounting, for $1,000. A gain of $546 is
recorded in other income.
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 from 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 centers. The Company opened eight wholly-owned and
four investee-owned centers in 1996. At December 31, 1996 there
were ten wholly-owned and five investee-owned centers operating.
The Company slowed its expansion in 1997 - two wholly-owned
centers were opened - to concentrate on making existing centers
profitable. During 1997, the Company closed one wholly-owned and
three investee-owned centers. During the last half of 1997 almost
every one of the remaining centers became profitable, primarily
due to increased procedure volume.
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
"enters 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. 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 line of credit ("Revolver") and a 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. Availability under The
Revolver was $1,359 at December 31, 1997.
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. The facility
further requires the Company to maintain $4,000 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.
As of January 1, 1998, the Company's open access concept and
management techniques are in place at the RCII laser refractive
eye surgery centers. Management anticipates that these changes,
together with the switch to VISX lasers at five of the centers,
will result in increased procedures and profitability in 1998.
During 1998 the Company will continue to focus on making its
centers profitable rather than expansion. This could result in
additional centers or possibly relocations if profitability
objectives are not achieved. The Company believes that procedures
will continue to increase in 1998 and will result in the laser
refractive eye surgery center business turning profitable. First
quarter 1998 procedures are ahead of the Company's forecast.
With the Facility expiring on September 30, 1998, the Company is
actively seeking a new financing package that will allow the
$5,900 of cash in escrow to be available or significantly reduced.
The Company believes that the cash flow resulting from the
procedure increase together with the freeing of restricted cash
will allow the Company to fund its activities without the need for
an increased credit facility. The Company is optimistic that it
can refinance the Facility; however, there can be no assurance
that the Company will be able to do such on satisfactory terms.
The Company is discussing a sale-leaseback transaction for certain
of its ophthalmic equipment and lasers with several leasing
companies. Funds generated from a sale-leaseback transaction would
be used to reduce the Company's existing bank debt. The Company is
also considering a private placement of equity or mezzanine
financing as a means to reduce its bank debt. However, there can
be no assurance that it can enter into such transactions or on
satisfactory terms.
Year 2000 Issue
Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the
century. If not corrected, many computer applications could fail
or create erroneous results by or at the Year 2000.
The Company's computer applications are pc-based and generally
utilize third-party vendor software. The Company has reviewed its
computer applications and determined that the cost of compliance
with the Year 2000 issue will be de minimus.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued
Statements No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosure about Segments of an Enterprise and Related
Information" which 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.
Item 7. Financial Statements.
The consolidated financial statements for the year ended December
31, 1997, are included in this Annual 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.
The information required by this item is incorporated by reference
to the Company's 1998 Proxy Statement to be filed on or prior to
April 21, 1998.
Item 10. Executive Compensation.
The information required by this item is incorporated by reference
to the Company's 1998 Proxy Statement to be filed on or prior to
April 21, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is incorporated by reference
to the Company's 1998 Proxy Statement to be filed on or prior to
April 21, 1998.
Item 12. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference
to the Company's 1998 Proxy Statement to be filed on or prior to
April 21, 1998.
PART IV
Item 13. Exhibits and Reports on Form 8K.
Exhibit
Number Description of Exhibit
3(a)(i) Amended Certificate of Incorporation
of Registrant Note A
3(a)(ii) Amended Certificate of Resignations as
to Interim Preferred Stock
3(b) 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) The LCA Surgery Center Real Estate Lease Note A
10(e) The LCA Surgery Center, Ltd.
Administrative Services Agreement Note A
10(f) Loan Agreement dated August 18, 1997
between Regristrant and
The Fifth Third Bank Note C
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney Note D
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. Incorporated by reference to Form 8-K filed August 18,
1997.
D. Contained on the first page of the signature pages
contained in this report.
(b) Reports on Form 8K
1) Form 8-KA amending the Form 8-K dated August 18,
1997 to include information required by Item 7.
Financial Statements and Exhibits
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 25, 1998 to be signed on its
behalf by the undersigned, thereunto duly authorized.
LCA-Vision Inc.
Date: March 25, 1998 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:
President and
/s/ Stephen N. Joffe Chief Executive March 25, 1998
Stephen N. Joffe Officer
Principal Financial and
Accounting Officer:
Chief Financial
/s/ Larry P. Rapp Officer March 25, 1998
Larry P. Rapp
Directors:
/s/ Stephen N. Joffe Director March 25, 1998
Stephen N. Joffe
/s/ William O. Coleman Director March 26, 1998
William O. Coleman
/s/ John H. Gutfreund Director March 27, 1998
John H. Gutfreund
/s/ John C. Hassan Director March 25, 1998
John C. Hassan
<PAGE>
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page Number
Description in this Report
Report of Independent Accountants 18
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995 19
Consolidated Balance Sheets
as of December 31, 1997 and 1996 20
Consolidated Statements of Shareholders' Investment
for the years ended December 31, 1997, 1996
and 1995 21
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996
and 1995 23
Notes to Consolidated Financial Statements 25
<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, 1997 and
1996, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three
years in the period ended December 31, 1997. 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 respects, the consolidated financial
position of LCA-Vision Inc. and its subsidiaries as of December
31, 1997 and 1996 and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
March 25, 1998
<PAGE>
LCA-VISION INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Dollars in thousands, except share data
Year Ended December 31,
1997 1996 1995
Net revenues:
Laser refractive eye surgery $12,917 $3,715
Multi-specialty laser surgery
programs 3,064 4,665 $6,621
Other 1,613 5,380 7,030
------ ------ ------
Total net revenues 17,594 13,760 13,651
Direct operating expenses 11,433 7,732 5,981
General and administrative expenses 9,299 7,327 6,305
Center pre-opening expenses 162 225
Depreciation and amortization 2,511 1,597 1,042
Repositioning accrual 1,100
------ ------ ------
Income (loss) from operations ( 6,911) (3,121) 323
Equity in income (loss) from
unconsolidated affiliates (27) ( 906) 40
Interest income 216 89 158
Interest expense (1,140) ( 770) ( 309)
Other income (expense) 77 51 10
------ ------ ------
Income (loss) before income tax (7,785) (4,057) 223
Income tax expense (68) (44)
------ ------ ------
Net income (loss) (7,853) (4,057) 179
Accrued dividend - Class B
preferred stock (183)
Amount applicable to income (loss)
per common share $(8,036) $ (4,057) $ 179
====== ====== ======
Income (loss) per common share
Basic $ (0.30) $ (0.21) (a)
Diluted $ (0.30) $ (0.21) (a)
Weighted average shares outstanding -
basic and diluted 26,709,184 19,609,505
(a) Note 2
The accompanying notes are an integral part of this statement
<PAGE>
LCA-VISION INC.
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $2,780 $ 724
Cash held in escrow 5,900
Accounts receivable, net 2,047 720
Prepaid expenses, inventory and other 1,892 1,229
------ ------
Total current assets 12,619 2,673
Property and equipment, net 18,462 9,456
Investment in affiliates 250 219
Goodwill, net 11,987 134
Other assets 1,209 999
------ ------
Total assets $44,527 $ 13,481
====== ======
LIABILITIES and SHAREHOLDERS' INVESTMENT
Current liabilities
Accounts payable $1,831 $ 783
Line of credit 6,641 3,438
Term loan2,998
Accrued liabilities and other 2,149 791
Capital lease obligations 543 639
Other 155 210
------ ------
Total current liabilities 14,317 5,861
Capital lease obligations 1,221 1,957
Obligations to shareholders 2,146 1,500
Other 129 2,965
------ ------
Total liabilities 17,813 12,283
Commitments and contingencies
Shareholders' investment
Preferred stock 2,522 2,522
Common stock 96 79
Additional paid-in capital 36,776 3,177
Accumulated (deficit) (12,446) (4,592)
Accrued preferred stock dividend (183)
Treasury stock, at cost ( 30)
Translation adjustment ( 21) 12
------ ------
Total shareholders' investment 26,714 1,198
------ ------
Total liabilities and shareholders'
investment $44,527 $13,481
====== ======
The accompanying notes are an integral part of this statement
<PAGE>
LCA-VISION INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
Dollars in thousands
Shares Amount
Class A Preferred Stock:
Balance at December 31, 1994
Shares issued to effect merger 1,668
-----
Balance at December 31, 1995,1996 and 1997 1,668
=====
Class B Interim Preferred Stock:
Balance at December 31, 1994 and 1995
Shares issued under shareholder debt
conversion 12.6 $ 2,522
------ --------
Balance at December 31, 1996 and 1997 12.6 $ 2,522
====== ========
Common Stock, $0.001 par value, 110,000,000
shares authorized
Balance at December 31, 1994 1,000,000 $ 4
Shares issued to effect merger 18,246,477 73
Sale of shares 292,500 1
---------- ------
Balance at December 31, 1995 19,538,977 78
Sale of shares 44,444 1
---------- ------
Other 6,591
Balance at December 31, 1996 19,590,012 79
Shares issued to acquire RCII 17,065,579 17
Sale of shares 20,128
Other (10,903)
---------- ------
Balance at December 31, 1997 36,664,816 $ 96
========== ======
Additional Paid-in Capital
Balance at December 31, 1994 $ 492
Shares issued to effect merger 2,229
Sale of shares 588
Distribution to shareholders (240)
-------
Balance at end of December 31, 1995 3,069
Sale of shares 100
Other 8
-------
Balance at December 31, 1996 3,177
Shares issued to acquire RCII 33,543
Sale of shares 56
-------
Balance at December 31, 1997 $ 36,776
=======
Accumulated (Deficit)Balance at December 31, 1994 $ 7,502
Net income for 1995 179
Distributions to shareholders (8,216)
-------
Balance at December 31, 1995 ( 535)
Net (loss) for 1996 (4,057)
-------
Balance at December 31, 1996 (4,592)
Net (loss) for 1997 (7,853)
Balance at December 31, 1997 $(12,446)
=======
LCA-VISION INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT (continued)
Dollars in thousands
Shares Amount
Accrued Preferred Stock Dividend
Balance at December 31, 1994, 1995 and 1996
Accrued dividend on class B interim preferred stock $ (183)
--------
Balance at December 31, 1997 $ (183)
========
Treasury Stock
Balance at December 31, 1994,1995 and 1996
Shares received in payment of advance 10,909 $ ( 30)
------ ------
Balance at December 31, 1997 10,909 $ ( 30)
====== =======
Translation Adjustment
Balance at December 31, 1994
Changes during 1995 $ 7
Balance at December 31, 1995 7
------
Changes during 1996 5
------
Balance at December 31, 1996 12
Changes during 1997 (33)
------
Balance at December 31, 1997 $ (21)
======
The accompanying notes are an integral part of this statement
LCA-VISION INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in thousands
Year Ended December 31,
1997 1996 1995
Cash flows from operating activities:
Net income (loss) $ ( 8,036)$( 4,057) $ 179
Adjustments to reconcile net (loss)
to net cash provided (used) in operating
activities:
Depreciation and amortization 2,511 1,597 1,042
Repositioning accrual 1,100
Equity in loss of unconsolidated
affiliates 27 906
(Gain) loss on sale of investments ( 576) 63
(Gain) on disposal of equipment ( 54) (121)
Provision for doubtful accounts receivable 145 153
Write off of intangibles 107 63
Changes in operating assets and
liabilities net of effect of acquisitions
(Increase) decrease
Accounts receivable ( 989) 1,044 148
Other current assets 334 (14) (26)
Increase (decrease)
Accounts payable 824 49 347
Accrued liabilities and other 219 ( 41) 393
----- ----- -----
Net cash provided (used) by operations (4,010) ( 894) 2,243
----- ----- -----
Cash flows from investing activities:
Cash acquired in business combination 10,007
Purchase of property and equipment (603) (2,747)(1,818)
Investment in unconsolidated affiliates (1,099)
Loans and advances to unconsolidated
affiliates ( 713)
Acquisition of business (64) ( 149) 67
Purchase of intangibles ( 41)( 168)
Proceeds from sales of equipment 133 339
Proceeds from sale of investment 1,000
----- ----- -----
Net cash provided (used) by investing
activities 9,340 (3,617)(1,580)
----- ----- -----
The accompanying notes are an integral part of this statement
LCA-VISION INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Dollars in thousands
Year Ended December 31,
1997 1996 1995
Cash flows from financing activities:
Net borrowing under line of credit 3,203 3,438
Proceeds from long-term notes payable 3,077 7,591
Repayment of long-term notes payable and
capitalized lease obligations (3,743) ( 545) (1,944)
Repayment of notes payable to
shareholders ( 354) ( 15)
Proceeds from sale of common stock 56 100 2,891
Distribution to shareholders ( 8,456)
Other 33 9 (4)
----- ----- -----
Net cash provided by financing
activities 2,626 2,648 63
----- ----- -----
Net increase (decrease) in cash 7,956 ( 1,863) 726
Cash at beginning of year 724 2,587 1,861
----- ----- -----
Cash at end of year $ 8,680 $ 724 $2,587
====== ===== =====
Supplemental disclosures:
Interest paid $ 985 $ 489
===== ======
Notes payable shareholders converted
to preferred stock $2,522
=====
Inventory sold for long-term notes
receivable $ 248
=====
Capital lease obligations entered into $2,265 $ (972)
===== =====
Transfer of equipment under capital
leaseto affiliate $ 486
=====
The accompanying notes are an integral part of this statement
<PAGE>
LCA-VISION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share information
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 operations 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 $6,391 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
$2,000 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") and laser in situ keratomileusis ("LASIK") for treatment
of myopia (nearsightedness).
The Company manages 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 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
marketing programs of the surgical center and educating 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.
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.
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 lesser of
the lease terms or their useful lives.
Per Share Data
In 1997 the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings per Share".
Statement 128 simplified the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per
Share". Statement 128 requires disclosure of basic and diluted
earnings per share. Basic earnings per share is net income to
common shareholders divided by weighted average common shares
outstanding; diluted earnings per share is net income to common
shareholders divided by weighted average common shares outstanding
plus potential common shares from dilutive securities such as
options and convertible securities. Statement 128 required
restatement of all prior-period earnings per share data presented.
The Company's weighted average shares for the diluted calculation
does not assume exercise of any stock options or conversion of
other securities since they would be antidilutive for 1997 and
1996 calculations.
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. It was not practicable to estimate the fair value of
borrowings under the Company's credit facility since there is no
liquid market for this debt.
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 dispersion 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
The Financial Accounting Standards Board recently issued
Statements No. 130, "Reporting Comprehensive Income" and No. 131
"Disclosures about Segments of an Enterprise and Related
Information" which 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.
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 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. The fair value of the assets acquired
consisted of $10,671, $9,511 and $12,802 for working capital,
equipment, and goodwill, respectively. Goodwill is being amortized
over 40 years using the straight-line method.
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 date on which Summit
owns less than five percent (5%) of the issued and outstanding
shares of the Company's common stock.
Summit and the Company have entered into a 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 to enable
Summit to sell such shares on any date after May 17, 1998.
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 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.
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 1997 financial statements
are revenues of $414 and operating losses of $343 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 in connection with
these decisions. Costs of $620 associated with restructuring RCII
were also recorded as part of the purchase price. These costs
relate primarily to rent for closed centers and severance costs.
Costs of $899 were charged against these accruals in 1997.
The Acquisition was 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 were 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 were not restated.
Unaudited pro forma data as though the Company had acquired RCII
as of the beginning of each of the years 1996: revenues - $16,778;
net (loss) - $(22,814); and (loss) per share - $(0.62); 1997:
revenues - $22,276; net (loss) - $(14,353); and (loss) per share -
$(0.39). 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 the respective
periods or 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, in cash and provide a letter of credit in the amount of $64,
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.
The Company may also be required to issue unregistered common
stock with a total market value of $280, or cash totaling $224,
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) has
been recorded as goodwill which is being amortized over 5 years
using the straight-line method.
c) Laser Centers of America, Inc. (Unaudited)
LCA was a subchapter S corporation prior to September 25, 1995.
Earnings of a subchapter S corporation are treated as taxable
income to the shareholders. The statement of operations does not
include a provision for income taxes during the period LCA was an
S corporation. If LCA had not been taxed as an S corporation a pro
forma provision for income taxes of $41 would have been recorded,
reducing net income to $138. Pro forma for earnings per share,
both basic and diluted, are $0.02 based on 5,659,208 pro forma
weighted average shares outstanding.
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31,
1997 1996
Receivables:
Trade receivables $ 2,142 $ 820
Allowance for doubtful accounts (95) (100)
------ ------
$ 2,047 $ (720)
====== ======
Prepaid Expenses, Inventory and Other:
Prepaid expenses $ 1,334 $ 206
Notes receivables 304 300
Inventory 103 245
Other 151 478
------ ------
$ 1,892 $ 1,229
====== ======
In December 1996, the Company sold its products inventory at book
value ($248) and received a two year note.
December 31,
1997 1996
Property and Equipment:
Land $ 375 $ 375
Building and improvements 4,933 4,929
Leasehold improvements 1,729 212
Furniture and fixtures 1,684 571
Equipment 13,231 2,967
Equipment held under capital leases 2,429 2,819
Vehicles 141 141
------ ------
24,522 12,013
Accumulated depreciation and
amortization (6,101) (3,063)
------ ------
18,421 8,953
Construction in progress 41 503
$ 18,462 $ 9,456
======== ========
Depreciation expense was $2,322; $1,503; and $885 in 1997, 1996
and 1995, 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.
<PAGE>
December 31,
1997 1996
Other Assets
Deposits - lasers $ 262
Organization costs, net $ 670
Long-term receivables 441
Other 539 296
------ ------
$ 1,209 $ 999
====== ======
December 31,
1997 1996
Accrued Liabilities and Other
Accrued interest - shareholder notes $ 358
Accrued wages 20
Other $ 2,149 413
------ ------
$ 2,149 $ 791
====== ======
4. CREDIT ARRANGEMENTS
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 new facility consists of an $8
million line of credit and a term loan in the amount of $3,053.
The 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 line of credit is payable monthly. The term
loan is payable in 14 monthly installments of $14 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 collateralized 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; defined as the sum of shareholders'
investment, obligations due shareholders, and accrued preferred
stock dividends; 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 without
the consent of the lender.
At December 31, 1996, the Company had a mortgage payable
approximating $3,100. The proceeds from the $3,053 term loan were
used to pay the balance of the mortgage at August 18, 1997.
The Company has a note payable collateralized by certain laser
equipment. The note requires monthly payments of principal and
interest of $3 (Canadian) and bears interest at the Royal Bank of
Canada prime rate plus 1.75%.
<PAGE>
5. OBLIGATIONS TO SHAREHOLDERS
Obligations to shareholders is comprised of:
1997 1996
Notes payable - shareholders $1,500 $1,500
Accrued interest 463
Accrued dividends on preferred
stock - Series B 183
----- -----
$2,146 $1,500
===== =====
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 $2,522 of their notes into Class
B preferred stock (note 7).
In connection with the acquisition of RCII, the notes payable-shareholders were
amended to limit payment of principal and
accrued interest 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. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company is an investor in two entities that own and operate
laser eyecare surgery centers:
Ownership
Percentage
The Baltimore Laser Sight Center, Ltd. 45%
Silmalaseri Oy 43
The Company wrote off its investments in Excimer Associates LLC
and The Georgia Laser Sight Center, Ltd. resulting in a charge to
income of $250 recorded in the third quarter of 1997.
The Company provides a variety of fee-based services to its
equity investee, The Baltimore Laser Sight Center, Ltd. Revenue
for management services performed for the investees was $ 162 and
$ 418 in 1997 and 1996 respectively. The Company was reimbursed
approximately $ 286 for marketing services performed on behalf of
the investees in 1997.
Summary financial information for these investments reported on
the equity method of accounting is as follows:
1997 1996
Financial Position:
Current assets $ 597 $1,113
Total assets 1,364 2,189
Total liabilities 1,057 2,479
Members' equity (deficit) 307 (209)
Operating Results:
Revenue 3,241 1,614
Net (loss) ( 114) (2,610)
In the first quarter of 1996 the Company sold its investment in
Continuum Biomedical, Inc. which had been accounted for using the
equity method for $1,000. Other income includes a gain of $546
from this sale.
7. 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 consists of: Class A, $.001 par value 1,688 shares
authorized, 1,688 shares issued ($68 aggregate liquidation
preference); Class B, $.001 par value, 7% dividend - First Interim
Series, 6 shares issued ($1,200 aggregate liquidation preference),
and Second Interim Series, 6.6 shares issued ($1,320 aggregate
liquidation preference).
In connection with the acquisition of RCII, 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 $2,000 plus all
accrued but unpaid dividends on each such share at the time of
conversion.
8. INCOME TAXES
Provisions for income taxes in 1997 and 1995 consist primarily of
foreign income taxes. There was no provision for domestic income
taxes in 1997 and 1996 due to operating losses.
Significant components of the Company's deferred tax assets and
liabilities are:
December 31,
1997 1996
Net operating loss carryforward $12,320 $1,000
Accounts receivable 140 17
Inventories 144 70
Marketable securities 138 138
Property and equipment 195 195
Notes payable to shareholders 185 143
Other 262 47
Equity investments 115 330
------ -----
Net deferred tax assets $13,499 $1,940
====== =====
Valuation allowance $(13,499) $(1,940)
====== =====
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, 1997, the Company had net operating loss
carryforwards for income tax purposes of approximately $30,800
which expire in 2011 and 2012. As a result of the RCII
acquisition, the Company acquired approximately $15,000 of net
operating loss carryforwards which are subject to utilization
limitations pursuant to Section 382 of the Internal Revenue Code.
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 for 1995.
9. LEASES
The Company leases certain office space for its laser refractive
surgery centers under noncancellable operating leases and its
lasers under capital lease arrangements. The Company has $1,100 on
deposit to secure letters of credit for certain of its operating
leases.
Future minimum payments are:
Capital Operating
Leases Leases
1998 $627 $2,950
1999 627 2,823
2000 606 2,481
2001 63 1,236
2002 313
Thereafter 176
----- -----
1,923 $ 9,979
======
Less amounts
representing interest (159)
-----
Capital lease obligations 1,764
Less current portion (543)
-----
$ 1,221
=====
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. The plan reserves a
maximum of 2,500,000 shares of common stock and provides that
awards under the plan shall be determined by the committee of the
Board of Directors ("Committee") designated to administer 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 and 1997 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:
Weighted
Number of Average
Shares Exercise Price
Options outstanding at
December 31, 1995 -0-
Granted at $2.25-$5.25 per share 1,996,750 $4.92
Forfeited at $5.25 per share (178,125) 5.25
---------
Options outstanding at
December 31, 1996 1,818,625 4.06
Granted at $2.75-$4.625 per share 647,500 3.26
Forfeited at $3.00 - $5.25 per share (634,563) 4.95
---------
Options outstanding at
December 31, 1997 1,831,562 4.03
=========
Options exercisable at December 31,
1996 at $2.56 - $5.25 per share 334,113 4.77
1997 at $2.25-$5.25 per share 405,913 4.34
Available for future option
grants at December 31, 1997 668,438
The weighted average remaining contractual life of the options
outstanding at December 31, 1997 is 8.7 years.
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. Such options become
exercisable at the rate of 20% per year 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. During
1997 options for 151,250 shares with an exercise price of $3.25
per share were granted; options for 75,000 shares with an exercise
price of $8.00 per share were forfeited. At December 31, 1997
15,000 shares at an option price of $8.00 per share are
exercisable and 1,023,750 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 average fair value of all options granted was $3.26 per
share in 1997 and $4.92 per share in 1996. Compensation expense
was immaterial for 1997 and 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 be
as follows:
1997 1996
Net (loss) As reported $(8,036) $(4,057)
Pro forma (9,588) (4,863)
(Loss) per share As reported ( 0.30) ( 0.21)
Pro forma ( 0.36) ( 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 Black-Scholes option-pricing model with the following
assumptions: 1997 - dividend yield of 0%; risk-free interest rates
ranging from 5.46% to 5.56%; expected volatility of 98% and an
expected holding period of five years. 1996 - dividend yield of
0%; expected volatility of 98%; risk-free interest rates ranging
from 5.34% to 6.82%; and an expected holding period of five years.
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 1997, 1996 or
1995.
11. RELATED PARTY TRANSACTIONS
The Company's President is the principal stockholder 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, 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
$74 and $162 for the years 1997, and 1996 respectively. Included
in accounts receivable at December 31, 1997 is $63 due from
Surgery Center.
Until August 1997 the Company's President was the guarantor of the
bank line of credit of up to $8,000 and the mortgage note in the
amount of $3,080. There was no compensation for these personal
guarantees. The new credit facility (note 4) does not require
personal guarantees.
The Company provided a $60 advance to a former officer in 1995.
The advance was 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 of the balance
due by exchanging 10,909 shares of the Company's common stock at
the then market value. The advance and accrued interest thereon
was repaid on October 31, 1997.
12. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks
on a claims-made basis. A lawsuit filed against the Toronto
Laservision Centre was dismissed without cost in 1996.
The Company is a defendant in a case entitled Cabrini Development
Council, et al. V. LCA-Vision Inc., et al., which was commenced in
October, 1997 in the Supreme Court of the State of New York,
County of New York and subsequently removed to the United States
District Court for the Southern District of New York, in November,
1997. Various employees, officers, directors and former directors
of the Company are co-defendants. The case 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 $4,500 punitive damages which
total not less than $2,000, as well as the creation of a
constructive trust over the Company's operations for the benefit
of the LLC. The Company believes that the plaintiffs' claims are
without merit and intends to vigorously defend the action. It has
made a motion to dismiss the complaint on various grounds. In
response, the plaintiffs filed a motion for leave to amend the
complaint. The Company has opposed such motion and cross-moved for
attorneys' fees incurred by the Company in opposing the
plaintiffs' motion. These motions have not yet been ruled on by
the court.
In the opinion of management the outcome will not have a material
adverse effect on the Company's financial position or results of
operations.
LCA VISION INC.
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
LCA-Vision (Canada) Inc. Ontario, Canada
The Toronto Laservision Centre (1992) Inc. Ontario, Canada
Toronto Lasersight Centre Ontario, Canada
LCA-Vision (Ohio), Inc. Ohio
938051 Ontario, Inc. Ontario, Canada
Refractive Centers International, Inc. Delaware
LCA-VISION INC.
Exhibit 23
to
Form 10-KSB for 1997
Consent Of Independent Accountants
We consent to the incorporation by reference in the registration
statements of LCA-Vision Inc. on Form S-8 (File No. 333-07621) and
on Forms S-3 (File No's. 333-41101 and 333-39179) of our report
dated March 25, 1998 on our audits of the consolidated financial
statements of LCA-Vision Inc. as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31,
1997, 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 27,1998
<PAGE>
Exhibit 3(a)(ii)
AMENDED CERTIFICATE OF DESIGNATION
INTERIM SERIES CLASS B PREFERRED STOCK
OF
LCA-VISION INC.
LCA-Vision Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that, pursuant to authority
conferred upon the Corporation's Board of Directors by the
Corporation's Restated Certificate of Incorporation, as amended,
and pursuant to Section 151 of Title 8 of the Delaware Code of
1953, said Board of Directors, by the unanimous written consent of
its members dated July 22, 1997, duly filed with the minutes of
the Board, adopted a resolution providing for amendments to the
Certificate of Designation of the Interim Series Class B Preferred
Stock, the amended text of which is appended hereto as Exhibit A
and made a part hereof.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by Susan B. Zaunbrecher, its Assistant
Secretary, this 18th day of August, 1997.
LCA-VISION INC.
By: /s/ Susan B. Zaunbrecher
Susan B. Zaunbrecher
Assistant Secretary
EXHIBIT A
AMENDED TEXT OF CERTIFICATE
OF DESIGNATIONS
RESOLVED, that pursuant to the authority conferred upon the
Board of Directors of LCA-Vision Inc., a Delaware corporation (the
"Corporation") by Article Fourth, Paragraph (b)(B) of the
Corporation's Certificate of Incorporation, as amended, the Board
of Directors hereby establishes a series of six shares of the
authorized Class B Preferred Stock of the Corporation to be
designated as the Interim Series of Class B Preferred Stock, par
value $.001 per share (hereinafter referred to as "Interim Series
Class B Preferred Stock"), and fixes and determines the rights,
preferences, privileges, limitations restrictions and relative
rights of such Interim Series Class B Preferred Stock as follows:
1. Dividends. The holders of the Interim Series Class B
Preferred Stock shall be entitled to receive, on a pari passu
basis out of any funds legally available therefor, dividends on
each outstanding share of Interim Series Class B Preferred Stock,
payable in preference and priority to any payment of any dividend
on Common Stock or Class A Preferred Stock, at the rate of 7% of
the price paid per share in exchange for the initial issuance of
such shares, per annum. Such dividends shall be paid to the
holders of Interim Series Class B Preferred Stock when and as
declared by the Board of Directors; provided, however, that the
Board of Directors shall not be obligated to declare such
dividends. If dividends are not declared on the Interim Series
Class B Preferred Stock at the aforesaid rate in any year, then
such dividends shall nevertheless accumulate. If dividends are
declared and paid with respect to any Preferred Stock, they must
be declared and paid on all outstanding Interim Series Class B
Preferred Stock contemporaneously. No dividends shall be declared
or paid on the Common Stock until dividends on the Interim Series
Class B Preferred Stock have been declared and paid or set aside
for payment at the rate set forth above for the current year and
all accumulated dividends on the Interim Series Class B Preferred
Stock have been paid. Upon conversion of a share of Interim
Series Class B Preferred Stock into Common Stock, all declared but
unpaid dividends on such share shall be payable by the Corporation
to the holder of such share and all accumulated but undeclared
dividends shall be forfeited. Dividends with respect to shares of
Interim Series Class B Preferred Stock shall begin to accumulate
on the date of issuance thereof by the Corporation. No
accumulated dividend shall bear or accrue interest. Accumulated
dividends shall be accrued on a per diem basis.
2. Liquidation Preference.
(a) Preference. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntarily
or involuntarily, the holders of Interim Series Class B Preferred
Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the
Corporation to the holders of Series A Preferred Stock and/or
Common Stock of the Corporation, an amount equal to $200,000 per
share of Interim Series Class B Preferred Stock, plus a further
amount equal to any accumulated but unpaid dividends on such
shares.
If upon such liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation are insufficient to
provide for the cash payment described above to the holders of
Interim Series Class B Preferred Stock, such assets as are
available shall be paid ratably (giving proportionate effect to
the different liquidation preferences of each series of Preferred
Stock) to the holders of Interim Series Class B Preferred Stock.
(b) Reorganization or Merger. A reorganization or
merger of the Corporation with or into any other corporation or
corporations, or a sale of all or substantially all of the assets
of the Corporation shall not be deemed to be a liquidation within
the meaning of this Section 2; provided that the holders of
Interim Series Class B Preferred Stock, Class A Preferred Stock,
and Common Stock shall be paid in cash or in securities received
from the acquiring corporation or in a combination thereof (in the
same proportions as the consideration received in the
transaction). Any securities to be delivered to the holders of
the Class A Preferred Stock, Interim Series Class B Preferred
Stock, and Common Stock upon a merger, reorganization or sale of
substantially all of the assets of the Corporation shall be valued
as follows:
(i) If traded on a securities exchange, the
value shall be deemed to be the average of the closing prices of
the securities on such exchange over the 30-day period ending
three business days prior to the closing;
(ii) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid prices
over the 30-trading day period ending three trading days prior to
the closing; and
(iii) If there is no active public market, the
value shall be the fair market value thereof, as mutually
determined by the Corporation and the holders of not less than a
majority of the outstanding shares of Interim Series Class B
Preferred Stock, provided that if the Corporation and the holders
of a majority of the outstanding shares of Interim Series Class B
Preferred Stock are unable to reach agreement, then by independent
appraisal by an investment banker hired and paid by the
Corporation, but acceptable to the holders of a majority of the
outstanding shares of Interim Series Class B Preferred Stock.
(c) Noncash Distributions. If any of the assets of
the Corporation are to be distributed other than in cash under
this Section 2 or for any purpose, then the Board of Directors of
the Corporation shall promptly engage independent competent
appraisers acceptable to the holders of a majority of the
outstanding shares of Interim Series Class B Preferred Stock, to
determine the value of the assets to be distributed to the holders
of Class A Preferred Stock, Interim Series Class B Preferred
Stock, or Common Stock. The Corporation shall, upon receipt of
such appraiser's valuation, give prompt written notice to each
holder of shares of Interim Series Class B Preferred Stock of the
appraiser's valuation.
3. Voting Rights.
Each share of Interim Series Class B Preferred Stock
shall be entitled to the number of votes equal to the number of
shares of Common Stock into which each share of Preferred Stock
could be converted, pursuant to Section 4 hereof, on the record
date for the vote or written consent of stockholders and, except
as otherwise required by law, shall have voting rights and powers
equal to the voting rights and powers of the Common Stock. The
holder of each share of Interim Series Class B Preferred Stock
shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Corporation and the holders of
Interim Series Class B Preferred Stock shall vote together with
holders of the Common Stock upon all matters submitted to a vote
of stockholders, except those matters required to be submitted to
a class vote by law.
4. Conversion. The holders of the Interim Series Class B
Preferred Stock shall have conversion rights as follows:
(a) Right to Convert. From and after July 1, 1997,
each share of Interim Series Class B Preferred Stock shall be
convertible without the payment of any additional consideration by
the holder thereof and, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of
the Corporation or any transfer agent for the Interim Series Class
B Preferred Stock. Each share of Interim Series Class B Preferred
Stock shall be convertible into the number of fully paid and
nonassessable shares of Common Stock which results from dividing
(i) the Conversion Value (as hereinafter defined) per share in
effect at the time of conversion by (ii) the per share Conversion
Price (as hereinafter defined) per share in effect at the time of
conversion. The Conversion Value per share of Interim Series
Class B Preferred Stock shall be the sum of $200,000 plus all
accrued but unpaid dividends, on a per share basis, on the Interim
Series Class B Preferred Stock. The per share Conversion Price of
Interim Series Class B Preferred Stock shall be $3.50 per share.
(b) [Deleted]
(c) Mechanics of Conversion. Before any holder of
Interim Series Class B Preferred Stock shall be entitled to
convert any shares thereof into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer
agent for the Interim Series Class B Preferred Stock. Such holder
shall give written notice to the Corporation at such office that
he, she or it elects to convert the number of shares of Interim
Series Class B Preferred Stock specified in such notice. The
Corporation shall, as soon as practicable after its receipt of
such notice or after the date of automatic conversion, as the case
may be, issue and deliver at such office to such holder a
certificate or certificates for the number of New Shares and/or
shares of Common Stock, as the case may be, to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on
the date of such surrender of the shares of Interim Series Class B
Preferred Stock to be converted and the person or persons entitled
to receive the New Shares and/or shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the
record holder or holders of such shares on such date.
(d) Fractional Shares. In lieu of any fractional
shares to which the holder of Interim Series Class B Preferred
Stock would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the fair market value of one
share of such stock as determined by the Board of Directors of the
Corporation. Whether or not fractional shares are issuable upon
such conversion shall be determined on the basis of the total
number of shares of Interim Series Class B Preferred Stock of each
holder at the time converting into New Shares and/or shares of
Common Stock and the number of New Shares and/or shares of Common
Stock issuable upon such aggregate conversion.
(e) No Impairment. The Corporation will not through
any reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4
and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the
holders of Interim Series Class B Preferred Stock against
impairment.
(f) Notices of Record Date. In the event of any
taking by the Corporation of a record of the holders of any class
of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or
any other securities or property or to receive any other right,
the Corporation shall mail to each holder of Interim Series Class
B Preferred Stock at least ten days prior to such record date, a
notice specifying the date on which any such record is to be taken
for the purpose of such dividend or distribution or right, and
the amount and character of such dividend, distribution or right.
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