<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report April 5, 1999
(Date of earliest event reported) December 4, 1998
Commission file number 1-10629
-------
LASER VISION CENTERS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1530063
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer identification
or organization) number)
540 Maryville Centre Dr., Suite 200, St. Louis, Missouri 63141
--------------------------------------------------------------
(Address of principal executive offices)
(314)434-6900
-------------
(Registrant's telephone number, including area code)
<PAGE> 2
Laser Vision Centers, Inc. hereby amends the following items, financial
statements, exhibits or other portions of its Current Report dated December 21,
1998, on Form 8-K:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
(1) Audited Financial Statements of Midwest Surgical Services,
Inc. for the two year period ended April 30, 1998
(2) Condensed Consolidated Balance Sheet (Unaudited) of Midwest
Surgical Services, Inc. as of October 31, 1998
(3) Consolidated Statements of Operations (Unaudited) of Midwest
Surgical Services, Inc. for the six month periods ended
October 31, 1998 and 1997
(4) Consolidated Statements of Cash Flows (Unaudited) of Midwest
Surgical Services, Inc. for the six month periods ended
October 31, 1998 and 1997
(5) Audited Financial Statements of Refractive Surgical Resources,
Inc. for the year ended April 30, 1998
(6) Condensed Balance Sheet (Unaudited) of Refractive
Surgical Resources, Inc. as of August 31, 1998
(7) Statements of Operations (Unaudited) of
Refractive Surgical Resources, Inc. for the four month periods
ended August 31, 1998 and 1997
(8) Statements of Cash Flows (Unaudited) of
Refractive Surgical Resources, Inc. for the four month periods
ended August 31, 1998 and 1997
(b) Pro Forma Financial Information
(1) Pro Forma Combined Statements of Operations (Unaudited) for
the year ended April 30, 1998
(2) Pro Forma Combined Statements of Operations (Unaudited) for
the six month period ended October 31, 1998
(3) Pro Forma Combined Balance Sheets (Unaudited) as of October
31, 1998
(c) Exhibits
None
<PAGE> 3
MIDWEST SURGICAL
SERVICES, INC.
FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Midwest Surgical Services, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of changes in stockholders' equity present fairly,
in all material respects, the financial position of Midwest Surgical Services,
Inc. at April 30, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended 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.
PricewaterhouseCoopers LLP
St. Louis, Missouri
August 27, 1998, except Note 13
which is as of December 4, 1998
<PAGE> 5
MIDWEST SURGICAL
SERVICES, INC.
BALANCE SHEET
APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 30,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance of $24,000 and
$19,137 in 1998 and 1997, respectively $ 702,386 $ 579,312
Other receivables 89,880 41,622
Notes and other receivables - related parties 77,089 2,617
Inventory 468,599 332,350
Prepaid expenses and other current assets 41,838 15,265
------------ ------------
Total current assets 1,379,792 971,166
------------ ------------
Property and equipment:
Medical equipment 2,683,537 1,688,379
Aircraft equipment 708,151 697,267
Furniture and fixtures 404,035 331,189
Automobiles 13,532 13,532
Accumulated depreciation (1,119,207) (591,416)
------------ ------------
2,690,048 2,138,951
Other assets 251,311 33,912
------------ ------------
Total assets $ 4,321,151 $ 3,144,029
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
MIDWEST SURGICAL SERVICES, INC.
BALANCE SHEET (CONTINUED)
APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 30,
1998 1997
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 351,806 $ 250,565
Dividend payable 247,629
Other accrued liabilities 218,395 82,574
Other accrued liabilities - related parties 15,825 38,811
Line of credit 300,000 230,000
Current portion of notes payable 34,341 5,315
Notes payable to related parties 30,000
Current portion of obligations under capital leases 564,493 451,961
------------ -----------
Total current liabilities 1,514,860 1,306,855
------------ -----------
Non-current liabilities:
Notes payable 577,795 562,500
Capital lease obligations 1,176,599 589,598
Other 42,000 44,500
------------ -----------
Total non-current liabilities 1,796,394 1,196,598
------------ -----------
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity:
Common stock, par value $0.10 per share,
250,000 shares authorized, 15,190 shares
issued and outstanding, respectively 1,519 1,519
Additional paid-in capital 94,805 75,188
Retained earnings 921,571 663,869
Treasury stock (7,998)
Notes receivable from stockholders (100,000)
------------ -----------
Total stockholders' equity 1,009,897 640,576
------------ -----------
Total liabilities and stockholders' equity $ 4,321,151 $ 3,144,029
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
MIDWEST SURGICAL SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 30,
1998 1997
<S> <C> <C>
Revenues $ 6,149,588 $ 5,125,182
Cost of revenues 3,623,436 2,918,104
------------ ------------
2,526,152 2,207,078
------------ ------------
Operating expense (income):
General and administrative 1,116,148 1,027,797
Salaries and related expenses 920,076 853,606
Impairment of investment 56,000
Gain from insurance recovery and
litigation settlement (241,500)
Management fees (158,000)
Other operating (income) expense (23,663) 14,918
------------ ------------
Income from operations 615,591 552,257
------------ ------------
Interest expense, net 171,876 109,056
Other expense 9,801 5,636
------------ ------------
Net income $ 433,914 $ 437,565
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
MIDWEST SURGICAL SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK PAID-IN RETAINED TREASURY STOCKHOLDER STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK NOTE EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996 15,000 $ 1,500 $ 46,800 $473,933 $ - $ (100,000) $ 422,233
Issuance of common stock 40 4 8,403 8,407
Exercise of stock options 150 15 19,985 20,000
Dividends (247,629) (247,629)
Net income for year ended
April 30, 1997 - - - 437,565 - 437,565
------ -------- -------- -------- ------- ---------- -----------
Balance at April 30, 1997 15,190 1,519 75,188 663,869 (100,000) 640,576
Transfer of net obligation under
capital lease 19,617 19,617
Purchase of treasury stock (7,998) (7,998)
Dividends (176,212) (176,212)
Repayment of Stockholder
note 100,000 100,000
Net income for the year ended
April 30, 1998 - - - 433,914 - 433,914
------ -------- -------- -------- ------- ---------- -----------
Balance at April 30, 1998 15,190 $ 1,519 $ 94,805 $921,571 $(7,998) $ - $ 1,009,897
====== ======== ======== ======== ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 9
MIDWEST SURGICAL SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities: $ 433,914 $ 437,565
Net income
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 722,195 404,571
Impairment of investment 56,000
Provision for uncollectible accounts receivable 4,863 19,137
Gain on sale of fixed assets (28,425)
(Gain) loss on termination of capital leases (21,163) 14,918
Gain from insurance recovery and litigation settlement (241,500)
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable (127,937) (134,688)
Increase in notes and other receivables (122,730) (44,239)
Increase in inventory (136,249) (12,658)
(Increase) decrease in prepaid expenses and
other assets (50,805) 14,460
Increase in accounts payable 101,241 33,631
Increase (decrease) in accrued liabilities and other 110,335 (104,328)
--------- ---------
Net cash provided by operating activities 969,664 358,444
--------- ---------
Cash flows from investing activities:
Capital expenditures (140,537) (787,495)
Proceeds from sale of fixed assets and termination 10,213 163,291
of capital leases
Proceeds from insurance recovery 150,000
Acquisition of mobile cataract surgery business (80,000) -
--------- ---------
Net cash used in investing activities (210,324) (474,204)
--------- ---------
Cash flows from financing activities:
Capital lease payments (381,822) (458,966)
Dividends paid (423,841)
Net borrowings under line-of-credit agreement 70,000 65,220
Debt principal payments (23,677) (156,423)
Proceeds from issuance of notes 562,500
Proceeds from stock options exercised 20,000
Proceeds from issuance of common stock - 8,407
--------- ---------
Net cash (used in) provided by financing activities (759,340) 40,738
--------- ---------
Net decrease in cash (75,022)
Cash at beginning of year - 75,022
--------- ---------
Cash at end of year $ - $ -
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 10
MIDWEST SURGICAL SERVICES, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
1998 1997
<S> <C> <C>
Supplemental schedule of non-cash investing and
financing activities:
Capital lease obligations for equipment purchases $ 1,235,060 $ 921,107
Termination of capital lease:
Capital lease obligation 109,636
Net book value of equipment 88,473
Purchase of investment in aircraft in exchange for:
Cancellation of note receivable 100,000
Issuance of note payable 30,000
Transfer of equipment and lease obligation to related party:
Capital lease obligation 44,069
Net book value of equipment 24,452
Purchase of treasury stock for note payable 7,998
Equipment received in litigation settlement 136,000
The Company purchased all of the assets of a mobile
cataract surgery business during fiscal 1998. In conjunction
with the acquisition, liabilities were assumed as follows:
Fair market value of assets acquired $ 140,000
Cash paid for assets 80,000
-----------
Liabilities assumed $ 60,000
===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 189,552 $ 145,397
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 11
MIDWEST SURGICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 and 1997
- --------------------------------------------------------------------------------
1. NATURE OF ORGANIZATION
Midwest Surgical Services, Inc. ("MSS" or the "Company") is a
Minneapolis-based provider of cataract surgery equipment and supplies
to rural community hospitals. The Company provides as a complete
package the instrumentation, disposables, consumables and prosthetics
along with a highly trained and certified surgical technician. This
service allows the small community hospital to provide the most
sophisticated phaco emulsification cataract surgery and other
procedures without significant capital investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, as well
as the reported amounts of revenue and expenses. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash,
accounts receivable, notes receivable, accounts payable, accrued
liabilities, notes payable and capitalized lease obligations. The
estimated fair value of these financial instruments approximates their
book value at April 30, 1998 and 1997, based on the nature of the
instruments and the terms currently available to the Company.
CONCENTRATION OF CREDIT RISK
The Company extends credit to its customers, which are primarily small
community hospitals located in the Midwest. Management believes the
credit risk related to its trade receivables is limited, as no single
customer accounted for a significant amount of the Company's revenue
and that its allowance for doubtful accounts is adequate.
INVENTORY
Inventory is stated at actual cost and consists principally of medical
supplies.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation and
amortization are computed utilizing the straight-line method. In the
opinion of management, this method is adequate to allocate the cost of
equipment over estimated useful lives which range from two to seven
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets when events
or changes in circumstances indicate that an asset's carrying value may
not be recoverable. In reviewing for impairment, if the carrying value
of an asset is greater than the sum of the undiscounted projected cash
flows attributable to that asset, an impairment loss is recognized. The
impairment loss is based on the fair value of the asset which is
determined based on market prices, discounted cash flows or the best
information available.
REVENUE
Revenues are recognized when the surgical procedures are performed.
<PAGE> 12
MIDWEST SURGICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
PAGE 2
- --------------------------------------------------------------------------------
COST OF REVENUES
Cost of revenues include medical equipment depreciation, equipment
maintenance, technician salaries and technician travel expenses and are
recognized over the useful lives of the related equipment or when
incurred.
INCOME TAXES
The Company is organized under subchapter S of the Internal Revenue
Code. In lieu of corporate income taxes, the shareholders of the S
corporation are taxed on their proportionate share of the Company's
taxable income. Accordingly, no provision for corporate income taxes
has been recorded in these financial statements.
3. 401(k) SAVINGS PLAN
MSS has a 401(k) savings plan for all employees that have completed one
year of service and are 21 years old. Matching contributions to the
plan are made at the discretion of the Company, subject to certain
limitations and subject to a maximum contribution per participant. The
Company may terminate or amend the plan at any time.
Contributions by the Company for eligible employees to the 401(k) plan
for the years ended April 30, 1998 and 1997 were $26,813 and $22,941,
respectively.
4. GAIN FROM INSURANCE RECOVERY AND LITIGATION
During fiscal 1997, an aircraft which the Company owned crashed. The
Company was insured for the loss and received $150,000 from the
insurance carrier. As the aircraft was fully depreciated, this resulted
in the recognition of a $150,000 gain from the insurance recovery.
During fiscal 1997, the Company settled certain litigation with a
medical equipment manufacturer in exchange for equipment with an
estimated fair market value of $136,000. The Company recorded the
equipment at its estimated fair value, a gain from litigation
settlement of $91,500 and deferred income of $44,500. A portion of the
gain was deferred because it is contingent on future purchases of
supplies. The deferred income will be recognized in subsequent periods
as supplies are purchased. During fiscal 1998, $2,500 of the deferred
income was recognized.
5. ASSET PURCHASE AGREEMENT
On March 6, 1998, MSS entered into an agreement to purchase a mobile
cataract surgery business for $80,000 in cash and the issuance of a
$60,000 note to the owner. The acquisition was accounted for under the
purchase method. Accordingly, the purchase price was allocated to fixed
assets with a fair market value of $10,000 and a non-compete agreement
with the owner valued at $30,000. The remaining $100,000 was recorded
as goodwill. The non-compete agreement and the goodwill are being
amortized over two years.
<PAGE> 13
MIDWEST SURGICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
Page 3
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
6. OTHER ASSETS
Other assets consist of the following at April 30:
1998 1997
Goodwill, net of $8,333 amortization $ 91,667 $ -
Investment in aircraft cooperative 74,000
Noncompete agreement, net of
$2,500 amortization 27,500
Lease deposits and other 58,144 33,912
------------ ------------
Total $ 251,311 $ 33,912
============ ============
</TABLE>
7. NOTES PAYABLE AND LINE OF CREDIT
On February 19, 1997, MSS borrowed $562,500 from Norwest Bank to
purchase an ownership interest in an aircraft for use in the Company's
operations. The note is due in 5 years, bears interest at 8.25% and is
collateralized by the aircraft. At April 30, 1998 and 1997, $545,625
and $562,500, respectively, was payable on the note. Subsequent to
year end, the aircraft was sold and the note was repaid.
In March 1997, MSS obtained a line of credit facility with Fidelity
Bank totaling $660,000. In May 1997, the facility was amended and
increased to $700,000. The facility bears interest at 9% and is
renewable annually and payable on demand. The current facility will
expire on May 1, 1999. At April 30, 1998 and 1997, $300,000 and
$230,000 was outstanding under the line of credit, respectively.
On July 13, 1994, MSS borrowed $54,500 at 9.5% for three years from
Fidelity Bank in conjunction with the purchase of two lasers. At April
30, 1997, $5,315 was outstanding under the note, and on July 15, 1997,
the remaining balance was paid off.
On January 1, 1998, MSS issued a $30,000 non-interest bearing note to
four shareholders of MSS in connection with the transfer of an
ownership interest in an aircraft to the company. The note, which was
due on demand was paid in full on July 29, 1998. See additional
discussion in the related party footnote 12.
On November 24, 1997, MSS purchased 150 shares of common stock for
$7,998 in exchange for a note payable which bears interest at 8% and
is due in two years. At April 30, 1998, $6,511 was payable of which
$4,341 is current and $2,170 is non-current.
In connection with the purchase of a mobile cataract surgery business
(see Note 5), MSS issued a $60,000 note payable to the owner. The note
bears interest at 8.5% and is payable in two annual installments of
$30,000.
<PAGE> 14
MIDWEST SURGICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30,1998 AND 1997
Page 4
- --------------------------------------------------------------------------------
8. OBLIGATIONS UNDER CAPITAL LEASES
The Company finances the purchase of medical equipment, computer
equipment and mini-vans with 3 and 5 year leases. Under the terms of
the lease agreements, the Company is required to purchase the
equipment at the end of the lease term at a fixed price and
accordingly, the leases have been accounted for as capital leases. At
April 30, 1998, the future minimum payments under capital leases are
as follows:
YEAR ENDING APRIL 30, AMOUNT
1999 $ 726,772
2000 567,378
2001 384,732
2002 272,898
2003 and thereafter 171,976
-----------
Total minimum lease payments 2,123,756
Less amount representing interest 382,664
Less current portion 564,493
-----------
Long-term portion of obligations
under capital leases $ 1,176,599
===========
Assets under capital leases totaled $2,482,752 and $1,545,004,
respectively, at April 30, 1998 and 1997. Depreciation of leased assets
was $456,903 and $321,127 for the years ended April 30, 1998 and 1997,
respectively.
During fiscal 1998, the Company terminated certain leases and returned
the related equipment. At the dates of the terminations, the aggregate
outstanding lease obligation and net book value of the equipment
totaled $109,636 and $88,473, respectively. Accordingly, the Company
recognized a $21,163 gain.
9. OPERATING LEASE
The Company currently leases its office space under an operating lease
with a third party that requires monthly payments of $8,418 through
January 31, 2002. The Company subleases a portion of the office space
to other tenants, which are related parties (see Note 12), and receives
monthly sublease revenues of $2,966.
10. STOCK OPTIONS
At April 30, 1998 and 1997, there were 600 options to purchase the
Company's common stock outstanding at an exercise price of $133.33 per
share. As discussed in Note 13, all of the options were exercised
subsequent to year end.
<PAGE> 15
MIDWEST SURGICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
PAGE 5
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation in the normal course of business.
However, management does not expect that any outstanding or pending
legal proceedings, individually or in the aggregate, will have a
material adverse effect upon the Company's future results of
operations, liquidity or financial condition.
12. RELATED PARTIES
In May 1997, the owners of MSS formed Refractive Surgical Resources,
Inc. (RSR), a provider of mobile access to microsurgical equipment
used by eye surgeons. In conjunction with its incorporation, the
Company transferred two microkeratome machines with a net book value of
$24,452 and RSR assumed the related capital lease obligation of
$44,069. The transfer was recorded at the historical net book value of
the machines and the related capital lease obligation and resulted in a
net increase to stockholders' equity of $19,617. MSS provides certain
management services and subleases a portion of its offices to RSR.
During fiscal year 1998, MSS charged RSR approximately $78,000 for
management fees and approximately $71,000 for reimbursement of office
rent and other administrative expenses. At April 30, 1998, RSR owed MSS
approximately $16,000.
In February 1997, the owners of MSS also formed an ophthalmic equipment
supply company. MSS provides certain management services and subleases
a portion of its offices to the supply company. In fiscal year 1998,
MSS charged the supply company $80,000 in management fees and
approximately $10,503 for reimbursement of office rent and other
administrative expenses. Additionally, during fiscal year 1997, MSS
charged the Company $1,965 for rent and other administrative expense.
At April 30, 1998, MSS had a $60,000 receivable from the supply company
related to these fees. The supply company also purchased $2,684 and
$130,480 of inventory from MSS during fiscal years 1998 and 1997,
respectively, while MSS purchased $12,316 and $548 of inventory from
the supply company during fiscal years 1998 and 1997, respectively.
Four stockholders of MSS also own a company that supplies lasers used
in mobile cataract services. During fiscal years 1998 and 1997, MSS
laser purchases from the laser supply company totaled $68,569 and
$165,127, respectively. At April 30, 1998 and 1997, MSS owed the
company $825 and $9,366, respectively. MSS also subleases office space
to the laser supply company. During fiscal years 1998 and 1997, MSS
charged the company $8,433 and $4,772, respectively for reimbursement
of office rent and other administrative expenses.
A stockholder of MSS owns a company specializing in intraocular lens
sales. During fiscal year 1998 and 1997, MSS purchased $198,044 and
$245,030 in lenses, respectively, from the company. At April 30, 1998,
and 1997, MSS owed the company $1,089 and $19,445, respectively. During
fiscal years 1998 and 1997, MSS incurred certain costs for equipment
rentals and selling expenses on behalf of the lens company which
totaled $43,032 and $26,463, respectively. The lens company has agreed
to reimburse MSS for these costs. At April 30, 1998 and 1997, MSS was
due $1,089 and $2,617, respectively, from the lens company.
A stockholder of MSS also provides consulting services to the Company.
Fees for fiscal years 1998 and 1997 were $35,000 and $30,000,
respectively. At April 30, 1998, and 1997, MSS owed the stockholder
$15,000 and $10,000, respectively.
<PAGE> 16
MIDWEST SURGICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
PAGE 6
- --------------------------------------------------------------------------------
In January 1996, four stockholders of MSS borrowed $100,000 from the
Company to purchase an interest in an aircraft cooperative. During
fiscal 1998, MSS purchased the stockholder's interest in the
cooperative for $130,000 in exchange for the cancellation of the
original note and the issuance of a $30,000 non-interest bearing note
payable to the stockholders. Subsequent to the purchase, the Company
determined that its investment was impaired and wrote it down to the
$74,000 estimated fair value resulting in a $56,000 charge to earnings.
MSS recognized $9,600 and $12,416 of interest income from the note
during fiscal years 1998 and 1997, respectively. In addition, it also
incurred $18,353 of expenses during fiscal year 1997 related to use of
the aircraft. Subsequent to April 30, 1998, the investment in the
aircraft cooperative was sold.
The three principal stockholders have personally guaranteed the
Company's obligations under its capital leases and the note with
Fidelity Bank. One stockholder has also personally guaranteed the
Company's obligations under its office lease.
13. SUBSEQUENT EVENTS
In July 1998, MSS sold their investment in an aircraft cooperative for
$74,000. No gain or loss resulted from this transaction.
On June 5, 1998, MSS sold their ownership interest in an aircraft for
$625,000. The proceeds were used principally to repay the debt
associated with original purchase of the interest. The sale resulted in
a gain of approximately $50,000. No gain or loss was recognized on the
extinguishment of the debt.
On July 1, 1998, MSS purchased the stock of Perry Surgical, a North
Carolina-based provider of mobile cataract services, for $305,000 in
cash and $124,000 of notes. The purchase agreement provides for the
payment of additional amounts based on revenues earned in the two years
following the acquisition. MSS also entered into a one year consulting
agreement with the two principal owners of Perry Surgical for $120,000.
On July 5, 1998, 300 options to purchase the Company's common stock
were exercised, and on November 30, 1998, the remaining 300 stock
options were exercised. Proceeds from these option exercises totaled
$80,000.
In November 1998, MSS declared a dividend of $206,000 which will be
paid in April 1999.
As of December 4, 1998, the outstanding stock of MSS was purchased by
Laser Vision Centers, Inc. ("LVCI") for an initial payment of $3.8
million in cash and notes, with potential additional consideration of
up to $8.25 million in cash and LVCI common stock based on the
performance of MSS through July 2001.
<PAGE> 17
Midwest Surgical Services, Inc.
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, April 30,
1998 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 1,167,000 702,000
Inventory 651,000 469,000
Prepaid expenses and other current assets 86,000 209,000
----------- -----------
Total current assets 1,904,000 1,380,000
Equipment, net of accumulated
depreciation of $1,855,000 and
$1,119,000, respectively 2,467,000 2,690,000
Other assets
Goodwill, net 383,000
Other 155,000 251,000
----------- -----------
Total other assets 538,000 251,000
----------- -----------
Total assets $ 4,909,000 $ 4,321,000
=========== ===========
Liabilities and stockholders' equity
Current liabilities
Current portion of notes payable $ 142,000 $ 64,000
Line of credit 330,000 300,000
Current portion of capitalized lease obligation 828,000 565,000
Accounts payable 489,000 352,000
Accrued liabilities 212,000 234,000
----------- -----------
Total current liabilities 2,001,000 1,515,000
Non-current liabilities
Notes payable 63,000 578,000
Capitalized lease obligations 1,354,000 1,176,000
Other 42,000 42,000
----------- -----------
Total non-current liabilities 1,459,000 1,796,000
Stockholders' equity
Common stock 2,000 2,000
Paid in capital 135,000 95,000
Retained earnings 1,320,000 921,000
Treasury stock (8,000) (8,000)
----------- -----------
Total stockholders' equity 1,449,000 1,010,000
----------- -----------
Total liabilities and stockholders' equity $ 4,909,000 $ 4,321,000
=========== ===========
</TABLE>
<PAGE> 18
Midwest Surgical Services, Inc.
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998 1997
<S> <C> <C>
Revenue $ 4,385,000 $ 3,085,000
Cost of Revenue 2,745,000 1,840,000
----------- -----------
Gross Profit 1,640,000 1,245,000
Selling, general and
administrative expense 1,102,000 843,000
----------- -----------
Income from operations 538,000 402,000
Other income and expenses (139,000) (85,000)
----------- -----------
Net income $ 399,000 $ 317,000
=========== ===========
</TABLE>
<PAGE> 19
Midwest Surgical Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 399,000 $ 317,000
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 793,000 312,000
Gain on sale of equipment (50,000)
Gain on termination of capital leases (21,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (389,000) (86,000)
Increase in inventory (147,000) (98,000)
(Increase) decrease in other current assets 129,000 (18,000)
Increase (decrease) in accounts
payable and accruals 25,000 165,000
----------- -----------
Net cash provided by operations 760,000 571,000
Cash flows from investing activities:
Acquisition of Perry Surgical, net of
cash acquired (283,000)
Proceeds from sale of equipment 625,000
Acquisition of equipment (111,000) (76,000)
Other 53,000 (17,000)
----------- -----------
Net cash provided by (used in) investing
activities 284,000 (93,000)
Cash flows from financing activities:
Dividends paid (248,000)
Payments on capital lease obligations (369,000) (109,000)
Proceeds from (payments on) line of credit 30,000 (80,000)
Payment on notes payable (745,000) (22,000)
Proceeds from option exercise 40,000 --
----------- -----------
Net cash used in financing activities (1,044,000) (459,000)
Net change in cash 0 19,000
Cash at beginning of period 0 0
----------- -----------
Cash at end of period $ 0 $ 19,000
=========== ===========
Non cash investing and financing activities:
Capital leases for equipment $ 810,000 $ 415,000
Transfer of equipment and lease
obligation to related party:
Capital lease obligation 44,000
Net book value of equipment 24,000
Termination of capital leases:
Capital lease obligation 110,000
Net book value of equipment 88,000
Acquisiton of Perry Surgical
Fair value of assets acquired $ 703,000
Cash paid for the capital stock (305,000)
-----------
Liabilities assumed $ 398,000
===========
</TABLE>
<PAGE> 20
Midwest Surgical Services, Inc.
Notes to Historical Financial Statements
1. The unaudited interim financial statements as of October 31, 1998
and October 31, 1997, include all normal recurring adjustments
which management considers necessary for a fair presentation. The
results of operations for the interim periods are not necessarily
indicative of the results which may be expected for the entire
fiscal year.
2. Midwest Surgical Services, Inc. (MSS) elected S corporation status
under the provisions of the Internal Revenue code. As such, all
income and losses flow through to the shareholders who are liable
for all applicable taxes. Accordingly, no provision or credit has
been made for federal and state income taxes.
3. On July 1, 1998, MSS purchased the stock of Perry Surgical, a
North Carolina-based provider of mobile cataract services, for
$305,000 in cash and $124,000 of notes. The purchase agreement
provides for the payment of additional amounts based on revenues
earned in the two years following the acquisition. MSS also
entered into a one year consulting agreement with the two
principal owners of Perry Surgical for $120,000. The unaudited pro
forma MSS results from operations assuming that the Perry
acquisition was consummated as of May 1, 1997 are as follows:
<TABLE>
<CAPTION>
Six months ended
10/31/98 10/31/97
-------- --------
<S> <C> <C>
Revenue $4,535,000 $3,459,000
Income 386,000 338,000
</TABLE>
4. In November 1998, MSS declared a dividend of $206,000 which will
be paid in April, 1999.
<PAGE> 21
REFRACTIVE
SURGICAL
RESOURCES, INC.
FINANCIAL STATEMENTS
APRIL 30, 1998
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Refractive Surgical Resources, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of changes in stockholders' equity present fairly,
in all material respects, the financial position of Refractive Surgical
Resources, Inc. at April 30, 1998, and the results of its operations and its
cash flows for the year ended April 30, 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 audit. We conducted our audit
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 audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
August 27, 1998, except Note 7,
which is as of September 1, 1998
<PAGE> 23
REFRACTIVE SURGICAL RESOURCES, INC.
BALANCE SHEET
APRIL 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 30, 1998
ASSETS
Current assets:
<S> <C>
Cash $ 97,106
Accounts receivable, net of allowance of $8,000 292,251
Other receivables 64,128
Inventory 61,186
Prepaid expenses and other current assets 28,375
--------------
Total current assets 543,046
--------------
Equipment:
Medical equipment 931,851
Furniture and fixtures 8,543
Accumulated depreciation (124,202)
--------------
Net property and equipment 816,192
Deposits 14,240
--------------
Total assets $ 1,373,478
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 133,982
Accounts payable 697,712
Other accrued liabilities 60,155
--------------
Total current liabilities 891,849
--------------
Non-current liabilities:
Capital lease obligations 261,643
--------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, par value $.01 per share, 100,000
authorized, 100,000 shares issued
and outstanding, respectively 1,000
Additional paid in capital 80,383
Retained earnings 138,603
--------------
219,986
--------------
Total liabilities and stockholders' equity $ 1,373,478
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 24
REFRACTIVE SURGICAL RESOURCES, INC.
STATEMENT OF OPERATIONS
APRIL 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 30, 1998
<S> <C>
Revenues $ 1,763,763
Cost of revenues (includes $121,840 of depreciation) 1,101,743
-------------
662,020
-------------
Operating expense:
General and administrative 330,649
Salaries and related expenses 159,000
Depreciation 2,362
-------------
492,011
-------------
Income from operations 170,009
Interest expense 31,406
-------------
Net income $ 138,603
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 25
REFRACTIVE SURGICAL RESOURCES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
APRIL 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Issuance of stock 100,000 $ 1,000 $ - $ - $ 1,000
Transfer of net obligation under
capital lease (19,617) (19,617)
Conversion of stockholder notes to
equity 100,000 100,000
Net income - - - 138,603 138,603
------- --------- -------- -------- ------------
Balance at April 30, 1998 100,000 $ 1,000 $ 80,383 $138,603 $ 219,986
======= ========= ======== ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 26
REFRACTIVE SURGICAL RESOURCES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1998
Cash flows from operating activities:
<S> <C>
Net income $ 138,603
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 124,202
Provision for uncollectible accounts receivable 8,000
Changes in operating assets and liabilities:
Increase in accounts receivable (300,251)
Increase in other receivables (64,128)
Increase in inventory (61,186)
Increase in prepaid expenses and other current assets (28,375)
Increase in accounts payable 697,712
Increase in accrued liabilities 60,155
----------
Net cash provided by operating activities 574,732
----------
Cash flows from investing activities:
Acquisition of equipment (487,943)
Equipment deposits (14,240)
----------
Net cash used by investing activities (502,183)
----------
Cash flows from financing activities:
Principal payments under capital lease obligations (76,443)
Proceeds from stockholder notes 100,000
Proceeds from sale of common stock 1,000
----------
Net cash provided by financing activities 24,557
----------
Net increase in cash 97,106
Cash at beginning of year -
----------
Cash at end of year $ 97,106
==========
Supplemental schedule of non-cash investing and financing activities:
Transfer of obligation under capital lease $ 44,069
==========
Transfer of equipment under capital lease $ 24,452
==========
Capital lease obligations related to equipment purchases $ 427,999
==========
Conversion of stockholder notes to equity $ 100,000
==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 31,406
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 27
REFRACTIVE SURGICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
- --------------------------------------------------------------------------------
1. NATURE OF ORGANIZATION
Refractive Surgical Services, Inc. ("RSR" or the "Company") is a
Minneapolis based provider of mobile microkeratome access. The
microkeratome is a microsurgical device which is used by eye surgeons
in conjunction with the excimer laser to perform laser in situ
keratomileusis (LASIK) procedures. RSR is the world's largest provider
of access to microkeratome technology.
RSR was incorporated on May 1, 1997 by the principal stockholders of
Midwest Surgical Services, Inc. ("MSS"), a provider of access to
ophthalmic equipment and other medical supplies, and an executive
formerly with Chiron Ophthalmics, the manufacturer of the
microkeratomes RSR provides.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, as well
as the reported amounts of revenue and expenses. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of financial reporting, the Company has determined that
the fair value of the Company's financial instruments, including cash,
accounts receivable, and capitalized lease obligations approximates
book value at April 30, 1998, based on terms currently available to the
Company in financial markets.
CONCENTRATION OF CREDIT RISK
One customer constituted approximately 27% of the accounts receivable
balance at April 30, 1998. Management believes the credit risk related
to its remaining trade receivables is limited as no single customer
accounted for a significant amount of the Company's revenue and that
its allowance for doubtful accounts is adequate.
INVENTORY
Inventory is stated at cost and consists of general medical supplies.
EQUIPMENT
Equipment is stated at cost. Expenditures for repairs and maintenance
are charged to expense as incurred. Depreciation and amortization are
computed utilizing the straight-line method. In the opinion of
management, this method is adequate to allocate the cost of equipment
over its estimated useful lives which range from two to seven years.
REVENUE
Revenues are recognized when the surgical procedures are performed.
COST OF REVENUES
Cost of revenues include medical equipment depreciation, equipment
maintenance, technician salaries and technician travel expenses and are
recognized over the useful lives of the related equipment or when
incurred.
<PAGE> 28
REFRACTIVE SURGICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
PAGE 2
- --------------------------------------------------------------------------------
INCOME TAXES
The Company is organized under subchapter S of the Internal Revenue
Code. In lieu of corporate income taxes, the shareholders of the S
corporation are taxed on their proportionate share of the Company's
taxable income. Accordingly, no provision for corporate income taxes
has been recorded in these financial statements.
3. NOTES PAYABLE
On May 15, 1997, RSR borrowed $100,000 from its stockholders at 9% per
annum, payable on May 15, 1998. On January 1, 1998 these notes were
converted to stockholders' equity. Interest expense of $5,690 was
incurred and paid through December 31, 1997.
4. OBLIGATIONS UNDER CAPITAL LEASES
During the fiscal year, the Company financed the purchase of 18
machines and various other medical equipment with 3 and 4 year capital
leases, requiring total principal payments of $427,999 and bearing
interest at 8.75% to 9%. In conjunction with its incorporation, the
Company received from MSS two microkeratome machines with a net book
value of $24,452 and assumed the related capital lease obligations of
$44,069. Under the terms of the lease agreements, the Company is
required to purchase the equipment at the end of the lease term at a
fixed price.
At April 30, 1998, the future minimum payments under capital leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30, AMOUNT
<S> <C>
1999 $ 166,207
2000 159,952
2001 121,496
-------------
Total minimum lease payments 447,655
Less amount representing interest (52,030)
Less current portion (133,982)
-------------
Long-term portion of obligations
under capital leases $ 261,643
=============
</TABLE>
Assets under capital leases totaled $452,451 at April 30, 1998.
Depreciation of leased assets was $69,956 for the year ended April 30,
1998.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation in the normal course of business.
However, management does not expect that any outstanding or pending
legal proceedings, individually or in the
<PAGE> 29
REFRACTIVE SURGICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
PAGE 3
- --------------------------------------------------------------------------------
aggregate, will have a material adverse effect upon the Company's
future results of operations, liquidity or financial condition.
6. RELATED PARTY
MSS provides certain management services and subleases a portion of its
offices to RSR. During fiscal 1998, MSS charged RSR approximately
$78,000 for management fees and approximately $71,000 for office rent
and other administrative expenses. At April 30, 1998, the Company owed
MSS approximately $16,000.
At the time of its incorporation, the Company retained three MSS
employees and assumed responsibility for two MSS equipment leases (see
Note 4).
7. SUBSEQUENT EVENT
On September 1, 1998, the outstanding stock of RSR was purchased by
Laser Vision Centers, Inc. ("LVCI") for a combination of cash and notes
payable totaling $3.3 million. One of the minority owners of the
Company is an outside director of LVCI. LVCI provides eye surgeons
access to excimer lasers.
The Company provides LVCI's customers with access to microkeratomes.
LVCI's customers represented approximately 60% of the Company's
revenues during the year ended April 30, 1998. For the year ended April
30, 1998, the Company also charged LVCI approximately $117,000 for
certain services and supplies it provided directly to LVCI. At April
30, 1998, the Company had $81,916 in receivables from LVCI.
<PAGE> 30
Refractive Surgical Resources, Inc.
Condensed Balance Sheet
<TABLE>
<CAPTION>
(Unaudited) (Audited)
August 31, April 30,
1998 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 300,000 $ 97,000
Accounts receivable, net 347,000 292,000
Inventory 87,000 61,000
Prepaid expenses and other current assets 20,000 93,000
---------- ----------
Total current assets 754,000 543,000
Equipment, net of accumulated
depreciation of $224,000 and
$124,000, respectively 829,000 816,000
Other assets 18,000 14,000
---------- ----------
Total assets $1,601,000 $1,373,000
========== ==========
Liabilities and stockholders' equity
Current liabilities
Current portion of capitalized lease obligation $ 165,000 $ 134,000
Accounts payable 925,000 698,000
Accrued liabilities 51,000 60,000
---------- ----------
Total current liabilities 1,141,000 892,000
Non-current liabilities
Capitalized lease obligations 287,000 261,000
---------- ----------
Total non-current liabilities 287,000 261,000
Stockholders' equity
Common stock 1,000 1,000
Paid in capital 80,000 80,000
Retained earnings 92,000 139,000
---------- ----------
Total stockholders' equity 173,000 220,000
---------- ----------
Total liabilities and stockholders' equity $1,601,000 $1,373,000
========== ==========
</TABLE>
<PAGE> 31
Refractive Surgical Resources, Inc.
Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Four Months Ended
August 31,
1998 1997
<S> <C> <C>
Revenue $ 1,133,000 $ 327,000
Cost of revenue 913,000 184,000
----------- -----------
Gross profit 220,000 143,000
Selling, general and
administrative expense 160,000 116,000
----------- -----------
Income from operations 60,000 27,000
Other income and expenses (20,000) (11,000)
----------- -----------
Net income $ 40,000 $ 16,000
=========== ===========
</TABLE>
<PAGE> 32
Refractive Surgical Resources, Inc.
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Four Months Ended
August 31,
1998 1997
<S> <C> <C>
Cash flow from operating activities:
Net income $ 40,000 $ 16,000
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 100,000 10,000
Changes in assets and liabilities
Increase in accounts receivable (55,000) (119,000)
Increase in inventory (26,000) (15,000)
(Increase) decrease in prepaid expenses
and other current asset increase 73,000 (34,000)
Increase in accounts payable and
accrued liabilities 218,000 164,000
--------- ---------
Net cash provided by operating activities 350,000 22,000
Cash flows from investing activities:
Acquisition of equipment (12,000) (84,000)
Other, net (4,000)
--------- ---------
Net cash used in investing activities (16,000) (84,000)
Cash flows from financing activities:
Principal payments under capitalized
lease obligations and notes payable (44,000) (10,000)
Proceeds from note payable 100,000
Contributions to/(distributions from) stockholders (87,000) 1,000
--------- ---------
Net cash provided by (used in) financing activities (131,000) 91,000
--------- ---------
Net increase in cash
and cash equivalents 203,000 29,000
Cash at beginning of period 97,000 -
--------- ---------
Cash at end of period $ 300,000 $ 29,000
========= =========
Non cash investing and financing activities:
Capital leases for equipment $ 101,000 $ 98,000
Transfer of capital leases:
Capital lease obligation 44,000
Net book value of equipment 24,000
</TABLE>
<PAGE> 33
Refractive Surgical Resources, Inc.
Notes to Historical Financial Statements
1. The unaudited interim financial statements as of August 31, 1998
and August 31, 1997, include all normal recurring adjustments
which management considers necessary for a fair presentation. The
results of operations for the interim periods are not necessarily
indicative of the results which may be expected for the entire
fiscal year.
2. Refractive Surgical Resources, Inc. (RSR) elected S corporation
status under the provisions of the Internal Revenue code. As such,
all income and losses flow through to the shareholders who are
liable for all applicable taxes. Accordingly, no provision or
credit has been made for federal and state income taxes.
<PAGE> 34
Item 7(b) - Pro Forma Financial Information, including Combined
Statements of Operations for the year ended April 30, 1998 and for the
six months ended October 31, 1998, Combined Balance Sheets as of
October 31, 1998 and Notes to the Condensed Pro Forma Financial
Statements
On September 1, 1998, Laser Vision Centers, Inc. (LVCI) acquired all of
the outstanding stock of Refractive Surgical Resources, Inc. (RSR), for
$680,000 in cash (including $212,000 of transaction expenses) and $2.1
million in notes payable/future payments (of which $1.1 million is due
within one year). The acquisition was accounted for under the purchase
method of accounting and resulted in the recognition of goodwill of
$2.6 million. RSR provides microkeratome access and the related
disposable blades used by ophthalmologists during the LASIK procedure.
On December 4, 1998 LVCI acquired all of the outstanding stock of
Midwest Surgical Services, Inc. (MSS), for $2.8 million in cash and
$1.0 million in notes payable/future payments, with potential
additional consideration of up to $8.25 million in cash and LVCI common
stock based on the performance of MSS through July 2001. LVCI has the
option to pay all future payments in cash. MSS provides mobile cataract
services to U.S. ophthalmologists primarily in small markets.
The unaudited pro forma financial statements present a combination of
the historical financial statements for LVCI, RSR and MSS as adjusted
to reflect purchase transactions in accordance with the purchase method
of accounting. Pro forma income statements are presented for the year
ended April 30, 1998 and the six months ended October 31, 1998 as if
the acquisitions had occurred as of May 1, 1997. A pro forma balance
sheet is presented as of October 31, 1998 to illustrate the estimated
effects of the acquisitions as if such events had occurred by this
date.
The Pro Forma Combined Statements of Operations for the year ended
April 30, 1998 include LVCI's, RSR's and MSS's results of operations
for the year ended April 30, 1998. The Pro Forma Combined Statements of
Operations for the six months ended October 31, 1998 include LVCI's
results of operations for this period (including RSR from September 1,
1998 to October 31, 1998), RSR's results of operations for the period
May 1, 1998 to August 31, 1998 only, and MSS's results of operations
for the six months ended October 31, 1998. The Pro Forma Combined
Balance Sheets include LVCI's balance sheet (including RSR) as of
October 31, 1998 and MSS's balance sheet as of October 31, 1998. Final
purchase accounting adjustments will differ from the pro forma
adjustments presented herein and described in the accompanying notes
due to the results of operations of MSS from October 31, 1998 to the
date of closing (December 4, 1998).
The unaudited pro forma financial information is based on assumptions
that management believes are reasonable and such information is
presented for comparative and informational purposes only. The
unaudited pro forma financial information does not purport to represent
what the Company's results of operations or financial condition would
actually have been had such transactions occurred on May 1, 1997 or to
project the Company's results of operations for any future period or
financial condition at any future date.
<PAGE> 35
Laser Vision Centers, Inc.
Pro Forma Combined Statements of Operations (Unaudited)
For the Year Ended April 30, 1998
<TABLE>
<CAPTION>
Historical
-------------------------------------- Pro Forma Pro Forma
LVCI RSR MSS Adjustments Total
---- --- --- ----------- -----
<S> <C> <C> <C> <C> <C>
Net revenue $23,469,000 $1,764,000 $6,150,000 $(117,000)(a) $31,266,000
Cost of revenue 16,750,000 1,102,000 3,624,000 (117,000)(a) 21,359,000
----------- ---------- ---------- --------- -----------
Gross profit 6,719,000 662,000 2,526,000 - 9,907,000
Selling, general and
administrative expenses 9,592,000 492,000 1,910,000 383,000(b) 12,377,000
----------- ---------- ---------- --------- -----------
Income (loss) from operations (2,873,000) 170,000 616,000 (383,000) (2,470,000)
Net interest expense and other (623,000) (31,000) (182,000) (444,000)(c) (1,280,000)
----------- ---------- ---------- --------- -----------
Net income (loss) (3,496,000) 139,000 434,000 (827,000) (3,750,000)
Preferred dividends (198,000) - - - (198,000)
----------- ---------- ---------- --------- -----------
Net loss applicable to
common stockholders(d) $(3,694,000) $139,000 $434,000 $(827,000) $(3,948,000)
=========== ========== ========== ========= ===========
Loss per share:
Basic and diluted $(.40) $(.43)
Weighted average number of
basic and diluted shares
outstanding 9,178,000 9,178,000
</TABLE>
(a) Adjustment to eliminate intercompany sales from RSR to LVCI.
(b) Selling, general and administrative expenses have been adjusted to reflect
the increase in the amortization of goodwill attributable to the
acquisitions of RSR and MSS. Total goodwill related to the RSR acquisition
of $2.6 million and the MSS acquisition of $3.1 million is being amortized
over a 15 year period.
(c) Interest expense of $251,000 (at 8%) has been adjusted to reflect the
interest expense on the $1.0 million of notes payable issued in connection
with the MSS acquisition and $2.1 million issued in connection with the
RSR acquisition. Interest income of $193,000 (at 5%) has been adjusted to
reflect the reduction in interest income related to the $3.2 million of
cash on hand utilized to finance the MSS acquisition and $680,000 of cash
on hand utilized to finance the RSR acquisition.
(d) Prior to being acquired by LVCI, RSR and MSS had elected S corporation
status under the provisions of the Internal Revenue Code. As such, all
pre-acquisition income subsequent to this election flowed through to the
shareholders of RSR and MSS, respectively, who were liable for all
applicable taxes. Accordingly, no provision is presented for federal and
state income taxes in the RSR and MSS historical Statements of Operations.
No pro forma adjustment for income tax provision is included since any
taxable income would be offset by the utilization of net operating loss
carryforwards of LVCI. For purposes of recording deferred tax assets of
LVCI, no future taxable income has been assumed given the results of
operations of LVCI through October 31, 1998. Accordingly, LVCI's deferred
tax asset, related primarily to net operating loss carryforwards, is fully
reserved with an offsetting valuation allowance. Therefore any utilization
of the net operating losses as a result of pro forma taxable income from
MSS or RSR would result in an offsetting reduction in the valuation
allowance.
<PAGE> 36
Laser Vision Centers, Inc.
Pro Forma Combined Statements of Operations (Unaudited)
For the Six Months ended October 31, 1998
<TABLE>
<CAPTION>
Historical
-------------------------------------- Pro Forma Pro Forma
LVCI RSR* MSS Adjustments Total
---- ---- --- ----------- -----
<S> <C> <C> <C> <C> <C>
Net revenue $19,512,000 $1,133,000 $4,385,000 $(47,000)(a) $24,983,000
Cost of revenue 12,991,000 913,000 2,745,000 (47,000)(a) 16,602,000
----------- ---------- ---------- -------- -----------
Gross profit 6,521,000 220,000 1,640,000 - 8,381,000
Selling, general and
administrative expenses 4,878,000 160,000 1,102,000 162,000(b) 6,302,000
----------- ---------- ---------- -------- -----------
Income from operations 1,643,000 60,000 538,000 (162,000) 2,079,000
Net interest expense and other (353,000) (20,000) (139,000) (188,000)(c) (700,000)
----------- ---------- ---------- -------- -----------
Net income 1,290,000 40,000 399,000 (350,000) 1,379,000
Preferred dividends (81,000) - - - (81,000)
----------- ---------- ---------- -------- -----------
Net income applicable to
common stockholders(d) $1,209,000 $40,000 $399,000 $(350,000) $1,298,000
=========== ========== ========== ========= ===========
Income per share:
Basic $.12 $.13
Diluted $.11 $.12
Weighted average number of
common shares outstanding - basic 9,834,000 9,834,000
Weighted average number of
common shares outstanding - diluted 10,779,000 10,779,000
</TABLE>
* RSR statement of income is for the four months ended August 31, 1998. RSR
operating results since the acquisition on September 1, 1998 are included in
the LVCI operating results.
(a) Adjustment to eliminate intercompany sales from RSR to LVCI.
(b) Selling, general and administrative expenses have been adjusted to reflect
the increase in the amortization of goodwill attributable to the
acquisitions of RSR and MSS. Total goodwill related to the RSR acquisition
of $2.6 million and the MSS acquisition of $3.1 million is being amortized
over a 15 year period.
(c) Interest expense of $97,000 (at 8%) has been adjusted to reflect the
interest expense on the $1.0 million of notes payable issued in connection
with the MSS acquisition and $2.1 million issued in connection with the
RSR acquisition. Interest income of $91,000 (at 5%) has been adjusted to
reflect the reduction in interest income related to the $3.2 million of
cash on hand utilized to finance the MSS acquisition and $680,000 of cash
on hand utilized to finance the RSR acquisition.
(d) Prior to being acquired by LVCI, RSR and MSS had elected S corporation
status under the provisions of the Internal Revenue Code. As such, all
pre-acquisition income subsequent to this election flowed through to the
shareholders of RSR and MSS, respectively, who were liable for all
applicable taxes. Accordingly, no provision is presented for federal and
state income taxes in the RSR and MSS historical Statements of Operations.
<PAGE> 37
No pro forma adjustment for income tax provision is included since any
taxable income would be offset by the utilization of net operating loss
carryforwards of LVCI. For purposes of recording deferred tax assets of
LVCI, no future taxable income has been assumed given the results of
operations of LVCI through October 31, 1998. Accordingly, LVCI's deferred
tax asset, related primarily to net operating loss carryforwards, is fully
reserved with an offsetting valuation allowance. Therefore any utilization
of the net operating losses as a result of pro forma taxable income from
MSS or RSR would result in an offsetting reduction in the valuation
allowance.
<PAGE> 38
Laser Vision Centers, Inc.
Pro Forma Combined Balance Sheets (Unaudited)
October 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
LVCI* MSS Adjustments Total
----- --- ----------- -----
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $8,491,000 $ - ($2,800,000)(a) $5,691,000
Restricted cash 525,000 525,000
Accounts receivable, net 5,490,000 1,167,000 6,657,000
Inventory 1,128,000 651,000 1,779,000
Prepaid expenses and
other current assets 1,352,000 86,000 1,438,000
---------- --------- --------- ----------
Total current assets 16,986,000 1,904,000 (2,800,000) 16,090,000
Equipment, net of accumulated
depreciation 14,703,000 2,467,000 17,170,000
Other assets
Goodwill, net 3,413,000 383,000 2,524,000(a) 6,320,000
Other 1,499,000 155,000 1,654,000
----------- ---------- ---------- -----------
Total other assets 4,912,000 538,000 2,524,000 7,974,000
---------- --------- --------- ----------
Total Assets $36,601,000 $4,909,000 $ (276,000) $41,234,000
=========== ========== ========== ===========
Liabilities and equity
Current liabilities
Current portion of
notes payable $3,686,000 $142,000 $1,000,000(a) $4,828,000
Line of credit 330,000 330,000
Current portion of
capitalized lease
obligation 842,000 828,000 1,670,000
Accounts payable 4,183,000 489,000 4,672,000
Accrued liabilities 2,697,000 212,000 173,000(a) 3,082,000
----------- ---------- ---------- -----------
Total current liabilities 11,408,000 2,001,000 1,173,000 14,582,000
Non-current liabilities
Notes payable 6,137,000 63,000 6,200,000
Capitalized lease
obligations 607,000 1,354,000 1,961,000
Other 42,000 42,000
----------- ---------- ---------- -----------
Total non-current liabilities 6,744,000 1,459,000 8,203,000
Stockholders' equity
Preferred stock 3,471,000 3,471,000
Common stock 100,000 2,000 (2,000)(b) 100,000
Warrants and options 1,346,000 1,346,000
Paid in capital 44,249,000 135,000 (135,000)(b) 44,249,000
Accumulated deficit (30,717,000) 1,312,000 (1,312,000)(b) (30,717,000)
----------- ---------- ---------- -----------
Total stockholders' equity 18,449,000 1,449,000 (1,449,000) 18,449,000
----------- ---------- ---------- -----------
Total liabilities and equity $36,601,000 $4,909,000 $ (276,000) $41,234,000
=========== ========== ========== ===========
</TABLE>
*Includes RSR balance sheet as of 10/31/98
<PAGE> 39
(a) The allocation of the estimated purchase price to assets and
liabilities assumed at October 31, 1998 is as follows:
Cash payment $2,800,000
Note payable 1,000,000
Transaction expenses 373,000
----------
Total $4,173,000
==========
The purchase price for MSS was allocated as follows:
Net book value of MSS assets $1,449,000
Less goodwill of MSS 383,000
----------
Subtotal 1,066,000
Cost in excess of net assets acquired 3,107,000
----------
Total $4,173,000
==========
Transaction expenses of $200,000 were accrued at October 31, 1998 and
are included in the LVCI balance sheet at October 31, 1998.
The former owners of MSS may earn additional consideration of up to
$8.25 million in cash and LVCI common stock based on the performance of
MSS through July 2001. Such amounts, if required to be paid, will be
recorded as goodwill at that time and amortized over the remaining life
of the goodwill recorded at acquisition.
The historical carrying value of MSS's assets and liabilities reflects
their fair market value on the date of acquisition.
The tax basis of the acquired assets and liabilities equal the
financial statement values as a result of the Company's tax election to
treat the stock purchase as an asset purchase.
(b) To eliminate equity of MSS.
