U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999.
[ ] 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:
51,502,989 shares as of November 2, 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
LCA-VISION INC.
INDEX
Facing Sheet
Index Page No.
Part I. Financial Information 1
Item 1. Financial Statements 2
Condensed Consolidated Balance Sheets
at September 30, 1999 (unaudited) and
at December 31, 1998 (audited) 3
Unaudited Condensed Consolidated
Statements of Operations for the
Three and Nine Months Ended
September 30, 1999 and 1998 4
Unaudited Condensed Consolidated
Statements of Cash Flows for the
Nine Months Ended September 30,
1999 and 1998 5
Notes to Unaudited Condensed
Consolidated Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information 17
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 19
LCA-VISION INC.
Condensed Consolidated Balance Sheet
September 30, 1999 (unaudited) and
December 31, 1998 (audited)
<TABLE>
September 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $13,227 $ 6,496
Short-term investments 37,299
Accounts receivable, net 2,024 1,119
Prepaid expenses, inventory
and other 1,993 1,416
------ -------
Total current assets 54,543 9,031
Property and equipment, net 9,120 9,433
Goodwill, net 8,113 8,304
Obligations due from shareholders, net 708 471
Investment in unconsolidated businesses 160 520
Certificate of deposit 2,100
Other assets 813 1,518
------ -------
Total assets $73,457 $31,377
------ -------
------ -------
Liabilities and Shareholders' Investment
Current liabilities
Accounts payable $2,106 $ 2,030
Accrued liabilities and other 2,935 2,637
Debt maturing in one year 653 787
------ -------
Total current liabilities 5,694 5,454
Long-term debt 481 2,724
Commitments and contingencies
Shareholders' investment
Preferred stock 7,687
Common stock ($0.001 par value;
51,489 shares and 40,974 shares issued) 114 103
Contributed capital 88,239 41,701
Accumulated (deficit) (21,059) (25,664)
Foreign currency translation adjustment 18 (14)
Less common stock in treasury at cost 30 30
Less accrued preferred stock dividend 584
------ -------
67,282 23,199
------ -------
Total liabilities and shareholders'
investment $73,457 $31,377
------ -------
------ -------
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.
LCA-VISION INC.
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1999 and 1998
(unaudited)
<TABLE>
in thousands, except per share data
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <S> <S> <S> <S>
Revenues:
Laser refractive
surgery $14,882 $8,398 $42,617 $23,134
Other 91 698 953 2,189
------ ----- ------ ------
Total revenues 14,973 9,096 43,570 25,323
Operating costs and
expenses:
Medical professional
and license fees 6,434 3,561 18,635 9,754
Direct costs of
services 3,108 2,771 8,396 8,234
General and
administrative
expenses 3,681 2,748 9,904 7,326
Depreciation and
amortization 775 692 2,211 2,815
Restructuring provision (150) 10,500
------ ------
Operating income (loss) 975 (676) 4,574 (13,306)
Equity in earnings (loss)
of unconsolidated
businesses (153) 108 264 144
Interest expense 25 108 145 698
Interest income 632 106 908 302
Other income (expense) 4 37 (55) 98
------ ----- ------ ------
Income (loss) before
taxes on income 1,433 (533) 5,546 (13,460)
Taxes on income 10 8 18 145
------ ----- ------ -------
Net income (loss) 1,423 (541) 5,528 (13,605)
Dividends to preferred
shareholders 12 218 140 390
------ ----- ------ -------
Income (loss) available
to common shareholders $1,411 $ (759) $ 5,388 $(13,995)
------ ----- ------ -------
------ ----- ------ -------
Income (loss) per
common share
Basic $0.03 $(0.02) $0.12 $(0.38)
Diluted $0.03 $(0.02) $0.11 $(0.38)
Weighted average
shares used in
computation
Basic 51,227 37,163 46,819 36,882
Diluted 54,389 37,163 50,104 36,882
</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 Nine Months Ended September 30, 1999 and 1998
(unaudited)
<TABLE>
in thousands
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $5,388 $(13,605)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,211 2,815
Equity in income of unconsolidated
affiliates (264) (144)
Compensation paid in common stock 375
Restructuring provision (150) 10,500
Other (134)
Changes in working capital:
Accounts receivable (804) 444
Prepaid expenses, inventory and other (301) 85
Accounts payable (457) (626)
Accrued liabilities and other 946 (259)
---- ------
Net cash provided by (used in) operations 6,810 (790)
Cash flows from investing activities:
Purchase of property and equipment (846) (1,811)
Advances to affiliates and shareholders (2,670)
Beginning cash of consolidated affiliate 1,032
Purchase of cash investments (35,199) (2,100)
Proceeds from sales of equipment 200 1,061
Other, net 7 (57)
---- ------
Net cash (used) by investing activities (34,806) (5,577)
Cash flows from financing activities:
Net (repayment) bank borrowing (9,651)
Bank borrowings 2,100
Principal payments of long-term notes,
debt and capital lease obligations (2,470) (395)
Exercise of stock options and warrants 944 51
Proceeds from sale of common stock 36,715
Proceeds from sale of 6% convertible
preferred stock 9,463
Cash dividends paid (462)
---- ------
Net cash provided by financing
activities 34,727 1,568
------ -------
Increase (decrease) in cash and cash
equivalents 6,731 (4,799)
Cash and cash equivalents at beginning
of period 6,496 8,680
------ -------
Cash and cash equivalents at end of
period $13,227 $3,881
------ -------
------ -------
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
LCA-VISION INC.
Notes to Condensed Consolidated Financial Statements
for the Three and Nine Months Ended September 30, 1999 and 1998
1. Summary of Significant Accounting Policies
The September 30, 1999 and 1998 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. We prepared
our Condensed Consolidated Interim Financial Statements in
conformity with Securities and Exchange Commission rules and
regulations which allow us to condense or omit certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles. Please read our 1998 Annual Report and Form 10-K to
gain a more complete understanding of our financial statements.
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").
The VISX Star S2 laser, which we have in each of our U.S. centers,
treats nearsightedness, myopic astigmatism, and hyperopia. We also
manage multi-specialty laser surgery programs at medical
facilities on a contract basis.
Revenue by source is comprised of:
- - Laser refractive surgery - fees for surgeries performed at our
wholly-owned centers.
- - Other - management fees for operating laser vision correction
centers of investees; contractual fees for managing multi-
specialty laser surgery programs at hospitals; marketing and
education program fees; and miscellaneous sources.
Operating costs and expenses are classified as follows:
- - Medical professional and license fees include fees collected by
us for the physicians performing laser vision correction and
the license fee of $260 per procedure paid to VISX.
- - Direct costs of services include center rent and utilities,
equipment lease and maintenance costs, surgical supplies,
center staff expense, and costs related to other revenue.
- - General and administrative include marketing and advertising,
headquarters staff expense, and other overhead costs.
- - Depreciation and amortization include periodic charges to
income for the costs of equipment and intangible assets
recorded in the balance sheet.
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
a subsidiary or affiliate. This means their accounts are combined
with our accounts. We eliminate intercompany balances and
transactions when we consolidate these accounts.
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 investment in Silmalaseri Oy under the equity
method.
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.
Short-term Investments
Our short-term investments consist primarily of time deposits and
obligations of U.S. government agencies with a maturity of 90 days
or more when purchased. Short-term investments are stated at cost,
which approximates market value.
Short-term investments at September 30, 1999 were (in thousands):
Certificate of deposit, due June 30, 2000 $2,100
Federal Home Mortgage Corporation:
note due January 28, 2000 15,200
note due February 15, 2000 19,999
------
$37,299
Per Share Data
Basic per share data is income (loss) applicable to common
shareholders divided by the weighted average common shares
outstanding. Diluted per share data is income (loss) applicable to
common shareholders divided by the weighted average common shares
outstanding plus the potential issuance of common shares if stock
options and warrants were exercised or convertible preferred stock
were converted into common stock.
Following is a reconciliation of basic and diluted earnings per
share for the three and nine months ended September 30, 1999 (in
thousands, except per share amounts):
<TABLE>
Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,423 $5,528
Dividends to
preferred
shareholders (12) (140)
----- -----
Basic EPS 51,227 46,819
Income available
to common
shareholders 1,411 $0.03 5,388 $0.12
---- ----
---- ----
Effect of Dilutive
Securities
Convertible
preferred stock 12 284 140 1,082
Stock options 2,794 2,143
Warrants 84 60
----- ------
Diluted EPS
Income available
to common
shareholders
and assumed
conversions $1,423 54,389 $0.03 $5,528 50,104 $0.11
</TABLE>
The weighted average shares for the September 30, 1998 diluted
calculations do not assume exercise of any stock options or
conversion of other securities since they would result in a
reduced loss per share.
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 Operations 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.
2. Shareholders' Investment
Common Stock
On June 30, 1999 we sold 5,000,000 new shares of our common stock
at a public offering price of $8.00 per share. Net proceeds
approximated $36,715,000 after deducting underwriting discounts
and commissions and our offering expenses, including the fee to be
listed on the Nasdaq National Market.
During the nine months ended September 30, 1999, 584,684 shares of
common stock at a weighted average exercise price of $1.57 per
share were issued to individuals who exercised stock options.
During the three months ended September 30, 1999 individuals
exercised 210,102 stock options at a weighted average exercise
price of $1.70 per share.
Preferred Stock
At September 30, 1999, there are no shares of preferred stock
issued and outstanding.
Class A
In February 1999 certain holders exchanged their shares of Class A
Preferred Stock for 33,191 shares of our common stock. In 1999 our
principal shareholder paid approximately $34,000 of a note due us
with his shares of Class A Preferred Stock. We retired the shares
of Class A Preferred Stock received.
Class B
First and Second Interim Series
Our Board of Directors declared the payment of the cumulative
unpaid dividend on our Class B Preferred Stock First and Second
Interim Series to the holders of record on July 31, 1999. The cash
dividend paid was $462,000. Subsequent to the payment of the
dividend, the holders of the 12.6 shares issued and outstanding
converted their shares into 720,478 restricted shares of our
common stock.
6% Series B-1 Convertible Preferred Stock
At December 31, 1998, 5,702 shares of the 6% Series B-1
convertible preferred stock were outstanding. During the three
months ended March 31, 1999, these shares and dividends totaling
$264,000 were converted into 3,994,642 shares of common stock.
The holders of these shares had the right to purchase an
additional $5 million of convertible preferred stock under the
same terms and conditions as the 6% Series B-1 Convertible
Preferred Stock until May 11, 1999. In March 1999 certain majority
holders of these shares agreed to accept 165,076 shares of our
common stock in exchange for their waiving their option to
purchase the additional convertible preferred stock. In June 1999
a former holder of these shares agreed to accept 25,396 shares of
our common stock in the same type of exchange. These agreements
resulted in a non-cash charge of $375,000 recorded as other
expense in the Condensed Consolidated Statement of Operations for
the nine months ended September 30, 1999, respectively.
Warrants
During the year, we issued warrants to purchase a total of 925,000
shares of common stock at prices ranging from $2 to $12 per share.
Warrants to purchase 125,000 shares at $2 per share are currently
exercisable. During the quarter, warrants for 14,064 shares were
exercised. Warrants to purchase 800,000 shares at $12 per share
were issued during the quarter of which 200,000 each are
currently exercisable; the remaining warrants become exercisable
in equal installments of 200,000 each as of December 31, 1999,
2000, and 2001.
3. Debt
At December 31, 1998 we had a term loan borrowing under our credit
facility of $2,053,000. The loan had an interest rate of 7.45% and
required monthly installments of $12,000 plus interest until June
30, 2000 when the remaining principal balance of $1,705,000 would
become due. In March 1999 we repaid the loan balance of
$2,030,000.
In May 1999 our line of credit with The Provident Bank was
increased to $10,000,000. We also were granted a $10,000,000 line
of credit for the purpose of funding acquisitions.
On September 30, 1999, our line of credit agreement was amended to
include a LIBOR plus 2-1/2% option for any borrowings under this
agreement. In addition, certain of the events of default were
changed. We are now required to maintain tangible net worth of
$45 million and our EBITDA (earnings before interest expense,
taxes, and depreciation and amortization) for the trailing twelve
months must be greater than 2.0 times the sum of our current
maturities of capital lease obligations and trailing twelve
months' interest expense.
4. Obligations Due from Shareholders and Their Affiliates, Net
The following table displays the details of net obligations due to
us as reported in our September 30, 1999 Condensed Consolidated
Balance Sheet (in thousands):
Due to us:
Receivable from shareholder's
affiliated company $631
Accrued interest 77
---
$708
---
---
Our principal shareholder is the majority stockholder of an
inactive ambulatory surgical center. We have no investment in this
surgery center; however, we did lease a portion of our
headquarters building and provided other administrative services.
During 1999 we acquired computer equipment and software from the
surgery center at their book value of $103,000. The account
receivable was reduced by this amount.
At December 31, 1998 we owed our principal shareholders notes in
the principal amount of $1,500,000 and interest of $568,000. These
shareholders owed us $2,100,000 which was collateralized by our
obligation to them. In March 1999 we repaid the obligations due
shareholders of $2,094,000 by netting the amount against the
advance to shareholders.
5. Investments in Unconsolidated Businesses
At June 30, 1999 we owned 45% of The Baltimore Laser Sight Center,
Ltd. ("Baltimore"). We reported our investment in Baltimore under
the equity method.
In July 1999, two other investees in Baltimore, owning
approximately 53%, resigned as members and Baltimore redeemed
their membership interests. This redemption increased our
ownership to approximately 97% which requires our combining
Baltimore's accounts with our accounts beginning the third quarter
1999. Our results of operations for the nine months ended
September 30, 1999 include Baltimore's third quarter and our
percentage share of the earnings for the six months ended June 30,
1999.
6. Segment Information
We operate in one segment - laser refractive surgery. The table
below summarizes the results of our Canadian operations included
in the Condensed Consolidated Statement of Operations for the
three and nine months ended September 30, 1999 and 1998 (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues $407 $419 $1,226 $1,575
Operating profit (loss) (66) 67 13 407
7. Additional Financial Information
The table below provides additional financial information related
to our Condensed Consolidated Statement of Operations (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Direct costs of
laser refractive
surgery:
Employee costs $1,156 $1,053 $3,110 $3,131
Equipment rent
and maintenance 1,042 870 2,799 2,229
Facility rent and
utilities 318 320 922 1,179
Supplies, gas and
other 549 391 1,434 984
----- ----- ----- -----
Total $3,065 $2,634 $8,265 $7,523
----- ----- ----- -----
----- ----- ----- -----
8. Commitments and Contingencies
We are a defendant and counter-claimant in a consolidated 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
involves claims and counterclaims asserted by and against us, and
two other members of a New York limited liability company formerly
engaged in operating a laser refractive surgery center, and arises
out of the cessation of operations of such limited liability
company.
Discovery in the actions, has recently concluded, and all parties
have filed motions, based on the discovery results, to dismiss all
claims of the other parties. A decision on the motions will be
issued by the court in due course.
In the opinion of management neither action will have a material
adverse effect on our financial position or results of operations.
Item 2. Management's Discussion and Analysis or Plan of
Operation.
This quarterly report on Form 10-QSB 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 for the three and nine months
ended September 30, 1999. It explains why our revenues and costs
changed, our overall financial condition, and other matters
including the Year 2000 Issue.
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").
The VISX Star S2 laser, which we have in each of our U.S. centers,
can be used for correcting nearsightedness, myopic astigmatism,
and hyperopia. We also manage a multi-specialty laser surgery
program at a medical facility.
Our sources of revenue are:
- - Laser refractive surgery - fees for surgeries performed at our
wholly-owned centers.
- - Other - management fees for operating laser vision correction
centers of investees; contractual fees for managing multi-
specialty laser surgery programs; marketing and education
program fees; and miscellaneous sources.
Our operating costs and expenses are comprised of:
- - Medical professional and license fees include fees collected by
us for the physicians performing laser vision correction and
the license fee of $260 per procedure paid to VISX.
- - Direct costs of services include center rent and utilities,
equipment lease and maintenance costs, surgical supplies,
center staff expense, and costs related to other revenue.
- - General and administrative include marketing and advertising,
headquarters staff expense, and other overhead costs.
- - Depreciation and amortization include periodic charges to
income for the costs of equipment and intangible assets
recorded in the balance sheet.
Results of Operations - Revenues
Laser refractive surgery
Laser refractive surgery revenue generally includes three
components: facility fee, royalty fee, and medical professional
fees. 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 costs from centers in such states do not include the
medical professionals fee component. The contribution, or revenues
less medical professional and license fees, from laser refractive
surgery procedures were (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue $14,882 $8,398 $42,617 $23,134
Less: Medical
professional and
license fees 6,434 3,561 18,635 9,754
------ ----- ------ ------
Contribution $8,448 $4,837 $23,982 $13,380
------ ----- ------ ------
------ ----- ------ ------
The following table illustrates the growth of laser vision
correction procedures performed at our consolidated centers.
Consolidated
1999 1998 1997
Q1 7,591 3,887 979
Q2 8,365 4,891 1,506
Q3 8,769 5,327 2,375
Q4 5,686 2,888
Our growth and profitability are predicated on increases in
procedure volume. Industry sources estimate that over 900,000
procedures will be performed in the U.S. in 1999. 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.
Other
Revenue declined because we reduced the extent to which we provide
management services for multi-specialty surgery programs at
hospitals 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 the 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.
Operating costs and expenses
Medical professional and license fees
The increases are a direct result of the increase in procedures
performed at our wholly-owned centers. These costs comprise a
significant portion of the total costs of a laser vision
correction procedure.
Direct costs of services
The table below provides information related to our direct costs
of services.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Laser refractive
surgery
Employee costs $1,156 $1,053 $3,110 $3,131
Equipment rent
and maintenance 1,042 870 2,799 2,229
Facility rent and
utilities 318 320 922 1,179
Supplies, gases
and other 549 391 1,434 984
----- ----- ----- -----
3,065 2,634 8,265 7,523
Hospital and other 43 137 131 711
----- ----- ----- -----
$3,108 $2,771 $8,396 $8,234
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
These costs decrease as a percentage of revenue because they
represent, for the most part, the fixed costs of a laser vision
correction center. 1998 includes the costs of the eight centers
closed during the year.
General and administrative
The table below provides information related to general and
administrative expenses (in thousands, except per cent data).
Three months ended Nine months ended
Dollars % of Revenue Dollars % of Revenue
September 30, 1999 $3,681 24.6% $9,904 22.7%
September 30, 1998 2,748 30.2 7,326 28.9
Our general and administrative expenses rose in dollars recorded
primarily due to additional marketing costs and programs and
increased usage of financing options offered, on a non-recourse
basis, to patients.
Depreciation and amortization
Depreciation and amortization for the three months ended September
30, 1999 increased as a result of capital expenditures, primarily
equipment.
The decrease for the nine month period results primarily from the
write-off of goodwill and leasehold improvements and the write-
down of idled lasers to their net realizable values announced in
the second quarter of 1998.
Non-operating income and expenses
Equity in earnings of unconsolidated affiliates is our share of
the profits of unconsolidated affiliates. Interest expense
decreased due to the significant reduction in debt. Interest
income increased because we had cash to invest in overnight cash
equivalents and short-term obligations issued by US government
agencies. Other expense in 1999 includes a $350,000 expense
associated with the issuance of 190,472 shares of our common stock
to certain majority holders of our 6% series B-1 convertible
preferred stock in exchange for these holders waiving their option
to purchase an additional $5,000,000 of convertible preferred
stock.
Liquidity and Capital Resources
On June 30, 1999 we sold 5,000,000 new shares of our common stock
at a public offering price of $8.00 per share. Net proceeds
approximated $36,715,000 after deducting underwriting discounts
and commissions and our offering expenses, including the fee to be
listed on the Nasdaq National Market.
We intend to use the net proceeds of the offering as follows:
- - To extensively market our centers and our brand names,
- - To open additional laser vision correction centers,
- - To purchase additional equipment,
- - To fund possible future strategic acquisitions, and
- - To provide working capital and for general corporate purposes.
We currently have no agreements or understandings with respect to
any material future acquisition. We will have broad discretion in
how to use our net proceeds. Until we use the proceeds for
business purposes, we intend to temporarily invest our net
proceeds from this offering in short-term, investment-grade,
interest-bearing securities or obligations of, or guaranteed by
the U.S. government.
Other sources of liquidity for the next year are expected to be:
- - cash generated from operations
- - proceeds from the exercise of stock options
- - credit facility and lease financing, as necessary
We generated positive cash flow from operations for the three and
nine months ended September 30, 1999. This was sufficient to
finance our capital expenditures and debt repayment.
Our cash balance increased $6,731,000 during the nine months ended
September 30, 1999. Cash flow from operations was $6,810,000
during this period. We also received $944,000 from the exercise of
stock options and warrants. We used $2,470,000 of our cash to make
principal payments on our debt and $846,000 for additions to
property and equipment.
During the quarter ended March 31, 1999, all of the outstanding
shares of our Series B-1 convertible preferred stock and accrued
dividends thereon were converted into shares of our common stock.
On July 31, 1999 we paid the cumulative dividends unpaid on our
Class B Preferred Stock First and Second Interim Series. The cash
dividend paid was $462,000. Subsequent to the payment of the
dividend, the holders of these shares converted them into 720,478
restricted shares of our common stock. As a result of these
conversions we no longer have an expense or a liability for
preferred stock dividends.
Our line of credit with The Provident Bank is $10,000,000. At
September 30, 1999, the line of credit supports letters of credit
totaling $800,000 and $9,200,000 is available to us for borrowing.
We also have a $10,000,000 line of credit for the purpose of
funding acquisitions.
At December 31, 1998 we had net operating loss carryforwards
("NOL's") for federal and state income tax purposes of $35.3
million which expire in varying amounts from 2012 through 2019.
These operating losses are available to offset future taxable
income. Approximately $15 million of the NOL's were acquired when
we bought Refractive Centers International, Inc. in August 1997
and their use is subject to limitation under Section 382 of the
Internal Revenue Code.
Approximately $15 million of our NOL's consist of deferred tax
assets for which, because of our operating losses, we could not
record a benefit in our statement of operations and a valuation
allowance was necessary. If our profitability continues, we will
be able to reduce the valuation allowance. A reduction of the
valuation allowance is generally shown in the statement of
operations as a reduction of income tax expense.
Regardless of when the reduction in the valuation reserve is
recognized in the statement of operations, the utilization of the
NOL's will substantially reduce our cash obligation for payment of
income taxes otherwise due over the next several years.
Forward-looking Information
During the quarter we introduced a "value pricing" model -
LasikPlus - in our Baltimore and Annapolis, Maryland centers. The
pricing of $2,995 resulted in a significant increase in procedures
- - 1,629 procedures compared with 1,178 during the second quarter,
a quarter-to-quarter increase of 38% and a year-over-year increase
of 152% - while maintaining the excellent clinical results and
patient satisfaction found in our open-access centers. Our initial
consumer research is that the value price makes LASIK surgery more
affordable to a larger customer base. As a result of our initial
success we have expanded the LasikPlus model to our centers in
California; Edina, Minnesota; and Columbus and Toledo, Ohio.
Even though we have reduced the price to the consumer, we have
maintained our per procedure contribution margin (total fee net of
medical professional and license fees). In order to launch the
LasikPlus model we have increased our marketing and advertising
efforts. We expect these costs to continue to increase at least
the next two quarters as we convert existing centers and add new
centers under the LasikPlus model. After the period of high-impact
advertising and marketing programs, we anticipate the expenditures
returning to traditional levels.
We have also completed physician enrollment in our National Lasik
Network. This network of ophthalmologists was established
subsequent to our agreement with Cole Managed Vision, a division
of Cole National Corporation, to offer laser vision correction
services to Cole members nationwide beginning January 2000. Cole
provides vision care benefits to such managed care companies as
Aetna/U.S. Healthcare, Blue Cross and Blue Shield as well as
MetLife, Healthnet and Cigna.
This agreement with Cole provides us access to over 50 million
managed care lives.
Year 2000 Issue
Compliance. Our services, operations, customers, suppliers and
service providers all rely on information technology systems, both
hardware and software, to function properly. This includes readily
apparent systems such as those controlling the VISX excimer lasers
used as a key part of our services as well as less obvious ones
such as those required to provide electricity to our headquarters
and our centers.
Suppliers. We have been surveying existing suppliers about the
ability of their systems and products to properly handle dates for
the Year 2000. However, VISX has advised us that its excimer
lasers will remain fully functional through the Year 2000 and
beyond. VISX has determined that the excimer laser systems do not
properly print or store patient report dates and procedures
performed in the Year 2000. VISX is in the process of developing
and testing a solution to this problem and expects to have it
available to us by the end of 1999.
Operations. We have been gathering information from vendors about
Year 2000 compliance for each of the major elements of our
internal information technology systems. Based on the statements
from vendors, we understand the following:
The latest versions of our operating systems, which include MS
Windows NT 4.x, MS Windows 98, MS Windows 95 and Solaris 7, are
all Year 2000 compliant. We have upgraded our file servers to
Solaris 7.
Our key applications, which include Oracle 8, Solomon IV financial
software for Windows, MS Office 97 and Netscape Enterprise server
and browser, are Year 2000 compliant.
We have installed a new call center information system, the Melita
International Corporation PhoneFrame Explorer System. This system,
which is Year 2000 compliant, became operational in the third
quarter of 1999. The new system has been leased on a three year
term.
Our computer hardware, which is all PC-based, is Year 2000
compliant with the exception of several older personal computers.
The hardware used to control our local area network is Year 2000
compliant. We expect to install any remaining necessary upgrades
or replace computers that are not Year 2000 compliant by year-end.
We have received notification from third parties that service our
facility that it is Year 2000 compliant with regard to building
security, heating, elevator, and lighting controls.
Costs to address Year 2000 issues
We expect that any remaining costs for the Year 2000 compliance
will be less than $40,000 and that most of our disbursements will
be for equipment purchases and, therefore, will be capitalized and
depreciated or leased. However, we may spend more money than we
have estimated, and this could have a material adverse effect on
our results of operations and financial condition. At this stage
in our assessment process, we do not believe that the Year 2000
issue will materially impact our financial position, results of
operations or cash flows in future periods. There can be no
assurance that operating problems or expenses related to the Year
2000 issue will not arise with our computer systems and software
or that customers or suppliers will be able to resolve their Year
2000 issues in a timely manner. Accordingly, we plan to devote the
necessary resources to resolve all significant Year 2000 issues in
a timely manner.
Contingency plans
The most reasonable likely worst case Year 2000 scenario would be
that a solution to the VISX laser printing and storage of patient
report dates for procedures performed in the Year 2000 and beyond
is not corrected in a timely manner. To the extent that any
computer documentation of procedure is unavailable, we are
prepared to manually produce the necessary reports. As we complete
our internal review and external surveys we will make additional
contingency plans to address the problems that we believe are
reasonably likely to arise. However, despite our best efforts, we
may not anticipate all problems that may ultimately arise.
Risks of Year 2000 issues
We will continue preparations to ensure that the information
technology relating to our services, operations and suppliers will
recognize dates and function properly in the Year 2000 and beyond.
However, unanticipated problems could affect our ability to
provide services to our customers or interrupt or prevent
deliveries from suppliers at the onset of the Year 2000. As a
result, we could suffer a material adverse impact to our business,
financial position and results of operation due to a loss of
revenue, legal claims or extra expenses caused by unanticipated
Year 2000 computer problems.
Business Risks and Fluctuations in Quarterly Results
Our results of operations have varied widely in the past, and they
could continue to vary significantly from quarter to quarter due
to a number of factors, including:
- - Public and market acceptance of laser vision correction as a
preferred means of vision correction;
- - The entry of competitors into our current markets;
- - Our opening new centers; and
- - The introduction of new methods for vision correction that
result in the excimer laser being less competitive.
Our profitability is dependent on the number of procedures
performed and on maintaining the contribution margin per
procedure. Any shortfall in procedures performed or contribution
margin would have an immediate impact on our earnings per share,
which could adversely affect the market price of our common stock.
Our general and administrative expenses, which include marketing,
are based on our expectations of future procedures and
contribution margins and are relatively fixed in the short term.
If procedures or contribution margins below our expectations we
may not be able to reduce our spending rapidly in response to such
shortfall. This could adversely affect our operating results. Due
to these factors, we believe that quarter-to-quarter comparisons
of our results of operations are not a good indication of future
performance.
Part II. Other Information
Item 1. Legal Proceedings
Commitments and Contingencies
We are a defendant and counter-claimant in a
consolidated 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 involves claims and counterclaims
asserted by and against us, and two other members of a
New York limited liability company formerly engaged in
operating a laser refractive surgery center, and arises
out of the cessation of operations of such limited
liability company.
Discovery in the actions, has recently concluded, and
all parties have filed motions, based on the discovery
results, to dismiss all claims of the other parties. A
decision on the motions will be issued by the court in
due course.
In the opinion of management neither action will have a
material adverse effect on our financial position or
results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
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 August 17, 1999 announcing the
declaration and cash payment of a cash dividend on
the Company's Class B Preferred Stock First and
Second Interim Series; the subsequent conversion of
such shares into 720,478 shares of the Company's
common stock; and the resignation and redemption of
the ownership interests of two of the Baltimore
Laser Sight Center, Ltd. ("BLSC") which increased
the Company's ownership of BLSC to approximately
97%.
2) Form 8-K dated September 7, 1999 announcing the
appointment of Joseph Dzialo as Executive Vice
President.
3) Form 8-K dated October 4, 1999 containing a copy of
a press release issued October 3, 1999 announcing
the procedure volume for the quarter ended September
30, 1999.
4) Form 8-K dated October 28, 1999, containing a copy
of a press release issued October 27, 1999,
announcing results of launching LasikPlus and an
estimate for year 2000 pre-tax earnings.
5) Form 8-K dated October 29, 1999, containing a copy
of a press release issued October 29, 1999,
announcing the results for the three and nine months
ended September 30, 1999.
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
LCA-VISION INC.
Date: November 2, 1999 /s/Stephen N. Joffe
-------------------------------
Stephen N. Joffe
Chairman and Chief Executive
Officer
Date: November 2, 1999 /s/Larry P. Rapp
--------------------------------
Larry P. Rapp
Treasurer and Chief Financial
Officer
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