U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT.
For the transition period from __________ to __________
Commission file number 0-27610
LCA-Vision Inc.
---------------
(Exact name of small business issuer as
specified in its charter)
Delaware 11-2882328
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7840 Montgomery Road, Cincinnati, Ohio 45236
---------------------------------------------
(Address of principal executive offices)
(513) 792-9292
---------------------------------------------
(Issuer's telephone number)
(Former name, former address and formal
fiscal year, if changes since last report.)
Check whether then issuer (1) filed all reports required to be
filed by Section 3 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
50,699,512 shares as of July 26, 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
---- -----
<PAGE>
LCA-VISION INC.
INDEX
Page No.
Facing Sheet 1
Index 2
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at 3
June 30, 1999 (unaudited) and at
December 31, 1998 (audited)
Unaudited Condensed Consolidated Statements 4
of Operations for the Three and Six Months
Ended June 30, 1999 and 1998
Unaudited Condensed Consolidated Statements 5
of Cash Flows for the Six Months Ended
June 30, 1999 and 1998
Notes to Unaudited Condensed Consolidated 6
Financial Statements
Item 2. Management's Discussion and 11
Analysis of Financial Condition
and Results of Operations
Part II. Other Information 16
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote
of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 18
LCA-VISION INC.
Condensed Consolidated Balance Sheet
June 30, 1999 (unaudited) and
December 31, 1998 (audited)
<TABLE>
in thousands, except per share data
June 30, June 30, Dec. 31,
1999 1999 1998
proforma
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $46,443 $ 9,029 $ 6,496
Certificate of deposit 2,100 2,100
Accounts receivable, net 2,681 2,681 1,119
Prepaid expenses, inventory
and other 1,419 1,533 1,416
------ ------- -------
Total current assets 52,643 15,343 9,031
Property and equipment, net 8,709 8,709 9,433
Goodwill, net 8,178 8,178 8,304
Obligations due from shareholders, net 261 261 471
Investment in unconsolidated
businesses 979 979 520
Certificate of deposit - - - - 2,100
Other assets 1,015 1,015 1,518
------ ------- -------
Total assets $71,785 $34,485 $31,377
------ ------- -------
------ ------- -------
Liabilities and Shareholders'
Investment
Current liabilities
Accounts payable $2,174 $2,174 $ 2,030
Accrued liabilities and
other 2,814 2,814 2,637
Debt maturing in one year 627 627 787
------ ------- -------
Total current liabilities 5,615 5,615 5,454
Long-term debt 496 496 2,724
Commitments and contingencies
Shareholders' investment
Preferred stock 2,522 2,522 7,687
Common stock ($0.001 par
value; 45,539 shares and
40,974 shares issued (50,539
proforma)) 113 108 103
Contributed capital 85,439 48,144 41,701
Accumulated (deficit) (21,940) (21,940) (25,664)
Foreign currency translation
adjustment 17 17 (14)
Less common stock in treasury
at cost 30 30 30
Less accrued preferred stock
dividend 447 447 584
------ ------- -------
65,674 28,374 23,199
Total liabilities and shareholders'
investment $71,785 $34,485 $ 31,377
------ ------- -------
------ ------- -------
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.
</TABLE>
<PAGE>
LCA-VISION INC.
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1999 and 1998
(unaudited)
<TABLE>
in thousands, except per share data
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Laser refractive surgery $14,346 $8,290 $27,735 $14,736
Other 384 729 862 1,492
------ ----- ------ ------
Total revenues 14,730 9,019 28,597 16,228
Operating costs and expenses:
Medical professional and
license fees 6,186 3,537 12,201 6,193
Direct costs of services 2,732 2,644 5,288 5,463
General and administrative
expenses 3,253 2,485 6,223 4,578
Depreciation and
amortization 724 1,069 1,436 2,124
Restructuring provision (150) 10,500 (150) 10,500
------ ----- ------ ------
Operating income (loss) 1,985 (11,216) 3,599 (12,630)
Equity in earnings from
unconsolidated businesses 94 (19) 417 37
Interest expense 27 247 120 590
Interest income 129 84 276 196
Other income (expense) 218 35 (59) 61
------ ----- ------ ------
Income (loss) before taxes
on income 2,399 (11,363) 4,113 (12,926)
Taxes on income 8 110 8 138
------ ----- ------ ------
Net income (loss) 2,391 (11,473) 4,105 (13,064)
Dividends to preferred
shareholders 44 129 128 172
------ ----- ------ ------
Income (loss) available to
common shareholders $2,347 $(11,602) $3,977 $(13,236)
------ ----- ------ ------
------ ----- ------ ------
Income (loss) per common
share
Basic $0.05 $(0.32) $0.09 $(0.36)
Diluted $0.05 $(0.32) $0.09 $(0.36)
Weighted average shares used
in computation
Basic 45,450 36,818 44,614 36,742
Diluted 49,035 36,818 47,962 36,742
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
LCA-VISION INC.
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998
(unaudited)
<TABLE>
in thousands
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $4,105 $(13,064)
Adjustments to reconcile net income
(loss)to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,436 2,124
Equity in income of unconsolidated
affiliates (417) (37)
Compensation paid in common stock 375 - -
Restructuring provision (150) 10,500
Other (150) 41
Changes in working capital:
Accounts receivable (1,362) 388
Prepaid expenses, inventory
and other (3) (683)
Accounts payable 144 2
Accrued liabilities and other 761 61
---- ----
Net cash provided by (used in) operations 4,611 (709)
---- ----
Cash flows from investing activities:
Purchase of property and equipment (227) (1,506)
Advances to affiliates - - (570)
Proceeds from sales of equipment - - 461
Other, net (22) - -
---- ----
Net cash (used) by investing activities (249) (1,615)
---- ----
Cash flows from financing activities:
Net (repayment) bank borrowing - - (9,639)
Principal payments of long-term notes,
debt and capital lease obligations (2,388) (33)
Exercise of stock options 559 51
Proceeds from sale of 6% convertible
preferred stock - - 9,463
Other - - (74)
---- ----
Net cash provided (used) by financing
activities (1,829) (232)
----- ----
Increase (decrease) in cash and cash
equivalents 2,533 (2,556)
Cash and cash equivalents at beginning
of period 6,496 8,680
----- -----
Cash and cash equivalents at end of
period $9,029 $6,124
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
LCA-VISION INC.
Notes to Condensed Consolidated Financial Statements
for the Three and Six Months Ended June 30, 1999 and 1998
(unaudited)
1. Summary of Significant Accounting Policies
The June 30, 1999 and 1998 financial data are unaudited; however,
in the opinion of the Company, such data include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair statement of the interim periods.
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.
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 and warrants were exercised or convertible preferred stock
were converted into common stock.
Following is a reconciliation of basic and diluted earnings per
share for the three and six months ended June 30, 1999 (in
thousands, except per share amounts):
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $2,391 $4,105
Dividends to preferred
shareholders (44) (128)
----- -----
Basic EPS
Income available to
common shareholders 2,347 45,450 $0.05 3,977 44,614 $0.09
---- ----
---- ----
Effect of Dilutive Securities
Convertible preferred stock 44 836 128 1,482
Stock options 2,655 1,819
Warrants 94 47
---- ------ -----
Diluted EPS
Income available to common
shareholders and assumed
conversions $2,391 49,035 $0.05 $4,105 47,962 $0.09
----- ------ ---- ----- ------ ----
----- ------ ---- ----- ------ ----
</TABLE>
The weighted average shares for the June 30, 1998 diluted calculations
do not assume exercise of any stock options or conversion of other
securities since they would result in a reduced loss per share.
2. Shareholders' Investment
Common Stock
On June 30, 1999 we sold 5,000,000 new shares of our common
stock at a public offering price of $8.00 per share. The net
proceeds will approximate $37,300,000 after deducting
underwriting discounts and commissions and our estimated
offering expenses, including the fee to be listed on the
Nasdaq National Market. At June 30, 1999 offering expenses of
$114,000 were incurred and recorded as a prepaid expense.
On July 6, 1999 we received $37,800,000 which was net of
underwriting discounts and commissions. The pro forma balance
sheet assumes that the public offering proceeds and offering
expenses were settled on June 30, 1999.
Class A Preferred Stock
At June 30, 1999 there are no shares of Class A Preferred
Stock issued and outstanding. Our principal shareholder paid
approximately $34,000 of a note due us with his shares of
Class A Preferred Stock.
In February 1999 the other holders exchanged their shares of
Class A Preferred Stock for 33,191 shares of our common
stock. We retired the shares of Class A Preferred Stock
received.
During the six months ended June 30, 1999, 344,470 shares of
common stock at a weighted average exercise price of $1.62
per share were issued to individuals who exercised stock
options. During the three months ended June 30, 1999
individuals exercised 206,420 stock options at a weighted
average exercise price of $1.36 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. In June, 1999 a former holder of
these shares agreed to accept 25,396 shares of our common
stock in the same type of exchange. These agreements resulted
in non-cash charges of $50,000 and $325,000 recorded as other
expense in the Condensed Consolidated Statement of Operations
for the three and six months ended June 30, 1999,
respectively.
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.
In May 1999 our line of credit with The Provident Bank was
increased to $10,000,000. We also were granted a $10,000,000 line
of credit for the purpose of funding acquisitions.
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 June 30, 1999 Condensed Consolidated Balance
Sheet (in thousands):
Due to us:
Receivable from shareholder's
affiliated company $631
Accrued interest 77
Due from us:
Accrued Interim Series B preferred
stock dividend 447
---
Net due us $ 261
---
---
Our principal shareholder is the majority stockholder of an
inactive ambulatory surgical center. We have no investment in this
surgery center; however, we did lease a portion of our
headquarters building and provided other administrative services.
During 1999 we acquired computer equipment and software from the
surgery center at their book value of $103,000. The account
receivable was reduced by this amount.
At December 31, 1998 we owed our principal shareholders notes in
the principal amount of $1,500,000 and interest of $568,000. These
shareholders owed us $2,100,000 which was collateralized by our
obligation to them. In March 1999 we repaid the obligations due
shareholders of $2,094,000 by netting the amount against the
advance to shareholders.
5. Segment Information
We operate in one segment - laser refractive surgery. The table
below summarizes the results of our Canadian operations included
in the Condensed Consolidated Statement of Operations for the
three and six months ended June 30, 1999 and 1998 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Revenues $457 $636 $819 $1,156
Operating profit 51 101 67 192
6. Additional Financial Information
The table below provides additional financial information related
to our Condensed Consolidated Statement of Operations (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Direct costs of
laser refractive
surgery:
Employee costs $1,001 $1,036 $1,954 $2,078
Equipment rent
and maintenance 900 632 1,757 1,359
Facility rent and
utilities 309 413 604 859
Supplies, gas and
other 479 310 885 593
---- ---- ---- ----
Total $ 2,689 $ 2,391 $ 5,200 $ 4,889
----- ----- ----- ----
----- ----- ----- ----
7. 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.
Discovery in the actions, has recently concluded. All parties have
indicated their intention, based on the discovery results, to move
to dismiss all claims of the other parties. The court has set a
motion schedule which ends in October, 1999, and a decision on the
motions will occur thereafter.
In the opinion of management neither action will have a material
adverse effect on our financial position or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
This quarterly report on Form 10-QSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of important
factors. For a discussion of important factors that could affect
our results, refer to the Overview and financial statement line
item discussions set forth in Management's Discussion and Analysis
or Plan of Operation.
"Management's Discussion and Analysis or Plan of Operation" is an
analysis of our operating results for the three and six months
ended June 30, 1999. It explains why our revenues and costs
changed, our overall financial condition, and other matters
including the Year 2000 Issue.
Overview (dollars in thousands, except where noted)
We are a leading developer and operator of free-standing laser
refractive surgery centers. Our laser refractive surgery centers
provide the facilities, equipment and support services for
performing various corrective eye surgeries that employ
state-of-the-art laser technologies. The laser vision correction
surgeries performed in our centers primarily include laser in situ
keratomileusis ("LASIK") and photorefractive keratectomy ("PRK").
The VISX Star S2 laser, which we have in each of our U.S. centers,
can be used for correcting nearsightedness, myopic astigmatism,
and hyperopia. We also manage multi-specialty laser surgery
programs at medical facilities on a contract basis.
Our sources of revenue are:
- Laser refractive surgery - fees for surgeries performed at
our wholly-owned centers.
- Other - management fees for operating laser vision
correction centers of investees; contractual fees for
managing multi-specialty laser surgery programs at
hospitals; marketing and education program fees; and
miscellaneous sources.
Our operating costs and expenses are comprised of:
- Medical professional and license fees include fees
collected by us for the physicians performing laser vision
correction and the license fee of $260 per procedure paid
to VISX.
- Direct costs of services include center rent and
utilities, equipment lease and maintenance costs, surgical
supplies, center staff expense, and costs related to other
revenue.
- General and administrative include marketing and
advertising, headquarters staff expense, and other
overhead costs.
- Depreciation and amortization include periodic charges to
income for the costs of equipment and intangible assets
recorded in the balance sheet.
Results of Operations - Revenues
Laser refractive surgery
Laser refractive surgery revenue generally includes three
components: facility fee, royalty fee, and medical professional
fees. Certain states prohibit us from practicing medicine,
employing physicians to practice medicine on our behalf or
employing optometrists to render optometry services on our behalf.
Revenues and costs from centers in such states do not include the
medical professionals fee component. The contribution from laser
refractive surgery procedures for the three and six months ended
June 30, 1999 and 1998 were (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenue $14,346 $8,290 $27,735 $14,736
Less: Medical
professional and
license fees 6,186 3,537 12,201 6,193
------ ----- ------ ------
Contribution $ 8,160 $ 4,753 $15,534 $ 8,543
------ ----- ------ ------
------ ----- ------ ------
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.
Wholly-owned Combined
1999 1998 1997 1999 1998 1997
Q1 7,591 3,887 979 9,064 4,450 1,443
Q2 8,365 4,891 1,506 9,742 5,737 2,078
Q3 5,327 2,375 6,102 2,794
Q4 5,686 2,888 6,791 3,400
Our growth and profitability are predicated on increases in
procedure volume. Industry sources estimate that over 800,000
procedures will be performed in the U.S. in 1999. As more people
have the procedure performed the critical mass for word-of-mouth
referrals is attained and, together with marketing and
advertising, we expect an increase in procedure volume.
Other
Revenue declined because we reduced the extent to which we provide
management services for multi-specialty surgery programs at
hospitals due to the difficult business environment. The renewal
of our contracts with the hospital providers became increasingly
difficult due to price pressures and the lengthening of sales
cycle. Hospital providers and other entities were being driven to
reduce costs and scaleback their operations, sometimes including
the programs that we managed. In addition, budget reductions at
the facilities reduced the marketing and education programs, key
elements to a successful surgery program.
Operating costs and expenses
Medical professional and license fees
The increases are a direct result of the increase in procedures
performed at our wholly-owned centers. These costs comprise a
significant portion of the total costs of a laser vision
correction procedure.
Direct costs of services
The table below provides information related to our direct costs
of services.
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Laser refractive
surgery
Employee costs $1,001 $1,036 $1,954 $2,078
Equipment rent
and maintenance 900 632 1,757 1,359
Facility rent and
utilities 309 413 604 859
Supplies, gases
and other 479 310 885 593
----- ----- ----- -----
2,689 2,391 5,200 4,889
Other 43 253 88 574
----- ----- ----- -----
$ 2,732 $ 2,644 $5,288 $5,463
----- ----- ----- -----
----- ----- ----- -----
These costs decrease as a percentage of revenue because they
represent, for the most part, the fixed costs of a laser vision
correction center. 1998 includes the costs of the eight centers
closed during the year.
General and administrative
The table below provides information related to general and
administrative expenses (in thousands, except per cent data).
Three months Six months
Dollars % of Revenue Dollars % of Revenue
------- ------------ ------- ------------
June 30, 1999 $3,253 22 $6,223 22
June 30, 1998 2,485 28 4,578 28
Our general and administrative expenses rose in dollars recorded
primarily due to additional marketing costs and programs and
increased usage of financing options offered, on a non-recourse
basis, to patients.
Depreciation and amortization
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
Equity in earnings of unconsolidated affiliates is our share of
the profits of unconsolidated affiliates. Interest expense
decreased due to the significant reduction in debt. Interest
income increased because we had cash to invest in overnight cash
equivalents. Other expense in 1999 includes a $350,000 expense
associated with the issuance of 190,472 shares of our common stock
to certain majority holders of our 6% series B-1 convertible
preferred stock in exchange for these holders waiving their option
to purchase an additional $5,000,000 of convertible preferred
stock.
Liquidity and Capital Resources
On June 30, 1999 we sold 5,000,000 new shares of our common stock
at a public offering price of $8.00 per share. The net proceeds
will approximate $37,300,000 after deducting underwriting
discounts and commissions and our estimated offering expenses,
including the fee to be listed on the Nasdaq National Market. At
June 30, 1999 offering expenses of $114,000 were incurred and
recorded as a prepaid expense. On July 6, 1999 we received
$37,800,000 which was net of underwriting discounts and
commissions.
We intend to use the net proceeds of the offering 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.
Other sources of liquidity for the next year are expected to be:
- cash generated from operations
- proceeds from the exercise of stock options
- credit facility and lease financing, as necessary
We generated positive cash flow from operations for the quarter
and six months ended June 30, 1999. This was sufficient to finance
our capital expenditures and debt repayment in the quarter.
Our cash balance increased $2,533,000 during the six months ended
June 30, 1999. Cash flow from operations was $4,611,000 during
this period. We also received $559,000 from the exercise of stock
options. We used $2,388,000 of our cash to make principal payments
on our debt and $227,000 for additions to property and equipment.
During the quarter ended March 31, 1999, all of the outstanding
shares of our Series B-1 convertible preferred stock and accrued
dividends thereon were converted into shares of our common stock.
Beginning April 1, 1999, we no longer accrued dividends for this
stock. Our repayment of the term loan during March 1999 resulted
in interest savings approximating $40,000 and principal payments
of $35,000 in the second quarter.
In May 1999 our line of credit with The Provident Bank was
increased to $10,000,000. At June 30, 1999, the line of credit
supports letters of credit totalling $1,000,000 and $9,000,000 is
available to us for borrowing. We also were granted a $10,000,000
line of credit for the purpose of funding acquisitions.
At December 31, 1998 we had net operating loss carryforwards
("NOL's") for federal and state income tax purposes of $35.3
million which expire in varying amounts from 2012 through 2019.
These operating losses are available to offset future taxable
income. Approximately $15 million of the NOL's were acquired when
we bought Refractive Centers International, Inc. in August 1997
and their use is subject to limitation under Section 382 of the
Internal Revenue Code.
Approximately $15 million of our NOL's consist of deferred tax
assets for which, because of our operating losses, we could not
record a benefit in our statement of operations and a valuation
allowance was necessary. If our profitability continues, we will
be able to reduce the valuation allowance. A reduction of the
valuation allowance is generally shown in the statement of
operations as a reduction of income tax expense.
Regardless of when the reduction in the valuation reserve is
recognized in the statement of operations, the utilization of the
NOL's will substantially reduce our cash obligation for payment of
income taxes otherwise due over the next several years.
Year 2000 Issue
Compliance. Our services, operations, customers, suppliers and
service providers all rely on information technology systems, both
hardware and software, to function properly. This includes readily
apparent systems such as those controlling the VISX excimer lasers
used as a key part of our services as well as less obvious ones
such as those required to provide electricity to our headquarters
and our centers.
Suppliers. We have been surveying existing suppliers about the
ability of their systems and products to properly handle dates for
the Year 2000. However, VISX has advised us that its excimer
lasers will remain fully functional through the Year 2000 and
beyond. VISX has determined that the excimer laser systems do not
properly print or store patient report dates and procedures
performed in the Year 2000. VISX is in the process of developing
and testing a solution to this problem and expects to have it
available to us by the 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.
We have received notification from third parties that service our
facility that it is Year 2000 compliant with regard to building
security, heating, elevator, and lighting controls.
Costs to address Year 2000 issues
We expect that any remaining costs for the Year 2000 compliance
will be less than $40,000 and that most of our disbursements will
be for equipment purchases and, therefore, will be capitalized and
depreciated or leased. However, we may spend more money than we
have estimated, and this could have a material adverse effect on
our results of operations and financial condition. At this stage
in our assessment process, we do not believe that the Year 2000
issue will materially impact our financial position, results of
operations or cash flows in future periods. There can be no
assurance that operating problems or expenses related to the Year
2000 issue will not arise with our computer systems and software
or that customers or suppliers will be able to resolve their Year
2000 issues in a timely manner. Accordingly, we plan to devote the
necessary resources to resolve all significant Year 2000 issues in
a timely manner.
Contingency plans
The most reasonable likely worst case Year 2000 scenario would be
that a solution to the VISX laser printing and storage of patient
report dates for procedures performed in the Year 2000 and beyond
is not corrected in a timely manner. To the extent that any
computer documentation of procedure is unavailable, we are
prepared to manually produce the necessary reports. As we complete
our internal review and external surveys we will make additional
contingency plans to address the problems that we believe are
reasonably likely to arise. However, despite our best efforts, we
may not anticipate all problems that may ultimately arise.
Risks of Year 2000 issues
We will continue preparations to ensure that the information
technology relating to our services, operations and suppliers will
recognize dates and function properly in the Year 2000 and beyond.
However, unanticipated problems could affect our ability to
provide services to our customers or interrupt or prevent
deliveries from suppliers at the onset of the Year 2000. As a
result, we could suffer a material adverse impact to our business,
financial position and results of operation sue to a loss of
revenue, legal claims or extra expenses cause by unanticipated
Year 2000 computer problems.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
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.
Discovery in the actions, has recently concluded. All
parties have indicated their intention, based on
the discovery results, to move to dismiss all claims of
the other parties. The court has set a motion schedule
which ends in October, 1999, and a decision on the motions
will occur thereafter.
In the opinion of management neither action will have a
material adverse effect on our financial position or
results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
<PAGE>
Part II. Other Information (continued)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
1) Form 8-K dated May 14, 1999, announcing that The
Provident Bank increased the Company's line of credit
to $10 million and had issued an additional new line
of credit, in the amount of $10 million, for the
purpose of funding acquisitions.
2) Form 8-K dated June 8, 1999 announcing that the
Company had filed a registration statement for a
public offering of 8.3 million shares of its common
stock; 5.0 million of which are being sold by the
Company and 3.3 are being sold by certain selling
shareholders.
3) Form 8-K dated June 30, 1999 announcing the pricing of
a public offering of 6 million shares of the Company's
common stock; 5 million shares by the Company, 1
million shares by certain selling stockholders.
4) Form 8-K dated July 6, 1999 announcing the laser
vision correction procedure volumes for the six
months ended June 30, 1999.
5) Form 8-K dated July 12, 1999 announcing that LCA-
Vision and Cole National entered into an arrangement
to make laser vision correction available to 50
million members of Cole Managed Vision through a
national network of laser vision correction providers
to be established by LCA-Vision.
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
LCA-VISION INC.
Date July 28, 1999 /s/ Stephen N. Joffe
--------------- --------------------
Stephen N. Joffe
Chairman and Chief Executive
Officer
Date July 28, 1999 /s/ Larry P. Rapp
---------------- -----------------
Larry P. Rapp
Treasurer and Chief
Financial Officer
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<LEGEND>
This schedule contains summary information extracted from the LCA-Vision Inc.
condensed consolidated balance sheet at June 30, 1999, and the related condensed
consolidated statement of operations for the six months ended June 30, 1999, and
is qualified in its entirety by reference to such financial statement.
</LEGEND>
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