SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-KSB
________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal Commission file number 0-27610
Year ended
December 31, 1998
LCA-VISION INC.
A Delaware I.R.S. Employer Identification No. 11-2882328
Corporation
7840 Montgomery Road, Cincinnati, Ohio 45236
Telephone Number (513) 792-9292
_________________________
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Title of class
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
________________________
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
________________________
As of February 5, 1999 the latest practicable date, 42,604,544
shares of Common Stock were outstanding. The aggregate market
value of Common Stock held by non-affiliates was approximately
$32,859,600 at that date.
________________________
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the part of the Form 10-KSB into which the document
is incorporated: Portions of the Registrant's Proxy Statement for
its 1999 Annual Meeting of Stockholders to be filed on or prior to
April 1, 1999 are incorporated by reference into Part III of this
Form 10-KSB.
Transitional Small Business Disclosure Format (Check one):
Yes ____ No _____X _____ In 1998, the SEC issued guidelines
to make shareholder
communications more understandable. We have written our Form 10-
KSB including the Management's Discussion and Analysis and
financial statements in plain English to help you better
understand our business and what we've done.
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. The name was changed 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, amended the Certificate of Incorporation to
change the name to LCA-Vision Inc., and effected a one-for-ten
reverse stock split. The corporate headquarters were moved to
7840 Montgomery Road, Cincinnati, Ohio.
On August 31, 1995, LCA Canada Inc., a wholly-owned subsidiary of
LCA-Vision, acquired all of the stock of the Toronto Laservision
Centre, Inc. 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 Company purchased all of the outstanding
shares of Refractive Centers International, Inc. ("RCII"), a
majority owned subsidiary of Summit Technology, Inc. ("Summit").
The Company 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 LCA-Vision common stock. Prior to the purchase,
19 individuals had held options for 312,500 shares of RCII common
stock, 278,767 of which were exercisable. These individuals
exercised their options 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 Common Stock. As a result of these
transactions, the Company issued a total of 17,065,579 shares of
its Common Stock for 100% ownership RCII's common stock.
Business Overview
We are a leading developer and operator of free-standing laser
refractive surgery centers. Our laser refractive surgery centers
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 our centers primarily include laser in situ
keratomileusis ("LASIK") and photorefractive keratectomy ("PRK").
On November 3, 1998, the United States Food and Drug
Administration ("FDA") approved the VISX Star S2 excimer laser to
treat farsightedness (hyperopia). The VISX Star S2 laser, which we
have in each of our U.S. centers, can now be used for correcting
nearsightedness, myopic astigmatism, and hyperopia. Only excimer
lasers approved by the FDA are used in our U.S. centers.
We also manage laser and minimally invasive surgical procedures at
several hospitals and ambulatory surgical centers on a contract
basis. We are generally compensated based on procedures performed;
increased surgical volume; reduced surgical costs; or a
combination of these. We may also receive compensation for
conducting the marketing programs and educating the surgical
staffs of the facilities.
<PAGE>
Laser Refractive Surgery Centers
Our laser refractive surgery centers 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 our
qualification criteria, use our facilities to perform laser
refractive surgery on an out-patient basis.
The most common procedures performed at the centers are LASIK
(laser in situ keratomileusis) and PRK (photorefractive
keratectomy) to treat nearsightedness, astigmatism and
farsightedness. PRK is an outpatient procedure performed with an
excimer, 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, also using an excimer laser. As new laser-
based surgical procedures are approved by the FDA, we plan to
accommodate the service requirements for these procedures as well,
to the extent feasible at that time.
The results of an internally-prepared study of the initial 1,150
procedures performed at our 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
Our operations 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. We also provide management services,
including billing and marketing functions, and educational
programs. We are compensated for a physician's use of the
Company's centers and support services.
We seek to differentiate our centers in the marketplace by
providing locations and treatment environments that meet patient
and doctor preferences. Physicians who use our facilities 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 our marketing skills and
programs (such as our toll-free 800 numbers) for 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.
Laser refractive surgery is not generally reimbursable by third-
party payors. To accommodate patients, we offer several financing
alternatives. Patients can pay for the procedure with cash, check,
money order or credit card. We also offer information regarding
installment plans, insurance coverage, home equity loans and
payment through employer flexible benefit plans. We bear minimal
or no credit risk for any of these options.
Marketing
Our 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, our personnel work
directly with ophthalmologists to increase the number of
credentialed physicians who are knowledgeable about and use our
centers to perform laser refractive surgery.
We utilize lasers manufactured by VISX Incorporated at our U.S.
laser refractive surgery centers and one each of Nidek, Chiron and
Summit at our non-U.S. laser refractive surgery centers. VISX
lasers are subject to a royalty fee of $260 per procedure
performed in the U.S.
Competition
Laser refractive surgery, whether performed at one of our centers
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.
We face 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 us, are a specialized type of multi-site eye care
center that primarily provide laser refractive surgery. Among the
laser refractive surgery center chains, we believe we are one of
the largest providers in terms of number of facilities in the U.S.
In addition to competition from other chains of laser refractive
surgery centers, we face competition from hospitals, clinics and
ophthalmologists, either as sole practitioners or as a group, 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, 1998, we had 145 employees, 99 of whom were
full-time. None of our employees are subject to a collective
bargaining agreement nor have we experienced a work stoppage.
Trademarks
Our trademarked names have not yet been formally registered.
Where the trademark symbol is used, it is our 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 we continue to use them. At some point in the future, we
plan to formally register our trademarks with the U.S. Trademark
Office.
Suppliers of Laser Equipment
We are not directly involved in the research, development or
manufacture of ophthalmic laser systems. There are two companies,
Summit and VISX, Incorporated, whose excimer laser systems have
been approved by the FDA for commercial sale in the U.S. The FDA
has given preliminary approval for the excimer lasers manufactured
by Autonomous Technologies, Inc. and Nidek to be marketed in the
U.S.
Government Regulation
Our 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 us 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 our business, financial condition and
results of operations. In addition, clearance or approvals could
be withdrawn in appropriate circumstances. Failure by us or our
principal suppliers to comply with regulatory requirements, or any
adverse regulatory action, could result in a limitation on or
prohibition of our use of excimer lasers which in turn would have
a material adverse effect on our 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 us 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 our
ability to use the lasers.<PAGE>
Item 2. Properties
Our corporate headquarters and one of our laser refractive surgery
centers are located in a 32,547 sq. ft. office building that we
own in Cincinnati, Ohio. Our other laser refractive surgery
centers are generally in professional office buildings. The laser
refractive surgery centers include laser surgery rooms, private
examination rooms, and 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, 1999 to December 31,
2004. We consider all of our centers to be well-suited to our
present and currently anticipated future requirements. We do not
believe that any of the leases is material. The following table
describes the locations of our laser refractive surgery centers at
December 31, 1998:
<TABLE>
<CAPTION>
Leased/ Aggregate Annual
Location Owned Lease Payment
<S> <C> <C>
Concord, CA Leased 50,973
Newport Beach, CA Leased 66,594
San Bernardino, CA Leased 58,130
San Jose, CA Leased 54,687
Torrance, CA Leased 58,123
Helsinki, Finland Leased --------
Clearwater, FL Leased 51,546
Schaumburg, IL Leased 51,786
Annapolis, MD Leased 22,403
Baltimore, MD Leased 93,621
Bethesda, MD Leased 54,098
Edina, MN Leased 62,942
Charlotte, NC Leased 62,817
Albany, NY Leased 70,637
Amherst, NY Leased 67,248
Centerville, OH Leased 55,148
Cincinnati, OH Owned -------
Columbus, OH Leased 35,553
Holland, OH Leased 83,719
Worthington, OH Leased 38,625
Ft. Erie, Ontario,
Canada Leased 6,891
Willowdale, Ontario,
Canada Leased 84,921
Falls Church, VA Leased 63,985
</TABLE>
(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
centers that have been closed and we are the sublessor. We are
actively pursuing a subtenant for the Worthington location.
Item 3. Litigation
We are a defendant and counter-claimant 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. Also named as co-defendants are various current and former
employees, officers and directors. The case arises out of the
operations of a New York limited liability company (the "LLC")
which had been formed by us, the plaintiffs 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, we 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 the complaint, the plaintiffs allege breaches of our
obligations as a member of the LLC, and have demanded both
substantial damages and equitable relief. We have filed an answer
denying the allegations of the complaint, and asserting
counterclaims against the plaintiffs seeking substantial damages,
alleging that the plaintiffs wrongfully failed to match the
capital contributions made by us to the LLC. We believe that the
plaintiffs' claims are without merit and intend to vigorously
defend the action and pursue our counterclaims.
After commencement of the above action, we filed an action against
the PC seeking damages for its failure to pay the capital
contributions required of it to the LLC. The PC has counterclaimed
alleging a right to be indemnified for its losses relating to the
LLC's operations.
Both actions are in the discovery stage. In the opinion of
management neither action will have a material adverse effect on
our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Our Common Stock is listed on the Nasdaq SmallCap Market under the
symbol "LCAV." There were approximately 3,249 holders of record of
our Common Stock on February 1, 1999.
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.
<TABLE>
<CAPTION>
1998 1997
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $2.125 $ 0.844 $ 6.875 $ 2.375
Second Quarter 4.156 1.688 7.125 2.688
Third Quarter 3.500 1.250 3.875 2.750
Fourth Quarter 1.500 1.000 3.625 1.000
</TABLE>
We did not pay any cash dividends during the year ended December
31, 1998 and do not anticipate doing so in the future. Our loan
agreement with our principal lender prohibits us from declaring or
paying any dividend or distributions, except stock dividends, on
our capital stock without the lender's approval.
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
our results, refer to the Overview and financial statement line
item discussions set forth in Management's Discussion and Analysis
or Plan of Operation.
"Management's Discussion and Analysis or Plan of Operation" is an
analysis of our operating results over the past three years. It
explains why our revenues and costs changed, our overall financial
condition, and other matters including the Year 2000 Issue.
The Notes to Consolidated Financial Statements provide more
information on our consolidated financial statements. For example,
the Notes give breakdowns of some amounts in the statements,
explain how we calculated certain amounts, and describe some of
our important accounting policies.
Overview (dollars in thousands, except where noted)
We are a leading developer and operator of free-standing laser
refractive surgery centers. Our laser refractive surgery centers
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 our centers primarily include laser in situ
keratomileusis ("LASIK") and photorefractive keratectomy ("PRK").
On November 3, 1998, the FDA approved the VISX Star S2 excimer
laser to treat farsightedness (hyperopia). The VISX Star S2 laser,
which we have in each of our U.S. centers, can now be used for
correcting nearsightedness, myopic astigmatism, and hyperopia. We
also manage multi-specialty laser surgery programs at medical
facilities on a contract basis.
Revenue is derived from three sources: (i) fees for surgeries
performed at our laser refractive surgery centers, (ii)
contractual fees for managing multi-specialty laser surgery
programs, and (iii) other including fees for marketing and
education programs; management fees for operating laser vision
correction centers of investees; and miscellaneous sources.
Operating expenses are classified as follows: (a) direct
operating expenses which include: (i) laser refractive surgery
centers - labor, physician fees, royalty fees (paid to the
manufacturers of the FDA-approved lasers of $260 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
headquarters staff expenses and other overhead costs; (c)
marketing program costs; (d) center pre-opening expenses which
include direct costs incurred prior to opening a laser vision
correction center; and (e) depreciation and amortization.
Results of Operations
On August 18, 1997, we 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 our 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 year ended December 31, 1997 include the revenues and expenses
of RCII subsequent to August 18, 1997.
Sources of Revenues
The table below summarizes our sources of revenue and their annual
growth or decline:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Laser refractive surgery $32,963 $12,917 $3,715
Growth rate 155% 248% N/A
Surgery management contracts 1,496 3,064 4,665
Growth rate -51% -34% -30%
Other 741 1,613 5,380
Growth rate -54% -70% -23%
Total 35,200 17,594 13,760
</TABLE>
Laser refractive surgery
Laser refractive surgery revenue generally includes three
components: facility fee, royalty fee, and medical professionals
fee. Certain states prohibit us from practicing medicine,
employing physicians to practice medicine on our behalf or
employing optometrists to render optometry services on our behalf.
Revenues and direct costs from centers in such states do not
include the medical professionals fee component. The contribution
from laser refractive surgery procedures for each of the three
years ended December 31, 1998 were (dollars in thousands, except
per procedure information):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenue $ 32,963 $ 12,917 $ 3,715
Direct costs 23,625 10,790 3,818
Contribution 9,338 2,127 (103)
</TABLE>
Our results of operations in any period are significantly affected
by the number of laser vision correction procedures performed.
The following table illustrates the growth of laser vision
correction procedures performed at our centers. Combined
procedures include those performed at investee centers. We record
the results of our investee centers using the equity method.
<TABLE>
<CAPTION>
Wholly-owned Combined
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Q4 5,686 2,888 745 6,791 3,400 1,089
Q3 5,327 2,375 596 6,102 2,794 864
Q2 4,891 1,506 790 5,737 2,078 1,054
Q1 3,887 979 532 4,450 1,443 613
</TABLE>
In 1998 approximately 77% of the combined procedures performed
were LASIK.
Our growth and profitability are predicated on increases in
procedure volume. Industry sources estimate that 450-500 thousand
procedures were performed in the U.S. 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, we expect an increase in procedure volume.
Surgery management contracts
We reduced the extent to which we provide this service due to the
difficult business environment. The renewal of our contracts with
the hospital providers became increasingly difficult due to price
pressures and the lengthening of sales cycle. Hospital providers
and other entities were being driven to reduce costs and scaleback
their operations, sometimes including the programs that we
managed. In addition, budget reductions at the facilities 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
our expansion into the laser refractive surgery business. Direct
operating expenses comprise the significant fixed costs of
performing the procedure as well as the costs of maintaining a
facility. 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.
We now have VISX Star S2 lasers in all of our U.S. centers. The
VISX lasers are leased and the monthly payments are recorded as
direct operating expense.
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.
During the second quarter of 1998, we implemented a plan to
restructure its operations by closing seven of our centers,
primarily centers acquired. Costs associated with the
restructuring include $7,287,000 related to the write-off of
goodwill and leasehold improvements and $677 thousand 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 also includes $2,536,000 related to
the write-down of these lasers to their net realizable value. The
balance of the accrual at December 31, 1998 was $748 thousand and
relates to facility rent and severance.
Equity in income from unconsolidated businesses increased because
of their increased profitability. Interest expense decreased due
to the significant reduction in debt. Interest income increased
because we had cash to invest in overnight cash equivalents.
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 $9,463,000 were
used for general corporate purposes including the reduction of
debt. As of December 31, 1998, 4,298 shares of Convertible
Preferred stock and accrued dividends of $117 thousand were
converted into 4,088,856 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 of our assets including a mortgage on the
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, we have the option to convert up to $3.5
million of borrowings under the facility to a term loan. On August
21, 1998 we 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 thousand plus interest
until June 30, 2000 at which time the remaining principal balance
of $1.705 million becomes payable. The proceeds were used to
purchase a certificate of deposit from Provident that matures on
June 30, 2000. The certificate of deposit is recorded in other
assets and interest is paid monthly at 5.7%
The credit facility also supports letters of credit and leased
assets totaling $1.1 million at December 31, 1998. The credit
facility, for which there is no formal compensating balance,
requires us to pay a commitment fee of .25% based on the unused
portion. At December 31, 1998 we had $4.9 million available to us
under the credit facility.
We are required to maintain certain financial ratios and amounts
for the credit facility to be available for our use. We are to
maintain tangible net worth of at least $14 million and the ratio
of total liabilities less subordinated debt to tangible net worth
must be greater than .75 to 1. The credit facility defines
tangible net worth as Shareholders' Investment plus Subordinated
Debt less unamortized Goodwill as shown on our Consolidated
Balance Sheets. Beginning with the quarter ended December 31, 1998
the ratio of our earnings before interest expense, taxes and
depreciation and amortization ("EBITDA") on a trailing 12 month
basis must be greater than 1.5 times the sum of our current
maturities of capital lease obligations, trailing 12 months
interest expense and $140 thousand.
On August 18, 1997, we issued 17,065,579 shares of our 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, we closed four of the RCII laser
refractive eye surgery centers. In June 1998, we closed an
additional six RCII centers. In addition, we closed the RCII
corporate office in Waltham, MA and terminated certain
administrative personnel.
We continue to focus on making our centers profitable rather than
expansion. On November 3, 1998 we received notice that the FDA had
approved the VISX Star S2 excimer laser to treat farsightedness
(hyperopia). The VISX Star S2 laser, which we have in each of our
U.S. centers, can now treat nearsightedness, myopic astigmatism,
and hyperopia. Management believes that our ability to treat these
disorders will result in increased procedures and profitability.
The ability to fund our marketing and advertising program and
planned capital expenditures will depend on our future
performance, which to a certain extent, is subject to general
economic, competitive, legislative, regulatory and other factors
that are beyond our control. Based upon the current level of
operations and anticipated revenue growth, we believe 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 Issue
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.
We have completed an assessment of our computer software and
hardware for compliance with Year 2000 and have determined that
all business critical systems are compliant. Business critical
systems include financial reporting systems and all lasers
utilized in our centers. Costs associated with the assessment were
internal costs, were expensed as incurred and were immaterial. We
have not verified or tested compliance with our telemarketing
information system; because we are in the process of purchasing a
new telemarketing system that will be Year 2000 compliant and
installed and operational by September 30, 1999. The cost of this
new system will be included in our capital expenditures or leased.
We expect the cost to exceed $200 thousand. We have 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 our operations.
Impact of Recently Issued Accounting Standards
In 1998 we adopted SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information."
SFAS No. 130 established standards for the reporting and display
of comprehensive income, requiring its components to be reported
in a financial statement that is displayed with the same
prominence as other financial statements. The adoption of SFAS No.
130 had no impact on our financial statements because our net loss
approximates comprehensive income.
SFAS No. 131 establishes standards for reporting financial
information about operating segments in annual financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. Operating segments are defined as components of
an enterprise about which separate financial information is
available and evaluated regularly by chief operating decision
makers in deciding how to allocate resources and in assessing
performance. We now operate in one segment - laser refractive
surgery. The adoption of SFAS No. 131, which affected disclosures
only, had no impact on our consolidated results of operations,
financial condition, or cash flows.
The FASB issued in 1998 Statements No. 132, "Employees Disclosures
about Pensions Benefits", No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise (an
amendment of FASB Statement No. 65). These Statements do not
currently have an impact on us because we have no activities
covered by them.
Item 7. Financial Statements.
Our consolidated financial statements for the year ended December
31, 1998, 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 our 1999 Proxy Statement to be filed on or prior to April 12,
1999.
Item 10. Executive Compensation.
The information required by this item is incorporated by reference
to our 1999 Proxy Statement to be filed on or prior to April 12,
1999.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is incorporated by reference
to our 1999 Proxy Statement to be filed on or prior to April 12,
1999.
Item 12. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference
to our 1999 Proxy Statement to be filed on or prior to April 12,
1999.<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
<S> <C> <C>
3(a)(i) Amended Certificate of Incorporation of
Registrant Note A
3(a)(ii) Amended Certificate of Designation as
to Interim Preferred Stock Note H
3(a)(iii) Amended Certificate of Designation as
to Series B-1 Convertible Preferred Stock Note G
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) Loan Agreement dated June 29, 1998
between Registrant and The Provident Bank Note C
10(e) LCA-Vision Inc. 1998 Long-Term
Stock Incentive Plan Note E
10(f) Promissory Note between the Registrant
and its major stockholders Note F
10(g) Convertible Preferred Stock Purchase
Agreement between Registrant and Certain
Purchasers date as of May 8, 1998 Note G
10(h) Agreement between Registrant and
Donaldson, Lufkin & Jenrette Securities
Corporation dated May 4, 1998 Note G
21 Subsidiaries of Registrant
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney Note D
27 Financial Data Schedule
/TABLE
<PAGE>
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 July 2,
1998
D. Contained on the first page of the signature pages
contained in this report.
E. Incorporated by reference to the Company's Proxy
Statement relating to its October 16, 1998 Special
Stockholders Meeting
F. Incorporated by reference to Form 10-QSB filed
November 12, 1998
G. Incorporated by reference to Form 10-QSB filed May 15,
1998
H. Incorporated by reference to Form 8-K filed December
4, 1996
(b) Reports on Form 8-K
(1) Form 8-K dated January 7, 1999 announcing fourth
quarter and year 1998 procedure volume and growth
rates.
(2) Form 8-K dated February 11, 1999 announcing results
for the quarter and year ended December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, LCA-Vision Inc., the Registrant, has duly caused this
report on Form 10-KSB dated February 16,1999 to be signed on its
behalf by the undersigned, thereunto duly authorized.
LCA-Vision Inc.
Date: February 16, 1999 By: /s/ Stephen N. Joffe
Stephen N. Joffe, Chairman and
Chief Executive Officer
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:
Chairman and February 16, 1999
/s/ Stephen N. Joffe Chief Executive Officer
Stephen N. Joffe
Principal Financial and Accounting Officer:
Chief Financial Officer February 16, 1999
/s/ Larry P. Rapp and Treasurer
Larry P. Rapp
Directors: Date:
/s/ Stephen N. Joffe Director February 16, 1999
Stephen N. Joffe
/s/ William O. Coleman Director February 16, 1999
William O. Coleman
/s/ John H. Gutfreund Director February 16, 1999
John H. Gutfreund
/s/ John C. Hassan Director February 16, 1999
John C. Hassan<PAGE>
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page Number
Description in this Report
Report of Management 15
Report of Independent Accountants 15
Consolidated Balance Sheets
as of December 31, 1998 and 1997 16
Consolidated Statements of Operations
for the years ended December 31, 1998,
1997 and 1996 17
Consolidated Statements of Cash Flows
for the years ended December 31, 1998,
1997 and 1996 18
Consolidated Statements of Shareholders' Investment
for the years ended December 31, 1998, 1997
and 1996 19
Notes to Consolidated Financial Statements 21
<PAGE>
REPORT OF MANAGEMENT
We, the management of LCA-Vision Inc., are responsible for the
consolidated financial statements and the information and
representations contained in this report. The Company prepared the
financial statements in accordance with generally accepted
accounting principles based upon available facts and circumstances
and management best estimates and judgements of known conditions.
We maintain an accounting system and related system of internal
controls designed to provide reasonable assurance that the
financial records are accurate and that the Company's assets are
protected. PricewaterhouseCoopers LLP, independent accountants,
audit the financial statements and express their opinion on them.
They perform their audit in accordance with generally accepted
auditing standards.
The Audit Committee of the Board of Directors, which consists of
our outside Directors, meets periodically with management and
PricewaterhouseCoopers LLP to review the activities of each in
discharging their responsibilities. The staff of
PricewaterhouseCoopers LLP has free access to the Audit Committee.
/s/Stephen N. Joffe /s/Larry P. Rapp
Stephen N. Joffe Larry P. Rapp
Chairman of the Board and Chief Financial Officer
Chief Executive Officer and Treasurer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of LCA-Vision Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, shareholders'
investment, and cash flows present fairly, in all material
respects, the financial position of LCA-Vision Inc. and its
subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these
statements in accordance with generally accepted auditing
standards which 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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 5, 1999
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Dollars in Thousands, Except Per Share Amounts
At December 31, 1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,496 $ 2,780
Cash held in escrow 5,900
Accounts receivable, net 1,119 2,047
Prepaid expenses, inventory and other 1,416 1,892
-------- -------
Total current assets 9,031 12,619
-------- -------
Property and equipment, net 9,433 18,462
Goodwill, net 8,304 11,987
Obligations due from shareholders, net 471
Investment in unconsolidated businesses 520 250
Other assets 3,618 1,209
-------- -------
Total assets $ 31,377 $ 44,527
========= =======
Liabilities and Shareholders' Investment
Current liabilities
Accounts payable $ 2,030 $ 1,831
Accrued liabilities and other 2,637 2,304
Debt maturing in one year 787 10,182
------- ------
Total current liabilities 5,454 14,317
======= ======
Obligations due to shareholders, net 2,146
Long-term debt 2,724 1,350
Commitments and contingencies
Shareholders' investment
Preferred stock 7,687 2,522
Common stock ($0.001 par value;
40,973,741 shares and
36,664,816 shares issued) 103 96
Contributed capital 41,701 36,776
Accumulated (deficit) (25,664) (12,446)
Foreign currency translation
adjustment (14) ( 21)
------ ------
23,813 26,927
Less common stock in treasury at cost 30 30
Less accrued preferred stock dividend 584 183
------ ------
23,199 26,714
Total liabilities and shareholders'
investment $ 31,377 $ 44,527
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Dollars in Thousands, Except Per Share Amounts
Years Ended
December 31, 1998 1997 1996
<S> <C> <C> <C>
Revenues
Laser refractive surgery $32,963 $12,917 $3,715
Surgery management contracts 1,496 3,064 4,665
Other 741 1,613 5,380
------ ------ ------
35,200 17,594 13,760
Direct costs of
Laser refractive surgery 23,625 10,790 3,818
Surgery management contracts 466 977 1,738
Other 372 959 2,176
------ ------ ------
24,463 12,726 7,732
General and administrative
expenses 7,961 6,747 5,663
Marketing and advertising 2,183 1,259 1,664
Depreciation and amortization 3,521 2,511 1,597
Restructuring provision 10,500 1,100
Other 162 225
------ ------ ------
Operating (loss) (13,428) ( 6,911) (3,121)
Equity in earnings (losses) from
unconsolidated businesses 354 (27) ( 906)
Interest expense 786 1,140 770
Interest income 441 216 89
Other income 358 77 651
------ ----- -----
(Loss) before taxes on income (13,061) (7,785) (4,057)
Taxes on income 157 68
------ ----- -----
Net (loss) (13,218) (7,853) (4,057)
Preferred stock dividends 518 183
------ ----- -----
(Loss) applicable to common
stock $(13,736) $(8,036) $(4,057)
======== ======= =======
(Loss) per common share
Basic $ (0.36) $ (0.30) $ (0.21)
Diluted $ (0.36) $ (0.30) $ (0.21)
Weighted average shares
outstanding -
Basic 37,669,471 26,709,184 19,609,505
Diluted 37,669,471 26,709,184 19,609,505
See Notes to Consolidated Financial Statements
/TABLE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Dollars in Thousands)
Years Ended
December 31, 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating
activities
Net (loss) $ (13,736) $ ( 8,036) $ ( 4,057)
Adjustments to reconcile
net (loss) to net cash
provided (used) by
operating activities:
Depreciation and
amortization 3,521 2,511 1,597
Restructuring provision 10,500 1,100
Equity in (income) loss
of unconsolidated
businesses (354) 27 906
Other items, net ( 378)
Changes in certain assets
and liabilities, net of
effects from acquisition of
businesses
Accounts receivable 424 (989) 1,044
Prepaid expenses, inventory
and other 476 334 (14)
Accounts payable 199 824 49
Accrued liabilities and
other 69 219 ( 41)
----- ----- -----
Net cash provided (used) by
operating activities 1,099 (4,010) (894)
----- ----- -----
Cash flows from investing
activities
Cash acquired in
acquisition of business 10,007
Purchase of property and
equipment (1,946) (603) ( 2,747)
Proceeds from sale of
property and equipment 1,211 133
Investment in
unconsolidated businesses,
net ( 1,099)
Loans and advances to
affiliated companies 570 (713)
Loans to shareholders (2,100)
Purchase of certificate of
deposit (2,100)
Other, net (382) (64) 809
------
Cash provided (used) in
investing activities (4,747) 9,340 ( 3,617)
------ ----- ------
Cash flows from financing
activities
Proceeds from bank
borrowings 2,100 6,280 3,438
Repayment of bank borrowings (9,651)
Principal payments of
long-term debt and capital
lease obligations (482) (3,743) (545)
Proceeds from sale of
convertible preferred
stock, net 9,463
Proceeds from issuance of
common stock 51 56 100
Other, net (17) 33 (345)
-----
Net cash provided by
financing activities 1,464 2,626 2,648
----- ----- -----
Increase (decrease) in cash
and equivalents (2,184) 7,956 ( 1,863)
Cash and cash equivalents at
beginning of year 8,680 724 2,587
------ ----- -----
Cash and cash equivalents at
end of year $ 6,496 $ 8,680 $ 724
========= ========= =======
</TABLE>
See Notes to Consolidated Financial Statement
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
<CAPTION>
Dollars in Thousands, Except Per Share Amounts
Years Ended December 31, 1998 1997 1996
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock:
Class A
Balance at beginning of year 1,668 1,668 1,668
Balance at end of year 1,668 1,668 1,668
----- ----- -----
Class B Interim Series Balance
at beginning of year 12.6 $2,522 12.6 $2,522
Shares issued - shareholder
debt conversion 12.6 $2,522
----- ----- ----- ----- ----- -----
Balance at end of year 12.6 2,522 12.6 2,522 12.6 $2,522
----- ------ ----- ----- ----- -----
Class B1 Convertible
Balance at beginning of year
Shares issued 10,000 10,000
Transaction fees (537)
Shares converted to common
stock (4,298) (4,298)
------ ------
Balance at end of year 5,702 5,165
------ ------
Total preferred stock - 7,687
------
Common Stock
Balance at beginning
of year 36,664,816 96 19,590,012 79 19,538,977 78
Shares issued:
Acquisition agreement 200,000 17,065,579 17
Conversion of B1
Convertible Preferred
Stock and dividends 4,088,856 4
Sale of stock 20,128 44,444
Employee plans 20,000
Other 69 3 (10,903) 6,591 1
---------- -------- ---------- ------- ---------- ------
Balance at end of year 40,973,741 103 36,664,816 96 19,590,012 79
---------- -------- ---------- ------- ---------- ------
Contributed Capital 36,776 3,177 3,069
Balance at beginning of
year
Shares issued:
Acquisition agreement 580 33,543
Conversion of B1
Convertible Preferred
Stock 4,411
Sale of stock 56 100
Employee plans 51
Other
Dividends on Conversion
of Class B1 Convertible
Preferred Stock (117) 8
------ ------ -----
Balance at end of year 41,701 36,776 3,177
------ ------ -----
<PAGE>
Accumulated (deficit)
Balance at beginning of year (12,446) (4,592) (535)
Net (loss) (13,218) (7,853) (4,057)
------ ----- -----
Balance at end of year (25,664) (12,446) (4,592)
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT (continued)
<CAPTION>
Dollars in Thousands, Except Per Share Amounts
Years Ended December 31, 1998 1997 1996
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Foreign Currency Translation
Adjustment
Balance at beginning of year (21) 12 7
Translation adjustments 5 (33) 5
----- ---- -----
Balance at end of year (14) (21) 12
----- ---- -----
Treasury Stock
Balance at beginning of year 10,909 (30)
Shares received for payment
of advance 10,909 (30)
------ ------ ------ ----
Balance at end of year 10,909 (30) 10,909 (30)
------- ------ ------ ----
Preferred Stock Dividend
Balance at beginning of year (183)
Dividends accrued
Class B Interim (177) (183)
Class B1 Convertible (341)
Conversion of Class B1
Convertible
Preferred Stock 117
----- -----
Balance at end of year (584) (183)
----- -----
Total Shareholders' Investment $ 23,199 $ 26,714 $ 1,198
======== ======== ======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant
Accounting Policies
Business
We are a leading developer and operator of free-standing laser
refractive surgery centers. Our laser refractive surgery centers
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 our centers are primarily laser in situ
keratomileusis ("LASIK") and photorefractive keratectomy ("PRK").
On November 3, 1998, we received notice that the FDA had approved
the VISX Star S2 excimer laser to treat farsightedness
(hyperopia). The VISX Star S2 laser, which we have in each of our
U.S. centers, can now treat nearsightedness, myopic astigmatism,
and hyperopia. We also manage multi-specialty laser surgery
programs at medical facilities on a contract basis.
Revenue is derived from three sources: (i) fees for surgeries
performed at our laser refractive surgery centers, (ii)
contractual fees for managing multi-specialty laser surgery
programs, and (iii) other including fees for marketing and
education programs; management fees for operating laser vision
correction centers of investees; and miscellaneous sources.
Operating expenses are classified as follows: (a) direct
operating expenses which include: (i) laser refractive surgery
centers -- labor, physician fees, royalty fees paid to the
manufacturers of the FDA-approved lasers of $260 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
headquarters staff expenses and other overhead costs; (c)
marketing program costs; (d) center pre-opening expenses which
include direct costs incurred prior to opening a laser vision
correction center; and (e) depreciation and amortization.
Consolidation Policy
We use two different methods to report our investments in our
subsidiaries and other companies - consolidation and the equity
method.
Consolidation
We use consolidation when we own a majority of the voting stock of
the subsidiary. This means the accounts of our subsidiaries are
combined with our accounts. We eliminate intercompany balances and
transactions when we consolidate these accounts. Our consolidated
financial statements include the accounts of:
LCA-Vision Inc.,
LCA-Vision (Ohio), Inc.,
Refractive Centers International, Inc. and Subsidiaries, and
LCA-Vision (Canada) Inc. and Subsidiaries
The Equity Method
We use the equity method to report investments in businesses where
we hold a 20% to 50% voting interest, giving us the ability to
exercise significant influence, but not control, over operating
and financial policies. Under the equity method we report:
- our interest in the entity as an investment in our
Consolidated Balance Sheets, and
- our percentage share of the earnings (losses) in our
Consolidated Statements of Operations.
We report our investments in The Baltimore Laser Sight Center,
Ltd. and Silmalaseri Oy under the equity method.
<PAGE>
Use of Estimates
Management makes estimates and assumptions when preparing
financial statements under generally accepted accounting
principles. These estimates and assumptions affect various matters
including:
- our reported amounts of assets and liabilities in our
Consolidated Balance Sheets at the dates of the financial
statements,
- our disclosure of contingent assets and liabilities at the
dates of the financial statements, and
- our reported amounts of revenues and expenses in our
Consolidated Statements of Income during the reporting
periods.
Actual amounts could differ from those estimates.
Reclassifications
We have reclassified certain prior-year amounts for comparative
purposes. These reclassifications did not affect consolidated
financial position, net losses or cash flows for the years
presented.
Cash and Cash Equivalents
For the purpose of reporting our cash flows, we consider highly
liquid investments with a maturity of 90 days or less when
purchased to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.
Property and Equipment, Goodwill, and Depreciation and
Amortization
Property and Equipment
We report our property and equipment at its original cost. At the
time property or equipment is retired, sold, or otherwise disposed
of, the related cost and accumulated depreciation or amortization
are deducted from the amounts reported in the Consolidated Balance
Sheet and any gains or losses on disposition are recognized in the
Consolidated Income Statement.
Goodwill
Goodwill is the excess of the acquisition cost of the businesses
over the fair value of the identifiable net assets acquired. We
amortize goodwill using the straight-line method over 40 years.
Depreciation and Amortization
We compute depreciation using the straight-line method which
recognizes the cost of the asset over its estimated useful life.
We use the following estimated useful lives for computing the
annual depreciation expense: building, 5 to 31 years; furniture
and fixtures, 5 to 7 years; medical equipment, 3 to 5 years; other
equipment, 3 to 5 years. Amortization of leasehold improvements is
recorded in the Consolidated Income Statements using the straight-
line method based on the lesser of the useful life of the
improvement or the lease term.
We assess the impairment of property and equipment and goodwill
related to our consolidated subsidiaries under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," whenever events or circumstances
indicate that the carrying value might not be recoverable.
Estimates of future cash flows are used to determine if there is
impairment.
Financial Instruments
Concentration of Credit Risk
Financial instruments that subject us to concentrations of credit
risk consist primarily of temporary cash investments and trade
receivables. Our policy is to place our temporary cash investment
in overnight repurchase agreements with The Provident Bank, the
financial institution that now provides our line of credit.
Concentrations of credit risk with respect to trade receivables is
limited due to the number of accounts and overall stability of the
health insurance and hospital industries.
Fair Values of Financial Instruments
The fair value of our cash and cash equivalents, trade receivables
and accounts payable approximate their fair values due to their
short term maturities. We were unable to determine the fair values
of our borrowings under our line of credit because there is no
liquid market for this debt.
Stock-Based Compensation
We account for stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Effective
January 1, 1996, we adopted the disclosure-only provision of SFAS
No. 123, "Accounting for Stock-Based Compensation," and related
interpretations.
Per Share Data
Basic loss per share data is loss applicable to common
shareholders divided by weighted average common shares
outstanding. Diluted per share data is loss applicable 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 result in a reduced loss per share.
Recent Accounting Pronouncements
In 1998 we adopted SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information."
SFAS No. 130 established standards for the reporting and display
of comprehensive income, requiring its components to be reported
in a financial statement that is displayed with the same
prominence as other financial statements. The adoption of SFAS No.
130 had no impact on our financial statements because our net loss
approximates comprehensive income.
SFAS No. 131 establishes standards for reporting financial
information about operating segments in annual financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. Operating segments are defined as components of
an enterprise about which separate financial information is
available and evaluated regularly by chief operating decision
makers in deciding how to allocate resources and in assessing
performance.
We now operate in one segment - laser refractive surgery. The
adoption of SFAS No. 131, which affected discolsures only, had no
impact on our consolidated results of operations, financial
condition, or cash flows.
The FASB issued in 1998 Statements No. 132, "Employees Disclosures
about Pensions Benefits", No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise (an
amendment of FASB Statement No. 65). These Statements do not
currently have an impact on us because we have no activities
covered by them.
2. Shareholders' Investment
Common Stock
We are authorized to issue up to 110 million shares of common
stock.
Preferred Stock
Class A
We are authorized to issue up to 1,688 shares of Class A
Preferred Stock which has an aggregate liquidation preference of
$68 thousand at December 31, 1998.
Class B
We are authorized to issue up to 5 million shares of
Class B Preferred Stock with terms and conditions at the
direction of our Board of Directors. However, the holders of the
Class B Preferred Stock cannot be granted voting rights superior
to those of any other existing class of our stock authorized for
issuance.
First and Second Interim Series
The Interim shares of Series Class B preferred Stock
have a par value of $0.001 and a 7% dividend. 6 shares of
the First Series are issued and have an aggregate liquidation
preference of $1.2 million; 6.6 shares of the second Series are
issued and have an aggregate liquidation preference of $1.32
million. When we acquired RCII the conversion price of the First
and Second Interim Series of the Class B Preferred Stock was
amended. Each share of the Interim Series is convertible into the
number of our common shares that results from dividing the sum of
$2 thousand plus accrued, but unpaid, dividends on that share by
$3.50.
6% Series B-1 Convertible
On May 11, 1998 we issued 10,000 shares of 6% Series B-1
Convertible Preferred Stock for $10 million. Each share has a par
value of $0.001 and a stated value of $1 thousand per share. These
shares were recorded at their stated value less issuance costs of
$537 thousand.
These shares are convertible into our common shares at a
price that floats with the closing bid price of our common stock.
The conversion price of the lesser of $3.90625 per share or the
average of the 4 lowest closing bid prices per share of our common
stock during the 22 trading days prior to the date of conversion.
We can require conversion if our common stock trades at a price
greater than $5.46875 per share for 15 consecutive trading days.
Dividends on these shares are cumulative from the date
of issuance and are payable on a quarterly basis on June 30, 1998.
We have the option to pay the dividends in cash or in shares of
our common stock. Accrued, unpaid dividends on shares being
converted are to be paid in shares of our common stock at the same
conversion price of the shares being converted.
Holders of these shares have converted 4,298 shares and
dividends totaling $117 thousand into 4,088,856 shares of our
common stock through December 31, 1998. An additional 3,037 shares
and dividends totaling $129.5 thousand were converted into
2,330,857 shares of common stock through February 5, 1999.
The holders of these shares have the right to purchase
an additional $5 million of these shares under the same terms and
conditions until May 11, 1999.
3. Acquisitions
Refractive Centers International, Inc.
On August 18, 1997, we issued 17,065,579 shares of our common
stock to Summit Technology, Inc. ("Summit") and certain
individuals for 100% of the issued and outstanding common stock of
Refractive Centers International, Inc. ("RCII").
On May 4, 1998, we issued 200,000 shares of our common stock
to an investment banking firm as compensation for services related
to the acquisition of RCII. The shares were recorded at their fair
value on the date of issuance.
We accounted for the acquisition of RCII using the purchase
method of accounting as described in Accounting Principles Board
Opinion No. 16, "Business Combinations," and related
interpretations. The purchase method required us to record in our
Consolidated Balance Sheet the fair values of the assets and
liabilities at the date of the acquisition. We recorded the
difference between the acquisition cost and the fair value of the
identifiable net assets acquired as goodwill.
The fair value of the assets acquired and liabilities assumed
consisted of cash - $10,007,000; other net working capital -
$664,000; equipment - $9,511,000; and goodwill - $12,802,000.
The revenues and expenses of RCII are included in our
Consolidated Statements of Operations beginning August 18, 1997.
Our Consolidated Statement of Operations prior to August 18, 1997
were not restated to include the historical results of RCII.
Unaudited pro forma data assuming we had acquired RCII at the
beginning of 1996 follows (dollars in thousands except per share
amounts):
1997 1996
Revenues $22,276 $16,778
Net (loss) (14,353) (22,814)
(Loss) per share (0.39) (0.62)
The pro forma data does not purport to be indicative of
operating results which would have occurred had we acquired RCII
at the beginning of 1996 or of the operating results which may
occur in the future.
<PAGE>
4. Restructuring Provision
During the second quarter of 1998 we implemented a plan to close
seven centers that were not contributing to our profitability. The
centers closed were primarily centers which had been operated by
RCII. Costs associated with the closings include $7,287,000
related the write-off of goodwill and leasehold improvements,
$677,000 for the accrual of costs for terminating leases and
employees, and $2,536,000 for the write-down of idled lasers to
their net realizable values.
At the time of completing the acquisition of RCII, we implemented
a program to close certain centers, both acquired and existing,
and reduce overhead costs. We recorded a 1.1 million restructuring
provision for these closings and $620 thousand was recorded for
facility rent and employee severance associated with closing the
RCII centers as part of the purchase price. Our 1997 Consolidated
Statement of Operations includes revenues of $414 thousand and
operating losses of $343 thousand for these centers.
We also wrote-off our investment in two of our unconsolidated
businesses that had closed their laser refractive surgery centers
and wrote-down certain product inventory to its net realizable
value. We recorded a restructuring provision of $1.1 million in
the third quarter of 1997 for the anticipated costs of these
decisions.
Costs totaling $848 thousand and $899 thousand were charged
against these accruals in 1998 and 1997, respectively. The
balance of these accruals was $748 thousand at December 31, 1998
and relates to facility rent and severance.
5. Credit Arrangements
On June 29, 1998 the Company entered into an $8 million credit
facility with The Provident Bank ("Provident"). At the same time
we repaid our borrowing from, and terminated our relationship
with, another lender.
The Provident facility, as amended, matures on June 30, 2000. The
facility can be used to support up to $2 million of letters of
credit issued by Provident and to support up to $2.5 million of
capital costs financed by leases entered into with an affiliate of
Provident. Borrowings under the working credit portion of the
facility bear interest at 1/2% above Provident's prime rate. We
have the option to convert up to $3.5 million of working capital
borrowings to a term loan. Substantially all of our assets are
pledged as collateral.
The credit facility also supports letters of credit and leased
assets totaling $1.1 million at December 31, 1998. The credit
facility, for which there is no formal compensating balance,
requires us to pay a commitment fee based of .25% on the unused
portion. At December 31, 1998 we had $4.9 million available to us
under the credit facility.
The credit facility requires us to maintain certain financial
ratios and amounts. We are to maintain tangible net worth of at
least $14 million and the ratio of total liabilities less
subordinated debt to tangible net worth must be less than .75 to
1. The credit facility defines tangible net worth as Shareholders'
Investment plus Subordinated Debt less unamortized Goodwill as
shown on our Consolidated Balance Sheets. Beginning with the
quarter ended December 31, 1998 the ratio of our earnings before
interest expense, taxes and depreciation and amortization
("EBITDA") on a trailing 12 month basis must be greater than 1.5
times the sum of our current maturities of capital lease
obligations, trailing 12 months interest expense and $140
thousand.
6. Debt
The following table displays the details of debt maturing within
one year:
(Dollars in Thousands)
At December 31, 1998 1997
Bank line of credit $6,641
Bank term loan $167 2,998
Capital lease obligations 620 543
------- -----
$ 787 $ 10,182
======== =========
We borrowed $2.1 million under the Provident credit facility on a
term loan basis. This loan bears interest at 7.45% and requires to
pay monthly installments of $12 thousand plus interest until June
30, 2000 when the remaining principal balance of $1.705 million is
due. We used the proceeds of the borrowing to purchase a
certificate of deposit from Provident with a maturity date of June
30, 2002. The certificate of deposit pays interest monthly at a
rate of 5.7% per annum. We recorded the certificate of deposit as
other assets in our Consolidated Balance Sheet at December 31,
1998.
7. Obligations Due from/Due to Shareholders and Their
Affiliates, net
The following table displays the details of net obligations due to
us in 1998 and net obligations due from us in 1997 as reported in
our Consolidated Balance Sheets:
(Dollars in Thousands)
At December 31, 1998 1997
Due from us:
Notes payable shareholders $1,500 $1,500
Accrued interest 568 463
Accrued Interim Series B
preferred stock dividend 359 183
Due to us:
Note receivable shareholders 2,100
Accrued interest 60
Receivable from shareholder's
affiliated company 738
------ ------
Net obligation $ 471 $ 2,146
====== =======
<PAGE>
The notes payable - shareholders mature on September 25, 2005, and
bear interest at 6.91%. In connection with the acquisition of RCII
the shareholders agreed to amend the notes to limit payment of
principal and accrued interest to 25% of the amount our earnings
for the prior fiscal year exceed $1 million. For this purpose
earnings are defined as income before taxes, amortization and
depreciation reduced by purchases of property and equipment for
the year. In February 1999 Summit agreed to waive our compliance
with the repayment restrictions. The notes are subordinate to any
of borrowings under the Provident credit facility.
We loaned $2.1 million to the holders of these notes payable. The
loan is collateralized by the $1.5 million notes held by the
shareholders and the accrued interest thereon and the preferred
stock dividends due them. The loan bears interest at 8.5% and
matures on September 26, 2005.
Our principal shareholder is the majority stockholder of The LCA
Center for Surgery, Ltd. ("Surgery Center") which is inactive. We
have no investment in the Surgery Center. We previously leased a
portion of our headquarters building to, and performed other
services for, the Surgery Center. We recorded rent and
administrative and marketing income of $74 thousand in 1997 and
$162 thousand in 1996. In June 1998 we purchased the leasehold
improvements that had been paid by the Surgery Center for $872
thousand, their book value at the time of purchase. During 1998 we
also advanced $576 thousand to the Surgery Center. Generally
accepted accounting principles required us to record a portion of
the Surgery Center's losses using the equity method of accounting.
We recorded losses of $265 thousand in 1998.
8. Investments in Unconsolidated Businesses
Our investments in unconsolidated businesses are comprised of the
following:
(Dollars in Thousands)
At December 31, 1998 1997
Ownership Investment Ownership Investment
The Baltimore
Laser Sight
Center, Ltd. 45% $417 45% $150
Silmalaseri Oy 43% 103 43% 24
Combined summary financial information for these investments
follows:
(Dollars in Thousands)
At December 31, 1998 1997
Financial Position:
Current assets $ 1,830 $ 597
Total assets 2,604 1,364
Total liabilities 1,443 1,057
Members' equity 1,161 307
Operating Results:
Revenue $ 3,787 $ 3,241
Net income (loss) 1,365 ( 114)
In 1997, we wrote off our investments in Excimer Associates LLC
and The Georgia Laser Sight Center, Ltd. resulting in a charge to
income of $250 thousand which was included in the restructuring
provision. In 1996, we sold the preferred stock of another
investment accounted for using the equity method of accounting for
$1 million. The gain of $546 thousand from this sale was included
in other income.
9. Income Taxes
We have not recorded a provision for U.S. income taxes for each of
the three years ended December 31, 1998 because of our operating
losses. The income tax expense in our Consolidated Statements of
Operations consists primarily of Canadian income taxes. We are
required to pay franchise taxes in most of the states in which we
have operations due to our net operating losses. We include the
franchise taxes paid in general and administrative expenses in our
Consolidated Statements of Operations.
At December 31, 1998, we have net operating loss carryforwards for
Federal and state income tax purposes of $35.3 million which
expire in varying amounts from 2012 through 2019. Approximately
$15 million of net operating loss carryforwards were acquired when
we bought RCII. Our ability to use these acquired net operating
loss carryforwards is subject to utilization limitations contained
in Section 382 of the Internal Revenue Code.
Deferred taxes arise because of differences in the book and tax
bases of certain assets and liabilities. Significant components of
our deferred tax assets (liabilities) are shown in the following
table:
(Dollars in Thousands)
At December 31, 1998 1997
Net operating loss carryforward $ 13,750 $ 12,320
Accounts receivable 140 140
Inventories 173 144
Marketable securities 138 138
Property and equipment 215 195
Notes payable to shareholders 185 185
Equity investments 351 262
Other 115 115
-------- -------
Deferred tax assets $ 15,067 $ 13,499
============ ==========
Valuation allowance $ (15,067) $(13,499)
============ ==========
The valuation allowance primarily represents tax benefits of net
operating loss carry forwards which may expire prior to being
utilized.
10. Leasing Arrangements
We lease office space for our centers and equipment for use in our
operations under both capital and operating leases. Capital leases
were primarily used for financing the lasers in our first five
centers; we now finance the cost of lasers using operating leases.
This table displays our aggregate minimal rental commitments under
noncancellable leases for the periods shown:
December 31, 1998 (Dollars in Thousands)
Capital Leases Operating Leases
Year
1999 $ 753 $ 5,029
2000 695 4,425
2001 62 2,135
2002 454
2003 288
Thereafter 101
------ ---------
Total minimum rental commitment 1,510 $ 12,432
===========
Less interest 75
-----------
Present values of minimum
lease payments 1,435
Less current installments 620
Long-term obligation at
December 31, 1998 $ 815
Total rent expense under operating leases amounted to $3.9 million
in 1998, $1.7 million in 1997, and $267 thousand in 1996. As of
December 31, 1998, the total minimum sublease rentals to be
received in the future under noncancellable operating leases was
approximately $970 thousand.
11. Employee Benefits
Savings Plan
We sponsor a savings plan under Internal Revenue Code Section
401(k) to provide an opportunity for eligible employees to save
for retirement on a tax-deferred basis. Under this plan, we make
discretionary contributions to the participants' accounts. We made
contributions of $26,000 in 1998 and none in 1997 and 1996.
Stock Option Plans
We have fixed stock option plans under which options to
purchase shares of our common stock are granted at a price equal
to the market price of the stock at the date of grant. The awards
under the plans are determined by the Compensation Committee of
the Board of Directors.
Under the 1995 Long term Stock Incentive Plan ("1995 Plan"),
employees and/or consultants may be granted incentive and/or
nonqualified stock options. The 1995 Plan permits the issuance of
stock appreciation rights and stock awards to employees. A maximum
of 2.5 million shares of common stock are reserved for the 1995
Plan.
This table is a summary of the status of our 1995 Plan:
Stock Options Weighted - Average
Exercise Price
Outstanding, December 31, 1995
Granted 1,996,750 $4.92
Forfeited (178,125) 5.25
---------
Outstanding, December 31, 1996 1,818,625 4.06
Granted 647,500 3.26
Forfeited (634,563) 4.95
Outstanding, December 31, 1997 1,831,562 4.03
Granted 843,600 1.02
Exercised (20,000) 2.56
Forfeited (650,337) 2.84
---------
Outstanding, December 31, 1998 2,004,825 $1.82
=========
Options exercisable, December 31:
1996 334,113 $4.77
1997 405,913 4.34
1998 524,625 2.31
In October 1998 our stockholders approved the adoption of
the 1998 Long Term Stock Incentive Plan ("1998 Plan"). Under the
1998 Plan employees may be granted incentive and/or nonqualified
stock options in addition to stock awards. A total of 5 million
shares of common stock are reserved for the 1998 Plan. No options
have been granted under the 1998 Plan.
The 1998 Plan will also be used to grant stock options to our
non-employee directors. Under the 1998 Plan, non-employee
directors will receive an option to purchase 75,000 shares of
common stock upon initial election or appointment and an annual
automatic grants of options to purchase 12,500 shares of common
stock. Non-employee directors previously received stock options
under the LCA-Vision Inc. director's Nondiscretionary Stock Option
Plan which has been discontinued.
The Compensation Committee of the Board of Directors
administers the 1995 and 1998 Plans. Options are granted with an
exercise price not less than fair market value on the date of
grant. Options granted have generally been exercisable ratably
over 5 years and expire in 10 years from the date of grant. The
1998 Plan allows for options to become exercisable or in part six
months after the date the option is granted or may become
exercisable in one or more installments.
In 1998 the Compensation Committee decided to reprice the
exercise prices of 973,750 stock options previously granted to
$1.1875 per share, the market price at the date of repricing.
These options had a weighted average exercise price of $4.02 per
share. As of December 31, 1998, a total of 486,175 shares were
available for the granting of options under the 1995 Plan.
<PAGE>
<TABLE>
This table summarizes information about the 1995 Plan stock options outstanding as of
December 31, 1998:
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
----- ------- ----------- ----- ------- -----------
Weighted - Weighted - Weighted -
average average average
Range of Exercise Prices Remaining
Shares Contractual Life Exercise Price Shares Exercise Price
------ ----------- ---- -------------- ------ -------- -----
<S> <C> <C> <C> <C> <C>
0.8750 352,400 9.0 years $0.8750
1.1250-1.1875 1,007,000 8.8 years 1.1844 314,325 $1.1875
1.2500-3.5000 391,650 8.9 years 2.0726 101,650 2.6431
5.2500 253,775 7.4 years 5.2500 108,650 5.2500
/TABLE
<PAGE>
This table is a summary of the status of our now discontinued
Director's Nondiscretionary Stock Option Plan:
Stock Options Weighted - Average
Exercise Price
Outstanding, December 31, 1995
Granted 150,000 $8.00
-------
Outstanding, December 31, 1996 150,000 8.00
Granted 151,250 3.25
Forfeited (75,000) 8.00
-------
Outstanding, December 31, 1997 226,250 4.83
Granted 78,750 3.25
-------
Outstanding December 31, 1998 305,000 $4.42
=======
As of December 31, 1998, a total of 60,250 options with a
weighted-average exercise price of $5.67 are exercisable under
this plan.
We apply APB No. 25 and related interpretations in accounting
for our stock option plans. We have adopted the disclosure-only
provisions of SFAS No. 123. We recognize no compensation expense
for our stock options granted to employees or directors.
Compensation expense for options granted to non-employees in each
of the three years ended December 31, 1998 was immaterial. If we
had elected to recognize compensation expense based on the fair
value at the grant dates consistent with the provisions of SFAS
no. 123, net loss and loss per share would have been changed to
the pro forma amounts indicated below:
(Dollars in Thousands, Except Per Share Amounts)
Years ended
December 31, 1998 1997 1996
Net (loss) As reported $(13,736) $(8,036) $(4,057)
Pro forma (15,453) (9,588) (4,863)
Diluted (loss)
As reported (0.36) (0.30) (0.21)
Pro forma (0.41) (0.36) (0.25)
These results may not be representative of the effects on pro
forma amounts for future years.
<PAGE>
We determined the pro forma amounts using the Black-Scholes
option-pricing model based on the following
assumptions:
1998 1997 1996
Dividend yield 0% 0% 0%
Expected volatility 92% 98% 98%
Risk free interest rate 4.9% 5.34-6.82% 5.46-5.56%
Expected lives (in years) 5 5 5
The weighted-average fair value of options granted was $.75
per option during 1998, $1.14 per option during 1997, and $4.15
per option during 1996.
12. Commitments and Contingencies
We are a defendant and counter-claimant 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. Also named as co-defendants are various current and former
employees, officers and directors. The case arises out of the
operations of a New York limited liability company (the "LLC")
which had been formed by us, the plaintiffs 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, we 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 the complaint, the plaintiffs allege breaches of our
obligations as a member of the LLC, and have demanded both
substantial damages and equitable relief. We have filed an answer
denying the allegations of the complaint, and asserting
counterclaims against the plaintiffs seeking substantial damages,
alleging that the plaintiffs wrongfully failed to match the
capital contributions made by us to the LLC. We believe that the
plaintiffs' claims are without merit and intend to vigorously
defend the action and pursue our counterclaims.
After commencement of the above action, we filed an action against
the PC seeking damages for its failure to pay the capital
contributions required of it to the LLC. The PC has counterclaimed
alleging a right to be indemnified for its losses relating to the
LLC's operations.
Both actions are in the discovery stage.
In the opinion of management neither action will have a material
adverse effect on our financial position or results of operations.
13. Additional Financial Information
The tables below provide additional financial information related
to our consolidated financial statements:
Balance Sheet Information
(Dollars in Thousands)
At December 31, 1998 1997
Receivables
Trade receivables - vision $ 1,482 $ 1,250
Trade receivables - other 1,034 1,690
Allowances (1,397) (893)
------ ------
$ 1,119 $ 2,047
======= ======== <PAGE>
(Dollars in Thousands)
At December 31, 1998 1997
Prepaid Expenses, Inventory and Other
Prepaid expenses $ 1,235 $ 1,334
Notes receivables 304
Inventory 44 103
Other 137 151
------ -------
$ 1,416 $ 1,892
======= ========
Property and equipment
Land $ 375 $ 375
Building and improvements 5,278 4,933
Leasehold improvements 1,930 1,729
Furniture and fixtures 1,556 1,684
Equipment 6,702 13,231
Equipment under capital leases 784 2,429
Other 186 141
------ ------
16,811 24,522
Accumulated depreciation and
amortization (7,398) (6,101)
Construction in progress 20 41
------ ------
$ 9,433 $ 18,462
======= ========
Other assets
Certificate of deposit $ 2,100
Other 2,518 $ 1,209
------ -------
$ 3,618 $ 1,209
======= ========
Cash Flow Information
(Dollars in Thousands)
For the Year Ended December 31, 1998 1997 1996
Cash paid during the year for
Interest $ 854 $ 985 $ 489
Income Taxes 157 68
Non cash investing and financing
activities
Common stock issued for acquisitions 580 32,786
Acquisition of equipment under
capital leases 2,265
Preferred stock issued for conversion
of notes payable- shareholders 2,522
Inventory sold for long-term note 248
Transfer of equipment under capital
lease to unconsolidated business 486
Segment Information
(Dollars in Thousands)
For the Year Ended December 31, 1998 1997 1996
Canadian operations
Revenues $2,016 $2,083 $2,096
Operating profit 471 298 79
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
LCA-Vision (Ohio), Inc. Ohio
Refractive Centers International, Inc. Delaware
LCA-Vision (Canada) Inc. Ontario, Canada
The Toronto Laservision Centre (1992) Inc. Ontario, Canada
938051 Ontario, Inc. Ontario, Canada
<PAGE>
Exhibit 23
to
Form 10-KSB for 1998
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, 333-39179 and 333-55955) of
our report dated February , 1999 on our audits of the
consolidated financial statements of LCA-Vision Inc. as of
December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998, which report is included in this
Annual Report on Form 10-KSB.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
________________, 1999<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE LCA-VISION INC.
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998, AND THE RELATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001003130
<NAME> LCA-VISION INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 0.00001
<CASH> 6,496
<SECURITIES> 0
<RECEIVABLES> 2,516
<ALLOWANCES> (1,397)
<INVENTORY> 44
<CURRENT-ASSETS> 9,031
<PP&E> 16,831
<DEPRECIATION> 7,398
<TOTAL-ASSETS> 31,377
<CURRENT-LIABILITIES> 5,454
<BONDS> 2,724
0
7,687
<COMMON> 103
<OTHER-SE> 15,409
<TOTAL-LIABILITY-AND-EQUITY> 31,377
<SALES> 17
<TOTAL-REVENUES> 35,200
<CGS> 0
<TOTAL-COSTS> 24,463
<OTHER-EXPENSES> 24,165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 786
<INCOME-PRETAX> (13,061)
<INCOME-TAX> 157
<INCOME-CONTINUING> (13,736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
