U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT.
For the transition period from __________ to __________
Commission file number 0-27610
LCA-Vision Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2882328
_______________________________ ____________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7840 Montgomery Road, Cincinnati, Ohio 45236
(Address of principal executive offices)
(513) 792-9292
(Issuer's telephone number)
___________________________________________________________________
(Former name, former address and formal fiscal year, if changes
since last report.)
Check whether then issuer (1) filed all reports required to be filed
by Section 3 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for
the past 90 days.
Yes _____X_____ No __________
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
38,286,759 shares as of October 31, 1998.
Transitional Small Business Disclosure Format (check one):
Yes __________ No____X_____
<PAGE>
LCA-VISION INC.
INDEX
Facing Sheet
Index
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet,
September 30, 1998
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months ended September 30, 1998 and
1997
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1998 and 1997
Notes to Unaudited Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
LCA-VISION INC.
Condensed Consolidated Balance Sheet
September 30, 1998
(unaudited)
Dollars in thousands September 30,
1998
ASSETS
Current assets
Cash and cash equivalents $ 3,881
Accounts receivable, net 1,603
Prepaid expenses, inventory and other 1,807
-----------
Total current assets 7,291
Property and equipment, net 10,179
Investment in affiliates 610
Goodwill, net 8,704
Other assets 3,905
-----------
Total assets $ 30,689
===========
IABILITIES and SHAREHOLDERS' INVESTMENT
Current liabilities
Accounts payable $ 1,205
Accrued liabilities and other 2,848
Debt obligations due in one year 608
-----------
Total current liabilities 4,661
Capital lease obligations 984
Obligations to shareholders 257
Long-term debt 1,944
-----------
Total liabilities 7,846
Commitments and contingencies
Shareholders' investment
Preferred stock 10,850
Common stock 99
Additional paid-in capital 38,564
Accumulated (deficit) (26,051)
Accrued preferred stock dividend (572)
Treasury stock, at cost (30)
Translation adjustment (17)
-----------
Total shareholders' investment 22,843
-----------
Total liabilities and shareholders' investment $ 30,689
===========
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.<PAGE>
LCA-VISION INC.
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1998 and 1997
(unaudited)
Dollars in thousands, except per share amounts
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues:
Laser refractive eye
surgery centers $8,509 $3,948 $23,423 $7,977
Multi-specialty
laser surgery
programs 431 657 1,338 2,142
Other 156 351 562 1,439
------ ------ ------ -------
Total net revenues 9,096 4,956 25,323 11,558
Direct operating expenses 6,332 2,711 17,987 7,123
General and administrative
expenses 2,749 2,902 7,327 6,310
Center pre-opening expenses 163
Depreciation and
amortization 692 611 2,815 1,443
Restructuring provision 1,100 10,500 1,100
------- ------- ------- --------
(Loss) from operations (676) (2,368) (13,306) (4,581)
Equity in income (loss) from
unconsolidated affiliates 108 6 144 (26)
Interest income 106 10 302 45
Interest expense (108) (267) (698) (775)
Other income 37 44 98 57
------- ------- ------- --------
(Loss) before income tax (533) (2,575) (13,460) (5,280)
Income tax expense (8) 6 (145) (56)
------- ------- ------- --------
Net (loss) (541) (2,569) (13,605) (5,336)
Accrued preferred stock
dividend 218 45 390 138
------- ------- ------- --------
Amount applicable to (loss)
per common share $ (759) $ (2,614) $(13,995) $ (5,474)
------- ------- ------- --------
(Loss) per common share
Basic $(.02) $(.08) $(.38) $(.23)
Diluted $(.02) $(.08) $(.38) $(.23)
<PAGE>
Weighted average common
shares outstanding
Basic and
Diluted 37,162,537 30,976,290 36,881,845 23,390,639
Operating (loss) $(676) $(2,368) $(13,306) $(4,581)
Restructuring provision 1,100 10,500 1,100
Depreciation and
amortization 692 611 2,815 1,443
------ ------- -------- -------
EBITDA $ 16 $ (657) $ 9 $(2,038)
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.<PAGE>
LCA-VISION INC.
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997
(unaudited)
Dollars in thousands
For the Nine Months
Ended September 30,
1998 1997
---- ----
Cash flows from operating activities:
Net (loss) $ (13,605) $ (5,336)
Adjustments to reconcile net (loss)
to net cash (used) in operating activities:
Depreciation and amortization 2,815 1,443
Equity in earnings of unconsolidated
affiliates (144) 26
Restructuring provision 10,500 1,100
Other 41
Changes in operating assets and
liabilities
(Increase) decrease
Accounts receivable 444 (901)
Other current assets 85 (154)
Increase (decrease)
Accounts payable (626) 125
Accrued liabilities and other (259) 1,308
-------- --------
Net cash (used) by operations (790) (2,348)
Cash flows from investing activities:
Cash acquired in business combination 10,007
Purchase of property and equipment (1,811) (434)
Advances to affiliates (570) (70)
Advances to officers/shareholders (2,100)
Purchase of certificate of deposit (2,100)
Proceeds from sales of equipment 1,061
-------- --------
Net cash provided (used) by investing
activities (5,520) 9,503
Cash flows from financing activities:
Repayment of bank borrowings (9,651) 3,471
Bank borrowings 2,100 3,080
Repayment of long-term obligations (395) (3,597)
Proceeds from sale of 6% convertible
preferred stock 9,463
Proceeds from exercise of stock options 51
Proceeds from sale of common stock 51
Other (57) (21)
-------- --------
Net cash provided (used) by financing
activities 1,511 2,984
-------- --------
Net increase (decrease) in cash (4,799) 10,139
Cash at beginning of period 8,680 724
-------- --------
Cash at end of period $ 3,881 $10,863
======== ========
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
LCA-VISION INC.
Notes to Condensed Consolidated Financial Statements
for the Three and Nine Months Ended September 30, 1998 and 1997
(unaudited)
Dollars in thousands, except per share and share information
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The September 30, 1998 and 1997 financial data are unaudited;
however, in the opinion of the Company, such data include all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the interim periods.
Business
LCA-Vision Inc. ("LCA-Vision" or the "Company") is a leading
developer and operator of free-standing laser refractive surgery
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 laser in situ keratomileusis
("LASIK") and photorefractive keratectomy ("PRK") for treatment of
myopia (nearsightedness), astigmatism and hyperopia
(farsightedness).
The Company also manages laser and minimally invasive, hospital
surgical programs at various medical facilities on a contract 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 the
Company and its wholly-owned subsidiaries after elimination of
intercompany balances and transactions.
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.
Per Share Data
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. The 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 1998 and 1997
calculations.
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.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") recently issued
Statements No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosure about Segments of an Enterprise and Related
Information". Statement 130 was adopted in the first quarter of 1998
and has not had a material impact on financial disclosures because
net income approximates comprehensive income. Statement 131 is
effective for the year ending December 31, 1998 and will be adopted
at that time.
In June 1998 the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement 133 is
effective for fiscal quarters of fiscal years beginning after June
15, 1999. The Company currently has no such financial instruments.
2. SHAREHOLDERS' INVESTMENT
On May 11, 1998 the Company issued 10,000 shares of 6% Series B-1
Convertible Preferred Stock ("Convertible Preferred Shares") for
$10,000. Each share has a par value of $0.001 per share and a stated
value of $1,000 per share. The Convertible Preferred Shares were
recorded at stated value less issuance costs of $593.
Each Convertible Preferred Share is convertible into LCA-Vision
common stock at the lesser of $3.90625 per share or the average of
the four (4) lowest per share market values (which need not occur on
consecutive trading days) of its common stock during the twenty-two
(22) trading days prior to the applicable conversion notice. The
purchasers of the Convertible Preferred Shares may convert their
shares as follows: up to 33% in the first 90 days following
issuance; up to 66-2/3% in the first 180 days following issuance;
and any and all unconverted shares from and after 180 days following
issuance. The Company may require conversion if its common stock
trades at greater than $5.46875 per share for fifteen (15)
consecutive trading days.
Dividends on the Convertible Preferred Shares are cumulative from
the date of issuance and are payable on a quarterly basis beginning
June 30, 1998. The Company has the option to pay the dividends in
cash or in shares of its common stock.
During the three months ended September 30, 1998, 1,135 shares of
Convertible Preferred stock and accrued dividends of $23 were
converted into 796,251 shares of common stock. Through November 6,
1998, an additional 1,970 shares of Convertible Preferred stock and
dividends of $56 were converted into 2,061,302 shares of common
stock.
On May 4, 1998, the Company issued 200,000 shares of its common
stock to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
as compensation for certain investment banking services related to
the acquisition of Refractive Centers International, Inc. The shares
were recorded at their fair value on the date of issuance.
3. CREDIT ARRANGEMENTS
On June 29, 1998 the Company entered into an $8 million credit
facility with the Provident Bank ("Provident"). In addition, the
company repaid the borrowings from, and terminated its credit
relationship with The Fifth Third Bank.
The new credit facility, as amended, matures on June 30, 2000 and
bears interest at 1/2% above Provident's prime rate. Interest on
borrowings under the line of credit is payable monthly. The facility
is collateralized by a blanket lien on all Company assets including
a mortgage on the Company's headquarters building.
The facility can be used to support letters of credit totaling not
more than $2 million. Availability under the facility will be
reduced in an amount equal to the capital costs financed under a
lease facility provided by Information Leasing Corporation, an
affiliate of Provident. The lease facility maximum is $2.5 million.
In addition, the Company has the option to convert up to $3.5
million of borrowings under the facility to a term loan.
On August 21, 1998 the Company borrowed $2.1 million from Provident
under the credit facility on a term loan basis. The loan bears
interest at 7.45% and requires monthly installments of $12 plus
interest until June 30, 2002 at which time the remaining principal
balance of $1.867 million becomes payable. The proceeds were used to
purchase a certificate of deposit from Provident that matures on
June 30, 2002. The certificate of deposit is recorded in other
assets and interest is paid monthly at 5.7%.
The new credit facility requires the Company to (i) maintain
tangible net worth, defined as the sum of shareholders investment
less goodwill of at least $14 million; (ii) permit the ratio of
total liabilities less subordinated debt to tangible net worth to be
greater than .75 to 1; and (iii), beginning with the quarter ended
September 30, 1998, permit the ratio of the trailing twelve month
EBITDA to the sum of current maturities of senior debt and
capitalized leases plus interest expense to be less than 1.25 to 1.
4. RESTRUCTURING PROVISION
During the second quarter of 1998, the Company implemented a plan to
restructure its operations by closing seven (7) of its centers,
primarily centers acquired. Costs associated with the restructuring
include $7,287 related to the write-off of goodwill and leasehold
improvements and $677 for the accrual of lease terminations and
employee severance costs. As a result of the closings, the Company
has certain lasers in storage. The restructuring provision includes
$2,536 related to the write-down of these lasers to their net
realizable value.
5. ACQUISITIONS
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.
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 for the three months and nine months ended
September 30, 1997 as though the Company had acquired RCII as of the
beginning of 1997 are:
Three Months Nine Months
September 30, 1997 September 30, 1997
------------------ ------------------
Revenues $6,186 $16,240
Net (loss) (4,168) (11,791)
(Loss) per share (0.11) (0.32)
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 period or of
results which may occur in the future.
6. OBLIGATIONS TO SHAREHOLDERS
Obligations to shareholders at September 30, 1998 is comprised of:
Notes payable - shareholders $1,500
Accrued interest 542
Accrued dividends on preferred
stock - Series B 315
-------
Less: note receivable -
shareholder (2,100)
-------
$ 257
=======
The notes payable - shareholders mature on September 25, 2005, and
bear interest at 6.91%. 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. The
notes are subordinate to borrowings under the Provident credit
facility.
On September 1, 1998 the Company loaned $2.1 million to its
President and principal shareholders. The loan, which is
collateralized by the notes to shareholders and accrued interest
thereon and accrued Interim Series preferred stock dividends, bears
interest at 8.5% per annum and matures on September 26, 2005.
7. 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. In June 1998 the Company purchased the
leasehold improvements previously paid for by the Surgery Center for
$872, the book value at the time of purchase. During the three
months ended September 30, 1998 the Company advanced $6 to the
Surgery Center and $576 for the nine months ended September 30, 1998
to the Surgery Center. As a result of these advances, the Company is
required to record its share of the operating losses of the Surgery
Center using the equity method of accounting. The Company recorded
losses of $69 for the three months ended September 30, 1998 and
$265 for the nine months ended September 30, 1998. Included in other
assets at September 30, 1998, is $738 due from the Surgery Center.
8. COMMITMENTS AND CONTINGENCIES
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 are
pending.
In the opinion of management the outcome will not have a material
adverse effect on the Company's financial position or results of
operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of
Operations.
This Quarterly Report on Form 10-Q 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
LCA-Vision Inc. ("LCA-Vision" or the "Company") is a leading
developer and operator of free-standing laser refractive eye surgery
centers. The laser refractive eye surgery centers operated by the
Company provide the facilities, equipment and support services for
performing various corrective eye surgeries that employ
state-of-the-art laser technologies. The laser vision correction
surgeries performed in the Company's centers primarily include laser
in situ keratomileusis ("LASIK") and photorefractive keratectomy
("PRK"). On November 3, 1998, the Company received notice that the
FDA had approved the VISX Star S2 excimer laser to treat
farsightedness (hyperopia). The VISX laser, which the Company has in
each of its U.S. centers, can now treat nearsightedness, myopic
astigmatism, and hyperopia. The Company also manages multi-specialty
laser surgery programs at medical facilities on a contract basis.
The Company derives its revenue from three sources: (i) fees for
surgeries performed at its laser refractive eye surgery centers,
(ii) contractual fees for managing multi-specialty laser surgery
programs, and (iii) fees for marketing and education programs;
management fees for operating laser vision correction centers of
investees; and miscellaneous sources.
The Company classifies operating expenses as follows: (a) direct
operating expenses which include: (i) laser refractive eye surgery
centers -- labor, physician fees, royalty fees (paid to the
manufacturers of the FDA-approved lasers of $250 per procedure),
facility rent and utilities, and surgical supplies; (ii)
multi-specialty laser surgery programs - - labor; and (iii) other
services and products -- labor and cost of products sold; (b)
general and administrative expenses which primarily include
marketing program costs, headquarters staff expenses and other
overhead costs; (c) center pre-opening expenses which include direct
costs incurred prior to opening a laser vision correction center;
and (d) depreciation and amortization.
Results of Operations
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 for the
three and nine months ended September 30, 1997 include the revenues
and expenses of RCII subsequent to August 18, 1997.
Sources of Revenues
Sources of revenues for the three and nine months ended September
30, 1998 and 1997 were (dollars in thousands):
Three Months Nine Months
1998 1997 1998 1997
----- ----- ----- -----
Laser refractive eye surgery
centers $8,509 $3,948 $23,423 $7,977
Multi-specialty surgery
programs 431 657 1,338 2,142
Other 156 351 562 1,439
------- ------- ------- -------
Total $9,096 $4,956 $25,323 $11,558
======= ======= ======= =======
Laser refractive eye surgery centers
The Company's results of operations in any period are significantly
affected by the number of laser refractive eye surgery centers
operating and the number of laser vision correction procedures
performed.
Revenues from the laser refractive eye surgery centers generally
include three components: facility fee, royalty fee, and medical
professionals fee. Certain states prohibit the Company from
practicing medicine, employing physicians to practice medicine on
the Company's behalf or employing optometrists to render optometry
services on the Company's behalf. Revenues from the laser refractive
eye surgery centers in such states do not include the medical
professionals fee component. The contribution to fixed and
discretionary costs from procedures performed at laser refractive
eye surgery centers for the three and nine months ended September
30, 1998 and 1997 were (dollars in thousands, except per procedure
information):
Three Months Nine Months
1998 1997 1998 1997
---- ---- ---- ----
Revenue $8,509 $3,948 $23,423 $7,977
Medical professional and
royalty fees 3,951 1,252 10,735 3,404
------ ------ ------- ------
Contribution $4,558 $2,696 $12,688 $4,573
====== ====== ======= ======
Contribution per procedure $ 856 $1,135 $ 901 $ 941
====== ====== ======= ======
The principal reason for the decline in the contribution per
procedure for the three and nine months ended September 30, 1998
compared to the same period in 1997 was the increase in the number
of leased lasers. The Company began changing to VISX lasers in its
centers, principally the RCII centers. The RCII centers had lasers
that were owned at the time of the Acquisition and the "cost" of
these lasers was recorded as depreciation expense. The VISX lasers
are leased and the monthly payments are recorded as direct operating
expense.
The decline in contribution per procedure was offset by the
increased number of LASIK procedures performed in 1998 as compared
to 1997. The contribution per procedure is influenced by the
relationship of LASIK to PRK procedures performed.
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
1998
Q3 5,327 6,102 5,327 6,102
Q2 4,894 5,677 4,894 5,677
Q1 3,857 4,451 3,857 4,451
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
and 220,000 procedures were performed in the U.S. in 1996 and 1997,
respectively, and that approximately 400,000 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, procedure volume should increase.
Multi-specialty surgery programs
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 continues to reduce its providing of this service due to
the difficult environment. In addition, budget reductions at the
facilities have reduced the marketing and education programs, key
elements to a successful surgery program.
Expenses
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 in 1998 primarily due
to additional costs incurred as a result of the acquisition of RCII.
For the three and nine months ended September 30, 1998, the Company
spent approximately $693 and $1,719, respectively, 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 increased as the Company added new laser
vision correction centers acquired from Summit.
Depreciation and amortization increased in 1998 compared to 1997 due
to the increase in goodwill and property and equipment, primarily
equipment, for the laser vision correction centers acquired from
Summit.
Interest expense for the nine and three months ended September 30,
1998 decreased compared to the same periods in 1997 due to the
repayment of bank indebtedness and capitalized lease obligations
during the nine-month period. Interest income increased due to more
funds on deposit in interest bearing accounts.
During the second quarter of 1998, the Company implemented a plan to
restructure its operations by closing seven (7) of its centers,
primarily centers acquired. Costs associated with the restructuring
include $7,287 related to the write-off of goodwill and leasehold
improvements and $677 for the accrual of leases termination and
employee severance costs. As a result of the closings, the Company
has certain lasers in storage. The restructuring provision includes
$2,536 related to the write-down of these lasers to their net
realizable value.
Liquidity and Capital Resources
On May 11, 1998 the Company issued 10,000 shares of 6% Series B-1
Convertible Preferred Stock for $10 million. Each share has a par
value of $0.001 per share and a stated value of $1,000 per share.
The net proceeds from this issuance, approximating $9,407,000 were
used for general corporate purposes including the reduction of debt.
During the three months ended September 30, 1998, 1,135 shares of
Convertible Preferred stock and accrued dividends of $23 were
converted into 796,251 shares of common stock.
On June 29, 1998 the Company entered into an $8 million credit
facility with the Provident Bank ("Provident"). In addition, the
company repaid the borrowings from, and terminated its credit
relationship with The Fifth Third Bank.
The new credit facility, as amended, matures on June 30, 2000 and
bears interest at 1/2% above Provident's prime rate. Interest on
borrowings under the line of credit is payable monthly. The facility
is collateralized by a blanket lien on all Company assets including
a mortgage on the Company's headquarters building.
The facility can be used to support letters of credit totaling not
more than $2 million. Availability under the facility will be
reduced in an amount equal to the capital costs financed under a
lease facility provided by Information Leasing Corporation, an
affiliate of Provident. The lease facility maximum is $2.5 million.
In addition, the Company has the option to convert up to $3.5
million of borrowings under the facility to a term loan. On August
21, 1998 the Company borrowed $2.1 million from Provident under the
credit facility on a term loan basis. The loan bears interest at
7.45% and requires monthly installments of $12 plus interest until
June 30, 2002 at which time the remaining principal balance of
$1.867 million becomes payable. The proceeds were used to purchase
a certificate of deposit from Provident that matures on June 30,
2002. The certificate of deposit is recorded in other assets and
interest is paid monthly at 5.7%
The new credit facility requires the Company to (i) maintain
tangible net worth, defined as the sum of shareholders investment
less goodwill of at least $14 million; (ii) permit the ratio of
total liabilities less subordinated debt to tangible net worth to be
greater than .75 to 1; and (iii), beginning with the quarter ended
September 30, 1998, permit the ratio of the trailing twelve month
EBITDA to the sum of current maturities of senior debt and
capitalized leases plus interest expense to be less than 1.25 to 1.
On August 18, 1997, the Company issued 17,065,579 shares of its
Common Stock for 100% of the issued and outstanding common stock of
RCII, a majority-owned subsidiary of Summit. At the time of the
acquisition, RCII owned and operated 19 laser refractive eye surgery
centers and had management service agreements with six "centers of
excellence" located at prestigious hospitals and university medical
centers. The acquisition agreement required RCII to have a minimum
cash balance of $10 million at closing. Shortly after the
acquisition, the Company closed four of the RCII laser refractive
eye surgery centers. In June 1998 the Company closed an additional
six RCII centers. In addition, the Company closed the RCII corporate
office in Waltham, MA and terminated certain administrative
personnel.
The Company continues to focus on making its centers profitable
rather than expansion. On November 3, 1998, the Company received
notice that the FDA had approved the VISX Star S2 excimer laser to
treat farsightedness (hyperopia). The VISX laser, which the Company
has in each of its U.S. centers, can now treat nearsightedness,
myopic astigmatism, and hyperopia. The Company believes that its
ability to treat these disorders will result in increased procedures
and profitability.
The Company's ability to fund its marketing and advertising program
and planned capital expenditures will depend on its future
performance, which to a certain extent, is subject to general
economic, competitive, legislative, regulatory and other factors
that are beyond its control. Based upon the current level of
operations and anticipated revenue growth, the Company believes that
cash flow from operations and available cash, together with
available borrowings under the credit facility from Provident will
be adequate to meet these needs.
Year 2000
Generally, application programs have used two-digit fields to define
the applicable year, rather than four-digit fields. Programs that
are time-sensitive may recognize a date using "00" as the year 1900
rather than the year 2000. This misinterpretation of the year could
result in an incorrect computation or computer shutdown.
The Company has completed an assessment of its computer software
and hardware for compliance with Year 2000 and has determined that
all business critical systems are compliant. Business critical
systems include financial reporting systems and all lasers utilized
in the Company's centers. Costs associated with the assessment were
internal costs, were expensed as incurred and were immaterial. The
Company has not verified or tested compliance with their
telemarketing information system; however, management is in the
process of purchasing a new telemarketing system that will be Year
2000 compliant and installed in the first quarter of 1999. The cost
of this new system will be included in the capital expenditures of
the Company and it is anticipated that the cost will exceed $200.
The Company has also completed an assessment of external risks
associated with Year 2000. Although management does not believe that
such external risks are significant, the loss of power or other
telecommunication link difficulties could disrupt the operations of
the Company.<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is a defendant in a case entitled Cabrini
Development Council, et al. V. LCA-Vision Inc., et al., 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 are
pending.
In the opinion of management the outcome will not have a
material adverse effect on the Company's financial position or
results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders was held on October 16, 1998.
Stockholders were solicited for the purpose of voting on two issues.
71.192% of the 37,242,468 issued and outstanding shares as of
September 15, 1998, the record date, were represented at the meeting
in person or by proxy. The two issues were approved. The results of
the voting on each issue follows.
<PAGE>
Part II. Other Information (continued)
(i) Approve the issuance of an indeterminable number
of shares of the company's Common Stock issuable upon conversion of
shares of 6% Series B-1 and B-2 Convertible Preferred Stock,
outstanding or to be outstanding, for purposes of complying with the
stockholder approval requirements of The Nasdaq Stock Market.
For 18,200,676
Against 710,391
Abstain 116,207
Not Voted 7,486,301
(ii) Approve and adopt the Company's 1998 Long Term
Stock Incentive Plan.
For 25,498,335
Against 885,183
Abstain 130,057
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
------- --------------------------
10 $2,100,000 Promissory Note
dated September 1, 1998
27 Financial Data Schedule
(b) Reports on Form 8-K.
1) Form 8-K dated August 25, 1998,
responding to the decline in the
Company's stock price.
2) Form 8-K dated September 28, 1998,
announcing the naming of
T. Jeffrey Dowdle as Vice President
and Director of Marketing.
3) Form 8-K dated October 5, 1998,
announcing procedure volume at the Company's
centers for the three and nine months ended
September 30, 1998.
4) Form 8-K dated November 3, 1998
announcing (i) the Company's third quarter
1998 earnings and (ii) announcing that all
of the Company's U.S. centers are equipped
with VISX lasers approved by the FDA for the
treatment of hyperopia.
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
LCA-VISION INC.
Date: November 11,1998 /s/ Stephen N. Joffe
Stephen N. Joffe
President and Chief
Executive Officer
Date: November 11,1998 /s/ Larry P. Rapp
Larry P. Rapp
Chief Financial Officer
Exhibit 10
PROMISSORY NOTE
Cincinnati, Ohio
$2,100,000 September 1, 1998
FOR VALUE RECEIVED, the undersigned, Stephen N. Joffe and
Sandra F.W. Joffe, jointly and severally (the "Payors"), promise to
pay to the order of LCA-Vision Inc., a Delaware corporation with its
principal place of business located at 7840 Montgomery Road,
Cincinnati, Ohio 45236 (referred to herein as the "Payee"), the
principal amount of two million one hundred thousand dollars
($2,100,000), plus interest at the rate of eight and 50/100 percent
(8.50%) per annum. All sums due hereunder, including accrued and
unpaid interest and outstanding principal, shall be due and payable
in full upon the maturity of this Promissory Note which shall be
September 26, 2005.
This Promissory Note is subject to the following additional
terms:
1. Place of Payment. All payments hereunder shall be payable
at the address of Payee specified above, or at such other address as
Payee may from time to time designate pursuant to Section 2 hereof
or as may be agreed upon by Payors and Payee.
2. Notices. Any notice required or permitted to be given
pursuant to the terms of this Promissory Note shall be in writing
and shall be deemed to have been received two days after being
deposited in the mail by certified or registered mail, return
receipt requested, postage prepaid, and addressed as specified
above.
3. Applicable Law and Jurisdiction. This Promissory Note
shall be governed by and interpreted under the laws of the State of
Ohio applicable to contracts made and to be performed herein,
without giving effect to the principles of conflicts of laws.
4. Prepayments. Any or all amounts due under this Promissory
Note may be prepaid in full or in part, at any time, without
penalty.
5. Interest Calculation. Interest shall be calculated on the
basis of a 360 days per year factor applied to the actual days on
which there exists an unpaid balance hereunder.
6. Notice of Presentment, Etc. Payor hereby waives notice of
demand, notice of protest, protest, presentment for payment, and
diligence in bringing suit against Payor under the occurrence of any
event, circumstance or condition of default.
7. Assignment. This Promissory Note may not be assigned by
Payors.
8. Security Interest. Stephen N. Joffe hereby grants to
Payee, as security for payment of this Promissory Note, with full
right of setoff, a security interest in and to that certain
promissory note dated September 27, 1995 made by Payee in favor of
the said Stephen N. Joffe in the principal amount of $3,307,435.
Sandra F.W. Joffe hereby grants to Payee, as security for payment of
this Promissory Note, with full right of setoff, a security interest
in and to that certain promissory note dated September 27, 1995 made
by Payee in favor of the said Sandra F.W. Joffe in the principal
amount of $1,066,942.
This Promissory Note is dated as of the 1st day of September,
1998.
/s/ Stephen N. Joffe
Stephen N. Joffe
/s/ Sandra F.W. Joffe
Sandra F.W. Joffe
Witnessed by: P.A. Kassar
<TABLE> <S> <C>
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE LCA-VISION INC.
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998, AND THE RELATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
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