-----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, DxbZmANbnjdeWbtvq+liBv1ebG3hwVsIb6mub2yxgpqAfcGbacZT3GakAEn0K6Af SKsk9Tz2QSjpzLbqS8NPhw== 0000906318-99-000074.txt : 19990730 0000906318-99-000074.hdr.sgml : 19990730 ACCESSION NUMBER: 0000906318-99-000074 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LCA VISION INC CENTRAL INDEX KEY: 0001003130 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 112882328 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-27610 FILM NUMBER: 99672620 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 10QSB 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 June 30, 1999. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT. For the transition period from __________ to __________ Commission file number 0-27610 LCA-Vision Inc. --------------- (Exact name of small business issuer as specified in its charter) Delaware 11-2882328 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7840 Montgomery Road, Cincinnati, Ohio 45236 --------------------------------------------- (Address of principal executive offices) (513) 792-9292 --------------------------------------------- (Issuer's telephone number) (Former name, former address and formal fiscal year, if changes since last report.) Check whether then issuer (1) filed all reports required to be filed by Section 3 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No ----- ----- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 50,699,512 shares as of July 26, 1999. Transitional Small Business Disclosure Format (check one): Yes No X ---- ----- LCA-VISION INC. INDEX Page No. Facing Sheet 1 Index 2 Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets at 3 June 30, 1999 (unaudited) and at December 31, 1998 (audited) Unaudited Condensed Consolidated Statements 4 of Operations for the Three and Six Months Ended June 30, 1999 and 1998 Unaudited Condensed Consolidated Statements 5 of Cash Flows for the Six Months Ended June 30, 1999 and 1998 Notes to Unaudited Condensed Consolidated 6 Financial Statements Item 2. Management's Discussion and 11 Analysis of Financial Condition and Results of Operations Part II. Other Information 16 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 18 LCA-VISION INC. Condensed Consolidated Balance Sheet June 30, 1999 (unaudited) and December 31, 1998 (audited) in thousands, except per share data June 30, June 30, Dec. 31, 1999 1999 1998 proforma Assets Current assets: Cash and cash equivalents $46,443 $ 9,029 $ 6,496 Certificate of deposit 2,100 2,100 Accounts receivable, net 2,681 2,681 1,119 Prepaid expenses, inventory and other 1,419 1,533 1,416 ------ ------- ------- Total current assets 52,643 15,343 9,031 Property and equipment, net 8,709 8,709 9,433 Goodwill, net 8,178 8,178 8,304 Obligations due from shareholders, net 261 261 471 Investment in unconsolidated businesses 979 979 520 Certificate of deposit - - - - 2,100 Other assets 1,015 1,015 1,518 ------ ------- ------- Total assets $71,785 $34,485 $31,377 ------ ------- ------- ------ ------- ------- Liabilities and Shareholders' Investment Current liabilities Accounts payable $2,174 $2,174 $ 2,030 Accrued liabilities and other 2,814 2,814 2,637 Debt maturing in one year 627 627 787 ------ ------- ------- Total current liabilities 5,615 5,615 5,454 Long-term debt 496 496 2,724 Commitments and contingencies Shareholders' investment Preferred stock 2,522 2,522 7,687 Common stock ($0.001 par value; 45,539 shares and 40,974 shares issued (50,539 proforma)) 113 108 103 Contributed capital 85,439 48,144 41,701 Accumulated (deficit) (21,940) (21,940) (25,664) Foreign currency translation adjustment 17 17 (14) Less common stock in treasury at cost 30 30 30 Less accrued preferred stock dividend 447 447 584 ------ ------- ------- 65,674 28,374 23,199 Total liabilities and shareholders' investment $71,785 $34,485 $ 31,377 ------ ------- ------- ------ ------- ------- The Notes to Condensed Consolidated Financial Statements are an integral part of this statement.
LCA-VISION INC. Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998 (unaudited) in thousands, except per share data Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Laser refractive surgery $14,346 $8,290 $27,735 $14,736 Other 384 729 862 1,492 ------ ----- ------ ------ Total revenues 14,730 9,019 28,597 16,228 Operating costs and expenses: Medical professional and license fees 6,186 3,537 12,201 6,193 Direct costs of services 2,732 2,644 5,288 5,463 General and administrative expenses 3,253 2,485 6,223 4,578 Depreciation and amortization 724 1,069 1,436 2,124 Restructuring provision (150) 10,500 (150) 10,500 ------ ----- ------ ------ Operating income (loss) 1,985 (11,216) 3,599 (12,630) Equity in earnings from unconsolidated businesses 94 (19) 417 37 Interest expense 27 247 120 590 Interest income 129 84 276 196 Other income (expense) 218 35 (59) 61 ------ ----- ------ ------ Income (loss) before taxes on income 2,399 (11,363) 4,113 (12,926) Taxes on income 8 110 8 138 ------ ----- ------ ------ Net income (loss) 2,391 (11,473) 4,105 (13,064) Dividends to preferred shareholders 44 129 128 172 ------ ----- ------ ------ Income (loss) available to common shareholders $2,347 $(11,602) $3,977 $(13,236) ------ ----- ------ ------ ------ ----- ------ ------ Income (loss) per common share Basic $0.05 $(0.32) $0.09 $(0.36) Diluted $0.05 $(0.32) $0.09 $(0.36) Weighted average shares used in computation Basic 45,450 36,818 44,614 36,742 Diluted 49,035 36,818 47,962 36,742
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 Six Months Ended June 30, 1999 and 1998 (unaudited) in thousands Six Months Ended June 30, 1999 1998 ---- ---- Cash flows from operating activities: Net income (loss) $4,105 $(13,064) Adjustments to reconcile net income (loss)to net cash provided by (used in) operating activities: Depreciation and amortization 1,436 2,124 Equity in income of unconsolidated affiliates (417) (37) Compensation paid in common stock 375 - - Restructuring provision (150) 10,500 Other (150) 41 Changes in working capital: Accounts receivable (1,362) 388 Prepaid expenses, inventory and other (3) (683) Accounts payable 144 2 Accrued liabilities and other 761 61 ---- ---- Net cash provided by (used in) operations 4,611 (709) ---- ---- Cash flows from investing activities: Purchase of property and equipment (227) (1,506) Advances to affiliates - - (570) Proceeds from sales of equipment - - 461 Other, net (22) - - ---- ---- Net cash (used) by investing activities (249) (1,615) ---- ---- Cash flows from financing activities: Net (repayment) bank borrowing - - (9,639) Principal payments of long-term notes, debt and capital lease obligations (2,388) (33) Exercise of stock options 559 51 Proceeds from sale of 6% convertible preferred stock - - 9,463 Other - - (74) ---- ---- Net cash provided (used) by financing activities (1,829) (232) ----- ---- Increase (decrease) in cash and cash equivalents 2,533 (2,556) Cash and cash equivalents at beginning of period 6,496 8,680 ----- ----- Cash and cash equivalents at end of period $9,029 $6,124
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 Six Months Ended June 30, 1999 and 1998 (unaudited) 1. Summary of Significant Accounting Policies The June 30, 1999 and 1998 financial data are unaudited; however, in the opinion of the Company, such data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim periods. Business We are a leading developer and operator of free-standing laser refractive surgery centers. Our laser refractive surgery centers provide the facilities, equipment and support services for performing various corrective eye surgeries that employ state-of-the-art laser technologies. The laser vision correction surgeries performed in our centers are primarily laser in situ keratomileusis ("LASIK") and photorefractive keratectomy ("PRK"). The VISX Star S2 laser, which we have in each of our U.S. centers, treats nearsightedness, myopic astigmatism, and hyperopia. We also manage multi-specialty laser surgery programs at medical facilities on a contract basis. Revenue by source is comprised of: - Laser refractive surgery - fees for surgeries performed at our wholly-owned centers. - Other - management fees for operating laser vision correction centers of investees; contractual fees for managing multi-specialty laser surgery programs at hospitals; marketing and education program fees; and miscellaneous sources. Operating costs and expenses are classified as follows: - Medical professional and license fees include fees collected by us for the physicians performing laser vision correction and the license fee of $260 per procedure paid to VISX. - Direct costs of services include center rent and utilities, equipment lease and maintenance costs, surgical supplies, center staff expense, and costs related to other revenue. - General and administrative include marketing and advertising, headquarters staff expense, and other overhead costs. - Depreciation and amortization include periodic charges to income for the costs of equipment and intangible assets recorded in the balance sheet. Consolidation Policy We use two different methods to report our investments in our subsidiaries and other companies - consolidation and the equity method. Consolidation We use consolidation when we own a majority of the voting stock of the subsidiary. This means the accounts of our subsidiaries are combined with our accounts. We eliminate intercompany balances and transactions when we consolidate these accounts. Equity Method We use the equity method to report investments in businesses where we hold a 20% to 50% voting interest, giving us the ability to exercise significant influence, but not control, over operating and financial policies. Under the equity method we report: - our interest in the entity as an investment in our Consolidated Balance Sheets, and - our percentage share of the earnings (losses) in our Consolidated Statements of Operations. We report our investments in The Baltimore Laser Sight Center, Ltd. and Silmalaseri Oy under the equity method. Use of Estimates Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. These estimates and assumptions affect various matters including: - our reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements, - our disclosure of contingent assets and liabilities at the dates of the financial statements, and - our reported amounts of revenues and expenses in our Consolidated Statements of Operations during the reporting periods. Actual amounts could differ from those estimates. Reclassifications We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect consolidated financial position, net losses or cash flows for the years presented. Per Share Data Basic per share data is income (loss) applicable to common shareholders divided by the weighted average common shares outstanding. Diluted per share data is income (loss) applicable to common shareholders divided by the weighted average common shares outstanding plus the potential issuance of common shares if stock options and warrants were exercised or convertible preferred stock were converted into common stock. Following is a reconciliation of basic and diluted earnings per share for the three and six months ended June 30, 1999 (in thousands, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, Income Shares Per-Share Income Shares Per-Share Numerator Denominator Amount Numerator Denominator Amount --------- ----------- --------- --------- ----------- --------- Net income $2,391 $4,105 Dividends to preferred shareholders (44) (128) ----- ----- Basic EPS Income available to common shareholders 2,347 45,450 $0.05 3,977 44,614 $0.09 ---- ---- ---- ---- Effect of Dilutive Securities Convertible preferred stock 44 836 128 1,482 Stock options 2,655 1,819 Warrants 94 47 ---- ------ ----- Diluted EPS Income available to common shareholders and assumed conversions $2,391 49,035 $0.05 $4,105 47,962 $0.09 ----- ------ ---- ----- ------ ---- ----- ------ ---- ----- ------ ----
The weighted average shares for the June 30, 1998 diluted calculations do not assume exercise of any stock options or conversion of other securities since they would result in a reduced loss per share. 2. Shareholders' Investment Common Stock On June 30, 1999 we sold 5,000,000 new shares of our common stock at a public offering price of $8.00 per share. The net proceeds will approximate $37,300,000 after deducting underwriting discounts and commissions and our estimated offering expenses, including the fee to be listed on the Nasdaq National Market. At June 30, 1999 offering expenses of $114,000 were incurred and recorded as a prepaid expense. On July 6, 1999 we received $37,800,000 which was net of underwriting discounts and commissions. The pro forma balance sheet assumes that the public offering proceeds and offering expenses were settled on June 30, 1999. Class A Preferred Stock At June 30, 1999 there are no shares of Class A Preferred Stock issued and outstanding. Our principal shareholder paid approximately $34,000 of a note due us with his shares of Class A Preferred Stock. In February 1999 the other holders exchanged their shares of Class A Preferred Stock for 33,191 shares of our common stock. We retired the shares of Class A Preferred Stock received. During the six months ended June 30, 1999, 344,470 shares of common stock at a weighted average exercise price of $1.62 per share were issued to individuals who exercised stock options. During the three months ended June 30, 1999 individuals exercised 206,420 stock options at a weighted average exercise price of $1.36 per share. 6% Series B-1 Convertible Preferred Stock At December 31, 1998, 5,702 shares of the 6% Series B-1 convertible preferred stock were outstanding. During the three months ended March 31, 1999, these shares and dividends totaling $264,000 were converted into 3,994,642 shares of common stock. The terms of these shares gave the holders the right to purchase an additional $5 million of convertible preferred stock under the same terms and conditions as the 6% Series B- 1 Convertible Preferred Stock until May 11, 1999. In March 1999 certain majority holders of these shares agreed to accept 165,076 shares of our common stock in exchange for their waiving their option to purchase the additional convertible preferred stock. In June, 1999 a former holder of these shares agreed to accept 25,396 shares of our common stock in the same type of exchange. These agreements resulted in non-cash charges of $50,000 and $325,000 recorded as other expense in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 1999, respectively. 3. Debt At December 31, 1998 we had a term loan borrowing under our credit facility of $2,053,000. The loan had an interest of 7.45% and required monthly installments of $12,000 plus interest until June 30, 2000 when the remaining principal balance of $1,705,000 would become due. In March 1999 we repaid the loan balance of $2,030,000. In May 1999 our line of credit with The Provident Bank was increased to $10,000,000. We also were granted a $10,000,000 line of credit for the purpose of funding acquisitions. 4. Obligations Due from Shareholders and Their Affiliates, Net The following table displays the details of net obligations due to us as reported in our June 30, 1999 Condensed Consolidated Balance Sheet (in thousands): Due to us: Receivable from shareholder's affiliated company $631 Accrued interest 77 Due from us: Accrued Interim Series B preferred stock dividend 447 --- Net due us $ 261 --- --- Our principal shareholder is the majority stockholder of an inactive ambulatory surgical center. We have no investment in this surgery center; however, we did lease a portion of our headquarters building and provided other administrative services. During 1999 we acquired computer equipment and software from the surgery center at their book value of $103,000. The account receivable was reduced by this amount. At December 31, 1998 we owed our principal shareholders notes in the principal amount of $1,500,000 and interest of $568,000. These shareholders owed us $2,100,000 which was collateralized by our obligation to them. In March 1999 we repaid the obligations due shareholders of $2,094,000 by netting the amount against the advance to shareholders. 5. Segment Information We operate in one segment - laser refractive surgery. The table below summarizes the results of our Canadian operations included in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 1999 and 1998 (in thousands): Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues $457 $636 $819 $1,156 Operating profit 51 101 67 192 6. Additional Financial Information The table below provides additional financial information related to our Condensed Consolidated Statement of Operations (in thousands): Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- Direct costs of laser refractive surgery: Employee costs $1,001 $1,036 $1,954 $2,078 Equipment rent and maintenance 900 632 1,757 1,359 Facility rent and utilities 309 413 604 859 Supplies, gas and other 479 310 885 593 ---- ---- ---- ---- Total $ 2,689 $ 2,391 $ 5,200 $ 4,889 ----- ----- ----- ---- ----- ----- ----- ---- 7. Commitments and Contingencies We are a defendant and counter-claimant in a case entitled Cabrini Development Council, et al. v. LCA-Vision Inc., et al., which was commenced in October, 1997 in the Supreme Court of the State of New York, County of New York and subsequently removed to the United States District Court for the Southern District of New York. Also named as co-defendants are various current and former employees, officers and directors. The case arises out of the operations of a New York limited liability company (the "LLC") which had been formed by us, the plaintiffs and a New York professional corporation (the "PC") owned by certain physicians for the purpose of opening and operating a Laser Refractive Surgery center or centers in New York City. Business activities commenced in 1995, but were unprofitable. After the LLC's resources were exhausted, we paid its operating costs for a period of time. In August, 1997, after further losses and after the parties were unable to come to a final understanding as to their respective rights and obligations, the operations of the LLC ceased. In the complaint, the plaintiffs allege breaches of our obligations as a member of the LLC, and have demanded both substantial damages and equitable relief. We have filed an answer denying the allegations of the complaint, and asserting counterclaims against the plaintiffs seeking substantial damages, alleging that the plaintiffs wrongfully failed to match the capital contributions made by us to the LLC. We believe that the plaintiffs' claims are without merit and intend to vigorously defend the action and pursue our counterclaims. After commencement of the above action, we filed an action against the PC seeking damages for its failure to pay the capital contributions required of it to the LLC. The PC has counterclaimed alleging a right to be indemnified for its losses relating to the LLC's operations. Discovery in the actions, has recently concluded. All parties have indicated their intention, based on the discovery results, to move to dismiss all claims of the other parties. The court has set a motion schedule which ends in October, 1999, and a decision on the motions will occur thereafter. In the opinion of management neither action will have a material adverse effect on our financial position or results of operations. Item 2. Management's Discussion and Analysis or Plan of Operation. This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect our results, refer to the Overview and financial statement line item discussions set forth in Management's Discussion and Analysis or Plan of Operation. "Management's Discussion and Analysis or Plan of Operation" is an analysis of our operating results for the three and six months ended June 30, 1999. It explains why our revenues and costs changed, our overall financial condition, and other matters including the Year 2000 Issue. Overview (dollars in thousands, except where noted) We are a leading developer and operator of free-standing laser refractive surgery centers. Our laser refractive surgery centers provide the facilities, equipment and support services for performing various corrective eye surgeries that employ state-of-the-art laser technologies. The laser vision correction surgeries performed in our centers primarily include laser in situ keratomileusis ("LASIK") and photorefractive keratectomy ("PRK"). The VISX Star S2 laser, which we have in each of our U.S. centers, can be used for correcting nearsightedness, myopic astigmatism, and hyperopia. We also manage multi-specialty laser surgery programs at medical facilities on a contract basis. Our sources of revenue are: - Laser refractive surgery - fees for surgeries performed at our wholly-owned centers. - Other - management fees for operating laser vision correction centers of investees; contractual fees for managing multi-specialty laser surgery programs at hospitals; marketing and education program fees; and miscellaneous sources. Our operating costs and expenses are comprised of: - Medical professional and license fees include fees collected by us for the physicians performing laser vision correction and the license fee of $260 per procedure paid to VISX. - Direct costs of services include center rent and utilities, equipment lease and maintenance costs, surgical supplies, center staff expense, and costs related to other revenue. - General and administrative include marketing and advertising, headquarters staff expense, and other overhead costs. - Depreciation and amortization include periodic charges to income for the costs of equipment and intangible assets recorded in the balance sheet. Results of Operations - Revenues Laser refractive surgery Laser refractive surgery revenue generally includes three components: facility fee, royalty fee, and medical professional fees. Certain states prohibit us from practicing medicine, employing physicians to practice medicine on our behalf or employing optometrists to render optometry services on our behalf. Revenues and costs from centers in such states do not include the medical professionals fee component. The contribution from laser refractive surgery procedures for the three and six months ended June 30, 1999 and 1998 were (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Revenue $14,346 $8,290 $27,735 $14,736 Less: Medical professional and license fees 6,186 3,537 12,201 6,193 ------ ----- ------ ------ Contribution $ 8,160 $ 4,753 $15,534 $ 8,543 ------ ----- ------ ------ ------ ----- ------ ------ The following table illustrates the growth of laser vision correction procedures performed at our centers. Combined procedures include those performed at investee centers. We record the results of our investee centers using the equity method. Wholly-owned Combined 1999 1998 1997 1999 1998 1997 Q1 7,591 3,887 979 9,064 4,450 1,443 Q2 8,365 4,891 1,506 9,742 5,737 2,078 Q3 5,327 2,375 6,102 2,794 Q4 5,686 2,888 6,791 3,400 Our growth and profitability are predicated on increases in procedure volume. Industry sources estimate that over 800,000 procedures will be performed in the U.S. in 1999. As more people have the procedure performed the critical mass for word-of-mouth referrals is attained and, together with marketing and advertising, we expect an increase in procedure volume. Other Revenue declined because we reduced the extent to which we provide management services for multi-specialty surgery programs at hospitals due to the difficult business environment. The renewal of our contracts with the hospital providers became increasingly difficult due to price pressures and the lengthening of sales cycle. Hospital providers and other entities were being driven to reduce costs and scaleback their operations, sometimes including the programs that we managed. In addition, budget reductions at the facilities reduced the marketing and education programs, key elements to a successful surgery program. Operating costs and expenses Medical professional and license fees The increases are a direct result of the increase in procedures performed at our wholly-owned centers. These costs comprise a significant portion of the total costs of a laser vision correction procedure. Direct costs of services The table below provides information related to our direct costs of services. Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Laser refractive surgery Employee costs $1,001 $1,036 $1,954 $2,078 Equipment rent and maintenance 900 632 1,757 1,359 Facility rent and utilities 309 413 604 859 Supplies, gases and other 479 310 885 593 ----- ----- ----- ----- 2,689 2,391 5,200 4,889 Other 43 253 88 574 ----- ----- ----- ----- $ 2,732 $ 2,644 $5,288 $5,463 ----- ----- ----- ----- ----- ----- ----- ----- These costs decrease as a percentage of revenue because they represent, for the most part, the fixed costs of a laser vision correction center. 1998 includes the costs of the eight centers closed during the year. General and administrative The table below provides information related to general and administrative expenses (in thousands, except per cent data). Three months Six months Dollars % of Revenue Dollars % of Revenue ------- ------------ ------- ------------ June 30, 1999 $3,253 22 $6,223 22 June 30, 1998 2,485 28 4,578 28 Our general and administrative expenses rose in dollars recorded primarily due to additional marketing costs and programs and increased usage of financing options offered, on a non-recourse basis, to patients. Depreciation and amortization The decrease results primarily from the write-off of goodwill and leasehold improvements and the write-down of idled lasers to their net realizable values announced in the second quarter of 1998. Non-operating income and expenses Equity in earnings of unconsolidated affiliates is our share of the profits of unconsolidated affiliates. Interest expense decreased due to the significant reduction in debt. Interest income increased because we had cash to invest in overnight cash equivalents. Other expense in 1999 includes a $350,000 expense associated with the issuance of 190,472 shares of our common stock to certain majority holders of our 6% series B-1 convertible preferred stock in exchange for these holders waiving their option to purchase an additional $5,000,000 of convertible preferred stock. Liquidity and Capital Resources On June 30, 1999 we sold 5,000,000 new shares of our common stock at a public offering price of $8.00 per share. The net proceeds will approximate $37,300,000 after deducting underwriting discounts and commissions and our estimated offering expenses, including the fee to be listed on the Nasdaq National Market. At June 30, 1999 offering expenses of $114,000 were incurred and recorded as a prepaid expense. On July 6, 1999 we received $37,800,000 which was net of underwriting discounts and commissions. We intend to use the net proceeds of the offering as follows: - To open additional laser vision correction centers, - To purchase additional equipment, - To extensively market our centers and the LCA-Vision brand name, - To fund possible future strategic acquisitions, and - To provide working capital and for general corporate purposes. We currently have no agreements or understandings with respect to any material future acquisition. We will have broad discretion in how to use our net proceeds. Until we use the proceeds for business purposes, we intend to temporarily invest our net proceeds from this offering in short-term, investment-grade, interest-bearing securities or obligations of, or guaranteed by the U.S. government. Other sources of liquidity for the next year are expected to be: - cash generated from operations - proceeds from the exercise of stock options - credit facility and lease financing, as necessary We generated positive cash flow from operations for the quarter and six months ended June 30, 1999. This was sufficient to finance our capital expenditures and debt repayment in the quarter. Our cash balance increased $2,533,000 during the six months ended June 30, 1999. Cash flow from operations was $4,611,000 during this period. We also received $559,000 from the exercise of stock options. We used $2,388,000 of our cash to make principal payments on our debt and $227,000 for additions to property and equipment. During the quarter ended March 31, 1999, all of the outstanding shares of our Series B-1 convertible preferred stock and accrued dividends thereon were converted into shares of our common stock. Beginning April 1, 1999, we no longer accrued dividends for this stock. Our repayment of the term loan during March 1999 resulted in interest savings approximating $40,000 and principal payments of $35,000 in the second quarter. In May 1999 our line of credit with The Provident Bank was increased to $10,000,000. At June 30, 1999, the line of credit supports letters of credit totalling $1,000,000 and $9,000,000 is available to us for borrowing. We also were granted a $10,000,000 line of credit for the purpose of funding acquisitions. At December 31, 1998 we had net operating loss carryforwards ("NOL's") for federal and state income tax purposes of $35.3 million which expire in varying amounts from 2012 through 2019. These operating losses are available to offset future taxable income. Approximately $15 million of the NOL's were acquired when we bought Refractive Centers International, Inc. in August 1997 and their use is subject to limitation under Section 382 of the Internal Revenue Code. Approximately $15 million of our NOL's consist of deferred tax assets for which, because of our operating losses, we could not record a benefit in our statement of operations and a valuation allowance was necessary. If our profitability continues, we will be able to reduce the valuation allowance. A reduction of the valuation allowance is generally shown in the statement of operations as a reduction of income tax expense. Regardless of when the reduction in the valuation reserve is recognized in the statement of operations, the utilization of the NOL's will substantially reduce our cash obligation for payment of income taxes otherwise due over the next several years. Year 2000 Issue Compliance. Our services, operations, customers, suppliers and service providers all rely on information technology systems, both hardware and software, to function properly. This includes readily apparent systems such as those controlling the VISX excimer lasers used as a key part of our services as well as less obvious ones such as those required to provide electricity to our headquarters and our centers. Suppliers. We have been surveying existing suppliers about the ability of their systems and products to properly handle dates for the Year 2000. However, VISX has advised us that its excimer lasers will remain fully functional through the Year 2000 and beyond. VISX has determined that the excimer laser systems do not properly print or store patient report dates and procedures performed in the Year 2000. VISX is in the process of developing and testing a solution to this problem and expects to have it available to us by the middle of 1999. Operations. We have been gathering information from vendors about Year 2000 compliance for each of the major elements of our internal information technology systems. Based on the statements from vendors, we understand the following: The latest versions of our operating systems, which include MS Windows NT 4.x, MS Windows 98, MS Windows 95 and Solaris 7, are all Year 2000 compliant. We will purchase packages to make our Sun Solaris 2.5.1 server operating systems Year 2000 compliant. We expect to complete this early in the third quarter of 1999. Our key applications, which include Oracle 8, Solomon IV financial software for Windows, MS Office 97 and Netscape Enterprise server and browser, are Year 2000 compliant. We have not verified or tested compliance for our call center information system because we are in the process of installing a new system, the Melita International Corporation PhoneFrame Explorer System. This system, which is Year 2000 compliant, should be in operation by the end of the third quarter of 1999. The cost of the new system is expected to be in excess of $200,000 and will either be included in our capital expenditures or leased. Our computer hardware, which is all PC-based, is Year 2000 compliant with the exception of several older personal computers. The hardware used to control our local area network is Year 2000 compliant. We expect to install any necessary upgrades or replace any computers that are not Year 2000 compliant during the second and third quarters. We have received notification from third parties that service our facility that it is Year 2000 compliant with regard to building security, heating, elevator, and lighting controls. Costs to address Year 2000 issues We expect that any remaining costs for the Year 2000 compliance will be less than $40,000 and that most of our disbursements will be for equipment purchases and, therefore, will be capitalized and depreciated or leased. However, we may spend more money than we have estimated, and this could have a material adverse effect on our results of operations and financial condition. At this stage in our assessment process, we do not believe that the Year 2000 issue will materially impact our financial position, results of operations or cash flows in future periods. There can be no assurance that operating problems or expenses related to the Year 2000 issue will not arise with our computer systems and software or that customers or suppliers will be able to resolve their Year 2000 issues in a timely manner. Accordingly, we plan to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. Contingency plans The most reasonable likely worst case Year 2000 scenario would be that a solution to the VISX laser printing and storage of patient report dates for procedures performed in the Year 2000 and beyond is not corrected in a timely manner. To the extent that any computer documentation of procedure is unavailable, we are prepared to manually produce the necessary reports. As we complete our internal review and external surveys we will make additional contingency plans to address the problems that we believe are reasonably likely to arise. However, despite our best efforts, we may not anticipate all problems that may ultimately arise. Risks of Year 2000 issues We will continue preparations to ensure that the information technology relating to our services, operations and suppliers will recognize dates and function properly in the Year 2000 and beyond. However, unanticipated problems could affect our ability to provide services to our customers or interrupt or prevent deliveries from suppliers at the onset of the Year 2000. As a result, we could suffer a material adverse impact to our business, financial position and results of operation sue to a loss of revenue, legal claims or extra expenses cause by unanticipated Year 2000 computer problems. Part II. Other Information Item 1. Legal Proceedings Commitments and Contingencies We are a defendant and counter-claimant in a case entitled Cabrini Development Council, et al. v. LCA-Vision Inc., et al., which was commenced in October, 1997 in the Supreme Court of the State of New York, County of New York and subsequently removed to the United States District Court for the Southern District of New York. Also named as co- defendants are various current and former employees, officers and directors. The case arises out of the operations of a New York limited liability company (the "LLC") which had been formed by us, the plaintiffs and a New York professional corporation (the "PC") owned by certain physicians for the purpose of opening and operating a Laser Refractive Surgery center or centers in New York City. Business activities commenced in 1995, but were unprofitable. After the LLC's resources were exhausted, we paid its operating costs for a period of time. In August, 1997, after further losses and after the parties were unable to come to a final understanding as to their respective rights and obligations, the operations of the LLC ceased. In the complaint, the plaintiffs allege breaches of our obligations as a member of the LLC, and have demanded both substantial damages and equitable relief. We have filed an answer denying the allegations of the complaint, and asserting counterclaims against the plaintiffs seeking substantial damages, alleging that the plaintiffs wrongfully failed to match the capital contributions made by us to the LLC. We believe that the plaintiffs' claims are without merit and intend to vigorously defend the action and pursue our counterclaims. After commencement of the above action, we filed an action against the PC seeking damages for its failure to pay the capital contributions required of it to the LLC. The PC has counterclaimed alleging a right to be indemnified for its losses relating to the LLC's operations. Discovery in the actions, has recently concluded. All parties have indicated their intention, based on the discovery results, to move to dismiss all claims of the other parties. The court has set a motion schedule which ends in October, 1999, and a decision on the motions will occur thereafter. In the opinion of management neither action will have a material adverse effect on our financial position or results of operations. Item 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information. None Part II. Other Information (continued) Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description of Exhibit ------- ---------------------- 27 Financial Data Schedule (b) Reports on Form 8-K. 1) Form 8-K dated May 14, 1999, announcing that The Provident Bank increased the Company's line of credit to $10 million and had issued an additional new line of credit, in the amount of $10 million, for the purpose of funding acquisitions. 2) Form 8-K dated June 8, 1999 announcing that the Company had filed a registration statement for a public offering of 8.3 million shares of its common stock; 5.0 million of which are being sold by the Company and 3.3 are being sold by certain selling shareholders. 3) Form 8-K dated June 30, 1999 announcing the pricing of a public offering of 6 million shares of the Company's common stock; 5 million shares by the Company, 1 million shares by certain selling stockholders. 4) Form 8-K dated July 6, 1999 announcing the laser vision correction procedure volumes for the six months ended June 30, 1999. 5) Form 8-K dated July 12, 1999 announcing that LCA- Vision and Cole National entered into an arrangement to make laser vision correction available to 50 million members of Cole Managed Vision through a national network of laser vision correction providers to be established by LCA-Vision. Signatures In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. LCA-VISION INC. Date July 28, 1999 /s/ Stephen N. Joffe --------------- -------------------- Stephen N. Joffe Chairman and Chief Executive Officer Date July 28, 1999 /s/ Larry P. Rapp ---------------- ----------------- Larry P. Rapp Treasurer and Chief Financial Officer EX-27 2
5 This schedule contains summary information extracted from the LCA-Vision Inc. condensed consolidated balance sheet at June 30, 1999, and the related condensed consolidated statement of operations for the six months ended June 30, 1999, and is qualified in its entirety by reference to such financial statement. 0001003130 LCA-VISION INC. 1,000 6-MOS DEC-31-1999 JAN-1-1999 JUN-30-1999 9,029 0 3,948 1,267 75 15,343 16,964 8,255 34,485 5,615 496 0 2,522 108 25,744 34,485 0 28,597 0 17,489 7,509 0 120 4,113 8 0 0 0 0 4,105 0.09 0.09
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