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 June 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:
36,941,768 shares as of July 31,1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
LCA-VISION INC.
INDEX
Page No.
Facing Sheet 1
Index 2
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet,
June 30, 1998 3
Unaudited Condensed Consolidated Statements of
Operations for the Three and Six Months ended
June 30, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of
Cash Flows for the Six Months ended
June 30, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II. Other Information 14
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 16
<PAGE>
LCA-VISION INC.
Condensed Consolidated Balance Sheet
June 30, 1998
(unaudited)
Dollars in thousands June 30,
1998
ASSETS
Current assets
Cash and cash equivalents $5,024
Cash held in escrow 1,100
Accounts receivable, net 1,946
Prepaid expenses, inventory and other 2,575
-------
Total current assets 10,645
Property and equipment, net 11,389
Investment in affiliates 358
Goodwill, net 8,883
Other assets 1,154
-------
Total assets $32,429
=======
LIABILITIES and SHAREHOLDERS' INVESTMENT
Current liabilities
Accounts payable $1,833
Accrued liabilities and other 2,966
Capital lease obligations 610
Total current liabilities 5,409
Capital lease obligations 1,121
Obligations to shareholders 2,286
Other 63
-------
Total liabilities 8,879
Commitments and contingencies
Shareholders' investment
Preferred stock 11,930
Common stock 99
Additional paid-in capital 37,407
Accumulated (deficit) (25,510)
Accrued preferred stock dividend (355)
Treasury stock, at cost (30)
Translation adjustment 9
-------
Total shareholders' investment 23,550
-------
Total liabilities and shareholders' investment $32,429
=======
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
<TABLE>
LCA-VISION INC.
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1998 and 1997
(unaudited)
Dollars in thousands, except per share amounts
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenues:
Laser refractive
eye surgery centers $8,399 $2,443 $14,913 $4,029
Multi-specialty laser
surgery programs 411 785 908 1,485
Other 209 612 407 1,088
--------- -------- -------- --------
Total net revenues 9,019 3,840 16,228 6,602
Direct operating expenses 6,181 2,541 11,655 4,412
General and administrative
expenses 2,485 1,529 4,579 3,408
Center pre-opening expenses 163
Depreciation and amortization 1,069 419 2,124 832
Restructuring provision 10,500 10,500
--------- -------- -------- --------
Income (loss) from
operations (11,216) (649) (12,630) (2,213)
Equity in income (loss) from
unconsolidated affiliates (19) (22) 37 (31)
Interest income 84 16 196 35
Interest expense (247) (272) (590) (508)
Other income (expense) 35 7 61 13
--------- -------- -------- --------
Income (loss) before income
tax (11,363) (920) (12,926) (2,704)
Income tax expense (110) (62) (138) (62)
--------- -------- -------- --------
Net income (loss) (11,473) (982) (13,064) (2,766)
Accrued dividend -
Class B preferred stock 129 44 172 94
Amount applicable to income
(loss)per common share $(11,602) $(1,026) $(13,236) $(2,860)
Income (loss) per common share
Basic $(0.32) $(0.05) $(0.36) $(0.15)
Diluted $(0.32) $(0.05) $(0.36) $(0.15)
Weighted average common shares
outstanding
Basic and Diluted 36,818,183 19,599,231 36,741,500 19,597,814
Operating (loss) $(11,216) $(649) $(12,630) $(2,213)
Restructuring provision 10,500 10,500
Depreciation and amortization 1,069 419 2,124 832
--------- -------- -------- --------
EBITDA $353 $(230) $(6) $(1,381)
========= ========= ========= ========
</TABLE>
The Notes to Condensed Consolidated Financial
Statements are an integral part of this statement.
LCA-VISION INC.
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997
(unaudited)
Dollars in thousands
For the Six Months
Ended June 30,
1998 1997
---- ----
Cash flows from operating activities:
Net (loss) $(13,064) $(2,766)
Adjustments to reconcile net (loss)
to net cash (used) in operating activities:
Depreciation and amortization 2,124 832
Equity in earnings of unconsolidated
affiliates (37) 31
Restructuring provision 10,500
Other 41
Changes in operating assets and
liabilities
(Increase) decrease
Accounts receivable 388 (93)
Other current assets (683) (78)
Increase (decrease)
Accounts payable 2 (351)
Accrued liabilities and other 61 245
------ ------
Net cash (used) by operations (709) (2,139)
Cash flows from investing activities:
Purchase of property and equipment (1,506) (384)
Advances to affiliates (570) (51)
Proceeds from sales of equipment 461
------ ------
Net cash (used) by investing activities (1,615) (434)
Cash flows from financing activities:
Net borrowing (repayment) of
bank borrowings (9,639) 3,469
Repayment of long-term notes payable and
capitalized lease obligations (33) (440)
Proceeds from sale of 6% convertible
preferred stock 9,463
Proceeds from exercise of stock options 51
Proceeds from sale of common stock 50
Other (74) (21)
------ ------
Net cash provided (used) by
financing activities (232) 3,058
------- ------
Net increase (decrease) in cash (2,556) 485
Cash at beginning of period 8,680 724
------- -----
Cash at end of period $6,124 $1,209
====== ======
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 Six Months Ended June 30, 1998 and 1997
(unaudited)
Dollars in thousands, except per share and share information
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The June 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 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) and astigmatism.
The Company manages multi-specialty laser surgery 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.
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.
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 $16 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 included $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.
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 six months ended
June 30, 1997 as though the Company had acquired RCII as of the
beginning of 1997 are:
Three Months Six Months
June 30, 1997 June 30, 1997
Revenues $5,648 $10,054
Net (loss) (2,555) (6,595)
(Loss) per share (0.07) (0.18)
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 June 30, 1998 is comprised of:
Notes payable - shareholders $1,500
Accrued interest 515
Accrued dividends on preferred
stock - Series B 271
------
$2,286
======
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 the Provident credit facility.
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 June 30, 1998 the Company
advanced $400 to the Surgery Center and $570 for the six months
ended June 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 $196 for the three and
six months ended June 30, 1998. Included in accounts receivable at
June 30, 1998 is $640 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 photorefractive keratectomy ("PRK") and laser in situ
keratomileusis ("LASIK") for treatment of myopia
(nearsightedness). 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
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.
Sources of Revenues
Sources of revenues for the three and six months ended June 30,
1998 and 1997 were (dollars in thousands):
Three Months Six Months
1998 1997 1998 1997
---- ---- ---- ----
Laser refractive eye
surgery centers $8,399 $2,443 $14,913 $4,029
Multi-specialty surgery
programs 411 785 908 1,485
Other 209 612 407 1,088
------ ------ ------- ------
Total $9,019 $3,840 $16,228 $6,602
====== ====== ======= ======
The extent of the shift in the Company's future revenues is
dependent on the number of laser vision correction procedures.
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 six months ended June 30,
1998 and 1997 were (dollars in thousands, except per procedure
information):
Three Months Six Months
1998 1997 1998 1997
---- ---- ---- ----
Revenue $8,399 $2,443 $14,913 $4,029
Medical professional and
royalty fees 3,847 1,252 6,784 2,152
------ ------ ------ ------
Contribution $4,552 $1,191 $8,129 $1,877
====== ====== ====== ======
Contribution per procedure $930 $791 $929 $755
====== ====== ====== ======
Contribution per procedure increased due to the increased number
of LASIK procedures performed in 1998 as compared to 1997. The
contribution per procedure is dependent on the number of LASIK and
PRK procedures performed.
Laser refractive eye surgery centers
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
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 has decided 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 six months ended June 30, 1998, the
Company spent approximately $470 and $1,026, 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 six months ended June 30, 1998 increased.
Interest expense for the three months ended June 30, 1998
decreased due to the repayment of the obligations during the
period offset by the higher interest rate. 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 included $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 to reduce debt for general corporate purposes including the
reduction of debt.
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.
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 $16 million; (ii) permit the ratio of
total liabilities less subordinated debt to tangible net worth to
be greater than .75 to 1; and (iii), beggining 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 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 has resulted in significant
cost savings due to the elimination of redundant general and
administrative expenses and the consolidation of marketing and
advertising programs.
The Company continues to focus on making its centers profitable
rather than expansion. 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 all of
its U.S. centers, will result in increased procedures which will
result in increased profitability of the Company.
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. None
Item 5. Other Information.
The Securities and Exchange Commission has
recently amended Rule 14a-4 to provide that with
respect to a shareholder proposal to be presented
at an annual shareholders' meeting other than
pursuant to Rule 14a-8 (i.e., which is not to be
included in the registrant's proxy statement),
the registrant's management may exercise
discretionary voting authority under proxies
solicited by it for the meeting if it receives
notice of the proposed non-Rule 14a-8 shareholder
action less than 45 days prior to the calendar
date its proxy materials were mailed for the
prior year's annual meeting.
Part II. Other Information (continued)
As the new provision applies to the Company, in
the event of a non-Rule 14a-8 shareholder
proposal to be presented at the Company's 1999
Annual Meeting of Shareholders is received by the
Company after March 8, 1999, the Company will be
permitted to exercise discretionary voting
authority under proxies solicited by it with
respect to the 1999 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
------
27 Financial Data Schedule
(b) Reports on Form 8-K.
(1) Form 8-K dated June 29, 1998,
announcing the Company's new
financing agreement from The
Provident Bank to replace its
financing package from the Fifth
Third Bank of Cincinnati.
<PAGE>
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 August 10, 1998 /s/ Stephen N. Joffe
Stephen N. Joffe
President and Chief
Executive Officer
Date August 10, 1998 /s/ Larry P. Rapp
Larry P. Rapp
Chief Financial Officer
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FORM THE LCA-VISION INC.
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998, AND THE RELATED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
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