<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE , 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LCA-VISION INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 11-2882328
(STATE OF JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
7840 MONTGOMERY ROAD,
CINCINNATI, OHIO 45236
(513) 792-9292
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES.)
------------------------
STEPHEN N. JOFFE
Chief Executive Officer
7840 Montgomery Road
Cincinnati, Ohio 45236
(513) 792-9292
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
With copies to:
<TABLE>
<S> <C>
CHARLES F. HERTLEIN, JR., ESQ. JAMES R. TANENBAUM, ESQ.
Dinsmore & Shohl LLP Stroock & Stroock & Lavan LLP
1900 Chemed Center 180 Maiden Lane
255 East Fifth Street New York, New York 10038
Cincinnati, Ohio 45202 (212) 806-6048
(513) 977-8315 Fax: (212) 806-6006
Fax: (513) 977-8141
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as possible following the effectiveness of this registration statement.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 9,545,000 $9.625 $91,870,625 $25,540.03
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,245,000 shares that the underwriters have the option to purchase
from a selling stockholder to cover over-allotments, if any.
(2) Estimated solely for the purposes of computing the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
------------------------
AN INDEX OF THE EXHIBITS TO THIS REGISTRATION STATEMENT CAN BE FOUND AT PAGE
S-2.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
LCA-VISION MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION -- JUNE, 1999
PROSPECTUS
- --------------------------------------------------------------------------------
8,300,000 Shares
LCAV LOGO
LCA-VISION INC.
Common Stock
- --------------------------------------------------------------------------------
LCA-Vision Inc. is offering 5,000,000 shares and the selling stockholders are
offering 3,300,000 shares of common stock. LCA-Vision will not receive any
proceeds from the sale of shares by the selling stockholders.
LCA-Vision is a leading developer and operator of stand-alone laser vision
correction centers.
The shares of LCA-Vision are quoted in the Nasdaq SmallCap Market under the
symbol "LCAV". On June 4, 1999, the last reported sale price on the Nasdaq
SmallCap Market was $10.5625 per share. It is anticipated that the shares of
LCA-Vision will be included for quotation in the Nasdaq National Market
immediately following this offering.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price................................... $ $
Underwriting discounts and commissions.................. $ $
Proceeds, before expenses, to LCA-Vision................ $ $
Proceeds to the selling stockholders.................... $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 7 TO 13 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF LCA-VISION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The underwriters may, under certain circumstances, purchase up to 1,245,000
additional shares from a selling stockholder at the public offering price, less
underwriting discounts and commissions. Delivery and payment for the shares will
be on , 1999.
PRUDENTIAL SECURITIES
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
, 1999
<PAGE> 3
[LCA-Vision Logo]
Our Centers
California
Florida
Illinois
Maryland
Minnesota
New York
North Carolina
Ohio
Virginia
Canada
Eye topography
[Graphic of Eye Topography Map]
Laser Vision
Correction Results
at LCA-Vision
---------------
97% of patients
recommend procedure
to a friend or relative
97% of patients
achieve 20/40 vision
or better.
Industry wide nearly
2.0 million treatments
have been performed.
LCA-Vision's
Continuum of
Care program is
our statement
of confidence
in the long-term
visual stability
of each vision
correction.
[LCA-Vision logo]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 3
Risk Factors....................... 8
Forward Looking Statements......... 14
Use of Proceeds.................... 15
Price Range of Common Stock........ 15
Dividend Policy.................... 15
Capitalization..................... 16
Dilution........................... 17
Selected Consolidated Financial
Data............................. 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 20
Business........................... 25
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management......................... 37
Certain Transactions............... 39
Principal and Selling
Stockholders..................... 40
Description of Securities.......... 42
Shares Eligible for Future Sale.... 43
Underwriting....................... 44
Legal Matters...................... 45
Experts............................ 45
Where You Can Find More
Information...................... 45
Information Incorporated by
Reference........................ 47
Index to Financial Statements...... F-1
</TABLE>
- --------------------------------------------------------------------------------
The terms "LCA-Vision", "we", "our" and "us" refer to LCA-Vision Inc. and its
subsidiaries unless the context suggests otherwise. The term "you" refers to a
prospective investor. LCA-Vision(TM) and the LCA-Vision logo are trademarks of
LCA-Vision.
- --------------------------------------------------------------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information contained in this prospectus is accurate as of any date
other than the date on the front cover of this prospectus.
2
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
investors should consider before investing in the common stock of LCA-Vision.
Investors should read the entire prospectus carefully.
THE COMPANY
We are a leading developer and operator of stand-alone laser vision
correction centers. We currently operate 22 laser vision correction centers, 19
of which are located in metropolitan markets throughout the United States, two
of which are in Canada and one of which is in Europe. Our centers are supported
by our network of over 2,200 credentialed ophthalmologists and optometrists who
perform laser vision correction procedures, pre-procedure evaluations and
post-procedure follow-ups. Over 60,000 laser vision correction procedures have
been performed at our centers since inception in 1991.
For the three months ended March 31, 1999, we earned net income of $1.6
million, or $0.04 per basic and diluted share, compared with a net loss of $1.6
million, or $(0.04) per basic and diluted share, in the comparable period last
year. Total revenues for the first quarter of 1999 were $13.9 million, compared
with revenues of $7.2 million for the same period last year, an increase of 92%.
On a quarter to quarter comparison, first quarter 1999 net income increased $1.4
million from $247,000, or $0.01 per basic and diluted share as reported in the
fourth quarter of 1998. In addition, first quarter 1999 revenues increased over
40% from $9.9 million reported in the fourth quarter of 1998. Our laser vision
correction procedures increased to 9,064 for the first quarter of 1999, a 33.5%
increase over procedures for the fourth quarter of 1998.
OUR INDUSTRY
More than 160 million Americans, or approximately 60% of our nation's
population, require eyeglasses or contact lenses to correct common refractive
vision disorders such as myopia (nearsightedness), hyperopia (farsightedness),
and astigmatism. The majority of this population can directly benefit from laser
vision correction procedures. Currently, laser vision correction is the most
rapidly growing surgical procedure in the U.S. with an estimated 480,000
procedures performed in 1998, an increase of 110% over the 215,000 procedures
performed in 1997. Industry analysts forecast approximately 800,000 procedures
will be performed in 1999 and 1.2 million procedures will be performed in 2000
indicating annual growth rates of 70% and 50%, respectively. Laser vision
correction is an elective, private pay procedure performed on an outpatient
basis.
OUR CUSTOMERS
We strive to meet the needs of our customers which include the
ophthalmologists and optometrists that are part of our network, and the patient.
We provide our ophthalmologists and optometrists with:
- State-of-the-art equipment and facilities,
- Trained technicians and support staff,
- Access to an expanded patient population,
- Opportunities for incremental income, and
- Clinical training programs for new procedures and techniques.
We provide our patients with:
- Convenient access to highly credentialed ophthalmologists and
optometrists,
- Treatment environments designed to enhance customer satisfaction,
- Educational consultations and materials,
- Regularly scheduled post-procedure follow-ups, and
- Affordable financing alternatives.
3
<PAGE> 6
OUR BUSINESS STRATEGY
We intend to increase utilization at our existing centers, increase
penetration and market share in our current markets, and expand into contiguous
markets. The key elements of our business strategy include:
- Developing and implementing innovative direct marketing campaigns,
- Attracting leading ophthalmologists and optometrists,
- Building and operating new laser vision correction centers, and
- Acquiring established laser vision correction centers.
LCA-Vision is incorporated in Delaware. Our principal executive offices are
located at 7840 Montgomery Road, Cincinnati, Ohio 45236, and our telephone
number is (513) 792-9292.
4
<PAGE> 7
THE OFFERING
Shares offered by LCA-Vision.......... 5,000,000 shares
Shares offered by the selling
stockholders(1)....................... 3,300,000 shares
Total shares outstanding after the
offering(2)........................... 50,566,978 shares
Use of proceeds by LCA-Vision......... To open additional laser vision
correction centers, to purchase
additional equipment, to extensively
market our centers and the LCA-Vision
brand name, to fund possible future
strategic acquisitions, and to
provide working capital and for
general corporate purposes.
Nasdaq SmallCap Market symbol......... LCAV
Proposed Nasdaq National Market
Symbol(3)............................. LCAV
- ---------------
(1) Does not include up to 1,245,000 shares that the underwriters may purchase
from a selling stockholder if they exercise their over-allotment options.
(2) Based on shares outstanding as of June 1, 1999. Includes 100,000 shares
which will be issued upon exercise of options by a selling stockholder and
sold in this offering. Excludes an aggregate of 3,710,531 shares of common
stock reserved for issuance upon exercise of outstanding options, warrants
and convertible preferred stock. See "Principal and Selling Stockholders."
(3) We have applied to quote our common stock in the Nasdaq National Market.
RISK FACTORS
You should consider the risk factors before investing in LCA-Vision's
common stock and the impact from various events which could adversely affect our
business. See "Risk Factors."
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data set forth below for the years
ended December 31, 1996, 1997 and 1998 are derived from the respective audited
consolidated financial statements of LCA-Vision which are included in this
prospectus. The following summary interim financial data as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 are unaudited and are
derived from the interim financial statements included in this prospectus. In
the opinion of management, the unaudited data have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for fair
presentation. Results for interim periods are not indicative of results for a
full year. The data set forth below should be read in conjunction with the
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------ ------------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Laser refractive surgery...................... $ 3,715 $12,917 $ 32,963 $ 6,446 $13,389
Surgery management contracts and other........ 10,045 4,677 2,237 763 478
------- ------- -------- ------- -------
Total revenues.............................. 13,760 17,594 35,200 7,209 13,867
Operating costs and expenses:
Medical professional and license fees......... 795 4,489 13,700 2,656 6,015
Direct costs of services...................... 6,937 8,237 10,763 2,819 2,556
------- ------- -------- ------- -------
Total operating costs and expenses.......... 7,732 12,726 24,463 5,475 8,571
Expenses:
General and administrative expenses........... 7,327 8,006 10,144 2,093 2,970
Depreciation and amortization................. 1,597 2,511 3,521 1,055 712
Other......................................... 225 162 -- -- --
Restructuring provision....................... -- 1,100 10,500 -- --
------- ------- -------- ------- -------
Total expenses.............................. 9,149 11,779 24,165 3,148 3,682
------- ------- -------- ------- -------
Operating income (loss)......................... (3,121) (6,911) (13,428) (1,414) 1,614
Equity in earnings (losses) from unconsolidated
businesses.................................... (906) (27) 354 56 323
Interest expense................................ 770 1,140 786 344 93
Interest income................................. 89 216 441 112 147
Other income (expense).......................... 651 77 358 25 (277)
------- ------- -------- ------- -------
Income (loss) before taxes on income............ (4,057) (7,785) (13,061) (1,565) 1,714
Taxes on income................................. -- 68 157 28 --
------- ------- -------- ------- -------
Net income (loss)............................... (4,057) (7,853) (13,218) (1,593) 1,714
------- ------- -------- ------- -------
Dividends to preferred shareholders............. -- 183 518 43 84
------- ------- -------- ------- -------
Income (loss) available to common
shareholders.................................. $(4,057) $(8,036) $(13,736) $(1,636) $ 1,630
======= ======= ======== ======= =======
Income (loss) per common share:
Basic......................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04
======= ======= ======== ======= =======
Diluted....................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04
======= ======= ======== ======= =======
Weighted average shares used in computation:
Basic......................................... 19,610 26,709 37,669 36,665 43,779
Diluted....................................... 19,610 26,709 37,669 36,665 47,082
SELECTED OPERATING DATA:
Laser vision correction procedures performed:
Wholly-owned centers........................ 2,663 7,748 19,791 3,887 7,591
Including affiliates........................ 3,620 9,715 23,080 4,450 9,064
</TABLE>
6
<PAGE> 9
The as adjusted presentation below gives effect to the sale by us of
5,000,000 shares of common stock at an assumed public offering price of $10.5625
per share, after deducting underwriting discounts and commissions and estimated
offering expenses and including $119,531 which we will receive upon exercise of
100,000 options to purchase common stock to be offered by a selling stockholder.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7,199 $ 59,766
Working capital............................................. 4,042 56,609
Certificate of deposit...................................... 2,100 2,100
Total assets................................................ 31,840 84,810
Total debt, excluding current portion....................... 642 642
Accumulated (deficit)....................................... (23,949) (23,949)
Total shareholders' investment.............................. 25,717 78,284
</TABLE>
7
<PAGE> 10
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus before purchasing shares of
common stock of LCA-Vision. Each of these risk factors could adversely affect
our business, operating results and financial condition, as well as adversely
affect the value of an investment in our common stock.
OUR BUSINESS DEPENDS ON MAINTAINING GOOD RELATIONSHIPS WITH OUR NETWORK OF
OPHTHALMOLOGISTS AND OPTOMETRISTS AND IF WE ARE UNABLE TO MAINTAIN SUCH
GOOD RELATIONSHIPS, OUR BUSINESS COULD BE NEGATIVELY AFFECTED.
Most states prohibit us from practicing ophthalmology, employing
ophthalmologists to practice ophthalmology on our behalf or employing
optometrists to render optometric services on our behalf. Because we do not
practice ophthalmology or optometry, our activities are limited to owning and
managing centers and affiliating with other healthcare providers. Our network of
ophthalmologists and optometrists provides a significant source of patients for
us. The success of our operations depends upon our ability to enter into
agreements on acceptable terms with a sufficient number of healthcare providers,
including ophthalmologists and optometrists, to render laser vision correction
and other professional services at centers owned or managed by us. There can be
no assurance that we will be able to enter into agreements with
ophthalmologists, optometrists or other healthcare providers on satisfactory
terms or that such agreements will be profitable to us.
SIGNIFICANT DECREASES IN EXCIMER LASER PRICES COULD HARM OUR BUSINESS BY
MAKING IT MORE ATTRACTIVE FOR OPHTHALMOLOGISTS TO BUY OR LEASE THEIR OWN
EXCIMER LASERS RATHER THAN USING OUR CENTERS.
A significant reduction in the price of excimer lasers could reduce demand
for our services by making it economically more attractive for ophthalmologists
to buy or lease excimer lasers for themselves instead of utilizing our centers.
The excimer lasers we use currently have a retail price of $525,000.
AN INCREASE IN THE NUMBER OF OPHTHALMOLOGISTS WHO PERFORM ENOUGH LASER
VISION CORRECTION PROCEDURES TO ECONOMICALLY JUSTIFY THE PURCHASE OF THEIR
OWN EXCIMER LASERS MAY HARM OUR BUSINESS.
As laser vision correction becomes more commonplace, the number of
ophthalmologists who can economically justify the purchase of their own excimer
laser may increase. Laser vision correction is still a relatively new procedure
for most ophthalmologists, and it generally takes time for ophthalmologists to
build up their procedure volume. We estimate that an ophthalmologist or practice
group needs to perform approximately 60 procedures a month in one location in
order to economically justify the purchase or lease of an excimer laser. This
estimate is based upon a number of factors including current prices for excimer
lasers, current procedure fees charged by ophthalmologists and our current per
procedure fee. This estimate does not take into consideration the value
ophthalmologists may place on our marketing and advertising, administrative
support, maintenance and other services we provide to ophthalmologists who use
our centers.
WE HAVE A LIMITED HISTORY OF PROFITABLE OPERATIONS AND OUR PLANNED
EXPANSION COULD CAUSE NET LOSSES.
We commenced laser vision correction operations in 1991 on a limited basis
in Canada. Since 1996, we have posted net losses in every year. We achieved
profitability for the fourth quarter ended December 31, 1998, posting $380,000
in income before taxes. In the first quarter of this year, we posted $1.7
million in income before taxes. However, we may experience net losses as a
result of our planned expansion of our U.S. operations, and we cannot assure you
that our recent profitability will continue. Our ability to maintain
profitability will depend largely on:
- Our ability to increase demand for our services,
- Our ability to execute our planned expansion, and
8
<PAGE> 11
- Our ability to effectively integrate any acquired businesses and assets.
PRICE COMPETITION COULD CAUSE US TO LOWER OUR PRICES THEREBY REDUCING OUR
REVENUE AND PROFITABILITY.
In the U.S., we generally charge patients between $2,000 and $2,500 per eye
for laser vision correction procedures. We have experienced pricing pressure in
Canada, where the regulatory environment is less stringent and there are no
per-procedure royalties paid to excimer laser manufacturers, making it easier to
offer lower pricing. Pricing pressure may occur in the U.S. This could cause us
to lower prices, which could negatively affect our revenue and profitability.
LASER VISION CORRECTION MAY NOT ACHIEVE BROAD MARKET ACCEPTANCE WHICH WOULD
LIMIT OUR PROFITABILITY AND GROWTH.
We believe that our profitability and expansion depends largely on
acceptance of laser vision correction. There can be no assurance that laser
vision correction will become more widely accepted by ophthalmologists,
optometrists or the general population as an alternative to existing methods of
treating refractive vision disorders. Acceptance of laser vision correction may
be affected adversely by:
- Its cost (particularly since laser vision correction is typically not
covered by government insurers or other third party payors and,
therefore, must be paid for by the individual receiving treatment),
- Concerns relating to its safety and effectiveness,
- General resistance to surgery of any type,
- The effectiveness of alternative methods of correcting refractive vision
disorders,
- The lack of long-term follow-up data and the possibility of unknown side
effects,
- Future reported adverse events or other unfavorable publicity involving
patient outcomes from laser vision correction,
- Regulatory developments, and
- Our ability, and that of other participants in the laser vision
correction market, to train a broad population of ophthalmologists to
perform the procedures.
THE LACK OF LONG-TERM FOLLOW-UP DATA REGARDING POTENTIAL COMPLICATIONS OR
SIDE EFFECTS ASSOCIATED WITH LASER VISION CORRECTION COULD ADVERSELY AFFECT
OUR BUSINESS.
Long-term follow-up data could reveal additional complications that may
have a material adverse effect on acceptance of laser vision correction. Concern
over the safety of laser vision correction procedures could adversely affect
market acceptance of laser vision correction or result in adverse regulatory
action, including product recalls. Any of these factors could have a material
adverse effect on our business, financial condition and results of operations.
Concerns with respect to the safety and effectiveness of laser vision
correction include predictability and stability of results. Potential
complications and side effects include:
- Post-procedure discomfort,
- Increase in the light scattering properties of the cornea during healing
(corneal hazing),
- Glare/halos (undesirable visual sensations produced by bright lights),
- Decreases in contrast sensitivity,
- Temporary increases in pressure within the eye in reaction to medication,
- Modest fluctuations in focusing capabilities during healing,
9
<PAGE> 12
- Modest decreases in best corrected vision (i.e., with corrective lenses),
- Unintended over or under-corrections,
- Decline in corrective effect,
- Disorders of corneal healing, corneal scars and corneal ulcers, and
- Induced astigmatism.
WE DEPEND ON LIMITED SOURCES OF EXCIMER LASERS, MICROKERATOMES AND
DISPOSABLE BLADES, AND SHORTAGES OF THESE ITEMS COULD HINDER OUR ABILITY TO
INCREASE OUR PROCEDURE VOLUME.
We currently use one supplier, VISX, Incorporated, for our excimer lasers
in the U.S. If VISX became unable or unwilling to supply us with excimer lasers,
to repair parts or to provide services, our business could be materially
adversely affected.
We are primarily dependent on Chiron Vision, a subsidiary of Bausch & Lomb,
Incorporated, to provide the microkeratomes, blades and other disposable items
we provide to ophthalmologists for the most popular type of laser vision
correction. There are a limited number of manufacturers of microkeratomes and
there can be no assurance that microkeratomes and microkeratome blades will be
available in the quantities or within the time frames we require. Any shortages
in our supplies of this equipment could limit our ability to increase our volume
of laser vision correction procedures.
OUR RECOGNITION OF NET DEFERRED TAX ASSETS MAY SUBSTANTIALLY INCREASE OR
DECREASE OUR EARNINGS PER SHARE AND AS A RESULT QUARTER TO QUARTER
COMPARISONS MAY BE UNRELIABLE UNLESS THEY ARE ADJUSTED TO ACCOUNT FOR THIS
EFFECT.
In prior years, we generated significant net operating losses ("NOLs"),
which are available to be carried forward for a limited number of years to
offset future taxable income. Due to our history of losses, we could not
previously conclude that there would be any future taxable income with which to
offset the NOLs prior to their expiration. As a result, no net tax benefit was
recorded for the tax effect of the NOLs.
For the three months ended March 31, 1999, we had income before taxes of
$1.7 million. Because we have now reached a significant level of profitability
and have had two consecutive quarters of profitable operations, we may soon be
able to conclude under generally accepted accounting principles that we will
have taxable income in the future, and can record a tax benefit for the portion
of the NOLs that we believe will likely be used in the next fiscal year. The
amount of tax benefit or expense we recognize in the future may fluctuate
significantly and will depend upon our estimates of future taxable income.
WE MAY EXPERIENCE DIFFICULTIES IN MANAGING OUR PLANNED INTERNAL EXPANSION
STRATEGY AND THE ACQUISITION OR INTEGRATION OF OTHER CENTERS, WHICH COULD
IMPAIR OUR BUSINESS.
Our success will depend on our ability to expand and manage our laser
vision correction centers. We will use a portion of the proceeds of this
offering to grow and expand. Our growth and expansion has resulted in, and may
continue to result in, new and increased responsibilities for management and
additional demands on management, operating and financial systems and resources.
Our ability to continue to expand will also depend upon our ability to:
- Implement and integrate new, expanded or upgraded operations and
financial systems, procedures and controls,
- Hire and train new staff and managerial personnel,
- Expand our infrastructure, and
- Adapt our structure to comply with present or future legal requirements
affecting our arrangements with ophthalmologists and optometrists.
10
<PAGE> 13
Our growth strategy also includes increasing the number of our laser vision
correction centers through strategic acquisitions. Adding new centers will
present challenges for management, including:
- Requiring management attention to be focused on integration instead of on
our core business,
- Possible adverse effects on operating performance resulting from
increased goodwill amortization, unanticipated liabilities and
contingencies,
- Increased interest costs, and
- The issuance of additional securities.
Any failure or inability to successfully implement these and other factors may
have a material adverse effect on our business, financial condition and results
of operations. There can be no assurance that we will be able to successfully
integrate and manage the centers we open or acquire or achieve the economies of
scale and/or the patient base required to achieve profitability in the centers.
If management is unable to successfully implement our growth strategy or manage
our growth effectively, our business, financial condition and results of
operations could be materially adversely affected.
WE DEPEND ON A SMALL NUMBER OF SENIOR MANAGERS DUE TO THEIR VITAL ROLE IN
ESTABLISHING OUR BUSINESS RELATIONSHIPS AND PLAN OF OPERATION.
Our success depends, to a significant extent, upon the efforts and
abilities of our Chairman and Chief Executive Officer, Stephen N. Joffe, and
other members of senior management. We currently do not have employment
agreements with any senior key employees. The loss of the services of one or
more of these key employees could have a material adverse effect on our
business.
OUR BUSINESS MAY BE IMPAIRED DUE TO GOVERNMENT REGULATIONS WHICH COULD
RESTRICT OUR EQUIPMENT, SERVICES AND RELATIONSHIPS WITH OPHTHALMOLOGISTS,
OPTOMETRISTS, AND OTHER HEALTHCARE PROVIDERS.
We and excimer laser manufacturers are subject to extensive federal, state,
local and foreign laws, rules and regulations, including:
- Restrictions on the approval, distribution and use of medical devices,
- Anti-kickback statutes,
- Fee-splitting laws,
- Corporate practice of medicine restrictions,
- Self-referral laws,
- Anti-fraud provisions,
- Facility license requirements and certificates of need,
- Conflict of interest regulations, and
- Sales and use taxes.
Many of these laws and regulations are ambiguous, and courts and regulatory
authorities have provided little clarification. Moreover, state and local laws
vary from jurisdiction to jurisdiction. As a result, we may not always be able
to accurately interpret applicable law, and some of our activities could be
challenged.
The excimer lasers we use in our centers are medical devices that in the
United States are subject to the jurisdiction of the FDA. In addition to FDA
approval for the initial uses of these excimer lasers, new uses require separate
approval. Obtaining such approval can be an expensive and time consuming
process, the success of which cannot be guaranteed. The failure of our suppliers
to obtain regulatory approvals for any additional uses of excimer lasers or
otherwise comply with regulatory requirements could have a material adverse
effect on our business, financial condition or results of operations.
11
<PAGE> 14
Failure to comply with applicable FDA requirements could subject us,
ophthalmologists who use our centers or excimer laser manufacturers to
enforcement actions, including product seizure, recalls, withdrawal of approvals
and civil and criminal penalties. Any such enforcement action could have a
material adverse effect on our business, financial condition and results of
operations. Further, failure to comply with regulatory requirements, or any
adverse regulatory action could result in limitations or prohibitions on our use
of excimer lasers. This could have a material adverse effect on our business,
financial condition and results of operations.
The regulatory environment in which we operate may change significantly in
the future. Numerous legislative proposals have been introduced in Congress and
in various state legislatures over the past several years that could cause major
reforms of the U.S. healthcare system. We cannot predict whether any of these
proposals will be adopted or how they might affect our business. New or revised
legislation could have a material adverse effect on our business, financial
condition and results of operations.
FUTURE SALES BY EXISTING STOCKHOLDERS COULD DEPRESS OUR SHARE VALUE AND
MAKE IT MORE DIFFICULT FOR US TO SELL STOCK IN THE FUTURE.
The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 50,566,978 shares of common stock will be outstanding.
Of these shares, 29,421,700 shares, including the 8,300,000 shares sold in this
offering (9,545,000 shares if the underwriters exercise their over-allotment
options in full) will be freely tradeable without restrictions under the
Securities Act, except for any shares purchased by "affiliates" of LCA-Vision
(as defined in Rule 144 under the Securities Act). Our officers and directors
and certain stockholders, including the selling stockholders, have entered into
lock-up agreements pursuant to which they have agreed not to offer or sell any
shares of common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Prudential Securities, on behalf
of the underwriters. Also, Prudential Securities may, at any time and without
notice, waive the terms of these lock-up agreements specified in the
underwriting agreement. Upon expiration of this lock-up period, 21,145,273
shares may be sold in the future subject to compliance with the volume
limitations and other restrictions of Rule 144. See "Underwriting" and "Shares
Eligible for Future Sale."
THE YEAR 2000 COULD NEGATIVELY AFFECT THE COMPUTER PROGRAMS AND SYSTEMS
UPON WHICH WE DEPEND.
We rely on computer applications to manage and monitor our accounting,
sales, development and administrative functions. Further, the sophisticated
equipment used in our centers is dependent on computer applications and embedded
technology for its operation. In addition, the ophthalmologists who use our
centers and our suppliers and service providers are reliant upon computer
applications, some of which contain technology which may fail as a result of the
upcoming change in century. Such failures could affect the interactions of these
third parties with us. While we do not believe our computer systems,
applications or embedded technologies currently in use will be materially
adversely affected by the upcoming change in century, we or our technology may
be adversely affected by the change in century. Failure of our software,
hardware or embedded technology or that of our customers, suppliers or service
providers could have a material adverse impact on our business, financial
condition and results of operations. For a more detailed discussion of Year 2000
readiness issues, see "Business -- Year 2000."
WE COULD BE SUED FOR PATIENT INJURIES, AND SUCH CLAIMS COULD NEGATIVELY
AFFECT OUR BUSINESS TO THE EXTENT PATIENTS ARE UNINSURED.
A partially or completely uninsured claim against us could have a material
adverse effect on our business, financial condition and results of operations.
The laser vision correction procedures performed in our centers involve a
potential risk of physical injury to patients. Such risk could result in product
liability, malpractice or other claims brought against us based upon injuries or
alleged injuries associated with a defect in a product's performance or
malpractice by an ophthalmologist or technician. Some injuries or defects may
12
<PAGE> 15
not become evident for a number of years. Therefore, the operation of any
excimer laser, microkeratome or other equipment may result in substantial claims
against us by patients who allege they were injured as a result of vision
correction procedures. Although we have "umbrella" product and professional
liability insurance in the amount of $1.0 million per occurrence and $5.0
million in the aggregate, we primarily rely and intend to continue to rely on
ophthalmologists' professional liability insurance policies and manufacturers'
insurance policies for product liability coverage. We require the
ophthalmologists who use our centers to maintain certain levels of professional
liability insurance. We cannot assure you that these ophthalmologists will
continue to be able to obtain sufficient insurance.
WE DO NOT PLAN TO PAY ANY DIVIDENDS IN THE NEAR FUTURE.
We have not declared or paid, and for the near future we do not anticipate
declaring or paying, dividends on our common stock. Under the existing credit
agreement with our bank, we are not permitted to pay dividends without first
obtaining the bank's consent.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE NET PROCEEDS AND
IT MAY NOT EFFECTIVELY UTILIZE THESE FUNDS.
We have not designated any specific uses for the net proceeds of this
offering. Therefore, we will have broad discretion in how we use such net
proceeds, which may include opening additional laser vision correction centers,
purchasing additional equipment, marketing our centers and our brand name,
completing future strategic acquisitions and for working capital and general
corporate purposes.
CERTAIN SHAREHOLDERS CONTROL A NUMBER OF SHARES SUFFICIENT TO INFLUENCE
CORPORATE ACTIONS.
Following this offering, Stephen and Sandra Joffe together will
beneficially own 24.8% of our outstanding common stock (22.4% if the
underwriters' over-allotment options are exercised in full). If these persons
acted together, they would have sufficient voting power to influence the outcome
of corporate actions submitted to the stockholders for approval and to influence
the management and affairs of LCA-Vision, including the election of our Board of
Directors.
13
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about LCA-Vision, including,
among other things:
- Our belief that the market for laser vision correction is growing,
- Our strategy to expand through internal growth, through adding new
centers and through possible strategic acquisitions,
- Our belief that substantial increases in marketing and advertising will
create higher demand for our laser vision correction services,
- Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition,
- Our belief that we will be able to conform our operations in all material
respects to applicable healthcare laws and obtain any necessary licenses
and certificates of need,
- General economic and business conditions, both nationally and in our
markets,
- Our belief that our systems and those of our key vendors will be fully
Year 2000 compliant before the end of 1999, and
- Other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect" and similar
expressions, as they relate to LCA-Vision, our business or our management, are
intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to LCA-Vision from the sale of common stock in the
offering, assuming a public offering price of $10.5625 per share, and $119,531
from the exercise of stock options by a selling stockholder, are estimated to be
$52.6 million after deducting underwriting discounts and commissions and
estimated offering expenses of $365,000 of LCA-Vision. We will not receive any
proceeds from the sale of shares by the selling stockholders. We intend to use
these net proceeds as follows:
- To open additional laser vision correction centers,
- To purchase additional equipment,
- To extensively market our centers and the LCA-Vision brand name,
- 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.
PRICE RANGE OF COMMON STOCK
Since 1996 our common stock has been included for quotation in the Nasdaq
SmallCap Market under the symbol "LCAV". The following table sets forth the high
and low sale prices of the common stock as reported by the Nasdaq SmallCap
Market.
<TABLE>
<CAPTION>
PRICE RANGE
-----------------
HIGH LOW
------- ------
<S> <C> <C>
1997
First Quarter.............................................. $ 6.875 $2.375
Second Quarter............................................. 7.125 2.688
Third Quarter.............................................. 3.875 2.750
Fourth Quarter............................................. 3.625 1.000
1998
First Quarter.............................................. $ 2.125 $0.844
Second Quarter............................................. 4.156 1.688
Third Quarter.............................................. 3.500 1.250
Fourth Quarter............................................. 1.500 1.000
1999
First Quarter.............................................. $ 4.000 $1.375
Second Quarter (through June 4, 1999)...................... 12.750 3.688
</TABLE>
On June 4, 1999, the last reported sale price of the common stock on the
Nasdaq SmallCap Market was $10.5625 per share. As of such date, there were
approximately 3,150 holders of record of the common stock. Application has been
made for quotation in the Nasdaq National Market following this offering.
DIVIDEND POLICY
We have not declared or paid, and we do not anticipate declaring or paying
any dividends on our common stock in the near future. Any future determination
as to the declaration and payment of dividends will be at the discretion of our
board of directors and will depend on then-existing conditions, including:
- Our financial condition,
- Results of operations,
- Contractual restrictions,
- Capital requirements,
- Business prospects, and
- Any other factors the board of directors deems relevant.
In addition, under our existing credit agreement with our bank, we are not
permitted to pay dividends without first obtaining the bank's consent.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the unaudited capitalization of LCA-Vision
as of March 31, 1999 and as adjusted to reflect this offering and the
application of the estimated net proceeds to LCA-Vision assuming a public
offering price of $10.5625 per share and $119,531 from the exercise of options
by a selling stockholder. See "Use of Proceeds." The following table should be
read in conjunction with LCA-Vision's consolidated financial statements, related
notes and other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 7,199 $ 59,766
Certificate of deposit...................................... 2,100 2,100
Debt maturing in one year................................... 649 649
Total debt, excluding current portion....................... 642 642
Shareholders' investment:
Common stock $.001 par value: authorized 110,000,000
shares, 45,281,950 (50,566,973 as adjusted) issued and
outstanding(1)......................................... 109 114
Preferred stock First and Second Interim Series Class B,
par value $.001, 7% dividend rate, 12.6 shares issued
and outstanding, liquidation preference of
$1,200,000............................................. 2,500 2,500
Contributed capital....................................... 47,485 100,047
Treasury stock and foreign currency translation
adjustment............................................. (25) (25)
Accrued preferred stock dividend.......................... (403) (403)
Accumulated (deficit)..................................... (23,949) (23,949)
-------- --------
Total shareholders' investment.............................. 25,717 78,284
-------- --------
Total capitalization........................................ $ 26,359 $ 78,926
======== ========
</TABLE>
- ---------------
(1) Excludes 4,707,792 shares reserved for issuance upon exercise of options,
warrants and convertible preferred stock as of March 31, 1999.
16
<PAGE> 19
DILUTION
Purchasers of the common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the common stock from
the initial public offering price. Net tangible book value per share represents
the amount of the total tangible assets less total liabilities of LCA-Vision,
divided by the number of shares of common stock outstanding. At March 31, 1999,
LCA-Vision had a net tangible book value of $17.0 million or $0.38 per share of
common stock. After giving effect to the sale of 5,000,000 shares of common
stock offered by LCA-Vision at an assumed public offering price of $10.5625 per
share and after the deduction of underwriting discounts and commissions and
estimated offering expenses of LCA-Vision, and adding $119,531 from the exercise
of options to purchase 100,000 shares of common stock by a selling stockholder,
the pro forma net tangible book value of LCA-Vision at March 31, 1999 would have
been $69.6 million or $1.38 per share. This represents an immediate increase in
such net tangible book value of $1.00 per share to existing shareholders and an
immediate and substantial dilution of $8.18 per share to new investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price...................................... $10.56
Net tangible book value as of March 31, 1999.............. $0.38
Increase attributable to new investors.................... 1.00
-----
Pro forma net tangible book value after this offering.............. 1.38
------
Dilution in pro forma net tangible book value to new investors..... $ 8.18
======
</TABLE>
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data set forth below for the years
ended December 31, 1996, 1997 and 1998 and the balance sheet data at December
31, 1997 and 1998 are derived from the respective audited consolidated financial
statements of LCA-Vision which are included in this prospectus. The statement of
operations data set forth below with respect to the years ended December 31,
1994 and 1995 and the balance sheet data at December 31, 1994, 1995 and 1996 are
derived from the audited financial statements of LCA-Vision which are not
included or incorporated by reference in this prospectus. The following summary
interim financial data as of March 31, 1999 and for the three months ended March
31, 1998 and 1999 are unaudited and are derived from the interim financial
statements included in this prospectus. In the opinion of management, the
unaudited data have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation. Results for interim
periods are not indicative of results for a full year. The data set forth below
should be read in conjunction with the consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ------------------
1994(1) 1995(1) 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Laser refractive surgery........................ $ -- $ 707 $ 3,715 $12,917 $ 32,963 $ 6,446 $13,389
Surgery management contracts and other.......... 16,932 12,944 10,045 4,677 2,237 763 478
------- ------- ------- ------- -------- ------- -------
Total revenues................................ 16,932 13,651 13,760 17,594 35,200 7,209 13,867
Operating costs and expenses:
Medical professional and license fees........... -- -- 795 4,489 13,700 2,656 6,015
Direct costs of services........................ 7,291 5,981 6,937 8,237 10,763 2,819 2,556
------- ------- ------- ------- -------- ------- -------
Total operating costs and expenses............ 7,291 5,981 7,732 12,726 24,463 5,475 8,571
Expenses:
General and administrative expenses............. 6,625 6,305 7,327 8,006 10,144 2,093 2,970
Depreciation and amortization................... 1,247 1,042 1,597 2,511 3,521 1,055 712
Other........................................... -- -- 225 162 -- -- --
Restructuring provision......................... -- -- -- 1,100 10,500 -- --
------- ------- ------- ------- -------- ------- -------
Total expenses................................ 7,782 7,347 9,149 11,779 24,165 3,148 3,682
------- ------- ------- ------- -------- ------- -------
Operating income (loss).......................... 1,769 323 (3,121) (6,911) (13,428) (1,414) 1,614
Equity in earnings (losses) from unconsolidated
businesses...................................... 108 40 (906) (27) 354 56 323
Interest expense................................. 132 309 770 1,140 786 344 93
Interest income.................................. 54 158 89 216 441 112 147
Other income (expense)........................... (102) 10 651 77 358 25 (277)
------- ------- ------- ------- -------- ------- -------
Income (loss) before taxes on income............. 1,697 222 (4,057) (7,785) (13,061) (1,565) 1,714
Taxes on income.................................. -- 44 -- 68 157 28 --
------- ------- ------- ------- -------- ------- -------
Net income (loss)................................ 1,697 178 (4,057) (7,853) (13,218) (1,593) 1,714
------- ------- ------- ------- -------- ------- -------
Dividends to preferred shareholders.............. -- -- -- 183 518 43 84
------- ------- ------- ------- -------- ------- -------
Income (loss) available to common shareholders... $ 1,697 $ 178 $(4,057) $(8,036) $(13,736) $(1,636) $ 1,630
======= ======= ======= ======= ======== ======= =======
Income (loss) per common share:
Basic........................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04
======= ======= ======== ======= =======
Diluted......................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04
======= ======= ======== ======= =======
Weighted average shares used in computation:
Basic........................................... 19,610 26,709 37,669 36,665 43,779
Diluted......................................... 19,610 26,709 37,669 36,665 47,082
Pro forma income data(2):
Net income as reported.......................... $ 1,697 $ 178
Provision for income taxes -- pro forma......... 645 41
------- -------
Proforma net income............................. $ 1,052 $ 137
======= =======
Pro forma income per common share:
Basic........................................... $ 1.05 $ 0.02
======= =======
Diluted......................................... $ 1.05 $ 0.02
======= =======
Pro forma weighted average shares used in
computation -- basic and diluted................ 1,000 5,659
SELECTED OPERATING DATA:
Laser vision correction procedures performed:
Wholly-owned centers.......................... -- 513 2,663 7,748 19,791 3,887 7,591
Including affiliates.......................... 964 1,459 3,620 9,715 23,080 4,450 9,064
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED(3)
------- ------- ------- ------- ------- ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 1,861 $ 2,587 $ 724 $ 2,780 $ 6,496 $ 7,199 $59,766
Cash held in escrow................ -- -- -- 5,900 -- -- --
Working capital (deficit).......... 3,939 3,280 (3,187) (1,698) 3,577 4,042 56,609
Certificate of deposit............. -- -- -- -- 2,100 2,100 2,100
Total assets....................... 11,035 13,526 13,481 44,527 31,377 31,840 84,810
Debt maturing in one year.......... 52 351 824 10,182 787 649 629
Total debt, excluding current
portion.......................... 1,864 8,477 6,423 2,850 4,224 2,142 2,142
Accumulated earnings
(deficit)(4)..................... 7,502 (535) (4,592) (12,446) (25,664) (23,949) (23,949)
Total shareholders' investment..... 7,998 2,619 1,198 26,714 23,199 25,717 78,926
</TABLE>
- ---------------
(1) On September 25, 1995, LCA-Vision Inc. merged with Laser Centers of America,
Inc. At the time of the merger, two shareholders owned an aggregate of 92%
of the outstanding voting stock of LCA-Vision and 100% of Laser Centers of
America. LCA-Vision was inactive and non-operational at the time of the
merger. The financial data for 1994 and 1995 reflect the historical
financial position and results of operations for Laser Centers of America,
except for shareholders' investment, which has been restated to show the
capital structure of LCA-Vision at the time of the merger.
(2) Prior to the merger, Laser Centers of America elected to be taxed as a
subchapter S corporation. Income tax liabilities, other than certain state
and local income taxes, were included in the tax returns of its
shareholders. Pro forma statement of operations data for 1994 and 1995
reflects the adjustments to the historical information assuming that the
conversion to a C corporation had taken place effective January 1, 1994. The
provision for income taxes represents an effective tax rate of 38%.
(3) As adjusted gives effect to this offering and the application of the
estimated net proceeds to LCA-Vision assuming a public offering price of
$10.5625 and $119,531 for the exercise of options by a selling stockholder.
(4) Immediately prior to the merger, $6.4 million was distributed to the
shareholders. This distribution represented a portion of the subchapter S
corporation earnings previously included in their taxable income. The
shareholders used the proceeds to acquire $2.0 million of LCA-Vision common
stock and to loan the remainder to LCA-Vision.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Consolidated Financial Data" and the accompanying financial
statements and related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could contribute to such differences include, but are not
limited to, those discussed in "Risk Factors."
OVERVIEW
We are a leading developer and operator of stand-alone laser vision
correction centers. Our laser vision correction centers provide the facilities,
equipment and support services for performing vision correction procedures using
state-of-the-art laser technologies. The VISX Star S2 laser, which we have in
each of our U.S. centers, can be used for correcting nearsightedness,
farsightedness and astigmatism. Substantially all of the revenues from our laser
vision correction procedures are derived from our U.S. centers. We also manage
multi-specialty laser surgery programs at medical facilities on a contract
basis, although we intend to substantially decrease our activity in this area.
Our sources of revenue are:
- Laser refractive surgery, including fees for procedures performed at our
wholly-owned centers, and
- Other, including 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.
Our operating costs and expenses consist of:
- Medical professional and license fees, including fees collected by us for
the ophthalmologists performing laser vision correction and the license
fee of $260 per procedure paid to VISX,
- Direct costs of services, including center rent and utilities, equipment
lease and maintenance costs, surgical supplies, center staff expense and
costs related to other revenue,
- General and administrative, including marketing and advertising,
headquarters staff expense, and other overhead costs, and
- Depreciation and amortization, including periodic charges to income for
the costs of equipment and intangible assets recorded in the balance
sheet.
RESULTS OF OPERATIONS
On August 18, 1997, we purchased 100% of the issued and outstanding common
stock of Refractive Centers International, Inc., then a majority-owned
subsidiary of Summit Technology, Inc., 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 Refractive Centers International
subsequent to August 18, 1997.
20
<PAGE> 23
SOURCES OF REVENUES
The table below summarizes our sources of revenue and their annual growth
or decline:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Laser refractive surgery........................... $ 3,715 $12,917 $32,963
Growth rate...................................... N/A 248% 155%
Surgery management contracts....................... $ 4,665 $ 3,064 $ 1,496
Growth rate...................................... -30% -34% -51%
Other.............................................. $ 5,380 $ 1,613 $ 741
Growth rate...................................... -23% -70% -54%
Total.................................... $13,760 $17,594 $35,200
</TABLE>
LASER REFRACTIVE SURGERY
Laser refractive surgery revenue generally includes three components:
facility fees, royalty fees 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 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, 1996, 1997 and
1998 and for the three months ended March 31, 1998 and 1999 were:
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
------ ------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue............................ $3,715 $12,917 $32,963 $6,446 $13,389
Direct costs....................... 3,818 10,790 23,625 5,154 8,526
Contribution....................... (103) 2,127 9,338 1,292 4,863
</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, which means that our financial statements include a percentage of
these centers' earnings or losses equal to our ownership percentage.
<TABLE>
<CAPTION>
WHOLLY-OWNED COMBINED
----------------------- -----------------------
1997 1998 1999 1997 1998 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First quarter...................... 979 3,887 7,591 1,443 4,450 9,064
Second quarter..................... 1,506 4,891 2,078 5,737
Third quarter...................... 2,375 5,327 2,794 6,102
Fourth quarter..................... 2,888 5,686 3,400 6,791
</TABLE>
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. Renewal of our contracts with hospital providers
became increasingly difficult due to price pressures and a lengthening 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.
21
<PAGE> 24
EXPENSES
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Medical professional and license fees: The increase of $3.4 million is 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: These costs decrease as a percentage of revenue
because our costs represent, for the most part, the fixed costs of a laser
vision correction center. These costs decreased in 1999 compared to 1998 because
1998 includes the costs of eight centers which were closed later in the year.
General and administrative: These costs increased $877,000, although as a
percentage of revenues they decreased by approximately eight percentage points
to 21% of total revenues. The increase is due in part to the increased costs
associated with our patient financing options.
Depreciation and amortization: The decrease 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: Our share of the profits of
unconsolidated affiliates is recorded in equity of earnings of unconsolidated
affiliates. The increase of $267,000 is due to the increased profitability of
these affiliates. Interest expense decreased due to the significant reduction in
debt. Interest income increased because we had cash to invest in overnight cash
equivalents. Other expense in 1999 includes a $325,000 expense associated with
the issuance of 165,076 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 $5.0 million of convertible
preferred stock.
We generated positive cash flow from operations for the quarter ended March
31, 1999. This was sufficient to finance our capital expenditures and debt
repayment in the quarter.
Our operating income of $1.6 million for the quarter, together with
non-cash items appearing in the Statement of Operations, resulted in positive
cash flow before working capital items of $2.3 million. Proceeds from option
exercises were $279,000 for the quarter.
Our $8.0 million credit facility has $7.0 million available for borrowing.
$1.0 million of the facility is being used to secure letters of credit and
operating leases with an affiliate of our lender. We had a cash balance of $7.2
million at March 31, 1999. We also have a $2.1 million certificate of deposit
recorded as a long-term asset that matures on June 30, 2000. This instrument
pays interest at a rate of 5.7% per annum.
During the quarter 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. Beginning April 1, 1999, we no longer accrue
dividends for this stock. Our repayment of the term loan during March 1999 will
result in interest savings of approximately $40,000 and principal payments of
$35,000 per quarter.
At December 31, 1998 we had NOLs for federal and state income tax purposes
of $35.3 million which expire in varying amounts from 2012 through 2019.
Approximately $15.0 million of this amount 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. These operating
losses are available to offset future taxable income.
We have approximately $15.0 million of deferred tax assets which, because
of our operating losses, we could not record as 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 NOLs will substantially
reduce our cash obligation for payment of income taxes otherwise due over the
next several years.
22
<PAGE> 25
1998 COMPARED TO PRIOR YEARS
The increase in direct operating expenses is primarily a result of the
expansion of our laser vision correction 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 other sources of revenue are more variable and fluctuate generally
with levels of revenue.
We now have VISX Star S2 lasers in all of our U.S. centers. The VISX
excimer 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
operations by closing seven of our centers, primarily acquired centers. Costs
associated with the restructuring include $7.3 million related to the write-off
of goodwill and leasehold improvements and $677,000 for the accrual of lease
terminations and employee severance costs. As a result of the closings, we have
certain excimer lasers in storage. The restructuring provision also includes
$2.5 million related to the write-down of these excimer lasers to their net
realizable value. The balance of the accrual at December 31, 1998 was $748,000
and relates to facility rent and severance.
Equity in income from unconsolidated businesses increased because of their
increased profitability. Interest expense decreased due to significant reduction
in debt. Interest income increased because we had cash to invest in overnight
cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
QUARTER ENDED MARCH 31, 1999 COMPARED TO PRIOR QUARTERS
Our primary sources of liquidity for the next year are expected to be:
- Net proceeds from this offering,
- Cash generated from operations,
- Proceeds from the exercise of stock options, and
- Credit facility and lease financing, as necessary.
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 our current level of
operations and anticipated revenue growth, we believe that cash flow from
operations and available cash, together with the net proceeds of this offering
and available borrowings under the credit facility from The Provident Bank will
be adequate to meet these needs.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PRIOR YEARS
On May 11, 1998, we issued 10,000 shares of 6% Series B-1 Convertible
Preferred Stock for $10.0 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, approximately $9.5 million, were used for general corporate purposes,
including debt reduction. At December 31, 1998, 4,298 shares of Convertible
Preferred Stock and accrued dividends of $117,000 were converted into 4,088,856
shares of common stock.
On June 29, 1998, we entered into an $8.0 million credit facility with
Provident. In addition, we repaid the borrowings from, and terminated our 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.
23
<PAGE> 26
The facility can be used to support letters of credit totaling not more
than $2.0 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 basis. 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 $12,000 plus interest until June 30, 2000 at which time the remaining
principal balance of $1.7 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.
On November 3, 1998 we received notice that the FDA had approved the VISX
Star S2 laser to treat farsightedness (hyperopia). The VISX Star S2 laser, which
we have in each of our U.S. centers, can now treat nearsightedness,
farsightedness and astigmatism. Management believes that our ability to treat
these disorders will result in increased procedures and profitability.
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 do
not expect the cost to exceed $200,000.
We have also completed an assessment of external risks and third party
risks associated with Year 2000. Although management does not believe that such
risks are significant, the loss of power or other telecommunication link
difficulties could disrupt our operations.
24
<PAGE> 27
BUSINESS
THE U.S. EYE CARE INDUSTRY
More than 160 million Americans, or approximately 60% of our nation's
population, require eyeglasses or contact lenses to correct common refractive
vision disorders and over 100 million Americans purchased eyewear in 1998. These
consumers, with a median age of approximately 35 years old, spent a total of
approximately $16 billion during 1998 on eyeglasses, contact lenses and other
corrective lenses. Consumers purchased retail optical goods through three main
retail channels: (1) independent ophthalmologists, optometrists and opticians,
which accounted for 63% of sales, (2) retail chains, which accounted for 35% of
sales and (3) health maintenance organizations, which accounted for 2% of sales.
COMMON REFRACTIVE VISION DISORDERS
The population segment described above usually suffers from one or more
refractive vision disorders, which result from improper curvature of the cornea
as related to the size and shape of the eye. If the cornea's curvature is not
precisely correct, it cannot properly focus the light passing through it onto
the retina, and the viewer will see a blurred image. The three most common
refractive vision disorders are:
- Myopia (nearsightedness) -- images are focused in front of the retina,
resulting in the blurred perception of distant objects
- Hyperopia (farsightedness) -- images are focused behind the retina,
resulting in the blurred perception of near objects
- Astigmatism -- images are not focused on any point due to the varying
curvature of the eye along different axes
LASER VISION CORRECTION PROCEDURES
Laser vision correction procedures are designed to reshape the outer layers
of the cornea to correct refractive vision disorders by changing its curvature
with an excimer laser, which eliminates or reduces the need for corrective
lenses. The excimer laser used in our U.S. centers is manufactured by VISX and
is currently approved to treat nearsightedness of up to -12 diopters with
astigmatism of up to -4 diopters, and farsightedness of up to +6 diopters.
There are currently two outpatient procedures that use the excimer laser to
correct common refractive vision disorders: Laser In-Situ Keratomileusis
("LASIK") and Photorefractive Keratectomy ("PRK"). In the case of both LASIK and
PRK, prior to the procedure, an assessment is made of the correction required to
program the excimer laser. The software of the excimer laser then calculates the
optimal number of pulses needed to achieve the intended correction using a
specially developed algorithm. An eyelid holder is inserted to prevent blinking
and topical anesthetic eye drops are applied. The patient reclines in a chair,
eyes focused on a fixed target, while the ophthalmologist positions the
patient's cornea for the procedure. The excimer laser emits energy in a series
of pulses with each pulse lasting only several billionths of a second. High-
energy ultraviolet light produced by the excimer laser creates a "non-thermal"
process known as ablation, which removes tissue and reshapes the cornea without
damaging adjacent tissue. The amount of tissue removed depends upon the degree
of the vision disorder being corrected. Following the procedure, the front
surface of the eye is flatter when corrected for nearsightedness and steeper
when corrected for farsightedness. In effect, the change made in the middle or
periphery of the cornea is translated to the front surface of the cornea which
results in vision correction. A series of patient follow-up visits are scheduled
with an
25
<PAGE> 28
optometrist or ophthalmologist to monitor the corneal healing process, to verify
that there are no complications and to test the correction achieved by the laser
vision correction procedure. The typical procedure takes 15 to 30 minutes from
set-up to completion. The excimer laser is generally used for less than 40
seconds.
LASIK. LASIK came into commercial use in Canada in 1994 and in the U.S. in
1996. Currently, the majority of laser vision correction procedures are LASIK
since it is believed that LASIK generally allows for:
- More precise correction than PRK for higher levels of myopia and
hyperopia (with or without astigmatism),
- Greater predictability of results,
- Shorter patient recovery times and less discomfort, and
- Decreased possibility of corneal regression.
In LASIK, an FDA-approved automated microsurgical instrument called a
microkeratome is used to create a thin corneal flap, which remains hinged to the
eye. Patients do not feel or see the cutting of the corneal flap, which takes
only a few seconds. The corneal flap is then laid back and excimer laser pulses
are applied to the exposed surface of the cornea to treat the eye according to
the patient's prescription. The corneal flap is then folded back to its original
position and inspected to ensure that it remains secured in position by the
natural suction within the cornea. Because the surface layer of the cornea
remains intact with LASIK, no bandage contact lens is required and the patient
experiences minimal discomfort. LASIK has the advantage of more rapid recovery
than PRK, with most patients seeing well enough to drive a car the next day and
healing completely within one to three months. The LASIK procedure allows an
ophthalmologist to treat both eyes of a patient during the same visit.
PRK. PRK has been used commercially since 1985. In PRK procedures, the
ophthalmologist removes the thin layer of cells covering the outer surface of
the cornea (the epithelium), rather than creating a corneal flap, in order to
apply the excimer laser pulses to the surface of the cornea. Following the PRK
procedure, a contact lens bandage is placed on the eye to protect it. The
patient typically experiences discomfort for up to 24 hours and blurred vision
for up to 72 hours until the epithelium heals. To assist in alleviating
discomfort and to promote corneal healing, an ophthalmologist generally will
prescribe certain topical pharmaceuticals. Although a patient usually
experiences substantial improvement in clarity of vision within a few days
following the procedure, it usually takes one to three months for the full
benefit of the PRK procedure to be realized. Patients usually have one eye
treated in one visit and the second eye treated at a later visit.
THE LASER VISION CORRECTION MARKET
In 1995, the FDA approved the first laser to perform laser vision
correction procedures in the U.S. Currently, laser vision correction is the most
rapidly growing surgical procedure in the U.S. with an estimated 480,000
procedures performed in 1998, an increase of 110% over the 215,000 procedures
performed in 1997. Industry analysts forecast approximately 800,000 procedures
will be performed in 1999 and 1.2 million procedures will be performed in 2000
indicating annual growth rates of 70% and 50%, respectively. Laser vision
correction is an elective, private pay procedure performed on an outpatient
basis.
26
<PAGE> 29
<TABLE>
<CAPTION>
105 '1996'
- --- ------
<S> <C>
215 '1997'
480 '1998'
800 '1999E'
1200 '2000E'
</TABLE>
The rapid growth of laser vision correction procedures performed in the
U.S. is attributable to:
- Word of Mouth -- As the number of procedures performed increases, so does
the number of patients able to attest to the benefits of laser vision
correction.
- Improved Procedure -- The LASIK procedure results in immediate
improvement, minimal patient discomfort and recovery in a matter of days.
- Expanded Applications -- The excimer laser is now approved to treat the
three most common types of refractive vision disorders: nearsightedness,
farsightedness and astigmatism.
- Demographic Trends -- Deteriorating eyesight experienced by aging baby
boomers is anticipated to create increased demand for eye care services,
including laser vision correction.
OUR LASER VISION CORRECTION CENTERS
We currently operate 22 laser vision correction centers, 19 of which are
located in metropolitan markets throughout the United States, two of which are
in Canada and one of which is in Europe. Our centers are supported by our fully
credentialed network of approximately 760 ophthalmologists and 1,460
optometrists who perform laser vision correction procedures, pre-procedure
evaluations and post-procedure follow-ups. Over 60,000 laser vision correction
procedures have been performed at our centers since inception in 1991.
Approximately 90% of the laser vision correction procedures performed in our
centers today are LASIK.
At our laser vision correction centers, we strive to meet the needs of our
customers which include the ophthalmologists and optometrists, and the patient.
WE PROVIDE OUR OPHTHALMOLOGISTS AND OPTOMETRISTS WITH:
State-of-the-art equipment and facilities. We provide our ophthalmologists
with the facilities, equipment and support services necessary to perform vision
correction procedures using state-of-the-art laser technologies. Our
ophthalmologists are able to focus on treating patients and are not burdened by
the financial, management, administrative, maintenance and regulatory
requirements associated with establishing and operating a laser vision
correction center. Our laser vision correction centers typically include one or
more laser procedure rooms, private examination rooms and patient waiting areas.
Each center in the U.S. is equipped with a VISX Star S2 laser in addition to
corneal topography instruments, ophthalmic examination equipment, computer
systems and standard office equipment.
27
<PAGE> 30
Trained technicians and support staff. Staffing at our laser vision
correction centers depends on the procedure volume at a particular center. All
of our centers are generally staffed with a center director, a technician and an
office manager. The center director typically has a medical background and is
responsible for the clinical management of the center including programming the
excimer laser for procedures. The technician assists the ophthalmologists during
the laser vision correction procedure and provides support services such as
sterilization of surgical instruments. The technician is certified by both the
excimer laser manufacturer and the microkeratome supplier. The office manager is
responsible for day-to-day operations of the center, including patient
administration, billing, scheduling and supply re-ordering. In addition, most
centers are assigned a medical support director who works with our center
director to support our network of ophthalmologists and optometrists, recruit
additional ophthalmologists and optometrists, and assist in developing laser
vision correction programs.
Access to an expanded patient population. We have helped many of our
ophthalmologists and optometrists develop laser vision correction practices
through our strong marketing efforts which identify and capture potential new
patients. We coordinate our efforts with our ophthalmologists to customize
marketing programs using the ophthalmologist's name in media advertisements and
when answering toll-free phone inquiries. We market each ophthalmologist's laser
vision correction services directly to the consumer through radio, direct mail
and print advertisements, videos, brochures and seminars.
Opportunities for incremental income. Each laser vision correction
procedure (one eye) yields a procedure fee for the ophthalmologist.
Ophthalmologists and optometrists who perform pre-procedure evaluations or
post-procedure follow-ups also receive a professional fee for such services.
These procedure and professional fees represent for our ophthalmologists and
optometrists an incremental source of income not subject to managed care or
government reimbursement.
Clinical training programs for new procedures and techniques. We strive to
be the leader in clinical training programs, to educate our network of
ophthalmologists and optometrists on laser vision correction, and to remain
current with new procedures and techniques. We provide our ophthalmologists with
live on-site procedure demonstrations and hands-on laser vision correction
training. In addition, certain centers are involved in pre-FDA evaluation of new
procedures and expanded applications for vision correction.
WE PROVIDE OUR PATIENTS WITH:
Convenient access to highly credentialed ophthalmologists and
optometrists. We focus on recruiting leading ophthalmologists and optometrists
who have a reputation for providing quality eye care within their respective
markets. Our ophthalmologists have completed extensive FDA-mandated training and
also have met our rigorous qualification criteria, including an extensive review
of state licensure, Board certification, malpractice insurance and history,
procedure experience and clinical outcomes. In addition, all newly-recruited
ophthalmologists are placed under the supervision of a more experienced laser
vision correction ophthalmologist to closely monitor clinical outcomes and
patient satisfaction.
Treatment environments designed to enhance customer satisfaction. Our
centers are designed to create a patient friendly environment and reduce any
anxiety associated with laser vision correction. Each center has an
aesthetically pleasing and comfortable waiting area for patients and our center
staff is focused on addressing each patient's needs. In addition, each center
provides consultation areas where the patient and center staff can discuss
procedures and financing alternatives in a private setting.
Educational consultations and materials. The education process begins with
our initial contact with the patient. All of our educational materials focus on
information regarding vision correction procedures. Our call center personnel
are trained to answer questions regarding procedures and have access to both an
ophthalmologist to address more difficult inquiries and past patients to relate
procedure experiences. Once in the center, potential patients receive a
consultation focused on educating the patient on vision correction procedures,
how the procedure corrects the specific refractive vision disorder that the
patient presents and what results the patient should expect after the procedure.
Patients are given written materials and can view a
28
<PAGE> 31
video of the procedure or witness an actual procedure during their initial
visit. We believe that an educated patient has realistic expectations and is
therefore more satisfied with procedure results.
Regularly scheduled post-procedure follow-ups. We strive towards 100%
patient satisfaction and have established a "Continuum of Care" program which
assures that the level of vision correction agreed to by the patient and the
ophthalmologist is achieved. We schedule post-procedure follow-ups with patients
to monitor procedure results and in those very few instances when the desired
correction is not achieved in the initial procedure, the patient receives a
no-cost enhancement. The results of an internally-prepared study of 2,072
procedures performed at our U.S. centers indicated that, of those procedures
with at least six months of follow-up, 83% of the eyes were corrected to between
20/15 and 20/25 and 97% were corrected to at least 20/40.
Affordable financing alternatives. Because laser vision correction
procedures are elective and generally not reimbursable by third party payors, we
offer patients several financing alternatives and in certain circumstances
promotional discounts. Customers can pay for the procedure with cash, personal
check, bank check, money order or credit card. In addition, we make available
multiple payment plans offered by an unaffiliated finance company. We also
provide information regarding installment plans, insurance coverage, home equity
loans and payment through employer flexible benefit plans. In the majority of
the procedures financed, we bear no credit risk.
OUR BUSINESS STRATEGY
We intend to increase penetration and market share in our current markets
and expand into contiguous markets. The key elements of our business strategy
include:
Developing and implementing innovative direct marketing campaigns. Our
marketing programs seek to reinforce the LCA-Vision brand name in addition to
raising awareness concerning laser vision correction and promoting our centers
and network of ophthalmologists and optometrists. We direct patient marketing
efforts to three potential sources: our network's patient base, other eye care
and medical professionals' patients and consumers in general. In each market, we
target a specific demographic group within each of these potential populations
that we believe is most likely to be interested in laser vision correction.
These direct marketing programs include print, television and direct mail
campaigns as well as brochures, videos and seminars. Our broader public
relations and advertising efforts rely on radio spots and placement of news
stories in various media to highlight the opening of new centers or the
availability of laser vision correction services within a specific market. In
most advertisements, prospective patients are provided a toll-free number to
contact our call center representatives who screen prospective patients and
record patient names and information into our centralized computer system for
future mailings. We coordinate our call center efforts with our network of
ophthalmologists and optometrists by answering calls and customizing follow-up
brochures using a local network ophthalmologist's or optometrist's name. Once
patient information has been recorded, our representatives schedule eye
evaluation appointments for prospective patients with a local network
ophthalmologist or optometrist to determine whether the prospective patient is a
candidate for laser vision correction. If a prospective patient elects not to
proceed with a laser vision procedure following an initial evaluation, the
prospective patient's name is kept on a follow-up mailing list and additional
materials are sent out to the patient for a certain period of time.
Attracting leading ophthalmologists and optometrists. We believe the most
effective way to attract leading ophthalmologists and optometrists is to
establish ourselves as a leading provider and operator of laser vision
correction centers within the eyecare community. We assign a medical support
director to each of our markets who is responsible for identifying the leading
ophthalmologists and optometrists located within that market. Our medical
support director establishes contacts and promotes our laser vision correction
services and capabilities through attending professional meetings and
conferences, advertisements in trade journals, direct mailings, our web site and
newsletters. We then continue to work closely with ophthalmologists and
optometrists who have indicated an interest in participating in our laser vision
correction programs by educating them as to how to develop their laser vision
correction business and providing training and
29
<PAGE> 32
credentialing for the laser vision correction procedure, including pre-procedure
evaluations and post-procedure follow-ups.
Building and operating new laser vision correction centers. We plan to expand
our business primarily through the development of new centers in contiguous
markets and within existing markets. In evaluating new and current markets for
building a laser vision correction center, we first evaluate population
demographics, determine the number of existing excimer lasers and interview
local ophthalmologists and optometrists to assess interest in developing a laser
vision correction center. The targeted market must exhibit a potential for
generating break-even procedure volume within the first 6 to 8 months, including
the necessary ophthalmologist and optometrist participation to support such
levels. We seek to lease 2,000 to 3,000 square feet of space in professional
office buildings located in high volume traffic areas. In addition, we have
developed standardized center plans and designs to be used in building each new
center.
Acquiring established laser vision correction centers. We will evaluate select
acquisition opportunities located in existing and contiguous markets. We perform
an extensive evaluation of each potential laser vision correction center's
historical operating performance and clinical outcomes and verify all
credentialing, licensures and certifications for the ophthalmologists performing
procedures. Furthermore, we assess each targeted center's physical structure,
geographic location and support staff qualifications. We seek to acquire laser
vision correction centers that have established profitability and can benefit
from our management and marketing programs.
OUR CENTER LOCATIONS
Our centers are located in the following U.S. metropolitan and
international markets:
Concord, CA
Newport Beach, CA
San Bernardino, CA
San Jose, CA
Torrance, CA
Clearwater, FL
Schaumburg, IL
Annapolis, MD*
Baltimore, MD*
Bethesda, MD
Edina, MN
Charlotte, NC
Albany, NY
Amherst, NY
Centerville, OH
Cincinnati, OH
Columbus, OH
Holland, OH
Falls Church, VA
Ft. Erie, Ontario, Canada
Willowdale, Ontario, Canada
Helsinki, Finland*
- ---------------
* We do not wholly-own these centers. They are owned by joint ventures in which
we have a substantial ownership interest.
PROCEDURE VOLUME
Approximately 90% of the procedures performed in our laser vision
correction centers in the U.S. for the three month period ended March 31, 1999
were LASIK procedures. During the same period in 1998, approximately 65% of the
procedures were LASIK procedures.
30
<PAGE> 33
The table below illustrates the quarterly growth in the number of combined
procedures performed in our centers since the first quarter of 1996.
<TABLE>
<CAPTION>
613 Q1
- --- --
<S> <C>
1054 Q2
864 Q3
1089 Q4
1443 Q1
2078 Q2
2794 Q3
3400 Q4
4450 Q1
5737 Q2
6102 Q3
6791 Q4
9064 Q1
</TABLE>
COMPETITION
Laser vision correction, whether performed at one of our centers or
elsewhere, competes with several surgical and non-surgical treatments to correct
refractive vision 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 vision correction.
We face competition from other providers of laser vision correction. Eye
care services in the U.S., including laser vision correction services, 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 vision correction
chains, like LCA-Vision, are a specialized type of multi-site eye care center
that primarily provide laser vision correction. Among the laser vision
correction center chains, we believe we are one of the largest providers in
terms of number of centers in the U.S.
The market for providing access to excimer lasers is highly competitive. We
compete with laser centers operated by other national operators of laser vision
correction centers as well as with local operators and ophthalmologists who have
purchased their own laser. Other companies which have indicated they intend to
operate or already operate laser centers in the U.S. are Clear Vision Laser
Centers, Laser Vision Centers, Inc., NovaMed Eyecare, Inc., Omega Health
Systems, Inc., Physicians Resource Group, Inc., TLC The Laser Center Inc. and
Vision Twenty-One, Inc. In addition, we face competition from companies which
own or operate mobile excimer laser facilities which they bring to
ophthalmologists on a regularly-scheduled basis, or an as-needed basis, rather
than operating fixed site open access centers like ours. Our largest competitor
of this type is Laser Vision Centers, Inc. Other companies pursuing this mobile
strategy include Omega Health Systems, Inc., and possibly, Nidek, Inc., an
excimer laser manufacturer.
In addition to competition from other chains of laser vision correction
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 vision correction procedures. Certain chains have entered the
laser vision correction market. Management believes they have had moderate
success and have limited their involvement in the industry. Other retail optical
chains are not currently focusing on providing laser vision correction.
31
<PAGE> 34
EMPLOYEES
As of May 31, 1999, we had 145 employees, 107 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. In the future, we plan
to formally register our trademarks with the U.S. Trademark Office.
GOVERNMENT REGULATION
Excimer lasers used in the U.S. are regulated by the FDA and cannot be sold
in the U.S. until the FDA approves the device. In the U.S., VISX, Summit,
Autonomous and Nidek are the only excimer laser manufacturers with FDA approval.
Excimer laser manufacturers that obtain FDA approval for use of their excimer
lasers are subject to continuing regulation by the FDA, including periodic
inspections to determine compliance with regulations. Although the FDA has not
sought to regulate ophthalmologists' use of approved and unmodified excimer
lasers, it enforces numerous regulations including regulations prohibiting the
sale and promotion of excimer lasers for non-indicated uses.
While excimer lasers are not approved by the FDA for LASIK,
ophthalmologists in the U.S., including those affiliated with us and our
competitors, have performed LASIK using their discretion as a practice of
ophthalmology matter. The FDA may seek to challenge this practice in the future.
The following is a more detailed description of certain laws and
regulations that affect our operations.
Restrictions on medical devices
In the U.S., the FDA regulates the manufacturing, labeling, distribution
and marketing of medical devices, including excimer lasers and microkeratomes.
The excimer lasers and other major equipment that we use have been authorized by
the FDA for certain uses.
Once FDA approval is obtained, however, medical device manufacturers are
subject to continuing FDA obligations. For example, the FDA requires that
medical devices be manufactured in accordance with its Quality System
Regulations. In essence, this means that medical devices must be manufactured
and records must be maintained in a prescribed manner with respect to
production, testing and control activities. In addition, the FDA sometimes
imposes restrictions and requirements regarding the labeling and promotion of
medical devices, with which users (such as LCA-Vision) as well as manufacturers
must comply. Non-compliance with FDA requirements could subject manufacturers
and LCA-Vision to enforcement action, including:
- Product seizures,
- Recalls,
- Withdrawal of approvals, and
- Civil and criminal penalties.
Any such enforcement action could have a material adverse effect on our
business, financial condition and results of operations.
To authorize new uses of medical devices, manufacturers are required to
obtain a supplemental FDA authorization. Obtaining these authorizations is time
consuming and expensive, and we cannot be sure that manufacturers of the devices
we use will be able to obtain any such additional FDA authorizations. Further,
later discovery of problems with the medical devices we use or the manufacture
or failure to comply with manufacturing or labeling requirements may result in
restrictions on use of the devices or enforcement action
32
<PAGE> 35
against the manufacturers, including withdrawal of devices from the market.
Changes in legislation or regulation could affect whether and how we can use the
devices. These and other regulatory actions could limit the supply of devices we
use or our ability to use them, which could have a material adverse effect on
our business, financial condition and results of operations.
Anti-kickback statutes
In the U.S., the federal anti-kickback statute prohibits the knowing and
willful solicitation, receipt, offer or payment of any kickback in connection
with:
- The referral of patients, and
- The ordering or purchasing of items or services payable in whole or in
part under Medicare, Medicaid or other federal healthcare programs.
Some courts have interpreted the federal anti-kickback statute broadly to
prohibit payments intended to induce the referral of Medicare or Medicaid
business, regardless of any other legitimate motives. Sanctions for violations
of the anti-kickback statute include:
- Criminal penalties,
- Civil penalties of up to $50,000 per violation, and
- Exclusion from Medicare, Medicaid and other federal programs.
According to the U.S. Office of the Inspector General, ophthalmologists and
optometrists who engage in agreements to refer business may be violating the
anti-kickback statute. Further, violations may occur even with respect to
non-Medicare or Medicaid services if the arrangement has an impact on the
referral pattern for Medicare or Medicaid services.
Some states have enacted statutes similar to the federal anti-kickback
statute which are applicable to all referrals of patients. Although we have
endeavored to structure our contractual relationships in compliance with these
laws, authorities could determine that our business practices are in violation
of such laws. This could have a material adverse effect on our business,
financial condition and results of operations.
Fee-splitting
Many states prohibit professionals (including ophthalmologists and
optometrists) from paying a portion of a professional fee to another individual
unless that individual is an employee or partner in the same professional
practice. Violation of a state's fee-splitting prohibition may result in civil
or criminal fines, as well as loss of licensing privileges. Many states offer no
clear guidance on what relationships constitute fee-splitting, particularly in
the context of providing management services for doctors. Although we have
endeavored to structure our contractual relationships in material compliance
with these laws, state authorities could find that fee-splitting prohibitions
apply to our business practices. This could have a material adverse effect on
our business, financial condition and results of operations.
Corporate practice of medicine and optometry
The laws of many states prohibit business corporations, such as LCA-Vision,
from practicing medicine and employing or engaging physicians to practice
medicine. Some states in which we currently operate prohibit business
corporations from practicing optometry or employing or engaging optometrists to
practice optometry. Such laws preclude companies that are not owned entirely by
eye care professionals from:
- Employing eye care professionals,
- Controlling clinical decision making, and
- Engaging in other activities that are deemed to constitute the practice
of optometry or ophthalmology.
33
<PAGE> 36
This prohibition is generally referred to as the prohibition against the
corporate practice of medicine or optometry. Violation of this prohibition may
result in civil or criminal fines, as well as sanctions imposed against the
professional through licensing proceedings. In those states in which we operate
centers, including California, Illinois and New York, our revenues and direct
costs do not include the medical professionals' fee component. Although we have
endeavored to structure our contractual relationships in compliance with these
laws, if any aspect of our operations were found to violate state corporate
practice of medicine or optometry prohibitions, this could have a material
adverse effect on our business, financial condition and results of operations.
Self-referral laws
The U.S. federal self-referral law (the "Stark Law") prohibits physicians
(including optometrists) from referring their Medicare or Medicaid patients for
certain health services to any provider with which they (or their immediate
family members) have a financial relationship. Certain referrals, however, fit
within specific exceptions in the statute or regulations. The penalties for
violating the Stark Law include:
- Denial of payment for the health services performed,
- Civil fines of up to $15,000 for each service provided pursuant to a
prohibited referral,
- A fine of up to $100,000 for participation in a circumvention scheme, and
- Possible exclusion from Medicare and Medicaid programs.
Currently, it is unclear how eye doctors are affected under the law. While
we believe that our present business practices will not be affected, there can
be no assurance that we fully comply with the Stark Law or similar state laws.
Any such actions could have a material adverse effect on our business, financial
condition and results of operations.
Other anti-fraud provisions
Certain federal and state laws impose penalties on healthcare providers and
those who provide services to such providers (including businesses such as
LCA-Vision) that fraudulently or wrongfully bill government or other third-party
payors for healthcare services. Such penalties include substantial civil and
criminal fines and imprisonment. In addition, the federal law prohibiting false
Medicare/Medicaid billings allows a private person to bring a civil action in
the name of the U.S. government for violations of its provisions. Such private
individuals can obtain a portion of the false claims recovery if the action is
successful. We believe that we operate in material compliance with these laws.
We do not know whether any of our activities will be challenged or reviewed by
governmental authorities or private parties asserting false claims. Any such
actions could have a material adverse effect on our business, financial
condition and results of operations.
Center licensure and certificate of need
State Departments of Health may require us to obtain licenses in the
various states in which we have or acquire laser vision correction centers or
other business operations. We believe that we have obtained the necessary
licensure in states where licensure is required and that we are not required to
obtain licenses in other states. However, some of the regulations governing the
need for licensure are unclear and there is little guidance available regarding
certain interpretative issues. Therefore, it is possible that a state regulatory
authority could determine that we are improperly conducting business operations
without a license. This could subject us to significant fines or penalties,
result in our being required to cease operations in that state and could
otherwise have a material adverse effect on our business, financial condition
and results of operations. We have no reason to believe that we will be unable
to obtain necessary licenses without unreasonable expense or delay, but there
can be no assurance that we will be able to obtain any required license.
Some states require permission by the State Department of Health in the
form of a Certificate of Need ("CON") prior to the construction or modification
of an ambulatory care facility or the purchase of certain medical equipment in
excess of a certain amount. Currently, we do not believe we need any CONs to
operate
34
<PAGE> 37
our laser vision correction centers. However, some of the regulations governing
the need for CONs are unclear and there is little guidance to cover certain
interpretive issues. Therefore, it is possible that a state regulatory authority
could determine that we are improperly conducting business operations without a
CON. This could have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that we will be
able to acquire a CON in all states where it is required.
Healthcare reform
Healthcare reform is considered by many in the U.S. to be a national
priority. Several states are also currently considering healthcare proposals. We
cannot predict what additional action, if any, the federal government or any
state may ultimately take with respect to healthcare reform or when any such
action will be taken. Healthcare reform may bring radical changes in the
financing and regulation of the healthcare industry, which could have a material
adverse effect on our business, financial condition and results of operations.
YEAR 2000
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 middle 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
will purchase packages to make our Sun Solaris 2.5.1 server operating systems
Year 2000 compliant. We expect to complete this early in the third quarter of
1999.
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 not verified or tested compliance for our call center information
system because we are in the process of installing a new system, the Melita
International Corporation PhoneFrame Explorer System. This system, which is Year
2000 compliant, should be in operation by the end of the third quarter of 1999.
The cost of the new system is expected to be in excess of $200,000 and will
either be included in our capital expenditures or leased.
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
necessary upgrades or replace any computers that are not Year 2000 compliant
during the second and third quarters of 1999.
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.
35
<PAGE> 38
Costs to address Year 2000 issues
We expect that any remaining costs for Year 2000 compliance will be less
than $400,000 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 our 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 reasonably likely worst case Year 2000 scenario would be that a
solution to the VISX laser printing and storing 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 procedures 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.
LEGAL PROCEEDINGS
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. Various current and former employees, officers and
directors are also named as co-defendants. 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 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.
The actions, which have been consolidated, are in the discovery stage. In
management's opinion neither action will have a material adverse effect on our
financial position or results of operations.
36
<PAGE> 39
MANAGEMENT
The directors, executive officers and key personnel of LCA-Vision and their
positions with LCA-Vision are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Chairman of the Board and Chief Executive
Stephen N. Joffe............................ Officer
Thomas E. Wilson............................ President and Chief Operating Officer
Larry P. Rapp............................... Treasurer and Chief Financial Officer
Sandra F. N. Joffe.......................... Secretary
William O. Coleman(1)(2).................... Director
John H. Gutfreund(1)(2)..................... Director
John C. Hassan(1)........................... Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Stephen N. Joffe, age 56, is LCA-Vision's Chairman of the Board and Chief
Executive Officer. He was the founder of the Company's corporate predecessor,
Laser Centers of America, Inc. and served as its Chairman of the Board and Chief
Executive Officer from its founding in 1985 until its merger into the Company in
1995. In addition, he is an Esteemed Professor of Surgery at the University of
Cincinnati Medical Center, a position he has held since 1990. He was a full-time
Professor of Surgery at the University of Cincinnati Medical Center for nine
years prior to 1990. He has held faculty appointments at the Universities of
London, Glasgow and Cincinnati and holds fellowships of the American College of
Surgeons and the Royal College of Surgeons of Edinburgh and Glasgow.
Thomas E. Wilson, age 60, is LCA-Vision's President and Chief Operating
Officer, a position he has held since December 1998. He served as a management
consultant to LCA-Vision from June 1998 through December 1998. Mr. Wilson was
the Vice President of Manufacturing of Pease Industries (residential door
manufacturer) from 1996-1998; Vice President of Operations of Cincinnati Mine
Machinery Company (manufacturer of coal mining equipment) from 1995-1996. Prior
to 1995, he served in a variety of management positions with the GE Aircraft
Engines Division of the General Electric Company for more than five years.
Larry P. Rapp, age 51, has been LCA-Vision's Treasurer since December 1998
and Chief Financial Officer since April 1996. He has over 15 years of senior
financial management experience in publicly traded and privately held companies,
as well as 13 years of public accounting experience with Price Waterhouse.
Immediately prior to joining LCA-Vision, he was a principal of Sanctuary
Financial Group, Inc. (a strategic management consulting firm) from 1993-1996.
Sandra F.N. Joffe, age 56, is LCA-Vision's Secretary, a position she has
held since 1995. Prior to that she was the Secretary of Laser Centers of
America, Inc., one of LCA-Vision's predecessor companies, for more than five
years.
William O. Coleman, age 70, is a Director and formerly held positions at
The Procter & Gamble Company from 1955-1989 that included General Sales Manager,
Vice President Food Products, Vice President International/Latin America, and
most recently, Vice President Professional Affairs, Special Projects. Mr.
Coleman continues to serve as a Trustee of the Procter & Gamble Retirement
Trusts.
John H. Gutfreund, age 69, is a Director and is President of Gutfreund &
Company, Inc., a New York-based financial consulting firm that specializes in
advising select corporations and financial institutions in the United States,
Europe and Asia. Formerly, Mr. Gutfreund was with Salomon Brothers from
1953-1991, most recently as its Chief Executive Officer. Mr. Gutfreund is:
Director, Foamex International, Inc.; Director, Baldwin Piano & Organ Company;
Director, Montefiore Medical Center, New York City and a Member of
37
<PAGE> 40
the Executive Committee of the Board of Trustees and Finance and Real Estate
Committees; Member, Council on Foreign Relations; Member, the Board of Trustees,
New York Public Library, Astor, Lenox and Tilden Foundations; Honorary Trustee,
Oberlin (Ohio) College; and Trustee, Aperture Foundation.
John C. Hassan, age 56, is a Director and has been the President of
Champion Printing, Inc. for more than five years. Previously, he was Vice
President, Marketing of the Drackett Company, a division of Bristol-Meyers
Squibb. He currently serves as Treasurer of Printing Industries of Southern
Ohio, and is a board member of the Ohio Graphics Arts Health Fund, the Camargo
Club and serves on the Greater Cincinnati United Way and Fine Arts campaigns.
There are no family relationships between any of the directors or executive
officers of LCA-Vision except that Stephen N. Joffe and Sandra F. W. Joffe are
married to one another.
38
<PAGE> 41
CERTAIN TRANSACTIONS
Since January 1, 1997, LCA-Vision has been a party, directly or indirectly,
to the transactions described below with its current directors, executive
officers and principal stockholders (including any of their associates or
affiliates). All of these transactions were with Stephen N. Joffe, our Chairman
and Chief Executive Officer, and his wife, Sandra F.W. Joffe, who is our
Secretary. Certain of these transactions arose out of the process of
establishing LCA-Vision as a publicly traded corporation rather than a
corporation privately owned by the Joffe family. The net result of the various
transactions described in detail below is that as of March 31, 1999, Mr. and
Mrs. Joffe were indebted to LCA-Vision, directly or indirectly, in the total
amount of $343,000. The individual transactions, all of which were approved by
the independent members of LCA-Vision's Board of Directors and are believed to
be on terms no less favorable to LCA-Vision than comparable third party
transactions would have been, are as follows:
In 1995, LCA-Vision borrowed a total of $4.4 million from Mr. and Mrs.
Joffe. The loans were made under two promissory notes which specified an
interest rate of 6.91% per annum and a maturity date of September 26, 2005. In
two separate transactions in December 1996, the note holders converted $2.5
million of their notes into 12.6 shares of Class B Preferred Stock, First and
Second Interim Series. As of January 1, 1997, the total amount due under these
notes, including outstanding principal and accrued interest, was $2.0 million.
In August 1997, in connection with LCA-Vision's acquisition of Refractive
Centers International, Inc. from Summit Technology, Inc., LCA-Vision and Mr. and
Mrs. Joffe agreed to amend the promissory notes to provide that LCA-Vision could
not make principal payments under the notes to Mr. and Mrs. Joffe in any year
unless during the prior fiscal year LCA-Vision's earnings before taxes,
amortization and depreciation net of capital expenditures exceeded $1.0 million,
and then payments could be made only up to 25% of such excess. No payments were
made under these loans in 1997 or 1998, and as of December 31, 1998 the total
amount of principal and accrued interest due under these loans was $2.1 million.
In February 1999, Summit agreed to waive the payment restriction which prevented
any payments to be made under these notes in 1997 and 1998. The balance of this
loan and accrued interest totaling $2.1 million were paid in March 1999.
Prior to August 1997, Mr. Joffe was the guarantor of approximately $11.1
million in bank loans to LCA-Vision, including a mortgage note in the amount of
$3.1 million, and a working capital credit line of up to $8.0 million. Mr. Joffe
was not compensated for these personal guarantees.
In 1998, LCA-Vision loaned Mr. and Mrs. Joffe a total of $2.1 million. This
loan bears interest at the rate of 8.5% per annum collateralized with Mr. and
Mrs. Joffe's pledge to LCA-Vision of their rights under the promissory notes
evidencing their loans to LCA-Vision. In March 1999, this advance was reduced by
the $2.1 million due the Joffes for notes payable and accrued interest due them.
Mr. Joffe is sole owner of The LCA Center for Surgery, Ltd. (the "Surgery
Center"). LCA-Vision does not hold an investment in the Surgery Center. During
1997 and approximately half of 1998, LCA-Vision leased a portion of its
headquarters building to the Surgery Center at an annual rental of $190,000. In
February 1997, LCA-Vision agreed to forego rent in exchange for the Surgery
Center providing LCA-Vision with certain systems and processes for research and
development and additional staffing, and for giving LCA-Vision unlimited use of
the leased premises for research, testing, educational and other agreed upon
purposes. In 1997, LCA-Vision recorded rent, administrative and marketing income
of approximately $74,000 related to the Surgery Center.
In August 1997, we pledged to The Fifth Third Bank a $985,000 certificate
of deposit issued by the Fifth Third as security for a $985,000 loan made by
Fifth Third to the Surgery Center. LCA-Vision pledged the certificate of deposit
for up to 30 days while the Surgery Center arranged to replace the certificate
of deposit as collateral for this loan. When Mr. Joffe's personal guarantee of
our prior facility with Fifth Third expired in August 1997, he remained
personally obligated to LCA-Vision with respect to replacing the certificate of
deposit as collateral for Fifth Third's loan to the Surgery Center. Mr. Joffe
fulfilled this obligation to LCA-Vision by pledging the required collateral, and
LCA-Vision is no longer obligated to Fifth Third with respect to the certificate
of deposit.
39
<PAGE> 42
In June 1998, LCA-Vision purchased the leasehold improvements that had been
paid for by the Surgery Center for their book value of approximately $872,000
and also advanced approximately $576,000 to the Surgery Center. As of March 31,
1999, the Surgery Center owed us approximately $635,000.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table and notes set forth certain information with respect to
the beneficial ownership of LCA-Vision's common stock as of March 31, 1999, both
before and after giving effect to the sale of shares of common stock in this
offering (excluding over-allotments, if any) for the following:
- Each of our directors and executive officers,
- All directors and executive officers as a group,
- The selling stockholders, and
- Each person who is known by us to be the beneficial owner of more than 5%
of our outstanding common stock.
The table below sets forth the names of the selling stockholders and the
number of shares which may be sold by each of the selling stockholders pursuant
to this prospectus. "Shares Beneficially Owned" prior to and after the offering
include those shares that could be acquired through the possible exercise of
outstanding options granted under one or more of our stock option plans which
are presently exercisable.
SEC rules provide that shares of common stock which an individual or group
has a right to acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for purposes of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person shown on
the table.
The information included below is based upon information provided by the
selling stockholders. Because this offering may not result in the sale of all
additional shares pursuant to over-allotments, no definitive estimate as to the
percentage of common stock that will be held by the selling stockholders after
this offering can be provided. The table below has been prepared on the
assumption that the over-allotment option has not been exercised, and that all
of the shares offered under this prospectus will be sold to unaffiliated
parties. See "Underwriting."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER THE OFFERING
--------------------- SHARES ---------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Stephen N. Joffe ................... 15,475,400(2) 33.4% 1,500,000 12,775,400(2) 24.8%
Sandra F.W. Joffe................... 15,475,400(2) 33.4% 1,200,000 12,775,400(2) 24.8%
----
Summit Technology, Inc.............. 7,164,361 15.8% 500,000 6,664,361 13.2%
----
Craig P.R. Joffe.................... 2,500,313 5.5% -- 2,500,313 4.9%
----
William O. Coleman.................. 241,250(3) * -- 241,250(3) *
John H. Gutfreund................... 126,900(4) * -- 126,900(4) *
John C. Hassan...................... 154,500(5) * -- 154,500(5) *
Larry P. Rapp....................... 255,500(6) * 100,000 155,500(6) *
Thomas E. Wilson.................... 100,000(7) * -- 100,000(7) *
All directors and executive officers
as a group persons(8)............. 16,353,550(8) 34.8% 2,800,000 13,553,550(8) 26.1%
----- ----
</TABLE>
40
<PAGE> 43
- ---------------
* Less than 1%
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws, where applicable, and the information
contained in other footnotes to this table.
(2) Stephen N. Joffe and Sandra F.W. Joffe are married to one another and each
is therefore deemed to be the beneficial owner of all shares owned by the
other. The total shown consists of 10,777,950 shares of common stock owned
of record by Mr. Joffe (9,277,950 shares after the offering), 3,851,649
shares of common stock owned of record by Mrs. Joffe (2,651,649 shares after
the offering), 1,000 shares of common stock owned of record by Mr. and Mrs.
Joffe jointly, 750 shares of common stock issuable to Mrs. Joffe in the
event of her exercise of a currently exercisable stock option, 736,309
shares of common stock issuable to Mr. Joffe in the event of conversion of
11 shares of Class B Preferred Stock owned by him, and 107,742 shares of
common stock issuable to Mrs. Joffe in the event of conversion of 1.6 shares
of Class B Preferred Stock owned by her.
(3) Includes 165,000 shares owned of record by Mr. Coleman and 76,250 shares of
common stock issuable to Mr. Coleman upon the exercise of certain
unexercised stock options.
(4) Includes 50,000 shares owned of record by Mr. Gutfreund, 650 shares owned of
record by him as custodian for his minor child, and 76,250 shares of common
stock issuable to Mr. Gutfreund upon the exercise of certain unexercised
outstanding stock options.
(5) Includes 2,000 shares owned of record by Mr. Hassan and 152,500 outstanding
shares of common stock issuable to Mr. Hassan upon the exercise of certain
unexercised stock options.
(6) Includes 500 shares owned of record by Mr. Rapp and 255,000 shares of common
stock issuable to Mr. Rapp upon the exercise of certain unexercised
outstanding stock options (155,000 shares after the offering).
(7) Includes 100,000 shares of common stock issuable to Mr. Wilson upon the
exercise of certain unexercised outstanding stock options.
(8) Consists of 14,848,749 shares owned of record directly or indirectly by such
persons (12,148,749 shares after the offering), 844,051 shares issuable upon
conversion of Class B Preferred Stock owned by such persons, and 660,750
shares issuable upon the exercise of stock options held directly or
indirectly by such persons (560,750 shares after the offering).
41
<PAGE> 44
DESCRIPTION OF SECURITIES
Our Amended and Restated Certificate of Incorporation authorizes
110,000,000 shares of common stock, $.001 par value, 1,688 shares of Class A
Preferred Stock, $.001 par value, and 5,000,000 shares of Class B Preferred
Stock, $.001 par value. The holders of shares of common stock and Class A
Preferred Stock have one vote per share. Neither the common stock nor the Class
A Preferred Stock has any conversion rights. The closing sale price of the
common stock on the Nasdaq SmallCap Market at the close of business June 4, 1999
was $10.5625 per share. Application has been made for quotation of the common
stock in the Nasdaq National Market. The holders of shares of common stock are
entitled to dividends when and as declared by the Board of Directors from
legally available funds. We do not anticipate declaring or paying any cash
dividends for the foreseeable future. There are currently 1,182 shares of Class
A Preferred Stock issued and outstanding. The holders of shares of Class A
Preferred Stock have one vote per share. The Class A Preferred Stock does not
have any conversion rights.
We have issued a total of 12.6 shares of two series of Interim Class B
Preferred Stock. Each of the 12.6 shares of our Interim Series Class B Preferred
Stock and Second Interim Series Class B Preferred Stock is convertible into the
number of fully paid and nonassessable shares of common stock that results from
dividing $3.50 into the sum of $200,000 plus all accrued but unpaid dividends on
each such share at the time of conversion.
Our Amended and Restated Certificate of Incorporation provides holders of
each series of Interim Class B Preferred Stock with a liquidation preference
payable upon any voluntary or involuntary liquidation, dissolution or winding up
of LCA-Vision of $200,000 per share, plus all accrued and unpaid dividends to be
paid prior to any distributions to the holders of Class A Preferred Stock or
common stock, and holders of Class A Preferred Stock with a liquidation
preference payable upon any voluntary or involuntary liquidation, dissolution or
winding up of LCA-Vision of $40 per share, plus all accrued and unpaid dividends
to be paid prior to any distributions to the holders of common stock. Subject to
those preferential rights, the holders of common stock are entitled to receive,
ratably, all of our remaining assets.
None of the Class A Preferred Stock, either Series of Interim Class B
Preferred Stock, or common stock has preemptive or cumulative voting rights, is
redeemable, or is liable for assessments or further calls.
On May 7, 1998, we filed a Certificate of Designation (as corrected on May
11, 1998 and May 12, 1998) with the Delaware Secretary of State governing the
rights, preferences and privileges of Series B-1 Stock. We subsequently issued
10,000 shares of Series B-1 Stock. As of March 31, 1999, no shares of Series B-1
Preferred Stock remained outstanding.
At the time we issued the Series B-1 Stock in May 1998, we agreed with the
six purchasers that on or before May 11, 1999, upon notice from the holders of a
majority of the Series B-1 Stock, we would sell them up to 5,000 shares of a
Series B-2 Preferred Stock with rights, preferences and privileges similar to
those of the Series B-1 Preferred Stock. Prior to May 11, 1999, we issued a
total of 165,076 shares of our common stock to three of the six original
purchasers, holding a majority of the Series B-1 Stock, in exchange for their
agreement not to purchase Series B-2 Stock. Subsequently, two of the remaining
three purchasers of the Series B-1 Stock filed suit against us in New York
seeking to compel the issuance of the Series B-2 Stock. Although we did not
believe there to be any merit to their allegations, we agreed to settle the
litigation by issuing 25,396 shares of our common stock to the plaintiffs.
42
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could drop due to sales of large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 50,566,973 shares of common stock will be outstanding.
Of these shares, 29,421,700 shares, including the 8,300,000 shares (9,545,000
shares if the underwriters exercise their over-allotment options in full) sold
in this offering, will be freely tradeable without restriction under the
Securities Act except for any shares purchased by any of our "affiliates" as
defined in Rule 144 under the Securities Act. The remaining 21,145,273 shares
are "restricted securities" within the meaning of Rule 144 under the Securities
Act. The restricted securities generally may not be sold unless they are
registered under the Securities Act or are sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act.
Our officers and directors and certain stockholders, including the selling
stockholders, have entered into lock-up agreements pursuant to which they have
agreed not to offer or sell any shares of common stock for a period of 180 days
after the date of this prospectus without the prior written consent of
Prudential Securities Incorporated, on behalf of the underwriters. See
"Underwriting". Prudential Securities may, at any time and without notice, waive
any of the terms of these lock-up agreements specified in the underwriting
agreement. Following the lock-up period, these shares will not be eligible for
sale in the public market without registration under the Securities Act unless
such sales meet the conditions and restrictions of Rule 144 as described below.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (1)
1% of the then-outstanding shares of common stock and (2) the average weekly
trading volume in the common stock during the four calendar weeks immediately
preceding the date on which the notice of such sale on Form 144 is filed with
the SEC. Sales under Rule 144 are also subject to certain provisions relating to
notice and manner of sale and the availability of current public information
about us. In addition, a person (or persons whose shares are aggregated) who has
not been an affiliate of ours at any time during the 90 days immediately
preceding a sale, and who has beneficially owned the shares for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation and other conditions described above. The foregoing
summary of Rule 144 is not intended to be a complete description.
43
<PAGE> 46
UNDERWRITING
We and the selling stockholders have entered into an underwriting agreement
with the underwriters named below, for whom Prudential Securities Incorporated,
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Raymond
James & Associates, Inc. are acting as representatives. We and the selling
stockholders are obligated to sell, and the underwriters are obligated to
purchase, all of the shares offered on the cover page of this prospectus, if any
are purchased. Subject to certain conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the shares indicated opposite its
name:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------ ---------
<S> <C>
Prudential Securities Incorporated..........................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..............................................
Raymond James & Associates, Inc.............................
---------
Total.................................................. 8,300,000
=========
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, over-allotment options to purchase up to
1,245,000 additional shares from a selling stockholder. If any additional shares
are purchased, the underwriters will severally purchase the shares in the same
proportion as per the table above.
The representatives of the underwriters have advised us and the selling
stockholders that the shares will be offered to the public at the offering price
indicated on the cover page of this prospectus. The underwriters may allow to
selected dealers a concession not in excess of $ per share and such dealers
may reallow a concession not in excess of $ per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and the concessions.
We and the selling stockholders have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the underwriters'
over-allotment options to purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
------------------------------------------------------------
FEE WITHOUT EXERCISE OF FULL EXERCISE OF OVER
PER SHARE OVER-ALLOTMENT OPTIONS ALLOTMENT OPTIONS
--------- ---------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us....................... $ $ $
Fees paid by the selling
stockholders........................ $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $365,000 in
expenses for this offering including those of the selling stockholders. We and
the selling stockholders have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to make in respect
of these liabilities.
We, our officers and directors, and certain stockholders, including the
selling stockholders, of LCA-Vision have entered into lock-up agreements
pursuant to which we and they have agreed not to offer or sell any shares of
common stock or securities convertible into or exchangeable or exercisable for
shares of common stock for a period of 180 days from the date of this prospectus
without the prior written consent of Prudential Securities, on behalf of the
underwriters. Prudential Securities may, at any time and without notice, waive
the terms of these lock-up agreements specified in the underwriting agreement.
44
<PAGE> 47
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
- Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment options.
- Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
- Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq Small Cap Market, on the Nasdaq National Market, in
the over-the-counter market or otherwise. Also and prior to the pricing of the
shares, and until such time when a stabilizing bid may have been made, some of
the underwriters who are market makers in the shares may make bids for or
purchases of shares subject to certain restrictions, known as passive market
activities.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- The Public Offers of Securities Regulations 1995,
- The Financial Services Act 1986, and
- The Financial Services Act 1986, (Investment Advertisements) (Exemptions)
Order 1996 (as amended).
We have asked the underwriters to reserve shares for sale at the same
offering price directly to our officers, directors, employees and other business
affiliates or related third parties. The number of shares available for sale to
the general public in the offering will be reduced to the extent such persons
purchase the reserved shares.
LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters will be passed upon for LCA-Vision by Dinsmore & Shohl LLP, Cincinnati,
Ohio. Certain legal matters in connection with this offering will be passed upon
for the underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
EXPERTS
The consolidated financial statements of LCA-Vision as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
included in this prospectus and the consolidated financial statements of
LCA-Vision as of December 31, 1998 and 1997 and for each of the three years in
the period ended December 31, 1998 incorporated by reference to our Annual
Report on Form 10-KSB have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. We
have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933 to register the offering of the shares of common stock
offered hereby. This prospectus constitutes a part of the registration
statement. Prospective
45
<PAGE> 48
investors may read and copy the registration statement and its exhibits and
schedules without charge at the Public Reference Room maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Prospective investors may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, we are required to file electronic versions of
these documents with the SEC through the SEC's Electronic Data Gathering,
Analysis, and Retrieval (EDGAR) system. The SEC maintains a World Wide Web Site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC.
46
<PAGE> 49
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those filed documents. The information incorporated by
reference is considered part of this prospectus, and information that we file
later with the SEC will automatically update and supersede the information in
this prospectus. The following documents, which were previously filed with the
SEC pursuant to the Exchange Act, are hereby incorporated by reference:
- Our Annual Report on Form 10-KSB for the year ended December 31, 1998,
- Our Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999,
and
- Current Reports on Form 8-K filed with the Commission on April 6, April
13, May 3 and May 14, 1999.
All reports and other documents filed by us pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this prospectus
and prior to the termination of this offering shall be deemed to be incorporated
by reference into this prospectus and shall be a part hereof from the date of
filing of such reports and documents.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus is delivered, upon such person's
written or oral request that includes the address (including title or
department) and telephone number to which such information is to be directed, a
copy of any and all information incorporated by reference in this prospectus
(other than exhibits to the information that is incorporated by reference,
unless such exhibits are specifically incorporated by reference herein). You can
request such documents by writing or calling us at 7840 Montgomery Road,
Cincinnati, Ohio 45236 (513) 792-9292, Attention: Larry P. Rapp.
47
<PAGE> 50
INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
Years Ended December 31, 1996, 1997 and 1998 (Audited):
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Cash Flows..................... F-5
Consolidated Statement of Shareholders' Investment........ F-6
Notes to Consolidated Financial Statements................ F-8
Quarter Ended March 31, 1999 (Unaudited):
Condensed Consolidated Balance Sheet...................... F-21
Condensed Consolidated Statements of Operations........... F-22
Condensed Consolidated Statements of Cash Flows........... F-23
Notes to Condensed Consolidated Financial Statements...... F-24
</TABLE>
F-1
<PAGE> 51
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
Cincinnati, Ohio
February 5, 1999
F-2
<PAGE> 52
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<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
F-3
<PAGE> 53
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 54
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)
<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 cash 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
F-5
<PAGE> 55
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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..................... 8
Dividends on Conversion of
Class B1 Convertible
Preferred Stock........... (117)
------ ------ ------
Balance at end of year....... 41,701 36,776 3,177
------ ------ ------
</TABLE>
F-6
<PAGE> 56
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- ------- ---------- ------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C>
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)
------- ------- ------
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
F-7
<PAGE> 57
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
procedures performed in our centers are primarily laser in situkeratomileusis
("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.
F-8
<PAGE> 58
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.
F-9
<PAGE> 59
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 disclosure 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.
F-10
<PAGE> 60
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 $200,000 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.
F-11
<PAGE> 61
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):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revenues.................................................... $22,276 $16,778
Net (loss).................................................. (14,353) (22,814)
(Loss) per share............................................ (0.39) (0.62)
</TABLE>
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.
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, we 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
F-12
<PAGE> 62
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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1998 1997
------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank line of credit........................................ $ 6,641
Bank term loan............................................. $167 2,998
Capital lease obligations.................................. 620 543
---- -------
$787 $10,182
==== =======
</TABLE>
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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
====== ======
</TABLE>
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
F-13
<PAGE> 63
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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1998 1997
---------------------- ----------------------
OWNERSHIP INVESTMENT OWNERSHIP INVESTMENT
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
The Baltimore Laser Sight Center, Ltd............. 45% $417 45% $150
Silmalaseri Oy.................................... 43% 103 43% 24
</TABLE>
Combined summary financial information for these investments follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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)
</TABLE>
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.
F-14
<PAGE> 64
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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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)
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
CAPITAL OPERATING
YEAR LEASES LEASES
---- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
======
</TABLE>
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
F-15
<PAGE> 65
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:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
STOCK OPTIONS EXERCISE PRICE
------------- ----------------
<S> <C> <C>
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
</TABLE>
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.
F-16
<PAGE> 66
This table summarizes information about the 1995 Plan stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------- ------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
--------- ---------------- ---------
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES 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>
This table is a summary of the status of our now discontinued Director's
Nondiscretionary Stock Option Plan:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
STOCK OPTIONS EXERCISE PRICE
------------- ----------------
<S> <C> <C>
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
=======
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
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)
</TABLE>
These results may not be representative of the effects on pro forma amounts
for future years.
F-17
<PAGE> 67
We determined the pro forma amounts using the Black-Scholes option-pricing
model based on the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
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:
F-18
<PAGE> 68
Balance Sheet Information
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Receivables
Trade receivables -- vision............................... $ 1,482 $ 1,250
Trade receivables -- other................................ 1,034 1,690
Allowances................................................ (1,397) (893)
------- -------
$ 1,119 $ 2,047
======= =======
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..................................................... 1,518 $ 1,209
------- -------
$ 3,618 $ 1,209
======= =======
</TABLE>
F-19
<PAGE> 69
Cash Flow Information
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
Canadian operations
Revenues.................................................. $ 2,016 $ 2,083 $ 2,096
Operating profit.......................................... 471 298 79
Statement of Operations Information
Direct costs of laser refractive surgery:
Medical professional and license fees..................... $13,700 $ 4,489 $ 795
Employee costs............................................ 4,094 2,940 1,746
Equipment rent and maintenance............................ 3,045 1,180 --
Facility rent and utilities............................... 1,472 1,002 318
Supplies, gases and other................................. 1,314 1,179 959
------- ------- -------
Total................................................ $23,625 $10,790 $ 3,818
======= ======= =======
</TABLE>
F-20
<PAGE> 70
LCA-VISION INC.
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 (UNAUDITED) AND
DECEMBER 31, 1998 (AUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................... $ 7,199 $ 6,496
Accounts receivable, net.................................. 686 1,119
Prepaid expenses, inventory and other..................... 1,638 1,416
------- -------
Total current assets.............................. 9,523 9,031
Property and equipment, net................................. 9,051 9,433
Goodwill, net............................................... 8,241 8,304
Obligations due from shareholders, net...................... 343 471
Investment in unconsolidated businesses..................... 886 520
Certificate of deposit...................................... 2,100 2,100
Other assets................................................ 1,696 1,518
------- -------
Total assets...................................... $31,840 $31,377
======= =======
Liabilities and Shareholders' Investment
Current liabilities
Accounts payable.......................................... $ 1,810 $ 2,030
Accrued liabilities and other............................. 3,022 2,637
Debt maturing in one year................................. 649 787
------- -------
Total current liabilities......................... 5,481 5,454
Long-term debt.............................................. 642 2,724
Commitments and contingencies
Shareholders' investment
Preferred stock........................................... 2,501 7,687
Common stock ($0.001 par value; 45,282 shares and 40,974
shares issued)......................................... 109 103
Contributed capital....................................... 47,485 41,701
Accumulated (deficit)..................................... (23,949) (25,664)
Foreign currency translation adjustment................... 4 (14)
------- -------
26,150 23,813
Less common stock in treasury at cost..................... 30 30
Less accrued preferred stock dividend..................... 403 584
------- -------
25,717 23,199
------- -------
Total liabilities and shareholders' investment.... $31,840 $31,377
======= =======
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
this statement.
F-21
<PAGE> 71
LCA-VISION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Laser refractive surgery.................................. $13,389 $ 6,446
Other..................................................... 478 763
------- -------
Total revenues.................................... 13,867 7,209
Operating costs and expenses:
Medical professional and license fees..................... 6,015 2,656
Direct costs of services.................................. 2,556 2,819
General and administrative expenses....................... 2,970 2,093
Depreciation and amortization............................. 712 1,055
------- -------
Operating income (loss)..................................... 1,614 (1,414)
Equity in earnings from unconsolidated businesses........... 323 56
Interest expense............................................ (93) (344)
Interest income............................................. 147 112
Other income (expense)...................................... (277) 25
Income (loss) before taxes on income........................ 1,714 (1,565)
Taxes on income............................................. (28)
-------
Net income (loss)........................................... 1,714 (1,593)
Dividends to preferred shareholders......................... (84) (43)
------- -------
Income (loss) available to common shareholders.............. $ 1,630 $(1,636)
======= =======
Income (loss) per common share
Basic..................................................... $ 0.04 $ (0.04)
Diluted................................................... $ 0.04 $ (0.04)
Weighted average shares used in computation
Basic..................................................... 43,779 36,665
Diluted................................................... 47,082 36,665
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
this statement
F-22
<PAGE> 72
LCA-VISION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
------------ -------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 1,630 $(1,636)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 712 1,055
Equity in income of unconsolidated affiliates............. (323) (56)
Compensation paid in common stock......................... 325
Changes in working capital:
Accounts receivable.................................... 433 (466)
Prepaid expenses, inventory and other.................. (222) 366
Accounts payable....................................... (220) 165
Accrued liabilities and other.......................... 385 (23)
------- -------
Net cash provided by (used in) operations................... 2,721 (595)
------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (23) (482)
Other, net................................................ (54) (56)
------- -------
Net cash (used) by investing activities..................... (77) (538)
------- -------
Cash flows from financing activities:
Proceeds from bank borrowing.............................. 294
Principal payments of long-term notes, debt and capital
lease obligations...................................... (2,220) (310)
Exercise of stock options................................. 279
------- -------
Net cash provided (used) by financing activities............ (1,941) (16)
------- -------
Increase (decrease) in cash and cash equivalents............ 703 (1,149)
Cash and cash equivalents at beginning of period............ 6,496 8,680
------- -------
Cash and cash equivalents at end of period.................. $ 7,199 $ 7,531
======= =======
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
this statement.
F-23
<PAGE> 73
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The March 31, 1999 and 1998 financial data are unaudited; however, in our
opinion, such data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the interim periods. The December
31, 1998 condensed consolidated balance sheet was derived from audited financial
statements and, due to its summary nature, does not include all information
required by generally accepted accounting principles.
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 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.
F-24
<PAGE> 74
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.
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.
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 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 months ended March 31, 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
NUMERATOR DENOMINATOR AMOUNT
--------- ----------- ---------
<S> <C> <C> <C>
Net income........................................ $1,714
Dividends to preferred shareholders............... (84)
------
Basic EPS
Income available to common shareholders......... 1,630 43,779 $0.04
=====
Effect of Dilutive Securities
Convertible preferred stock..................... 84 2,314
Stock options................................... 989
------
Diluted EPS
Income available to common shareholders and
assumed conversions............................. $1,714 47,082 $0.04
====== ====== =====
</TABLE>
The weighted average shares for the March 31, 1998 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.
F-25
<PAGE> 75
2. SHAREHOLDERS' INVESTMENT
COMMON STOCK
During the three months ended March 31, 1999, 138,050 shares of common
stock were issued to individuals who exercised stock options. The average
exercise price was $2.02 per share.
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 terms of these shares gave the holders 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. This agreement resulted in
a non-cash charge of $325,000 recorded as other expense in the Condensed
Consolidated Statement of Operations for the quarter.
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 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.
This repayment resulted in increasing the amount of borrowing capability
under the current credit facility to $7,000,000.
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 March 31, 1999 Condensed Consolidated Balance Sheet:
<TABLE>
<S> <C>
Due to us:
Receivable from shareholder's affiliated company.......... $635,000
Accrued interest.......................................... 105,000
Note receivable shareholders.............................. 6,000
Due from us:
Accrued Interim Series B preferred stock dividend......... 403,000
--------
Net due us.................................................. $343,000
========
</TABLE>
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 this quarter 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.
F-26
<PAGE> 76
5. SEGMENT INFORMATION
We operate in one segment -- laser refractive surgery. Following is a table
summarizing the results of our Canadian operations included in the Condensed
Consolidated Statement of Operations for the three months ended March 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues.................................................... $362 $520
Operating profit............................................ 16 91
</TABLE>
6. 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.
The actions, which have been consolidated, 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.
7. ADDITIONAL FINANCIAL INFORMATION
The table below provides additional financial information related to our
Condensed Consolidated Statement of Operations.
<TABLE>
<CAPTION>
MARCH 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Direct costs of laser refractive surgery:
Employee costs............................................ $ 953 $1,042
Equipment rent and maintenance............................ 857 727
Facility rent and utilities............................... 295 446
Supplies, gases and other................................. 406 283
------ ------
Total.................................................. $2,511 $2,498
====== ======
</TABLE>
F-27
<PAGE> 77
[INSIDE BACK COVER OF PROSPECTUS]
THE LASIK PROCEDURE
Nearsightedness, farsightedness and astigmatism can now be corrected using
LASIK. In LASIK, a thin flap of cornea is painlessly lifted permitting laser
treatment of the exposed surface. Following treatment, the flap is repositioned
and reconnects almost instantly. LASIK offers many patients the potential of a
virtually painless procedure, rapid visual recovery, and reduced follow-up care
(as compared to other laser treatments).
PATIENTS REPORT RAPID VISUAL RECOVERY WITH MINIMAL (IF ANY) DISCOMFORT.
[Color drawing of eye with lifted corneal flap and area of eye being treated]
[Photograph of smiling woman]
ALL LCA VISION
PHYSICIANS ARE
BOARD CERTIFIED/
QUALIFIED AND
CREDENTIALED.
<PAGE> 78
- --------------------------------------------------------------------------------
LCAV Logo
PRUDENTIAL SECURITIES
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
- --------------------------------------------------------------------------------
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the approximate costs and expenses, other than
underwriting discounts and commissions, payable by LCA-Vision in connection with
the sale of common stock being registered hereunder:
<TABLE>
<S> <C>
SEC Registration fees....................................... $ 25,540
Blue Sky expenses........................................... $ 10,000*
Printing cost............................................... $100,000*
Legal fees and expenses..................................... $ 60,000*
Accounting fees and expenses................................ $ 40,000*
NASD filing fee............................................. $ 5,000*
Nasdaq National Market listing fees......................... $ 95,000*
Miscellaneous............................................... $ 29,460*
--------
Total....................................................... $365,000*
========
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LCA-Vision's Certificate of Incorporation provides for indemnification of
the officers and directors of LCA-Vision to the fullest extent permitted by the
laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware
provides generally and in pertinent part that a Delaware corporation may
indemnify its directors and officers against expenses, judgments, fines and
settlements actually and reasonably incurred by them in connection with any
civil suit or action, except actions by or in the right of the corporation, or
in connection with any administrative or investigative proceedings if, in
connection with the matters in issue, they acted in good faith and in a manner
they reasonable believed to be in, or not opposed to, the best interests of the
corporation and in connection with any criminal suit or proceeding, if in
connection with the matters in issue, they had no reasonably cause to believe
their conduct was unlawful. Section 145 further permits a Delaware corporation
to grant its directors and officers additional rights of indemnification through
bylaw provisions and otherwise and to purchase indemnity insurance on behalf of
its directors and officers.
The Registrant maintains a policy of insurance under which the directors
and officers of the Registrant are insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors or officers.
S-1
<PAGE> 80
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
1.1 Form of Underwriting Agreement
3(a)(i) Amended Certificate of Incorporation of Registrant Note A
3(a)(ii) Amended Certificate of Designation as to Interim Preferred Note E
Stock
3(b) Amended Bylaws of Registrant Note A
5.1 Opinion of Dinsmore & Shohl LLP with respect to the shares
being registered
10(a) LCA-Vision Inc. 1995 Long-Term Stock Incentive Plan Note B
10(b) LCA-Vision Inc. 401(k) Plan Note A
10(c) Loan Agreement dated June 29, 1998 between Registrant and Note C
The Provident Bank
10(d) LCA-Vision Inc. 1998 Long-Term Stock Incentive Plan Note D
23.1 Consent of Independent Accountants, PricewaterhouseCoopers
LLP
23.2 Consent of Dinsmore & Shohl LLP to use its opinion letter
filed herewith (contained in Opinion Letter at Exhibit 5.1)
24.1 Power of Attorney executed by LCA-Vision's officers and
directors appointing Stephen N. Joffe and Larry P. Rapp as
attorneys-in-fact (contained on signature page)
</TABLE>
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. Incorporated by reference to the Company's Proxy Statement relating to
its October 16, 1998 Special Stockholders Meeting.
E. Incorporated by reference to Form 8-K filed December 4, 1996.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
LCA-Vision hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a Post-Effective Amendment to this registration statement:
(i) To include any prospectus required by section 10(a) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the Effective Date of the registration statement (or the most recent
Post-Effective Amendment thereof) which, individually or
S-2
<PAGE> 81
in the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining liability under the
Securities Act, each Post-Effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a Post-Effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of the registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(5) That for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Exchange Act (and where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
S-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on a Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cincinnati, State of Ohio on the 7th day of June,
1999.
LCA-VISION INC.
By: /s/ STEPHEN N. JOFFE
------------------------------------
Stephen N. Joffe
Chairman and Chief Executive Officer
S-4
<PAGE> 83
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Stephen N. Joffe and Larry P.
Rapp, and each of them, jointly and severally, as his or her true and lawful
attorneys-in-fact and agents, each with full power of substitution, and each
with power to act alone, to sign and execute on behalf of the undersigned any
amendment or amendments to this Registration Statement on Form S-3, and to
perform any acts necessary to be done in order to file such amendment 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 attorneys-in-fact and agents, or their or his substitutes,
shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman and
/s/ STEPHEN N. JOFFE Chief Executive Officer
- ----------------------------------------------------- (Principal Executive
Stephen N. Joffe Officer) June 7, 1999
/s/ LARRY P. RAPP Chief Financial Officer
- ----------------------------------------------------- (Principal Financial and
Larry P. Rapp Accounting Officer) June 7, 1999
/s/ JOHN C. HASSAN
- -----------------------------------------------------
John C. Hassan Director June 7, 1999
/s/ STEPHEN N. JOFFE
- -----------------------------------------------------
Stephen N. Joffe Director June 7, 1999
/s/ JOHN H. GUTFREUND
- -----------------------------------------------------
John H. Gutfreund Director June 4, 1999
/s/ WILLIAM O. COLEMAN
- -----------------------------------------------------
William O. Coleman Director June 7, 1999
</TABLE>
S-5
<PAGE> 1
Exhibit 1.1
LCA-VISION INC.
8,300,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
June __, 1999
PRUDENTIAL SECURITIES INCORPORATED
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated
Raymond James & Associates, Inc.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Ladies and Gentlemen:
LCA-Vision Inc., a Delaware corporation (the "Company"), and the
Selling Stockholders (as defined herein) hereby confirm their respective
agreements with the several underwriters named in Schedule 1 hereto (the
"Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacities, the "Representatives"), as set forth below.
If you are the only Underwriters, all references herein to the Representatives
shall be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions herein contained,
the Company proposes to issue and sell to the several Underwriters an aggregate
of 5,000,000 shares of the Company's common stock, par value $0.001 per share
("Common Stock"). Certain stockholders of the Company named in Schedule 2 hereto
(each, a "Selling Stockholder" and together, the "Selling Stockholders") propose
to sell to the several Underwriters an aggregate of 3,300,000 shares, with each
Selling Stockholder selling the number of shares of Common Stock set forth
opposite such Selling Stockholder's name in Column (1) of Schedule 2 hereto. The
shares to be sold by the Company and the shares to be sold by the Selling
Stockholders are referred to herein
- --------
(1) Plus an option to purchase from a Selling Stockholder up to 1,245,000
additional shares to cover over-allotments.
<PAGE> 2
as the "Firm Securities." In addition, solely for the purpose of covering
over-allotments, one of the Selling Stockholders proposes to sell to the
Underwriters, at the option of the Underwriters, up to an additional 1,245,000
shares of Common Stock. Any and all shares of Common Stock to be purchased by
the Underwriters pursuant to such option are referred to herein as the "Option
Securities", and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities".
2. Representations and Warranties of the Company and the Selling
Stockholders. The Company and the Selling Stockholders jointly and severally
represent and warrant to, and agree with, each of the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-_________) with
respect to the Securities, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the Commission
either (i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Securities, that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this Agreement. The
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration shall be effective upon filing with
the Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time
-2-
<PAGE> 3
it was or is declared effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the
Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending
use of any Preliminary Prospectus. When any Preliminary Prospectus was filed
with the Commission it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective) and
on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The documents which are incorporated by reference in any
Preliminary Prospectus, the Prospectus or any Term Sheet or from which
information is so incorporated by reference, when they became effective or were
filed (or, if any amendment with respect to any such document was filed, when
such amendment was filed) with the Commission, as the case may be, complied in
all material respects with the requirements of the Securities Exchange Act of
1934, as
-3-
<PAGE> 4
amended (the "Exchange Act") and the rules and regulations thereunder, and did
not, when such documents became effective or were so filed, as the case may be,
include any untrue statement of a material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The foregoing
provisions of this paragraph (b) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (i) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(d) The Company and each of its subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified does not amount
to a material liability or disability to the Company and its subsidiaries, taken
as a whole.
(e) The Company and each of its subsidiaries have full power (corporate
and other) to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(f) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of any
security interests, liens, encumbrances, equities or claims.
(g) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Firm Securities and the Option Securities
have been duly authorized and at the Firm Closing Date or the related Option
Closing Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable. No holders of
outstanding shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities, and no holder
of securities of the Company has any right which has not been fully exercised or
waived to require
-4-
<PAGE> 5
the Company to register the offer or sale of any securities owned by such holder
under the Act in the public offering contemplated by this agreement.
(h) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus.
(i) Except as disclosed in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), there are no outstanding
(A) securities or obligations of the Company or any of its subsidiaries
convertible into or exchangeable for any capital stock of the Company or any
such subsidiary, (B) warrants, rights or options to subscribe for or purchase
from the Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C) obligations of the
Company or any such subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(j) The consolidated financial statements and schedules of the Company
and its consolidated subsidiaries included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present the financial position of the Company and
its consolidated subsidiaries and the results of operations and changes in
financial condition as of the dates and periods therein specified. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Selected Consolidated Financial Information"
in the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated in the Prospectus
(or such Preliminary Prospectus), the information included therein.
(k) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements and
schedules included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), are
independent public accountants as required by the Act and the applicable rules
and regulations thereunder.
(l) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
(m) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not described therein
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and no such proceedings have been threatened against the Company or
any of its subsidiaries or with respect to any of their respective properties;
and no contract or other
-5-
<PAGE> 6
document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or filed as required.
(n) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the Company or any
of its subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Company or any of its subsidiaries.
(o) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus, neither the Company nor any
of its subsidiaries has sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding and there has not been any material
adverse change, or any development involving a prospective material adverse
change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of the operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(p) The Company has not, directly or indirectly, (i) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Selling Securityholders under this Agreement).
(q) The Company has not distributed and, prior to the later of (i) the
Closing Date and (ii) the completion of the distribution of the Securities, will
not distribute any offering material in connection with the offering and sale of
the Securities other than the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or other materials, if any permitted by the Act.
-6-
<PAGE> 7
(r) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), (1) the Company and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(s) The Company and each of its subsidiaries have good and marketable
title in fee simple to all items of real property and marketable title to all
personal property owned by each of them, in each case free and clear of any
security interests, liens, encumbrances, equities, claims and other defects,
except such as do not materially and adversely affect the value of such property
and do not interfere with the use made or proposed to be made of such property
by the Company or such subsidiary, and any real property and buildings held
under lease by the Company or any such subsidiary are held under valid,
subsisting and enforceable leases, with such exceptions as are not material and
do not interfere with the use made or proposed to be made of such property and
buildings by the Company or such subsidiary, in each case except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(t) No labor dispute with the employees of the Company or any of its
subsidiaries exists or is threatened or imminent that could result in a material
adverse change in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company and its subsidiaries, except
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(u) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(v) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the
-7-
<PAGE> 8
Company nor any such subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely affect
the condition (financial or otherwise), business prospects, net worth or results
of operations of the Company and its subsidiaries, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(w) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(x) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(y) The Company will conduct its operations in a manner that will not
subject it to registration as an investment company under the Investment Company
Act of 1940, as amended, and this transaction will not cause the Company to
become an investment company subject to registration under such Act.
(z) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its subsidiaries) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(aa) Neither the Company nor any of its subsidiaries is in violation of
any federal or state law or regulation relating to occupational safety and
health or to the storage, handling or transportation of hazardous or toxic
materials and the Company and its subsidiaries have received all permits,
licenses or other approvals required of them under applicable federal and state
occupational safety and health and environmental laws and regulations to conduct
their respective businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permit, license or
approval, except any such violation of law or
-8-
<PAGE> 9
regulation, failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits, licenses or
approvals which would not, singly or in the aggregate, result in a material
adverse change in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company and its subsidiaries, except
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(bb) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(cc) Except for the shares of capital stock of each of the subsidiaries
owned by the Company and such subsidiaries, neither the Company nor any such
subsidiary owns any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm, partnership, association or
other entity, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(dd) There are no holders of securities of the Company, who, by reason
of the filing of the Registration Statement, have the right (and have not waived
such right) to request the Company to register under the Act, or to include in
the Registration Statement, securities held by them.
(ee) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(ff) No default exists, and no event has occurred which, with notice or
lapse of time or both, would constitute a default in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties is bound or may be affected in any
material adverse respect with regard to property, business or operations of the
Company and its subsidiaries.
3. Representations and Warranties of the Selling Stockholders. The
Selling Stockholders severally, and not jointly, represent and warrant to, and
agree with, each of the several Underwriters that:
(a) The execution and delivery of this Agreement has been duly executed
and delivered by such Selling Stockholder, and is the valid, binding agreement
of such Selling
-9-
<PAGE> 10
Stockholder, except (i) as enforceability hereof may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other laws
relating to or affecting creditors' rights generally and by general equitable
principles and (ii) that enforcement of rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or principles of
public policy.
(b) Such Selling Stockholder has full legal right and authority to
enter into this Agreement. The execution, delivery and performance by each
Selling Stockholder of this Agreement and the consummation by such Selling
Stockholder of the transactions contemplated hereby will not conflict with or
result in a breach of any of the terms or provisions, or constitute a default or
cause an acceleration of any obligation under any material license, indenture,
lease, mortgage, deed of trust, bank loan, credit agreement, or other material
agreement or instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder is bound, or to which any of the property or assets of
such Selling Stockholder is subject, or any order of any court or governmental
agency or authority entered into in any proceeding to which such Selling
Stockholder was or is a party or by which such Selling Stockholder is bound, or
violate or conflict with any applicable foreign, federal, state or local law,
rule, administrative regulation or ordinance or administrative or court decree
applicable to such Selling Stockholder or such Selling Stockholder's property.
(c) Other than as permitted by the Act, such Selling Stockholder has
not distributed, nor will such Selling Stockholder distribute, any prospectus or
other offering material in connection with the offering and sale of the
Securities.
(d) Any certificate signed by the Selling Stockholder and delivered to
the Representatives or to counsel for the Underwriters shall also be deemed a
representation and warranty made by such Selling Stockholder to each Underwriter
as to the matters covered thereby and shall also be deemed incorporated herein
in its entirety and shall be effective as if such representation and warranty
were made herein. No statement, representation, warranty or covenant made by
such Selling Stockholder in this Agreement or made in any certificate or
document required by this Agreement to be delivered to the Representatives was
or will be, when made, inaccurate, untrue or incorrect in any material respect.
(e) Other than pursuant to this Agreement, the Selling Stockholder has
not, directly or indirectly, (i) taken any action designed to cause or to result
in, or that has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities or (B) paid or agreed
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(f) Such Selling Stockholder is the lawful owner of the Securities to
be sold by such Selling Stockholder hereunder and upon sale and delivery of, and
payment for, such Securities, as provided herein, such Selling Stockholder will
convey and the Underwriters will acquire, to the extent that the Underwriters
are purchasing for value, without notice of adverse claims, good,
-10-
<PAGE> 11
valid and marketable title to such Securities, free and clear of any security
interests, liens, encumbrances, equities, claims or other defects.
(g) Such Selling Stockholder has reviewed the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and the
Registration Statement, and the information regarding such Selling Stockholder
set forth therein under the caption "Principal and Selling Stockholders" is
complete and accurate in all material respects.
(h) There are no outstanding options, warrants, rights or other
agreements or arrangements requiring such Selling Stockholder at any time to
transfer any Securities to be sold hereunder by it.
(i) To the knowledge of such Selling Stockholder, there are no pending
actions, suits, arbitrations or other proceedings or investigations (domestic or
foreign, formal or informal) against such Selling Stockholder which (A)
questions the validity of this Agreement or of any action taken or to be taken
by it pursuant to or in connection with this Agreement or (B) is required to be
disclosed in the Registration Statement which is not so disclosed.
(j) On the Firm Closing Date, all stock transfer or other taxes (other
than income taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold by such Selling Stockholder to the several
Underwriters hereunder will have been fully paid or provided for by such Selling
Stockholder and all laws imposing such taxes will have been fully complied with.
(k) The sale of the Securities proposed to be sold by the Selling
Stockholders is not prompted by the Selling Stockholder's knowledge of any
material adverse, non-public information concerning the Company or any of its
subsidiaries.
4. Purchase, Sale and Delivery of the Securities. (a) On the basis of
the representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, and at a purchase price of
$_____ per share of Common Stock, (A) the Company agrees to sell to the several
Underwriters, and the Underwriters severally and not jointly, agree to purchase
from the Company the number of Securities set forth opposite the respective
names of the Underwriters in Column (1) of Schedule 1 hereto and (B) each
Selling Stockholder, severally and not jointly, agrees to sell to the
Underwriters, a pro rata portion of the total number of Securities set forth
opposite the name of such Selling Stockholder in Column (1) of Schedule 2.
(b) One or more certificates in definitive form for the Firm Securities
that the several Underwriters have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Representatives request upon notice to the Company at least 48 hours prior to
the Firm Closing Date, shall be delivered by or on behalf of the Company and the
Selling Stockholders to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase price therefor by wire transfer in same-day funds (the "Wired Funds")
to the account of the Company and the
-11-
<PAGE> 12
Selling Stockholders. Such delivery of and payment for the Firm Securities shall
be made at the offices of Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New
York, New York 10038 at 9:30 A.M., New York time, on ________ __, 1999, or at
such other place, time or date as the Representatives, the Company and the
Selling Stockholders may agree upon or as the Representatives may determine
pursuant to Section 10 hereof, such time and date of delivery against payment
being herein referred to as the "Firm Closing Date". The Company will make such
certificate or certificates for the Firm Securities available for checking and
packaging by the Representatives at the offices in New York, New York of the
Company's transfer agent or registrar or of Prudential Securities Incorporated
at least 24 hours prior to the Firm Closing Date.
(c) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, one of the Selling Stockholders designated on Schedule 2 hereto
grants to the several Underwriters an option to purchase, severally and not
jointly, the Option Securities. The purchase price to be paid for any Option
Securities shall be the same price per share as the price per share for the Firm
Securities set forth above in paragraph (a) of this Section 4. The option
granted hereby may be exercised as to all or any part of the Option Securities
from time to time within (thirty) days after the date of the Prospectus (or, if
such 30th day shall be a Saturday or Sunday or a holiday, on the next business
day thereafter when the New York Stock Exchange is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representatives may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Selling Stockholder setting forth the
aggregate number of Option Securities as to which the several Underwriters are
then exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and the
Selling Stockholder may agree upon or as the Representatives may determine
pursuant to Section 10 hereof, is herein called the "Option Closing Date" with
respect to such Option Securities. Upon exercise of the option as provided
herein, the Selling Stockholder shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become obligated to
purchase from the Selling Stockholder, the same percentage of the total number
of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, calculated as set forth in (a) above, as
adjusted by the Representatives in such manner as they deem advisable to avoid
fractional shares. If the option is exercised as to all or any portion of the
Option Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 4, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(d) Each of the Company and the Selling Stockholders hereby acknowledge
that the
-12-
<PAGE> 13
wire transfer by or on behalf of the Underwriters of the purchase price for any
Shares does not constitute closing of a purchase and sale of the Securities.
Only execution and delivery of a receipt for Shares by the Underwriters
indicates completion of the closing of a purchase of the Securities from the
Company and the Selling Stockholders. Furthermore, in the event that the
Underwriters wire funds to the Company and the Selling Stockholders prior to the
completion of the closing of a purchase of Shares, each of the Company and the
Selling Stockholders hereby acknowledge that until the Underwriters execute and
deliver a receipt for the Shares, by facsimile or otherwise, the Company and the
Selling Stockholders will not be entitled to the Wired Funds and shall return
the Wired Funds to the Underwriters as soon as practicable (by wire transfer of
same-day funds) upon demand. If the closing of a purchase of Shares is not
completed and the Wired Funds are not returned by the Company and the Selling
Stockholders to the Underwriters on the same day the Wired Funds were received
by the Company and the Selling Stockholders, each of the Company and the Selling
Stockholders agree to pay to the Underwriters in respect of each day the Wired
Funds are not returned by it, in same-day funds, interest on the amount of such
Wired Funds in an amount representing the Underwriters' cost of financing as
reasonably determined by Prudential Securities Incorporated.
(e) It is understood that any of you, individually and not as one of
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
5. Offering by the Underwriters. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
6. Covenants of the Company and the Selling Stockholders. The Company
covenants and agrees with each of the Underwriters as to the matters set forth
in subparagraphs (a) through (m) below. Each of the Selling Stockholders,
severally and not jointly, covenants and agrees with each of the Underwriters as
to the matters set forth in subparagraphs (n) through (s) below.
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required to
be delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus,
Term Sheet or any amendment to the
-13-
<PAGE> 14
Registration Statement or any Rule 462(b) Registration Statement of which the
Representatives previously have been advised and furnished with a copy for a
reasonable period of time prior to the proposed filing and as to which filing
the Representatives shall not have given their consent. The Company will prepare
and file with the Commission, in accordance with the rules and regulations of
the Commission, promptly upon request by the Representatives or counsel for the
Underwriters, any amendments to the Registration Statement or amendments or
supplements to the Prospectus that may be necessary or advisable in connection
with the distribution of the Securities by the several Underwriters, and will
use its best efforts to cause any such amendment to the Registration Statement
to be declared effective by the Commission as promptly as possible. The Company
will advise the Representatives, promptly after receiving notice thereof, of the
time when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Representatives of each
such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
(ii) the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
-14-
<PAGE> 15
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto), (ii) to each other
Underwriter, a conformed copy of such registration statement or any Rule 462(b)
Registration Statement and each amendment thereto (in each case without exhibits
thereto) and (iii) so long as a prospectus relating to the Securities is
required to be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request; without limiting the application of
clause (iii) of this sentence, the Company, not later than (A) 6:00 P.M., New
York City time, on the date of determination of the public offering price, if
such determination occurred at or prior to 10:00 A.M., New York City time, on
such date or (B) 2:00 P.M., New York City time, on the business day following
the date of determination of the public offering price, if such determination
occurred after 10:00 A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Representatives may reasonably request for purposes
of confirming orders that are expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable, will make generally available
to its securityholders and to the Representatives a consolidated earnings
statement of the Company and its subsidiaries that satisfies the provisions of
Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 90 days after the date hereof, except pursuant to this Agreement and
except for issuances pursuant to the exercise of employee stock options
outstanding on the date hereof, pursuant to the Company's dividend reinvestment
plan or pursuant to the terms of convertible securities of the Company
outstanding on the date hereof.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling Securityholders
under this Agreement).
(j) The Company will obtain the agreements described in Section 8(f)
hereof prior to the Firm Closing Date.
-15-
<PAGE> 16
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the
date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for
quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") prior to the Firm Closing Date. The Company will ensure that the
Securities remain included for quotation on the Nasdaq National Market following
the Firm Closing Date.
(n) Such Selling Stockholder consents to the use of the Prospectus and
any amendment or supplement thereto by the Underwriters and all dealers to whom
the Firm Securities and Option Securities may be sold, both in connection with
the offering or sale of the Securities and the Option Securities and for such
period of time thereafter as the Prospectus is required by law to be delivered
in connection therewith.
(o) Such Selling Stockholder will not at any time, directly or
indirectly, take any action intended, or which might reasonably be expected, to
cause or result in, or which will constitute, stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of any
of the Securities or the Additional Securities.
(p) Such Selling Stockholder will not at any time, directly or
indirectly (A) sell, bid for, purchase, or pay anyone any compensation for
soliciting purchases of, the Securities or the Additional Securities or (B) pay
or agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of Securities
and the Additional Securities by the Selling Stockholders under this Agreement).
(q) During the period of 90 days from the date of the Prospectus, such
Selling Stockholder will not, without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, directly or indirectly,
issue, offer, sell, pledge, offer to sell, contract to sell, pledge, grant any
option to purchase, or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of, any shares of Common Stock or other capital stock
of the Company (or any
-16-
<PAGE> 17
securities convertible into, or exchangeable or exercisable for, any shares of
Common Stock or other capital stock of the Company),
(r) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 with respect to the transactions herein contemplated, such Selling
Stockholder will deliver to the Representatives prior to or at the Closing Date
a properly completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
(s) As soon as any Selling Stockholder is advised thereof, such Selling
Stockholder will advise the Representatives (and immediately confirm such advice
in writing), (A) of receipt by such Selling Stockholder, or by any
representative or agent of such Selling Stockholder, of any communication from
the Commission relating to the Registration Statement, the Prospectus or any
Preliminary Prospectus, or any notice or order of the Commission relating to the
Company or such Selling Stockholder in connection with the transactions
contemplated by this Agreement and (B) of the happening of any event which makes
or may make any statement made in the Registration Statement, the Prospectus or
any Preliminary Prospectus relating to such Selling Stockholder untrue or that
requires the making of any changes in the Registration Statement, the Prospectus
or any Preliminary Prospectus, as the case may be, in order to make the
statements therein not misleading.
7. Expenses. The Company will pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 12 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities, (vii) any
quotation of the Securities on the Nasdaq SmallCap Market and, (viii) any
meetings with prospective investors in the Securities (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters) and (ix) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Representatives to
be paid for by the Underwriters). If the sale of the Securities provided for
herein is not consummated because any condition to the obligations of the
Underwriters set forth in Section 8 hereof is not satisfied, because this
Agreement is terminated pursuant to Section 12 hereof or because of any failure,
refusal or inability on the part of the Company to perform all
-17-
<PAGE> 18
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement.
8. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers and the Selling Stockholders made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Original Registration Statement or such amendment
and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have been declared effective not later than the
earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to
the registration statement originally filed with respect to the Securities or to
the Registration Statement, as the case may be, containing information regarding
the initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 434 and 424(b) under the
Act; no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Representatives, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Dinsmore & Shohl LLP, counsel for the Company and the Selling
Stockholders, to the effect that:
(i) the Company and each of its subsidiaries listed in
Schedule 3 hereto (the "Subsidiaries") have been duly organized and are
validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified
to transact business as foreign corporations and are in good standing
under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their
respective businesses requires such qualification, except
-18-
<PAGE> 19
where the failure to be so qualified does not amount to a material
liability or disability to the Company and the Subsidiaries, taken as a
whole;
(ii) the Company and each of the Subsidiaries have corporate
power to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and
the Prospectus, and the Company has corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it;
(iii) the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially by the Company free
and clear of any perfected security interests or, to the best knowledge
of such counsel, any other security interests, liens, encumbrances,
equities or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares
of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in
compliance with all applicable federal and state securities laws and
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities; the Firm
Securities have been duly authorized by all necessary corporate action
of the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; the Securities have been duly included for
trading on the Nasdaq National Market; no holders of outstanding shares
of capital stock of the Company are entitled as such to any preemptive
or other rights to subscribe for any of the Securities; and no holders
of securities of the Company are entitled to have such securities
registered under the Registration Statement;
(v) the statements set forth under the heading "Description of
Securities" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company,
provide a fair summary of such provisions; and the statements set forth
under the headings "Business--Government Regulation" and
"Business--Legal Proceedings" in the Prospectus, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a fair summary of such legal
matters, documents and proceedings;
(vi) the execution and delivery of this Agreement have been
duly authorized by all necessary corporate action of the Company and
this Agreement has been duly executed and delivered by the Company;
(vii) (A) no legal or governmental proceedings are pending to
which the Company or any of the Subsidiaries is a party or to which the
property of the Company or any of the Subsidiaries is subject that are
required to be described in the Registration Statement or the
Prospectus and are not described therein, and, to the best knowledge of
-19-
<PAGE> 20
such counsel, no such proceedings have been threatened against the
Company or any of the Subsidiaries or with respect to any of their
respective properties and (B) no contract or other document is required
to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement that is not
described therein or filed as required;
(viii) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement
and the consummation of the other transactions herein contemplated do
not (A) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as
have been obtained and such as may be required under state securities
or blue sky laws, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other
agreement or instrument, known to such counsel, to which the Company or
any of the Subsidiaries is a party or by which the Company or any of
the Subsidiaries or any of their respective properties are bound, or
the charter documents or by-laws of the Company or any of the
Subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any
arbitrator known to such counsel and applicable to the Company or
Subsidiaries;
(ix) the Registration Statement is effective under the Act;
any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 434 and 424(b) has been
made in the manner and within the time period required by Rules 434 and
424(b); and no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to
the best knowledge of such counsel, are contemplated by the Commission;
(x) the Registration Statement originally filed with respect
to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than the
financial statements and other financial information contained therein,
as to which such counsel need express no opinion) comply as to form in
all material respects with the applicable requirements of the Act and
the rules and regulations of the Commission thereunder;
(xi) if the Company elects to rely on Rule 434, the Prospectus
is not "materially different", as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time of
its effectiveness or an effective post-effective amendment thereto
(including such information that is permitted to be omitted pursuant to
Rule 430A);
(xii) each Selling Stockholder who is not an individual has
full power and authority (corporate, partnership or other, as
applicable) to enter into this agreement and to sell, transfer and
deliver the Firm Securities and Option
-20-
<PAGE> 21
Securities, as the case may be, being sold by such Selling Stockholder
in the manner provided in this Agreement; the delivery and execution of
this Agreement has been duly authorized by all necessary corporate
action of each Selling Stockholder that is corporation; this Agreement
this Agreement has been duly executed and delivered by or on behalf of
each Selling Stockholder;
(xiii) upon the delivery by each Selling Stockholder to the
several Underwriters of certificates for the Firm Securities or Option
Securities, as the case may be, being sold hereunder by such Selling
Stockholder against payment therefor as provided herein, assuming that
each of the Underwriters which has severally purchased such Firm
Securities or Option Securities, as the case may be, acquires such Firm
Securities or Option Securities, as the case may be, in good faith and
without notice of any adverse claim (within the meaning of the
applicable Uniform Commercial Code), such Underwriter will have
acquired all of the rights of such Selling Stockholder to the Firm
Securities or Option Securities, as the case may be, sold by such
Selling Stockholder hereunder, and in addition will have acquired title
to such Firm Securities or Option Securities, as the case may be, free
and clear of any adverse claim; and
(xiv) the sale of Firm Securities or Option Securities, as the
case may be, to the Underwriters by each Selling Stockholder pursuant
to this Agreement, the compliance by such Selling Stockholder with the
other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not (A) to such counsel's
knowledge, require the consent, approval, authorization, registration
or qualification of or with any governmental authority, except such as
have been obtained and such as may be required under state securities
or blue sky laws, or (B) to such counsel's knowledge, conflict with or
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument known to such counsel to which
such Selling Stockholders is a party or by which such Selling
Stockholder or any of such Selling Stockholder's properties are bound,
or, in the case of a Selling Stockholder that is a corporation, the
charter documents or bylaws of such Selling Stockholder; and nothing
has come to such counsel's attention which causes such counsel to
believe that the sale of Firm Securities or Option Securities, as the
case may be, to the Underwriters by each Selling Stockholder pursuant
to this Agreement, the compliance by such Selling Stockholder with the
other provisions of this Agreement and the consummation of the other
transactions herein contemplated will result in a violation of any
statute or any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator known to such counsel
to be applicable to such Selling Stockholder.
Such counsel shall also state that they have no reason to believe that
the Registration Statement, as of its effective date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein
-21-
<PAGE> 22
not misleading or that the Prospectus, as of its date or the date of such
opinion, included or includes any untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Stroock & Stroock & Lavan LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(d) The Representatives shall have received from PricewaterhouseCoopers
LLP a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the Act
and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of a reading of the latest available
interim unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries, carrying out certain
specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would not
necessarily reveal matters of significance with respect to the comments
set forth in this paragraph (iii), a reading of the minute books of the
shareholders, the board of directors and any committees thereof of the
Company and each of its consolidated subsidiaries, and inquiries of
certain officials of the Company and its consolidated subsidiaries who
have responsibility for financial and accounting matters, nothing came
to their attention that caused them to believe that:
(A) the unaudited consolidated condensed financial statements
of the Company and its consolidated subsidiaries included in the
Registration Statement and the
-22-
<PAGE> 23
Prospectus do not comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations thereunder or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus; and
(B) at a specific date not more than five business days prior
to the date of such letter, there were any changes in the capital stock
or long-term debt of the Company and its consolidated subsidiaries or
any decreases in not current assets or stockholders' equity of the
Company and its consolidated subsidiaries, in each case compared with
amounts shown on the March 31, 1999 consolidated balance sheet included
in the Registration Statement and the Prospectus, or for the period
from April 1, 1999 to such specified date there were any decreases, as
compared with March 31, 1999 in sales, net revenues, net income before
income taxes or total or per share amounts of net income of the Company
and its consolidated subsidiaries except in all instances for changes,
decreases or increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and are
included in the Registration Statement and the Prospectus under the
captions "Summary Consolidated Financial Data" and "Selected
Consolidated Financial Data" and in Exhibit 11 to the Registration
Statement, and have compared such amounts, percentages and financial
information with such records of the Company and its consolidated
subsidiaries and with information derived from such records and have
found them to be in agreement, excluding any questions of legal
interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(e) The Representatives shall have received a certificate, dated the
Firm Closing Date, of Stephen N. Joffe and Larry P. Rapp of the Company to the
effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing
Date, does not include any untrue
-23-
<PAGE> 24
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and the Company has performed all covenants and
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to
the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
or any of its subsidiaries, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(f) The Representatives shall have received from each person who is a
director or officer of the Company or who owns _______ shares of Common Stock
and from each Selling Stockholder an agreement to the effect that such person
will not, directly or indirectly, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 90 days
after the date of this Agreement.
(g) The Representatives shall have received a certificate, dated the
Firm Closing Date, executed by each Selling Stockholder to the effect that the
representations and warranties of such Selling Stockholder in this Agreement are
true and correct in all material respects on and as of the Firm Closing Date;
such Selling Stockholder has complied wityh all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date; and the Registration Statement and the Prospectus, as amended or
supplemented as of the Firm Closing Date contain all statements required to be
included therein regarding such Selling Stockholder, and none of the
Registration Statement nor any amendment thereto includes any untrue statement
of a material fact regarding such Selling Stockholder or omits to state any
material fact regarding such Selling Stockholder required to be stated therein
or necessary to make the statements therein regarding such Selling Stockholder
not misleading, and neither the
-24-
<PAGE> 25
Prospectus (and any supplements thereto) or any Preliminary Prospectus includes
or included any untrue statement of a material fact regarding such Selling
Stockholder or omits or omitted to state a material fact regarding such Selling
Stockholder required to be stated therein or necessary in order to make the
statements therein regarding such Selling Stockholder, in the light of the
circumstances under which they were made, not misleading.
(h) On or before the Firm Closing Date, the Representatives and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
(i) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
9. Indemnification and Contribution. (a) The Company and the Selling
Stockholders, severally and not jointly, agree to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of, caused by, related to, based upon or arising out
of or in connection with:
(i) any untrue statement or alleged untrue statement made by
the Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange
(each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or
-25-
<PAGE> 26
any amendment thereto, any Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto, or any Application a material fact
required to be stated therein or necessary to make the statements
therein not misleading; or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials, including,
without limitation, slides, videos, films and tape recordings used in
connection with the marketing of the Securities, including, without
limitation, statements communicated to securities analysts employed by
the Underwriters,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that neither the Company nor the
Selling Stockholders will be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company and the Selling Stockholders by such Underwriter
through the Representatives specifically for use therein; and provided, further,
that neither the Company nor the Selling Stockholders will be liable to any
Underwriter or any person controlling such Underwriter with respect to any such
untrue statement or omission made in any Preliminary Prospectus that is
corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased Securities
from such Underwriter but was not sent or given a copy of the Prospectus (as
amended or supplemented) at or prior to the written confirmation of the sale of
such Securities to such person in any case where such delivery of the Prospectus
(as amended or supplemented) is required by the Act, unless such failure to
deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 6(d) and (e) of this Agreement. This
indemnity agreement will be in addition to any liability which the Company and
the Selling Stockholders may otherwise have. Neither the Company nor the Selling
Stockholders will, without the prior written consent of the Underwriter or
Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the
Securities, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such Underwriter or
any person who controls any such Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to such claim, action, suit
or proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(b) Notwithstanding the other provisions of this Section 9, no Selling
Stockholder shall be liable for indemnification under this Section 9 for an
amount exceeding the total proceeds received by such Selling Stockholder from
the Underwriters for the Firm Securities and/or Option Securities sold by such
Selling Stockholders hereunder. The Company and the
-26-
<PAGE> 27
Selling Stockholders may agree, as among themselves and without limiting the
rights of the Underwriters under this Agreement, as to the respective amounts of
such liability for which they each shall be responsible.
(c) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each Selling Stockholder, each of the Company's
directors, each of the Company's officers who signed the Registration Statement
and each person, if any, who controls the Company or each Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
against any losses, claims, damages or liabilities to which the Company, a
Selling Stockholder or any such director, officer or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application or (ii) the omission or the alleged omission to state therein
a material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company or the Selling Stockholder by such Underwriter through
the Representatives specifically for use therein; and, subject to the limitation
set forth immediately preceding this clause, will reimburse, as incurred, any
legal or other expenses reasonably incurred by the Company, a Selling
Stockholder or any such director, officer or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or any
action in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 9
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 9, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 9. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the
-27-
<PAGE> 28
indemnifying party will not be liable to such indemnified party under this
Section 9 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representatives in
the case of paragraph (a) of this Section 9, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(e) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 9 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion (i) with respect to the Company, the total proceeds
from the offering (before deducting expenses) received by the Underwriters and
(ii) with respect to the Selling Stockholders, the sum of the total proceeds
from the Offering (before deducting expenses) received by the Selling
Stockholders, to the total underwriting discounts and commissions received by
the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders or
the Underwriters, the parties' relative intents, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
and any other equitable considerations appropriate in the circumstances. The
Company, each Selling Stockholder and the Underwriters agree that it would not
be equitable if the amount of such contribution were determined by pro rata or
per capita allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to above in this paragraph (e).
Notwithstanding any other provision of this paragraph (e), no Underwriter shall
be obligated
-28-
<PAGE> 29
to make contributions hereunder that in the aggregate exceed the total public
offering price of the Securities purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, no Selling Stockholder shall be required to contribute an amount
in excess of the total proceeds received by such Selling Stockholder from the
Underwriters for the Firm Securities and/or Option Securities sold by such
Selling Stockholder hereunder, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (e), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, each Selling Stockholder and each person, if any, who
controls the Company or a Selling Stockholder within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company and the Selling Stockholder.
10. Default of Underwriters. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 11 hereof. In the event of any default by one or more Underwriters as
described in this Section 10, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 4 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
-29-
<PAGE> 30
11. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, the
Selling Stockholders and the several Underwriters set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, the Selling
Stockholders, any Underwriter or any controlling person referred to in Section 9
hereof and (ii) delivery of and payment for the Securities. The respective
agreements, covenants, indemnities and other statements set forth in Sections 7
and 9 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
12. Termination. (a) This Agreement may be terminated with respect to
the Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company and the Selling Stockholders given
prior to the Firm Closing Date or the related Option Closing Date, respectively,
if the Company or the Selling Stockholders shall have failed, refused or been
unable to perform all obligations and satisfy all conditions on their part to be
performed or satisfied hereunder at or prior thereto or, if at or prior to the
Firm Closing Date or such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Company),
in the condition (financial or otherwise), business prospects, net
worth or results of operations of the Company and its subsidiaries,
except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by
the Commission, the Nasdaq SmallCap Market or the Nasdaq National
Market or trading in securities generally on the New York Stock
Exchange, Nasdaq SmallCap Market or the Nasdaq National Market shall
have been suspended or minimum or maximum prices shall have been
established on either such exchange;
(iii) a banking moratorium shall have been declared by New
York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering
-30-
<PAGE> 31
or the delivery of the Securities as contemplated by the Registration
Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 12 shall be
without liability of any party to any other party except as provided in Section
11 hereof.
13. Information Supplied by Underwriters. The statements set forth
under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus
(to the extent such statements relate to the Underwriters) constitute the only
information furnished by any Underwriter through the Representatives to the
Company for the purposes of Sections 2(b) and 9 hereof. The Underwriters confirm
that such statements (to such extent) are correct.
14. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; if sent to the Company, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to the Company at 7840
Montgomery Road, Cincinnati, Ohio 45236, Attention: Stephen N. Joffe, and if
sent to Stephen N. Joffe, Sandra Joffe or Larry P. Rapp, c/o LCA-Vision Inc., at
7840 Montgomery Road, Cincinnati, Ohio 45236, and if to Summit at _____________.
15. Successors. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company, the Selling Stockholders
and their respective successors and legal representatives, and nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other person except
that (i) the indemnities of the Company and the Selling Stockholders contained
in Section 9 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 9 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement, and any person or persons who control the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No
purchaser of Securities from any Underwriter shall be deemed a successor because
of such purchase.
16. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
17. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, each Selling Stockholder accepts
for itself and in connection with its properties, generally and
-31-
<PAGE> 32
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
waives any defense of forum non conveniens and irrevocably agrees to be bound by
any judgment rendered thereby in connection with this Agreement. The Selling
Stockholders collectively designate and appoint __________________, and such
other persons as may hereafter be selected by the Selling Stockholders acting
together irrevocably agreeing in writing to so serve, as its agent to receive on
their behalf service of all process in any such proceedings in any such court,
such service being hereby acknowledged by each Selling Stockholder to be
effective and binding service in every respect. A copy of any such process so
served shall be mailed by registered mail to each Selling Securityholder at its
address provided in Section 14 hereof; provided, however, that, unless otherwise
provided by applicable law, any failure to mail such copy shall not affect the
validity of service of such process. If any agent appointed by the Selling
Stockholders refuses to accept service, each Selling Stockholder hereby agrees
that service of process sufficient for personal jurisdiction in any action
against the Selling Stockholders in the State of New York may be made by
registered or certified mail, return receipt requested, to the Selling
Stockholder at the address provided in Section 14 hereof, and each Selling
Stockholder hereby acknowledges that such service shall be effective and binding
in every respect. Nothing herein shall affect the right to serve process in any
other manner permitted by law or shall limit the right of any Underwriter to
bring proceedings against the Selling Stockholders in the courts of any other
jurisdiction.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-32-
<PAGE> 33
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, the
Selling Stockholders and each of the several Underwriters.
Very truly yours,
LCA-VISION INC.
By: ________________________
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS,
a division of Dain Rauscher Incorporated
RAYMOND JAMES & ASSOCIATES, INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By _____________________
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
-33-
<PAGE> 34
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
(1) (2)
Number of Number of
Securities to Securities to be
be Purchased Purchased from
Underwriter from the Company the Selling Stockholders
<S> <C> <C>
Prudential Securities Incorporated...................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated.......................................
Raymond James & Associates, Inc......................
Total................. 5,000,000 3,300,000
</TABLE>
-34-
<PAGE> 35
SCHEDULE 2
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
(1) (2)
Number of Firm Maximum Number of
Securities Option Securities
Name to be Sold to be Sold
<S> <C> <C>
Stephen N. Joffe 1,500,000 1,245,000
Sandra Joffe 1,200,000 --
Summit 500,000 --
Larry P. Rapp 100,000 --
----------- ---------
Total 3,300,000 1,245,000
</TABLE>
-35-
<PAGE> 36
SCHEDULE 3
SUBSIDIARIES
Name Jurisdiction of Incorporation
-36-
<PAGE> 1
EXHIBITS 5.1 AND 23.2
Charles F. Hertlein, Jr.
[email protected]
(513) 977-8315
June 7, 1999
LCA-Vision Inc.
7840 Montgomery Road
Cincinnati, Ohio 45236
Ladies and Gentlemen:
This opinion is rendered for use in connection with the Registration
Statement on Form S-3, prescribed pursuant to the Securities Act of 1933, to be
filed by LCA-Vision Inc. (the "Company") with the Securities and Exchange
Commission on or about June 7, 1999, under which 8,300,000 shares of the
Company's Common Stock, $.001 par value ("Common Stock") are to be registered.
We hereby consent to the filing of this opinion as Exhibits 5 and 23.2
to the Registration Statement and to the reference to our name in the
Registration Statement.
As counsel to the Company, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
such statutes, documents, corporate records, certificates of public officials,
and other instruments as we have deemed necessary for the purpose of this
opinion, including the Company's Amended Certificate of Incorporation and
Amended Bylaws and the record of proceedings of the stockholders and directors
of the Company.
Based upon the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing and
in good standing as a corporation under the laws of the State of Delaware.
2. When the Registration Statement shall have been declared effective
by order of the Securities and Exchange Commission, such 8,300,000 shares of
Company Common Stock will be legally and validly issued and outstanding,
fully-paid and nonassessable.
Very truly yours,
DINSMORE & SHOHL LLP
/s/ Charles F. Hertlein, Jr.
Charles F. Hertlein, Jr.
Encl.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated February 5, 1999 relating to the
consolidated financial statements of LCA-Vision Inc., which appears in
LCA-Vision Inc.'s Annual Report on Form 10-K for the year ended December 31,
1998 and to the inclusion in this Registration Statement on Form S-3 of our
report dated February 5, 1999 relating to the consolidated financial statements
of LCA-Vision as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998 which are included in this Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
June 7, 1999
