-----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, O5LZjEe9zc2/css2DmAp+y/ZaVkZj2z3bQOeUjOS9fXGmNQ72hmgPlUCzOGVMaaT FI5yLtcAsL5k52DD/cWRbg== 0000906318-99-000115.txt : 19991105 0000906318-99-000115.hdr.sgml : 19991105 ACCESSION NUMBER: 0000906318-99-000115 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991104 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: 99741080 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 September 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: 51,502,989 shares as of November 2, 1999. Transitional Small Business Disclosure Format (check one): Yes No X LCA-VISION INC. INDEX Facing Sheet Index Page No. Part I. Financial Information 1 Item 1. Financial Statements 2 Condensed Consolidated Balance Sheets at September 30, 1999 (unaudited) and at December 31, 1998 (audited) 3 Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 4 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information 17 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 19 LCA-VISION INC. Condensed Consolidated Balance Sheet September 30, 1999 (unaudited) and December 31, 1998 (audited) September 30, December 31, 1999 1998 ----------- ------------ Assets Current assets: Cash and cash equivalents $13,227 $ 6,496 Short-term investments 37,299 Accounts receivable, net 2,024 1,119 Prepaid expenses, inventory and other 1,993 1,416 ------ ------- Total current assets 54,543 9,031 Property and equipment, net 9,120 9,433 Goodwill, net 8,113 8,304 Obligations due from shareholders, net 708 471 Investment in unconsolidated businesses 160 520 Certificate of deposit 2,100 Other assets 813 1,518 ------ ------- Total assets $73,457 $31,377 ------ ------- ------ ------- Liabilities and Shareholders' Investment Current liabilities Accounts payable $2,106 $ 2,030 Accrued liabilities and other 2,935 2,637 Debt maturing in one year 653 787 ------ ------- Total current liabilities 5,694 5,454 Long-term debt 481 2,724 Commitments and contingencies Shareholders' investment Preferred stock 7,687 Common stock ($0.001 par value; 51,489 shares and 40,974 shares issued) 114 103 Contributed capital 88,239 41,701 Accumulated (deficit) (21,059) (25,664) Foreign currency translation adjustment 18 (14) Less common stock in treasury at cost 30 30 Less accrued preferred stock dividend 584 ------ ------- 67,282 23,199 ------ ------- Total liabilities and shareholders' investment $73,457 $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 Nine Months Ended September 30, 1999 and 1998 (unaudited) in thousands, except per share data Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Laser refractive surgery $14,882 $8,398 $42,617 $23,134 Other 91 698 953 2,189 ------ ----- ------ ------ Total revenues 14,973 9,096 43,570 25,323 Operating costs and expenses: Medical professional and license fees 6,434 3,561 18,635 9,754 Direct costs of services 3,108 2,771 8,396 8,234 General and administrative expenses 3,681 2,748 9,904 7,326 Depreciation and amortization 775 692 2,211 2,815 Restructuring provision (150) 10,500 ------ ------ Operating income (loss) 975 (676) 4,574 (13,306) Equity in earnings (loss) of unconsolidated businesses (153) 108 264 144 Interest expense 25 108 145 698 Interest income 632 106 908 302 Other income (expense) 4 37 (55) 98 ------ ----- ------ ------ Income (loss) before taxes on income 1,433 (533) 5,546 (13,460) Taxes on income 10 8 18 145 ------ ----- ------ ------- Net income (loss) 1,423 (541) 5,528 (13,605) Dividends to preferred shareholders 12 218 140 390 ------ ----- ------ ------- Income (loss) available to common shareholders $1,411 $ (759) $ 5,388 $(13,995) ------ ----- ------ ------- ------ ----- ------ ------- Income (loss) per common share Basic $0.03 $(0.02) $0.12 $(0.38) Diluted $0.03 $(0.02) $0.11 $(0.38) Weighted average shares used in computation Basic 51,227 37,163 46,819 36,882 Diluted 54,389 37,163 50,104 36,882
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, 1999 and 1998 (unaudited) in thousands Nine Months Ended September 30, 1999 1998 ---- ---- Cash flows from operating activities: Net income (loss) $5,388 $(13,605) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,211 2,815 Equity in income of unconsolidated affiliates (264) (144) Compensation paid in common stock 375 Restructuring provision (150) 10,500 Other (134) Changes in working capital: Accounts receivable (804) 444 Prepaid expenses, inventory and other (301) 85 Accounts payable (457) (626) Accrued liabilities and other 946 (259) ---- ------ Net cash provided by (used in) operations 6,810 (790) Cash flows from investing activities: Purchase of property and equipment (846) (1,811) Advances to affiliates and shareholders (2,670) Beginning cash of consolidated affiliate 1,032 Purchase of cash investments (35,199) (2,100) Proceeds from sales of equipment 200 1,061 Other, net 7 (57) ---- ------ Net cash (used) by investing activities (34,806) (5,577) Cash flows from financing activities: Net (repayment) bank borrowing (9,651) Bank borrowings 2,100 Principal payments of long-term notes, debt and capital lease obligations (2,470) (395) Exercise of stock options and warrants 944 51 Proceeds from sale of common stock 36,715 Proceeds from sale of 6% convertible preferred stock 9,463 Cash dividends paid (462) ---- ------ Net cash provided by financing activities 34,727 1,568 ------ ------- Increase (decrease) in cash and cash equivalents 6,731 (4,799) Cash and cash equivalents at beginning of period 6,496 8,680 ------ ------- Cash and cash equivalents at end of period $13,227 $3,881 ------ ------- ------ -------
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, 1999 and 1998 1. Summary of Significant Accounting Policies The September 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. We prepared our Condensed Consolidated Interim Financial Statements in conformity with Securities and Exchange Commission rules and regulations which allow us to condense or omit certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. Please read our 1998 Annual Report and Form 10-K to gain a more complete understanding of our financial statements. 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 a subsidiary or affiliate. This means their accounts 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 investment in Silmalaseri Oy under the equity method. Cash and Cash Equivalents For the purpose of reporting our cash flows, we consider highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. Short-term Investments Our short-term investments consist primarily of time deposits and obligations of U.S. government agencies with a maturity of 90 days or more when purchased. Short-term investments are stated at cost, which approximates market value. Short-term investments at September 30, 1999 were (in thousands): Certificate of deposit, due June 30, 2000 $2,100 Federal Home Mortgage Corporation: note due January 28, 2000 15,200 note due February 15, 2000 19,999 ------ $37,299 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 nine months ended September 30, 1999 (in thousands, except per share amounts): Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999 Income Shares Per-Share Income Shares Per-Share Numerator Denominator Amount Numerator Denominator Amount ---------- ----------- --------- --------- ----------- --------- Net income $1,423 $5,528 Dividends to preferred shareholders (12) (140) ----- ----- Basic EPS 51,227 46,819 Income available to common shareholders 1,411 $0.03 5,388 $0.12 ---- ---- ---- ---- Effect of Dilutive Securities Convertible preferred stock 12 284 140 1,082 Stock options 2,794 2,143 Warrants 84 60 ----- ------ Diluted EPS Income available to common shareholders and assumed conversions $1,423 54,389 $0.03 $5,528 50,104 $0.11
The weighted average shares for the September 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. 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. 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. Net proceeds approximated $36,715,000 after deducting underwriting discounts and commissions and our offering expenses, including the fee to be listed on the Nasdaq National Market. During the nine months ended September 30, 1999, 584,684 shares of common stock at a weighted average exercise price of $1.57 per share were issued to individuals who exercised stock options. During the three months ended September 30, 1999 individuals exercised 210,102 stock options at a weighted average exercise price of $1.70 per share. Preferred Stock At September 30, 1999, there are no shares of preferred stock issued and outstanding. Class A In February 1999 certain holders exchanged their shares of Class A Preferred Stock for 33,191 shares of our common stock. In 1999 our principal shareholder paid approximately $34,000 of a note due us with his shares of Class A Preferred Stock. We retired the shares of Class A Preferred Stock received. Class B First and Second Interim Series Our Board of Directors declared the payment of the cumulative unpaid dividend on our Class B Preferred Stock First and Second Interim Series to the holders of record on July 31, 1999. The cash dividend paid was $462,000. Subsequent to the payment of the dividend, the holders of the 12.6 shares issued and outstanding converted their shares into 720,478 restricted shares of our common stock. 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 holders of these shares had 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 a non-cash charge of $375,000 recorded as other expense in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 1999, respectively. Warrants During the year, we issued warrants to purchase a total of 925,000 shares of common stock at prices ranging from $2 to $12 per share. Warrants to purchase 125,000 shares at $2 per share are currently exercisable. During the quarter, warrants for 14,064 shares were exercised. Warrants to purchase 800,000 shares at $12 per share were issued during the quarter of which 200,000 each are currently exercisable; the remaining warrants become exercisable in equal installments of 200,000 each as of December 31, 1999, 2000, and 2001. 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 rate 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. On September 30, 1999, our line of credit agreement was amended to include a LIBOR plus 2-1/2% option for any borrowings under this agreement. In addition, certain of the events of default were changed. We are now required to maintain tangible net worth of $45 million and our EBITDA (earnings before interest expense, taxes, and depreciation and amortization) for the trailing twelve months must be greater than 2.0 times the sum of our current maturities of capital lease obligations and trailing twelve months' interest expense. 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 September 30, 1999 Condensed Consolidated Balance Sheet (in thousands): Due to us: Receivable from shareholder's affiliated company $631 Accrued interest 77 --- $708 --- --- 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. Investments in Unconsolidated Businesses At June 30, 1999 we owned 45% of The Baltimore Laser Sight Center, Ltd. ("Baltimore"). We reported our investment in Baltimore under the equity method. In July 1999, two other investees in Baltimore, owning approximately 53%, resigned as members and Baltimore redeemed their membership interests. This redemption increased our ownership to approximately 97% which requires our combining Baltimore's accounts with our accounts beginning the third quarter 1999. Our results of operations for the nine months ended September 30, 1999 include Baltimore's third quarter and our percentage share of the earnings for the six months ended June 30, 1999. 6. 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 nine months ended September 30, 1999 and 1998 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues $407 $419 $1,226 $1,575 Operating profit (loss) (66) 67 13 407 7. Additional Financial Information The table below provides additional financial information related to our Condensed Consolidated Statement of Operations (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Direct costs of laser refractive surgery: Employee costs $1,156 $1,053 $3,110 $3,131 Equipment rent and maintenance 1,042 870 2,799 2,229 Facility rent and utilities 318 320 922 1,179 Supplies, gas and other 549 391 1,434 984 ----- ----- ----- ----- Total $3,065 $2,634 $8,265 $7,523 ----- ----- ----- ----- ----- ----- ----- ----- 8. Commitments and Contingencies We are a defendant and counter-claimant in a consolidated 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 involves claims and counterclaims asserted by and against us, and two other members of a New York limited liability company formerly engaged in operating a laser refractive surgery center, and arises out of the cessation of operations of such limited liability company. Discovery in the actions, has recently concluded, and all parties have filed motions, based on the discovery results, to dismiss all claims of the other parties. A decision on the motions will be issued by the court in due course. 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 nine months ended September 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 a multi-specialty laser surgery program at a medical facility. 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; 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, or revenues less medical professional and license fees, from laser refractive surgery procedures were (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenue $14,882 $8,398 $42,617 $23,134 Less: Medical professional and license fees 6,434 3,561 18,635 9,754 ------ ----- ------ ------ Contribution $8,448 $4,837 $23,982 $13,380 ------ ----- ------ ------ ------ ----- ------ ------ The following table illustrates the growth of laser vision correction procedures performed at our consolidated centers. Consolidated 1999 1998 1997 Q1 7,591 3,887 979 Q2 8,365 4,891 1,506 Q3 8,769 5,327 2,375 Q4 5,686 2,888 Our growth and profitability are predicated on increases in procedure volume. Industry sources estimate that over 900,000 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 the 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 Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Laser refractive surgery Employee costs $1,156 $1,053 $3,110 $3,131 Equipment rent and maintenance 1,042 870 2,799 2,229 Facility rent and utilities 318 320 922 1,179 Supplies, gases and other 549 391 1,434 984 ----- ----- ----- ----- 3,065 2,634 8,265 7,523 Hospital and other 43 137 131 711 ----- ----- ----- ----- $3,108 $2,771 $8,396 $8,234 ----- ----- ----- ----- ----- ----- ----- -----
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 ended Nine months ended Dollars % of Revenue Dollars % of Revenue September 30, 1999 $3,681 24.6% $9,904 22.7% September 30, 1998 2,748 30.2 7,326 28.9 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 Depreciation and amortization for the three months ended September 30, 1999 increased as a result of capital expenditures, primarily equipment. The decrease for the nine month period 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 and short-term obligations issued by US government agencies. 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. Net proceeds approximated $36,715,000 after deducting underwriting discounts and commissions and our offering expenses, including the fee to be listed on the Nasdaq National Market. We intend to use the net proceeds of the offering as follows: - - To extensively market our centers and our brand names, - - To open additional laser vision correction centers, - - To purchase additional equipment, - - 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 three and nine months ended September 30, 1999. This was sufficient to finance our capital expenditures and debt repayment. Our cash balance increased $6,731,000 during the nine months ended September 30, 1999. Cash flow from operations was $6,810,000 during this period. We also received $944,000 from the exercise of stock options and warrants. We used $2,470,000 of our cash to make principal payments on our debt and $846,000 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. On July 31, 1999 we paid the cumulative dividends unpaid on our Class B Preferred Stock First and Second Interim Series. The cash dividend paid was $462,000. Subsequent to the payment of the dividend, the holders of these shares converted them into 720,478 restricted shares of our common stock. As a result of these conversions we no longer have an expense or a liability for preferred stock dividends. Our line of credit with The Provident Bank is $10,000,000. At September 30, 1999, the line of credit supports letters of credit totaling $800,000 and $9,200,000 is available to us for borrowing. We also have 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. Forward-looking Information During the quarter we introduced a "value pricing" model - LasikPlus - in our Baltimore and Annapolis, Maryland centers. The pricing of $2,995 resulted in a significant increase in procedures - - 1,629 procedures compared with 1,178 during the second quarter, a quarter-to-quarter increase of 38% and a year-over-year increase of 152% - while maintaining the excellent clinical results and patient satisfaction found in our open-access centers. Our initial consumer research is that the value price makes LASIK surgery more affordable to a larger customer base. As a result of our initial success we have expanded the LasikPlus model to our centers in California; Edina, Minnesota; and Columbus and Toledo, Ohio. Even though we have reduced the price to the consumer, we have maintained our per procedure contribution margin (total fee net of medical professional and license fees). In order to launch the LasikPlus model we have increased our marketing and advertising efforts. We expect these costs to continue to increase at least the next two quarters as we convert existing centers and add new centers under the LasikPlus model. After the period of high-impact advertising and marketing programs, we anticipate the expenditures returning to traditional levels. We have also completed physician enrollment in our National Lasik Network. This network of ophthalmologists was established subsequent to our agreement with Cole Managed Vision, a division of Cole National Corporation, to offer laser vision correction services to Cole members nationwide beginning January 2000. Cole provides vision care benefits to such managed care companies as Aetna/U.S. Healthcare, Blue Cross and Blue Shield as well as MetLife, Healthnet and Cigna. This agreement with Cole provides us access to over 50 million managed care lives. 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 end 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 have upgraded our file servers to Solaris 7. 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 installed a new call center information system, the Melita International Corporation PhoneFrame Explorer System. This system, which is Year 2000 compliant, became operational in the third quarter of 1999. The new system has been leased on a three year term. 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 remaining necessary upgrades or replace computers that are not Year 2000 compliant by year-end. 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 due to a loss of revenue, legal claims or extra expenses caused by unanticipated Year 2000 computer problems. Business Risks and Fluctuations in Quarterly Results Our results of operations have varied widely in the past, and they could continue to vary significantly from quarter to quarter due to a number of factors, including: - - Public and market acceptance of laser vision correction as a preferred means of vision correction; - - The entry of competitors into our current markets; - - Our opening new centers; and - - The introduction of new methods for vision correction that result in the excimer laser being less competitive. Our profitability is dependent on the number of procedures performed and on maintaining the contribution margin per procedure. Any shortfall in procedures performed or contribution margin would have an immediate impact on our earnings per share, which could adversely affect the market price of our common stock. Our general and administrative expenses, which include marketing, are based on our expectations of future procedures and contribution margins and are relatively fixed in the short term. If procedures or contribution margins below our expectations we may not be able to reduce our spending rapidly in response to such shortfall. This could adversely affect our operating results. Due to these factors, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of future performance. Part II. Other Information Item 1. Legal Proceedings Commitments and Contingencies We are a defendant and counter-claimant in a consolidated 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 involves claims and counterclaims asserted by and against us, and two other members of a New York limited liability company formerly engaged in operating a laser refractive surgery center, and arises out of the cessation of operations of such limited liability company. Discovery in the actions, has recently concluded, and all parties have filed motions, based on the discovery results, to dismiss all claims of the other parties. A decision on the motions will be issued by the court in due course. 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 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 August 17, 1999 announcing the declaration and cash payment of a cash dividend on the Company's Class B Preferred Stock First and Second Interim Series; the subsequent conversion of such shares into 720,478 shares of the Company's common stock; and the resignation and redemption of the ownership interests of two of the Baltimore Laser Sight Center, Ltd. ("BLSC") which increased the Company's ownership of BLSC to approximately 97%. 2) Form 8-K dated September 7, 1999 announcing the appointment of Joseph Dzialo as Executive Vice President. 3) Form 8-K dated October 4, 1999 containing a copy of a press release issued October 3, 1999 announcing the procedure volume for the quarter ended September 30, 1999. 4) Form 8-K dated October 28, 1999, containing a copy of a press release issued October 27, 1999, announcing results of launching LasikPlus and an estimate for year 2000 pre-tax earnings. 5) Form 8-K dated October 29, 1999, containing a copy of a press release issued October 29, 1999, announcing the results for the three and nine months ended September 30, 1999. 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 2, 1999 /s/Stephen N. Joffe ------------------------------- Stephen N. Joffe Chairman and Chief Executive Officer Date: November 2, 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 SEPTEMBER 30, 1999, AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 0001003130 LCA-VISION INC. 1,000 9-MOS DEC-31-1999 JAN-1-1999 SEP-30-1999 13,227 0 3,302 1,278 125 54,543 17,208 8,088 73,457 5,694 481 0 0 114 67,168 73,457 0 43,570 0 27,031 11,965 0 145 5,546 18 0 0 0 0 5,377 0.12 0.11
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