-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IfaWu4NskGZ3NX4GWeOP8/7tnRk8zbjZvT8VqvmPncRyv2BctrrMZNfTlf3UG9EV 76OUTg6YvYxSwaNVK5V1fA== 0000906318-98-000100.txt : 19981202 0000906318-98-000100.hdr.sgml : 19981202 ACCESSION NUMBER: 0000906318-98-000100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LCA VISION INC CENTRAL INDEX KEY: 0001003130 STANDARD INDUSTRIAL CLASSIFICATION: 8093 IRS NUMBER: 112882328 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27610 FILM NUMBER: 98745446 BUSINESS ADDRESS: STREET 1: 7840 MONTGOMERY RD CITY: CINCINNATI STATE: OH ZIP: 45236 BUSINESS PHONE: 5137929292 MAIL ADDRESS: STREET 1: 7840 MONTGOMERY ROAD CITY: CINCINNATI STATE: OH ZIP: 45236 10-Q 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1998. [ ] 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: 38,286,759 shares as of October 31, 1998. Transitional Small Business Disclosure Format (check one): Yes __________ No____X_____ LCA-VISION INC. INDEX Facing Sheet Index Part I. Financial Information Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheet, September 30, 1998 Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 1998 and 1997 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1998 and 1997 Notes to Unaudited Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information 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 LCA-VISION INC. Condensed Consolidated Balance Sheet September 30, 1998 (unaudited) Dollars in thousands September 30, 1998 ASSETS Current assets Cash and cash equivalents $ 3,881 Accounts receivable, net 1,603 Prepaid expenses, inventory and other 1,807 ----------- Total current assets 7,291 Property and equipment, net 10,179 Investment in affiliates 610 Goodwill, net 8,704 Other assets 3,905 ----------- Total assets $ 30,689 =========== IABILITIES and SHAREHOLDERS' INVESTMENT Current liabilities Accounts payable $ 1,205 Accrued liabilities and other 2,848 Debt obligations due in one year 608 ----------- Total current liabilities 4,661 Capital lease obligations 984 Obligations to shareholders 257 Long-term debt 1,944 ----------- Total liabilities 7,846 Commitments and contingencies Shareholders' investment Preferred stock 10,850 Common stock 99 Additional paid-in capital 38,564 Accumulated (deficit) (26,051) Accrued preferred stock dividend (572) Treasury stock, at cost (30) Translation adjustment (17) ----------- Total shareholders' investment 22,843 ----------- Total liabilities and shareholders' investment $ 30,689 =========== The Notes to Condensed Consolidated Financial Statements are an integral part of this statement. LCA-VISION INC. Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 (unaudited) Dollars in thousands, except per share amounts For the Three Months For the Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net revenues: Laser refractive eye surgery centers $8,509 $3,948 $23,423 $7,977 Multi-specialty laser surgery programs 431 657 1,338 2,142 Other 156 351 562 1,439 ------ ------ ------ ------- Total net revenues 9,096 4,956 25,323 11,558 Direct operating expenses 6,332 2,711 17,987 7,123 General and administrative expenses 2,749 2,902 7,327 6,310 Center pre-opening expenses 163 Depreciation and amortization 692 611 2,815 1,443 Restructuring provision 1,100 10,500 1,100 ------- ------- ------- -------- (Loss) from operations (676) (2,368) (13,306) (4,581) Equity in income (loss) from unconsolidated affiliates 108 6 144 (26) Interest income 106 10 302 45 Interest expense (108) (267) (698) (775) Other income 37 44 98 57 ------- ------- ------- -------- (Loss) before income tax (533) (2,575) (13,460) (5,280) Income tax expense (8) 6 (145) (56) ------- ------- ------- -------- Net (loss) (541) (2,569) (13,605) (5,336) Accrued preferred stock dividend 218 45 390 138 ------- ------- ------- -------- Amount applicable to (loss) per common share $ (759) $ (2,614) $(13,995) $ (5,474) ------- ------- ------- -------- (Loss) per common share Basic $(.02) $(.08) $(.38) $(.23) Diluted $(.02) $(.08) $(.38) $(.23) Weighted average common shares outstanding Basic and Diluted 37,162,537 30,976,290 36,881,845 23,390,639 Operating (loss) $(676) $(2,368) $(13,306) $(4,581) Restructuring provision 1,100 10,500 1,100 Depreciation and amortization 692 611 2,815 1,443 ------ ------- -------- ------- EBITDA $ 16 $ (657) $ 9 $(2,038) The Notes to Condensed Consolidated Financial Statements are an integral part of this statement. LCA-VISION INC. Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (unaudited) Dollars in thousands For the Nine Months Ended September 30, 1998 1997 ---- ---- Cash flows from operating activities: Net (loss) $ (13,605) $ (5,336) Adjustments to reconcile net (loss) to net cash (used) in operating activities: Depreciation and amortization 2,815 1,443 Equity in earnings of unconsolidated affiliates (144) 26 Restructuring provision 10,500 1,100 Other 41 Changes in operating assets and liabilities (Increase) decrease Accounts receivable 444 (901) Other current assets 85 (154) Increase (decrease) Accounts payable (626) 125 Accrued liabilities and other (259) 1,308 -------- -------- Net cash (used) by operations (790) (2,348) Cash flows from investing activities: Cash acquired in business combination 10,007 Purchase of property and equipment (1,811) (434) Advances to affiliates (570) (70) Advances to officers/shareholders (2,100) Purchase of certificate of deposit (2,100) Proceeds from sales of equipment 1,061 -------- -------- Net cash provided (used) by investing activities (5,520) 9,503 Cash flows from financing activities: Repayment of bank borrowings (9,651) 3,471 Bank borrowings 2,100 3,080 Repayment of long-term obligations (395) (3,597) Proceeds from sale of 6% convertible preferred stock 9,463 Proceeds from exercise of stock options 51 Proceeds from sale of common stock 51 Other (57) (21) -------- -------- Net cash provided (used) by financing activities 1,511 2,984 -------- -------- Net increase (decrease) in cash (4,799) 10,139 Cash at beginning of period 8,680 724 -------- -------- Cash at end of period $ 3,881 $10,863 ======== ======== The Notes to Condensed Consolidated Financial Statements are an integral part of this statement. LCA-VISION INC. Notes to Condensed Consolidated Financial Statements for the Three and Nine Months Ended September 30, 1998 and 1997 (unaudited) Dollars in thousands, except per share and share information 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The September 30, 1998 and 1997 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 LCA-Vision Inc. ("LCA-Vision" or the "Company") is a leading developer and operator of free-standing laser refractive surgery centers. The laser refractive surgery centers operated by the Company provide the facilities, equipment and support services for performing various corrective eye surgeries that employ state-of-the-art laser technologies. The surgeries performed in the Company's centers primarily include laser in situ keratomileusis ("LASIK") and photorefractive keratectomy ("PRK") for treatment of myopia (nearsightedness), astigmatism and hyperopia (farsightedness). The Company also manages laser and minimally invasive, hospital surgical programs at various medical facilities on a contract basis. Compensation is generally fixed based on procedures performed; based on increased surgical volume or reduced surgical costs; or a combination of such. Contracts may also compensate the Company for conducting the marketing programs of the surgical center and educating its staff including doctors. Principles of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of intercompany balances and transactions. Use of Estimates 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 and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Per Share Data Basic earnings per share is net income to common shareholders divided by weighted average common shares outstanding; diluted earnings per share is net income to common shareholders divided by weighted average common shares outstanding plus potential common shares from dilutive securities such as options and convertible securities. The weighted average shares for the diluted calculation does not assume exercise of any stock options or conversion of other securities since they would be antidilutive for 1998 and 1997 calculations. Investments in Unconsolidated Affiliates The equity method is used for investments in laser refractive surgery centers in which the Company has 50% or less ownership. These investments are recorded at the Company's initial investment, increased or decreased by the Company's share of the center's income or loss, less distributions received. Impact of Recently Issued Accounting Standards The Financial Accounting Standards Board ("FASB") recently issued Statements No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosure about Segments of an Enterprise and Related Information". Statement 130 was adopted in the first quarter of 1998 and has not had a material impact on financial disclosures because net income approximates comprehensive income. Statement 131 is effective for the year ending December 31, 1998 and will be adopted at that time. In June 1998 the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement 133 is effective for fiscal quarters of fiscal years beginning after June 15, 1999. The Company currently has no such financial instruments. 2. SHAREHOLDERS' INVESTMENT On May 11, 1998 the Company issued 10,000 shares of 6% Series B-1 Convertible Preferred Stock ("Convertible Preferred Shares") for $10,000. Each share has a par value of $0.001 per share and a stated value of $1,000 per share. The Convertible Preferred Shares were recorded at stated value less issuance costs of $593. Each Convertible Preferred Share is convertible into LCA-Vision common stock at the lesser of $3.90625 per share or the average of the four (4) lowest per share market values (which need not occur on consecutive trading days) of its common stock during the twenty-two (22) trading days prior to the applicable conversion notice. The purchasers of the Convertible Preferred Shares may convert their shares as follows: up to 33% in the first 90 days following issuance; up to 66-2/3% in the first 180 days following issuance; and any and all unconverted shares from and after 180 days following issuance. The Company may require conversion if its common stock trades at greater than $5.46875 per share for fifteen (15) consecutive trading days. Dividends on the Convertible Preferred Shares are cumulative from the date of issuance and are payable on a quarterly basis beginning June 30, 1998. The Company has the option to pay the dividends in cash or in shares of its common stock. During the three months ended September 30, 1998, 1,135 shares of Convertible Preferred stock and accrued dividends of $23 were converted into 796,251 shares of common stock. Through November 6, 1998, an additional 1,970 shares of Convertible Preferred stock and dividends of $56 were converted into 2,061,302 shares of common stock. On May 4, 1998, the Company issued 200,000 shares of its common stock to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as compensation for certain investment banking services related to the acquisition of Refractive Centers International, Inc. The shares were recorded at their fair value on the date of issuance. 3. CREDIT ARRANGEMENTS On June 29, 1998 the Company entered into an $8 million credit facility with the Provident Bank ("Provident"). In addition, the company repaid the borrowings from, and terminated its credit relationship with The Fifth Third Bank. The new credit facility, as amended, matures on June 30, 2000 and bears interest at 1/2% above Provident's prime rate. Interest on borrowings under the line of credit is payable monthly. The facility is collateralized by a blanket lien on all Company assets including a mortgage on the Company's headquarters building. The facility can be used to support letters of credit totaling not more than $2 million. Availability under the facility will be reduced in an amount equal to the capital costs financed under a lease facility provided by Information Leasing Corporation, an affiliate of Provident. The lease facility maximum is $2.5 million. In addition, the Company has the option to convert up to $3.5 million of borrowings under the facility to a term loan. On August 21, 1998 the Company borrowed $2.1 million from Provident under the credit facility on a term loan basis. The loan bears interest at 7.45% and requires monthly installments of $12 plus interest until June 30, 2002 at which time the remaining principal balance of $1.867 million becomes payable. The proceeds were used to purchase a certificate of deposit from Provident that matures on June 30, 2002. The certificate of deposit is recorded in other assets and interest is paid monthly at 5.7%. The new credit facility requires the Company to (i) maintain tangible net worth, defined as the sum of shareholders investment less goodwill of at least $14 million; (ii) permit the ratio of total liabilities less subordinated debt to tangible net worth to be greater than .75 to 1; and (iii), beginning with the quarter ended September 30, 1998, permit the ratio of the trailing twelve month EBITDA to the sum of current maturities of senior debt and capitalized leases plus interest expense to be less than 1.25 to 1. 4. RESTRUCTURING PROVISION During the second quarter of 1998, the Company implemented a plan to restructure its operations by closing seven (7) of its centers, primarily centers acquired. Costs associated with the restructuring include $7,287 related to the write-off of goodwill and leasehold improvements and $677 for the accrual of lease terminations and employee severance costs. As a result of the closings, the Company has certain lasers in storage. The restructuring provision includes $2,536 related to the write-down of these lasers to their net realizable value. 5. ACQUISITIONS On August 18, 1997, the Company purchased 100% of the issued and outstanding common stock of Refractive Centers International, Inc. ("RCII"), a subsidiary of Summit Technology, Inc. ("Summit") (the "Acquisition"). The Company issued 17,065,579 shares of its common stock: 901,218 shares to individuals who held options for RCII common stock and exercised them prior to the closing and 16,164,361 shares to Summit. The fair value of the assets acquired consisted of $10,671, $9,511 and $12,802 for working capital, equipment, and goodwill, respectively. Goodwill is being amortized over 40 years using the straight-line method. The Acquisition agreement restricts Summit from owning or operating laser vision correction centers for a period ending on the earlier of (i) July 22, 2000, or (ii) the date on which Summit owns less than five percent (5%) of the issued and outstanding shares of the Company's common stock. Summit and the Company have entered into a registration rights agreement pursuant to which Summit has the right to demand that the Company register under the Securities Act of 1933 the 7,164,361 shares of Company Common Stock owned by Summit to enable Summit to sell such shares on any date after May 17, 1998. In connection with the Acquisition, the Company signed service contracts with Summit for all Summit lasers owned or leased by the company. These contracts each have a term of three years and require fees of $80 per laser system for such three-year period. With respect to up to five service contracts, if during the term of a service contract the Company discontinues all use of the laser system under the contract (except in connection with the closing of a laser refractive eye surgery center), and does not replace the laser system with any Summit excimer laser system, then the Company may terminate the contract. The Acquisition was accounted for under the "purchase" method of accounting, as described in Accounting Principles Board Opinion No. 16 and the interpretations thereof, pursuant to which the assets and liabilities of RCII were adjusted to their respective fair values and included with those of the Company as of August 18, 1997. The results of operations of the Company subsequent to August 18, 1997 include the revenues and expenses of RCII; the historical results of operations of the Company for periods prior to August 18, 1997 were not restated. Unaudited pro forma data for the three months and nine months ended September 30, 1997 as though the Company had acquired RCII as of the beginning of 1997 are: Three Months Nine Months September 30, 1997 September 30, 1997 ------------------ ------------------ Revenues $6,186 $16,240 Net (loss) (4,168) (11,791) (Loss) per share (0.11) (0.32) The pro forma information does not purport to be indicative of operating results which would have occurred had the acquisition of RCII been made at the beginning of the respective period or of results which may occur in the future. 6. OBLIGATIONS TO SHAREHOLDERS Obligations to shareholders at September 30, 1998 is comprised of: Notes payable - shareholders $1,500 Accrued interest 542 Accrued dividends on preferred stock - Series B 315 ------- Less: note receivable - shareholder (2,100) ------- $ 257 ======= The notes payable - shareholders mature on September 25, 2005, and bear interest at 6.91%. In connection with the acquisition of RCII, the notes payable-shareholders were amended to limit payment of principal and accrued interest to 25% of the amount earnings for the prior fiscal year exceed $1 million. Earnings for this purpose are defined as income before taxes, amortization of goodwill and depreciation, net of capital expenditures, for such fiscal year. The notes are subordinate to borrowings under the Provident credit facility. On September 1, 1998 the Company loaned $2.1 million to its President and principal shareholders. The loan, which is collateralized by the notes to shareholders and accrued interest thereon and accrued Interim Series preferred stock dividends, bears interest at 8.5% per annum and matures on September 26, 2005. 7. RELATED PARTY TRANSACTIONS The Company's President is the principal stockholder of The LCA Center for Surgery, Ltd. ("Surgery Center."). The Company does not hold an investment in the Surgery Center. The Company has leased to the Surgery Center, for a period of twenty (20) years at an annual rental of $190, a portion of its headquarters building located at 7840 Montgomery Road. In February 1997, the Company agreed to forego rent in return for the Surgery Center providing to the Company certain systems and processes for research and development, for providing additional staffing, and for giving the Company unlimited use of the leased premises for research, testing, educational and other agreed purposes. In June 1998 the Company purchased the leasehold improvements previously paid for by the Surgery Center for $872, the book value at the time of purchase. During the three months ended September 30, 1998 the Company advanced $6 to the Surgery Center and $576 for the nine months ended September 30, 1998 to the Surgery Center. As a result of these advances, the Company is required to record its share of the operating losses of the Surgery Center using the equity method of accounting. The Company recorded losses of $69 for the three months ended September 30, 1998 and $265 for the nine months ended September 30, 1998. Included in other assets at September 30, 1998, is $738 due from the Surgery Center. 8. COMMITMENTS AND CONTINGENCIES The Company is a defendant 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, in November, 1997. Various employees, officers, directors and former directors of the Company are co-defendants. The case arises out of the operations and the termination of operations of a New York limited liability company (the "LLC") which had been formed by the Company, the plaintiff in the action 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, the Company 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 its complaint, the plaintiffs allege breaches of various agreements entered into between them, the Company, and the PC concerning the LLC and its operations, as well as alleged fraud and alleged conversion of a business opportunity arising out of the operation of a center in Mt. Kisco, New York, which the plaintiffs claim constituted business of the LLC. The plaintiffs have demanded on all of their causes of action compensatory damages which total not less than $4,500, punitive damages which total not less than $2,000, as well as the creation of a constructive trust over the Company's operations for the benefit of the LLC. The Company believes that the plaintiffs' claims are without merit and intends to vigorously defend the action. It has made a motion to dismiss the complaint on various grounds. In response, the plaintiffs filed a motion for leave to amend the complaint. The Company has opposed such motion and cross-moved for attorneys' fees incurred by the Company in opposing the plaintiffs' motion. These motions are pending. In the opinion of management the outcome will not have a material adverse effect on the Company's financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report on Form 10-Q 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 the Company's results, refer to the Overview and financial statement line item discussions set forth in Management's Discussion and Analysis or Plan of Operation. Overview LCA-Vision Inc. ("LCA-Vision" or the "Company") is a leading developer and operator of free-standing laser refractive eye surgery centers. The laser refractive eye surgery centers operated by the Company 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 the Company's centers primarily include laser in situ keratomileusis ("LASIK") and photorefractive keratectomy ("PRK"). On November 3, 1998, the Company received notice that the FDA had approved the VISX Star S2 excimer laser to treat farsightedness (hyperopia). The VISX laser, which the Company has in each of its U.S. centers, can now treat nearsightedness, myopic astigmatism, and hyperopia. The Company also manages multi-specialty laser surgery programs at medical facilities on a contract basis. The Company derives its revenue from three sources: (i) fees for surgeries performed at its laser refractive eye surgery centers, (ii) contractual fees for managing multi-specialty laser surgery programs, and (iii) fees for marketing and education programs; management fees for operating laser vision correction centers of investees; and miscellaneous sources. The Company classifies operating expenses as follows: (a) direct operating expenses which include: (i) laser refractive eye surgery centers -- labor, physician fees, royalty fees (paid to the manufacturers of the FDA-approved lasers of $250 per procedure), facility rent and utilities, and surgical supplies; (ii) multi-specialty laser surgery programs - - labor; and (iii) other services and products -- labor and cost of products sold; (b) general and administrative expenses which primarily include marketing program costs, headquarters staff expenses and other overhead costs; (c) center pre-opening expenses which include direct costs incurred prior to opening a laser vision correction center; and (d) depreciation and amortization. Results of Operations On August 18, 1997, the Company purchased 100% of the issued and outstanding common stock of Refractive Centers International, Inc. ("RCII"), a majority-owned subsidiary of Summit Technology, Inc. (the "Acquisition") for 17,065,579 shares of its common stock. The Acquisition was accounted for under the "purchase" method of accounting, as described in Accounting Principles Board Opinion No. 16 and interpretations thereof. The results of operations for the three and nine months ended September 30, 1997 include the revenues and expenses of RCII subsequent to August 18, 1997. Sources of Revenues Sources of revenues for the three and nine months ended September 30, 1998 and 1997 were (dollars in thousands): Three Months Nine Months 1998 1997 1998 1997 ----- ----- ----- ----- Laser refractive eye surgery centers $8,509 $3,948 $23,423 $7,977 Multi-specialty surgery programs 431 657 1,338 2,142 Other 156 351 562 1,439 ------- ------- ------- ------- Total $9,096 $4,956 $25,323 $11,558 ======= ======= ======= ======= Laser refractive eye surgery centers The Company's results of operations in any period are significantly affected by the number of laser refractive eye surgery centers operating and the number of laser vision correction procedures performed. Revenues from the laser refractive eye surgery centers generally include three components: facility fee, royalty fee, and medical professionals fee. Certain states prohibit the Company from practicing medicine, employing physicians to practice medicine on the Company's behalf or employing optometrists to render optometry services on the Company's behalf. Revenues from the laser refractive eye surgery centers in such states do not include the medical professionals fee component. The contribution to fixed and discretionary costs from procedures performed at laser refractive eye surgery centers for the three and nine months ended September 30, 1998 and 1997 were (dollars in thousands, except per procedure information): Three Months Nine Months 1998 1997 1998 1997 ---- ---- ---- ---- Revenue $8,509 $3,948 $23,423 $7,977 Medical professional and royalty fees 3,951 1,252 10,735 3,404 ------ ------ ------- ------ Contribution $4,558 $2,696 $12,688 $4,573 ====== ====== ======= ====== Contribution per procedure $ 856 $1,135 $ 901 $ 941 ====== ====== ======= ====== The principal reason for the decline in the contribution per procedure for the three and nine months ended September 30, 1998 compared to the same period in 1997 was the increase in the number of leased lasers. The Company began changing to VISX lasers in its centers, principally the RCII centers. The RCII centers had lasers that were owned at the time of the Acquisition and the "cost" of these lasers was recorded as depreciation expense. The VISX lasers are leased and the monthly payments are recorded as direct operating expense. The decline in contribution per procedure was offset by the increased number of LASIK procedures performed in 1998 as compared to 1997. The contribution per procedure is influenced by the relationship of LASIK to PRK procedures performed. The following table illustrates the growth of laser vision correction procedures performed at the Company's centers. Historical Pro Forma Wholly- Combined Wholly- Combined owned owned 1998 Q3 5,327 6,102 5,327 6,102 Q2 4,894 5,677 4,894 5,677 Q1 3,857 4,451 3,857 4,451 1997 Q4 2,888 3,296 2,888 3,296 Q3 2,375 2,790 3,196 3,611 Q2 1,506 2,078 2,973 3,543 Q1 979 1,443 2,262 2,726 1996 Q4 745 1,089 1,789 2,133 Q3 596 864 1,257 1,525 Q2 790 1,054 1,155 1,419 Q1 532 613 548 629 Pro forma procedures include those performed at RCII centers prior to their acquisition by the Company. Combined procedures include those performed at investee centers. The Company records the results of its investee centers using the equity method. The growth and profitability of the Company are predicated on increases in procedure volume. Industry sources estimate that 70,000 and 220,000 procedures were performed in the U.S. in 1996 and 1997, respectively, and that approximately 400,000 procedures will be performed in 1998. As more people have the procedure performed the critical mass for word-of-mouth referrals is attained and, together with marketing and advertising, procedure volume should increase. Multi-specialty surgery programs The renewal of the Company's contracts with the hospital providers has become increasingly difficult due to price pressures and the lengthening of sales cycle. Hospital providers and other entities are being driven to reduce costs and scaleback their operations, sometimes including the programs that the Company manages. The Company's existing contracts provide positive cash flow; however, the Company continues to reduce its providing of this service due to the difficult environment. In addition, budget reductions at the facilities have reduced the marketing and education programs, key elements to a successful surgery program. Expenses The increase of direct operating expenses is primarily a result of the Company's expansion into the laser refractive eye surgery business. Direct operating expenses comprise the significant fixed costs of performing the procedure as well as the costs of maintaining a facility. Certain of these costs will become a lesser percentage of revenue as procedure volume increases. Direct operating expenses related to the other sources of revenue are more variable and fluctuate generally with the level of revenue. General and administrative expenses increased in 1998 primarily due to additional costs incurred as a result of the acquisition of RCII. For the three and nine months ended September 30, 1998, the Company spent approximately $693 and $1,719, respectively, for marketing and advertising programs to educate and inform individuals about PRK and LASIK. Other expenses such as telephone, legal, insurance, and repairs and maintenance increased as the Company added new laser vision correction centers acquired from Summit. Depreciation and amortization increased in 1998 compared to 1997 due to the increase in goodwill and property and equipment, primarily equipment, for the laser vision correction centers acquired from Summit. Interest expense for the nine and three months ended September 30, 1998 decreased compared to the same periods in 1997 due to the repayment of bank indebtedness and capitalized lease obligations during the nine-month period. Interest income increased due to more funds on deposit in interest bearing accounts. During the second quarter of 1998, the Company implemented a plan to restructure its operations by closing seven (7) of its centers, primarily centers acquired. Costs associated with the restructuring include $7,287 related to the write-off of goodwill and leasehold improvements and $677 for the accrual of leases termination and employee severance costs. As a result of the closings, the Company has certain lasers in storage. The restructuring provision includes $2,536 related to the write-down of these lasers to their net realizable value. Liquidity and Capital Resources On May 11, 1998 the Company issued 10,000 shares of 6% Series B-1 Convertible Preferred Stock for $10 million. Each share has a par value of $0.001 per share and a stated value of $1,000 per share. The net proceeds from this issuance, approximating $9,407,000 were used for general corporate purposes including the reduction of debt. During the three months ended September 30, 1998, 1,135 shares of Convertible Preferred stock and accrued dividends of $23 were converted into 796,251 shares of common stock. On June 29, 1998 the Company entered into an $8 million credit facility with the Provident Bank ("Provident"). In addition, the company repaid the borrowings from, and terminated its credit relationship with The Fifth Third Bank. The new credit facility, as amended, matures on June 30, 2000 and bears interest at 1/2% above Provident's prime rate. Interest on borrowings under the line of credit is payable monthly. The facility is collateralized by a blanket lien on all Company assets including a mortgage on the Company's headquarters building. The facility can be used to support letters of credit totaling not more than $2 million. Availability under the facility will be reduced in an amount equal to the capital costs financed under a lease facility provided by Information Leasing Corporation, an affiliate of Provident. The lease facility maximum is $2.5 million. In addition, the Company has the option to convert up to $3.5 million of borrowings under the facility to a term loan. On August 21, 1998 the Company borrowed $2.1 million from Provident under the credit facility on a term loan basis. The loan bears interest at 7.45% and requires monthly installments of $12 plus interest until June 30, 2002 at which time the remaining principal balance of $1.867 million becomes payable. The proceeds were used to purchase a certificate of deposit from Provident that matures on June 30, 2002. The certificate of deposit is recorded in other assets and interest is paid monthly at 5.7% The new credit facility requires the Company to (i) maintain tangible net worth, defined as the sum of shareholders investment less goodwill of at least $14 million; (ii) permit the ratio of total liabilities less subordinated debt to tangible net worth to be greater than .75 to 1; and (iii), beginning with the quarter ended September 30, 1998, permit the ratio of the trailing twelve month EBITDA to the sum of current maturities of senior debt and capitalized leases plus interest expense to be less than 1.25 to 1. On August 18, 1997, the Company issued 17,065,579 shares of its Common Stock for 100% of the issued and outstanding common stock of RCII, a majority-owned subsidiary of Summit. At the time of the acquisition, RCII owned and operated 19 laser refractive eye surgery centers and had management service agreements with six "centers of excellence" located at prestigious hospitals and university medical centers. The acquisition agreement required RCII to have a minimum cash balance of $10 million at closing. Shortly after the acquisition, the Company closed four of the RCII laser refractive eye surgery centers. In June 1998 the Company closed an additional six RCII centers. In addition, the Company closed the RCII corporate office in Waltham, MA and terminated certain administrative personnel. The Company continues to focus on making its centers profitable rather than expansion. On November 3, 1998, the Company received notice that the FDA had approved the VISX Star S2 excimer laser to treat farsightedness (hyperopia). The VISX laser, which the Company has in each of its U.S. centers, can now treat nearsightedness, myopic astigmatism, and hyperopia. The Company believes that its ability to treat these disorders will result in increased procedures and profitability. The Company's ability to fund its marketing and advertising program and planned capital expenditures will depend on its future performance, which to a certain extent, is subject to general economic, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated revenue growth, the Company believes that cash flow from operations and available cash, together with available borrowings under the credit facility from Provident will be adequate to meet these needs. Year 2000 Generally, application programs have used two-digit fields to define the applicable year, rather than four-digit fields. Programs that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This misinterpretation of the year could result in an incorrect computation or computer shutdown. The Company has completed an assessment of its computer software and hardware for compliance with Year 2000 and has determined that all business critical systems are compliant. Business critical systems include financial reporting systems and all lasers utilized in the Company's centers. Costs associated with the assessment were internal costs, were expensed as incurred and were immaterial. The Company has not verified or tested compliance with their telemarketing information system; however, management is in the process of purchasing a new telemarketing system that will be Year 2000 compliant and installed in the first quarter of 1999. The cost of this new system will be included in the capital expenditures of the Company and it is anticipated that the cost will exceed $200. The Company has also completed an assessment of external risks associated with Year 2000. Although management does not believe that such external risks are significant, the loss of power or other telecommunication link difficulties could disrupt the operations of the Company. Part II. Other Information Item 1. Legal Proceedings The Company is a defendant 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, in November, 1997. Various employees, officers, directors and former directors of the Company are co-defendants. The case arises out of the operations and the termination of operations of a New York limited liability company (the "LLC") which had been formed by the Company, the plaintiff in the action 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, the Company 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 its complaint, the plaintiffs allege breaches of various agreements entered into between them, the Company, and the PC concerning the LLC and its operations, as well as alleged fraud and alleged conversion of a business opportunity arising out of the operation of a center in Mt. Kisco, New York, which the plaintiffs claim constituted business of the LLC. The plaintiffs have demanded on all of their causes of action compensatory damages which total not less than $4,500, punitive damages which total not less than $2,000, as well as the creation of a constructive trust over the Company's operations for the benefit of the LLC. The Company believes that the plaintiffs' claims are without merit and intends to vigorously defend the action. It has made a motion to dismiss the complaint on various grounds. In response, the plaintiffs filed a motion for leave to amend the complaint. The Company has opposed such motion and cross-moved for attorneys' fees incurred by the Company in opposing the plaintiffs' motion. These motions are pending. In the opinion of management the outcome will not have a material adverse effect on the Company's 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 A Special Meeting of Stockholders was held on October 16, 1998. Stockholders were solicited for the purpose of voting on two issues. 71.192% of the 37,242,468 issued and outstanding shares as of September 15, 1998, the record date, were represented at the meeting in person or by proxy. The two issues were approved. The results of the voting on each issue follows. Part II. Other Information (continued) (i) Approve the issuance of an indeterminable number of shares of the company's Common Stock issuable upon conversion of shares of 6% Series B-1 and B-2 Convertible Preferred Stock, outstanding or to be outstanding, for purposes of complying with the stockholder approval requirements of The Nasdaq Stock Market. For 18,200,676 Against 710,391 Abstain 116,207 Not Voted 7,486,301 (ii) Approve and adopt the Company's 1998 Long Term Stock Incentive Plan. For 25,498,335 Against 885,183 Abstain 130,057 Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description of Exhibit ------- -------------------------- 10 $2,100,000 Promissory Note dated September 1, 1998 27 Financial Data Schedule (b) Reports on Form 8-K. 1) Form 8-K dated August 25, 1998, responding to the decline in the Company's stock price. 2) Form 8-K dated September 28, 1998, announcing the naming of T. Jeffrey Dowdle as Vice President and Director of Marketing. 3) Form 8-K dated October 5, 1998, announcing procedure volume at the Company's centers for the three and nine months ended September 30, 1998. 4) Form 8-K dated November 3, 1998 announcing (i) the Company's third quarter 1998 earnings and (ii) announcing that all of the Company's U.S. centers are equipped with VISX lasers approved by the FDA for the treatment of hyperopia. Signatures In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. LCA-VISION INC. Date: November 11,1998 /s/ Stephen N. Joffe Stephen N. Joffe President and Chief Executive Officer Date: November 11,1998 /s/ Larry P. Rapp Larry P. Rapp Chief Financial Officer Exhibit 10 PROMISSORY NOTE Cincinnati, Ohio $2,100,000 September 1, 1998 FOR VALUE RECEIVED, the undersigned, Stephen N. Joffe and Sandra F.W. Joffe, jointly and severally (the "Payors"), promise to pay to the order of LCA-Vision Inc., a Delaware corporation with its principal place of business located at 7840 Montgomery Road, Cincinnati, Ohio 45236 (referred to herein as the "Payee"), the principal amount of two million one hundred thousand dollars ($2,100,000), plus interest at the rate of eight and 50/100 percent (8.50%) per annum. All sums due hereunder, including accrued and unpaid interest and outstanding principal, shall be due and payable in full upon the maturity of this Promissory Note which shall be September 26, 2005. This Promissory Note is subject to the following additional terms: 1. Place of Payment. All payments hereunder shall be payable at the address of Payee specified above, or at such other address as Payee may from time to time designate pursuant to Section 2 hereof or as may be agreed upon by Payors and Payee. 2. Notices. Any notice required or permitted to be given pursuant to the terms of this Promissory Note shall be in writing and shall be deemed to have been received two days after being deposited in the mail by certified or registered mail, return receipt requested, postage prepaid, and addressed as specified above. 3. Applicable Law and Jurisdiction. This Promissory Note shall be governed by and interpreted under the laws of the State of Ohio applicable to contracts made and to be performed herein, without giving effect to the principles of conflicts of laws. 4. Prepayments. Any or all amounts due under this Promissory Note may be prepaid in full or in part, at any time, without penalty. 5. Interest Calculation. Interest shall be calculated on the basis of a 360 days per year factor applied to the actual days on which there exists an unpaid balance hereunder. 6. Notice of Presentment, Etc. Payor hereby waives notice of demand, notice of protest, protest, presentment for payment, and diligence in bringing suit against Payor under the occurrence of any event, circumstance or condition of default. 7. Assignment. This Promissory Note may not be assigned by Payors. 8. Security Interest. Stephen N. Joffe hereby grants to Payee, as security for payment of this Promissory Note, with full right of setoff, a security interest in and to that certain promissory note dated September 27, 1995 made by Payee in favor of the said Stephen N. Joffe in the principal amount of $3,307,435. Sandra F.W. Joffe hereby grants to Payee, as security for payment of this Promissory Note, with full right of setoff, a security interest in and to that certain promissory note dated September 27, 1995 made by Payee in favor of the said Sandra F.W. Joffe in the principal amount of $1,066,942. This Promissory Note is dated as of the 1st day of September, 1998. /s/ Stephen N. Joffe Stephen N. Joffe /s/ Sandra F.W. Joffe Sandra F.W. Joffe Witnessed by: P.A. Kassar EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE LCA-VISION INC. CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998, AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 0001003130 LCA-VISION INC. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-1-1998 SEP-30-1998 0.00001 3,881 0 1,957 354 46 7,291 17,401 7,222 30,689 4,661 3,185 0 10,850 99 11,894 30,689 0 25,323 0 28,129 10,500 0 698 (13,460) 145 0 0 0 0 (13,605) (.38) (.38)
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