-----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, IgN5eNsbdCf28tMmY/2T0ci++XHE+xcd//o8bcT7SyUq0DdHtYP6HCE8slOaAmCU 4E7GA/fO2FF2UxikpZBwSg== 0000950152-99-005153.txt : 19990615 0000950152-99-005153.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950152-99-005153 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990607 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: S-3 SEC ACT: SEC FILE NUMBER: 333-80145 FILM NUMBER: 99641737 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 S-3 1 LCA-VISION INC. S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE , 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ LCA-VISION INC. (EXACT NAME OF REGISTRANT IN ITS CHARTER) DELAWARE 11-2882328 (STATE OF JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
7840 MONTGOMERY ROAD, CINCINNATI, OHIO 45236 (513) 792-9292 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES.) ------------------------ STEPHEN N. JOFFE Chief Executive Officer 7840 Montgomery Road Cincinnati, Ohio 45236 (513) 792-9292 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------ With copies to: CHARLES F. HERTLEIN, JR., ESQ. JAMES R. TANENBAUM, ESQ. Dinsmore & Shohl LLP Stroock & Stroock & Lavan LLP 1900 Chemed Center 180 Maiden Lane 255 East Fifth Street New York, New York 10038 Cincinnati, Ohio 45202 (212) 806-6048 (513) 977-8315 Fax: (212) 806-6006 Fax: (513) 977-8141
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as possible following the effectiveness of this registration statement. ------------------------ If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value 9,545,000 $9.625 $91,870,625 $25,540.03 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Includes 1,245,000 shares that the underwriters have the option to purchase from a selling stockholder to cover over-allotments, if any. (2) Estimated solely for the purposes of computing the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended. ------------------------ AN INDEX OF THE EXHIBITS TO THIS REGISTRATION STATEMENT CAN BE FOUND AT PAGE S-2. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. LCA-VISION MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION -- JUNE, 1999 PROSPECTUS - -------------------------------------------------------------------------------- 8,300,000 Shares LCAV LOGO LCA-VISION INC. Common Stock - -------------------------------------------------------------------------------- LCA-Vision Inc. is offering 5,000,000 shares and the selling stockholders are offering 3,300,000 shares of common stock. LCA-Vision will not receive any proceeds from the sale of shares by the selling stockholders. LCA-Vision is a leading developer and operator of stand-alone laser vision correction centers. The shares of LCA-Vision are quoted in the Nasdaq SmallCap Market under the symbol "LCAV". On June 4, 1999, the last reported sale price on the Nasdaq SmallCap Market was $10.5625 per share. It is anticipated that the shares of LCA-Vision will be included for quotation in the Nasdaq National Market immediately following this offering.
Per Share Total Public offering price................................... $ $ Underwriting discounts and commissions.................. $ $ Proceeds, before expenses, to LCA-Vision................ $ $ Proceeds to the selling stockholders.................... $ $
SEE "RISK FACTORS" ON PAGES 7 TO 13 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE INVESTING IN THE SHARES OF LCA-VISION. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- The underwriters may, under certain circumstances, purchase up to 1,245,000 additional shares from a selling stockholder at the public offering price, less underwriting discounts and commissions. Delivery and payment for the shares will be on , 1999. PRUDENTIAL SECURITIES DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED RAYMOND JAMES & ASSOCIATES, INC. , 1999 3 [LCA-Vision Logo] Our Centers California Florida Illinois Maryland Minnesota New York North Carolina Ohio Virginia Canada Eye topography [Graphic of Eye Topography Map] Laser Vision Correction Results at LCA-Vision --------------- 97% of patients recommend procedure to a friend or relative 97% of patients achieve 20/40 vision or better. Industry wide nearly 2.0 million treatments have been performed. LCA-Vision's Continuum of Care program is our statement of confidence in the long-term visual stability of each vision correction. [LCA-Vision logo] 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary................. 3 Risk Factors....................... 8 Forward Looking Statements......... 14 Use of Proceeds.................... 15 Price Range of Common Stock........ 15 Dividend Policy.................... 15 Capitalization..................... 16 Dilution........................... 17 Selected Consolidated Financial Data............................. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20 Business........................... 25
PAGE ---- Management......................... 37 Certain Transactions............... 39 Principal and Selling Stockholders..................... 40 Description of Securities.......... 42 Shares Eligible for Future Sale.... 43 Underwriting....................... 44 Legal Matters...................... 45 Experts............................ 45 Where You Can Find More Information...................... 45 Information Incorporated by Reference........................ 47 Index to Financial Statements...... F-1
- -------------------------------------------------------------------------------- The terms "LCA-Vision", "we", "our" and "us" refer to LCA-Vision Inc. and its subsidiaries unless the context suggests otherwise. The term "you" refers to a prospective investor. LCA-Vision(TM) and the LCA-Vision logo are trademarks of LCA-Vision. - -------------------------------------------------------------------------------- You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. 2 5 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that investors should consider before investing in the common stock of LCA-Vision. Investors should read the entire prospectus carefully. THE COMPANY We are a leading developer and operator of stand-alone laser vision correction centers. We currently operate 22 laser vision correction centers, 19 of which are located in metropolitan markets throughout the United States, two of which are in Canada and one of which is in Europe. Our centers are supported by our network of over 2,200 credentialed ophthalmologists and optometrists who perform laser vision correction procedures, pre-procedure evaluations and post-procedure follow-ups. Over 60,000 laser vision correction procedures have been performed at our centers since inception in 1991. For the three months ended March 31, 1999, we earned net income of $1.6 million, or $0.04 per basic and diluted share, compared with a net loss of $1.6 million, or $(0.04) per basic and diluted share, in the comparable period last year. Total revenues for the first quarter of 1999 were $13.9 million, compared with revenues of $7.2 million for the same period last year, an increase of 92%. On a quarter to quarter comparison, first quarter 1999 net income increased $1.4 million from $247,000, or $0.01 per basic and diluted share as reported in the fourth quarter of 1998. In addition, first quarter 1999 revenues increased over 40% from $9.9 million reported in the fourth quarter of 1998. Our laser vision correction procedures increased to 9,064 for the first quarter of 1999, a 33.5% increase over procedures for the fourth quarter of 1998. OUR INDUSTRY More than 160 million Americans, or approximately 60% of our nation's population, require eyeglasses or contact lenses to correct common refractive vision disorders such as myopia (nearsightedness), hyperopia (farsightedness), and astigmatism. The majority of this population can directly benefit from laser vision correction procedures. Currently, laser vision correction is the most rapidly growing surgical procedure in the U.S. with an estimated 480,000 procedures performed in 1998, an increase of 110% over the 215,000 procedures performed in 1997. Industry analysts forecast approximately 800,000 procedures will be performed in 1999 and 1.2 million procedures will be performed in 2000 indicating annual growth rates of 70% and 50%, respectively. Laser vision correction is an elective, private pay procedure performed on an outpatient basis. OUR CUSTOMERS We strive to meet the needs of our customers which include the ophthalmologists and optometrists that are part of our network, and the patient. We provide our ophthalmologists and optometrists with: - State-of-the-art equipment and facilities, - Trained technicians and support staff, - Access to an expanded patient population, - Opportunities for incremental income, and - Clinical training programs for new procedures and techniques. We provide our patients with: - Convenient access to highly credentialed ophthalmologists and optometrists, - Treatment environments designed to enhance customer satisfaction, - Educational consultations and materials, - Regularly scheduled post-procedure follow-ups, and - Affordable financing alternatives. 3 6 OUR BUSINESS STRATEGY We intend to increase utilization at our existing centers, increase penetration and market share in our current markets, and expand into contiguous markets. The key elements of our business strategy include: - Developing and implementing innovative direct marketing campaigns, - Attracting leading ophthalmologists and optometrists, - Building and operating new laser vision correction centers, and - Acquiring established laser vision correction centers. LCA-Vision is incorporated in Delaware. Our principal executive offices are located at 7840 Montgomery Road, Cincinnati, Ohio 45236, and our telephone number is (513) 792-9292. 4 7 THE OFFERING Shares offered by LCA-Vision.......... 5,000,000 shares Shares offered by the selling stockholders(1)....................... 3,300,000 shares Total shares outstanding after the offering(2)........................... 50,566,978 shares Use of proceeds by LCA-Vision......... 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. Nasdaq SmallCap Market symbol......... LCAV Proposed Nasdaq National Market Symbol(3)............................. LCAV - --------------- (1) Does not include up to 1,245,000 shares that the underwriters may purchase from a selling stockholder if they exercise their over-allotment options. (2) Based on shares outstanding as of June 1, 1999. Includes 100,000 shares which will be issued upon exercise of options by a selling stockholder and sold in this offering. Excludes an aggregate of 3,710,531 shares of common stock reserved for issuance upon exercise of outstanding options, warrants and convertible preferred stock. See "Principal and Selling Stockholders." (3) We have applied to quote our common stock in the Nasdaq National Market. RISK FACTORS You should consider the risk factors before investing in LCA-Vision's common stock and the impact from various events which could adversely affect our business. See "Risk Factors." 5 8 SUMMARY CONSOLIDATED FINANCIAL DATA The consolidated statement of operations data set forth below for the years ended December 31, 1996, 1997 and 1998 are derived from the respective audited consolidated financial statements of LCA-Vision which are included in this prospectus. The following summary interim financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are unaudited and are derived from the interim financial statements included in this prospectus. In the opinion of management, the unaudited data have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation. Results for interim periods are not indicative of results for a full year. The data set forth below should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED MARCH 31, ------------------------------ ------------------ 1996 1997 1998 1998 1999 ------- ------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Laser refractive surgery...................... $ 3,715 $12,917 $ 32,963 $ 6,446 $13,389 Surgery management contracts and other........ 10,045 4,677 2,237 763 478 ------- ------- -------- ------- ------- Total revenues.............................. 13,760 17,594 35,200 7,209 13,867 Operating costs and expenses: Medical professional and license fees......... 795 4,489 13,700 2,656 6,015 Direct costs of services...................... 6,937 8,237 10,763 2,819 2,556 ------- ------- -------- ------- ------- Total operating costs and expenses.......... 7,732 12,726 24,463 5,475 8,571 Expenses: General and administrative expenses........... 7,327 8,006 10,144 2,093 2,970 Depreciation and amortization................. 1,597 2,511 3,521 1,055 712 Other......................................... 225 162 -- -- -- Restructuring provision....................... -- 1,100 10,500 -- -- ------- ------- -------- ------- ------- Total expenses.............................. 9,149 11,779 24,165 3,148 3,682 ------- ------- -------- ------- ------- Operating income (loss)......................... (3,121) (6,911) (13,428) (1,414) 1,614 Equity in earnings (losses) from unconsolidated businesses.................................... (906) (27) 354 56 323 Interest expense................................ 770 1,140 786 344 93 Interest income................................. 89 216 441 112 147 Other income (expense).......................... 651 77 358 25 (277) ------- ------- -------- ------- ------- Income (loss) before taxes on income............ (4,057) (7,785) (13,061) (1,565) 1,714 Taxes on income................................. -- 68 157 28 -- ------- ------- -------- ------- ------- Net income (loss)............................... (4,057) (7,853) (13,218) (1,593) 1,714 ------- ------- -------- ------- ------- Dividends to preferred shareholders............. -- 183 518 43 84 ------- ------- -------- ------- ------- Income (loss) available to common shareholders.................................. $(4,057) $(8,036) $(13,736) $(1,636) $ 1,630 ======= ======= ======== ======= ======= Income (loss) per common share: Basic......................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04 ======= ======= ======== ======= ======= Diluted....................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04 ======= ======= ======== ======= ======= Weighted average shares used in computation: Basic......................................... 19,610 26,709 37,669 36,665 43,779 Diluted....................................... 19,610 26,709 37,669 36,665 47,082 SELECTED OPERATING DATA: Laser vision correction procedures performed: Wholly-owned centers........................ 2,663 7,748 19,791 3,887 7,591 Including affiliates........................ 3,620 9,715 23,080 4,450 9,064
6 9 The as adjusted presentation below gives effect to the sale by us of 5,000,000 shares of common stock at an assumed public offering price of $10.5625 per share, after deducting underwriting discounts and commissions and estimated offering expenses and including $119,531 which we will receive upon exercise of 100,000 options to purchase common stock to be offered by a selling stockholder.
MARCH 31, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 7,199 $ 59,766 Working capital............................................. 4,042 56,609 Certificate of deposit...................................... 2,100 2,100 Total assets................................................ 31,840 84,810 Total debt, excluding current portion....................... 642 642 Accumulated (deficit)....................................... (23,949) (23,949) Total shareholders' investment.............................. 25,717 78,284
7 10 RISK FACTORS You should carefully consider the following risk factors, in addition to the other information set forth in this prospectus before purchasing shares of common stock of LCA-Vision. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. OUR BUSINESS DEPENDS ON MAINTAINING GOOD RELATIONSHIPS WITH OUR NETWORK OF OPHTHALMOLOGISTS AND OPTOMETRISTS AND IF WE ARE UNABLE TO MAINTAIN SUCH GOOD RELATIONSHIPS, OUR BUSINESS COULD BE NEGATIVELY AFFECTED. Most states prohibit us from practicing ophthalmology, employing ophthalmologists to practice ophthalmology on our behalf or employing optometrists to render optometric services on our behalf. Because we do not practice ophthalmology or optometry, our activities are limited to owning and managing centers and affiliating with other healthcare providers. Our network of ophthalmologists and optometrists provides a significant source of patients for us. The success of our operations depends upon our ability to enter into agreements on acceptable terms with a sufficient number of healthcare providers, including ophthalmologists and optometrists, to render laser vision correction and other professional services at centers owned or managed by us. There can be no assurance that we will be able to enter into agreements with ophthalmologists, optometrists or other healthcare providers on satisfactory terms or that such agreements will be profitable to us. SIGNIFICANT DECREASES IN EXCIMER LASER PRICES COULD HARM OUR BUSINESS BY MAKING IT MORE ATTRACTIVE FOR OPHTHALMOLOGISTS TO BUY OR LEASE THEIR OWN EXCIMER LASERS RATHER THAN USING OUR CENTERS. A significant reduction in the price of excimer lasers could reduce demand for our services by making it economically more attractive for ophthalmologists to buy or lease excimer lasers for themselves instead of utilizing our centers. The excimer lasers we use currently have a retail price of $525,000. AN INCREASE IN THE NUMBER OF OPHTHALMOLOGISTS WHO PERFORM ENOUGH LASER VISION CORRECTION PROCEDURES TO ECONOMICALLY JUSTIFY THE PURCHASE OF THEIR OWN EXCIMER LASERS MAY HARM OUR BUSINESS. As laser vision correction becomes more commonplace, the number of ophthalmologists who can economically justify the purchase of their own excimer laser may increase. Laser vision correction is still a relatively new procedure for most ophthalmologists, and it generally takes time for ophthalmologists to build up their procedure volume. We estimate that an ophthalmologist or practice group needs to perform approximately 60 procedures a month in one location in order to economically justify the purchase or lease of an excimer laser. This estimate is based upon a number of factors including current prices for excimer lasers, current procedure fees charged by ophthalmologists and our current per procedure fee. This estimate does not take into consideration the value ophthalmologists may place on our marketing and advertising, administrative support, maintenance and other services we provide to ophthalmologists who use our centers. WE HAVE A LIMITED HISTORY OF PROFITABLE OPERATIONS AND OUR PLANNED EXPANSION COULD CAUSE NET LOSSES. We commenced laser vision correction operations in 1991 on a limited basis in Canada. Since 1996, we have posted net losses in every year. We achieved profitability for the fourth quarter ended December 31, 1998, posting $380,000 in income before taxes. In the first quarter of this year, we posted $1.7 million in income before taxes. However, we may experience net losses as a result of our planned expansion of our U.S. operations, and we cannot assure you that our recent profitability will continue. Our ability to maintain profitability will depend largely on: - Our ability to increase demand for our services, - Our ability to execute our planned expansion, and 8 11 - Our ability to effectively integrate any acquired businesses and assets. PRICE COMPETITION COULD CAUSE US TO LOWER OUR PRICES THEREBY REDUCING OUR REVENUE AND PROFITABILITY. In the U.S., we generally charge patients between $2,000 and $2,500 per eye for laser vision correction procedures. We have experienced pricing pressure in Canada, where the regulatory environment is less stringent and there are no per-procedure royalties paid to excimer laser manufacturers, making it easier to offer lower pricing. Pricing pressure may occur in the U.S. This could cause us to lower prices, which could negatively affect our revenue and profitability. LASER VISION CORRECTION MAY NOT ACHIEVE BROAD MARKET ACCEPTANCE WHICH WOULD LIMIT OUR PROFITABILITY AND GROWTH. We believe that our profitability and expansion depends largely on acceptance of laser vision correction. There can be no assurance that laser vision correction will become more widely accepted by ophthalmologists, optometrists or the general population as an alternative to existing methods of treating refractive vision disorders. Acceptance of laser vision correction may be affected adversely by: - Its cost (particularly since laser vision correction is typically not covered by government insurers or other third party payors and, therefore, must be paid for by the individual receiving treatment), - Concerns relating to its safety and effectiveness, - General resistance to surgery of any type, - The effectiveness of alternative methods of correcting refractive vision disorders, - The lack of long-term follow-up data and the possibility of unknown side effects, - Future reported adverse events or other unfavorable publicity involving patient outcomes from laser vision correction, - Regulatory developments, and - Our ability, and that of other participants in the laser vision correction market, to train a broad population of ophthalmologists to perform the procedures. THE LACK OF LONG-TERM FOLLOW-UP DATA REGARDING POTENTIAL COMPLICATIONS OR SIDE EFFECTS ASSOCIATED WITH LASER VISION CORRECTION COULD ADVERSELY AFFECT OUR BUSINESS. Long-term follow-up data could reveal additional complications that may have a material adverse effect on acceptance of laser vision correction. Concern over the safety of laser vision correction procedures could adversely affect market acceptance of laser vision correction or result in adverse regulatory action, including product recalls. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. Concerns with respect to the safety and effectiveness of laser vision correction include predictability and stability of results. Potential complications and side effects include: - Post-procedure discomfort, - Increase in the light scattering properties of the cornea during healing (corneal hazing), - Glare/halos (undesirable visual sensations produced by bright lights), - Decreases in contrast sensitivity, - Temporary increases in pressure within the eye in reaction to medication, - Modest fluctuations in focusing capabilities during healing, 9 12 - Modest decreases in best corrected vision (i.e., with corrective lenses), - Unintended over or under-corrections, - Decline in corrective effect, - Disorders of corneal healing, corneal scars and corneal ulcers, and - Induced astigmatism. WE DEPEND ON LIMITED SOURCES OF EXCIMER LASERS, MICROKERATOMES AND DISPOSABLE BLADES, AND SHORTAGES OF THESE ITEMS COULD HINDER OUR ABILITY TO INCREASE OUR PROCEDURE VOLUME. We currently use one supplier, VISX, Incorporated, for our excimer lasers in the U.S. If VISX became unable or unwilling to supply us with excimer lasers, to repair parts or to provide services, our business could be materially adversely affected. We are primarily dependent on Chiron Vision, a subsidiary of Bausch & Lomb, Incorporated, to provide the microkeratomes, blades and other disposable items we provide to ophthalmologists for the most popular type of laser vision correction. There are a limited number of manufacturers of microkeratomes and there can be no assurance that microkeratomes and microkeratome blades will be available in the quantities or within the time frames we require. Any shortages in our supplies of this equipment could limit our ability to increase our volume of laser vision correction procedures. OUR RECOGNITION OF NET DEFERRED TAX ASSETS MAY SUBSTANTIALLY INCREASE OR DECREASE OUR EARNINGS PER SHARE AND AS A RESULT QUARTER TO QUARTER COMPARISONS MAY BE UNRELIABLE UNLESS THEY ARE ADJUSTED TO ACCOUNT FOR THIS EFFECT. In prior years, we generated significant net operating losses ("NOLs"), which are available to be carried forward for a limited number of years to offset future taxable income. Due to our history of losses, we could not previously conclude that there would be any future taxable income with which to offset the NOLs prior to their expiration. As a result, no net tax benefit was recorded for the tax effect of the NOLs. For the three months ended March 31, 1999, we had income before taxes of $1.7 million. Because we have now reached a significant level of profitability and have had two consecutive quarters of profitable operations, we may soon be able to conclude under generally accepted accounting principles that we will have taxable income in the future, and can record a tax benefit for the portion of the NOLs that we believe will likely be used in the next fiscal year. The amount of tax benefit or expense we recognize in the future may fluctuate significantly and will depend upon our estimates of future taxable income. WE MAY EXPERIENCE DIFFICULTIES IN MANAGING OUR PLANNED INTERNAL EXPANSION STRATEGY AND THE ACQUISITION OR INTEGRATION OF OTHER CENTERS, WHICH COULD IMPAIR OUR BUSINESS. Our success will depend on our ability to expand and manage our laser vision correction centers. We will use a portion of the proceeds of this offering to grow and expand. Our growth and expansion has resulted in, and may continue to result in, new and increased responsibilities for management and additional demands on management, operating and financial systems and resources. Our ability to continue to expand will also depend upon our ability to: - Implement and integrate new, expanded or upgraded operations and financial systems, procedures and controls, - Hire and train new staff and managerial personnel, - Expand our infrastructure, and - Adapt our structure to comply with present or future legal requirements affecting our arrangements with ophthalmologists and optometrists. 10 13 Our growth strategy also includes increasing the number of our laser vision correction centers through strategic acquisitions. Adding new centers will present challenges for management, including: - Requiring management attention to be focused on integration instead of on our core business, - Possible adverse effects on operating performance resulting from increased goodwill amortization, unanticipated liabilities and contingencies, - Increased interest costs, and - The issuance of additional securities. Any failure or inability to successfully implement these and other factors may have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will be able to successfully integrate and manage the centers we open or acquire or achieve the economies of scale and/or the patient base required to achieve profitability in the centers. If management is unable to successfully implement our growth strategy or manage our growth effectively, our business, financial condition and results of operations could be materially adversely affected. WE DEPEND ON A SMALL NUMBER OF SENIOR MANAGERS DUE TO THEIR VITAL ROLE IN ESTABLISHING OUR BUSINESS RELATIONSHIPS AND PLAN OF OPERATION. Our success depends, to a significant extent, upon the efforts and abilities of our Chairman and Chief Executive Officer, Stephen N. Joffe, and other members of senior management. We currently do not have employment agreements with any senior key employees. The loss of the services of one or more of these key employees could have a material adverse effect on our business. OUR BUSINESS MAY BE IMPAIRED DUE TO GOVERNMENT REGULATIONS WHICH COULD RESTRICT OUR EQUIPMENT, SERVICES AND RELATIONSHIPS WITH OPHTHALMOLOGISTS, OPTOMETRISTS, AND OTHER HEALTHCARE PROVIDERS. We and excimer laser manufacturers are subject to extensive federal, state, local and foreign laws, rules and regulations, including: - Restrictions on the approval, distribution and use of medical devices, - Anti-kickback statutes, - Fee-splitting laws, - Corporate practice of medicine restrictions, - Self-referral laws, - Anti-fraud provisions, - Facility license requirements and certificates of need, - Conflict of interest regulations, and - Sales and use taxes. Many of these laws and regulations are ambiguous, and courts and regulatory authorities have provided little clarification. Moreover, state and local laws vary from jurisdiction to jurisdiction. As a result, we may not always be able to accurately interpret applicable law, and some of our activities could be challenged. The excimer lasers we use in our centers are medical devices that in the United States are subject to the jurisdiction of the FDA. In addition to FDA approval for the initial uses of these excimer lasers, new uses require separate approval. Obtaining such approval can be an expensive and time consuming process, the success of which cannot be guaranteed. The failure of our suppliers to obtain regulatory approvals for any additional uses of excimer lasers or otherwise comply with regulatory requirements could have a material adverse effect on our business, financial condition or results of operations. 11 14 Failure to comply with applicable FDA requirements could subject us, ophthalmologists who use our centers or excimer laser manufacturers to enforcement actions, including product seizure, recalls, withdrawal of approvals and civil and criminal penalties. Any such enforcement action could have a material adverse effect on our business, financial condition and results of operations. Further, failure to comply with regulatory requirements, or any adverse regulatory action could result in limitations or prohibitions on our use of excimer lasers. This could have a material adverse effect on our business, financial condition and results of operations. The regulatory environment in which we operate may change significantly in the future. Numerous legislative proposals have been introduced in Congress and in various state legislatures over the past several years that could cause major reforms of the U.S. healthcare system. We cannot predict whether any of these proposals will be adopted or how they might affect our business. New or revised legislation could have a material adverse effect on our business, financial condition and results of operations. FUTURE SALES BY EXISTING STOCKHOLDERS COULD DEPRESS OUR SHARE VALUE AND MAKE IT MORE DIFFICULT FOR US TO SELL STOCK IN THE FUTURE. The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that such sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. After this offering, 50,566,978 shares of common stock will be outstanding. Of these shares, 29,421,700 shares, including the 8,300,000 shares sold in this offering (9,545,000 shares if the underwriters exercise their over-allotment options in full) will be freely tradeable without restrictions under the Securities Act, except for any shares purchased by "affiliates" of LCA-Vision (as defined in Rule 144 under the Securities Act). Our officers and directors and certain stockholders, including the selling stockholders, have entered into lock-up agreements pursuant to which they have agreed not to offer or sell any shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of Prudential Securities, on behalf of the underwriters. Also, Prudential Securities may, at any time and without notice, waive the terms of these lock-up agreements specified in the underwriting agreement. Upon expiration of this lock-up period, 21,145,273 shares may be sold in the future subject to compliance with the volume limitations and other restrictions of Rule 144. See "Underwriting" and "Shares Eligible for Future Sale." THE YEAR 2000 COULD NEGATIVELY AFFECT THE COMPUTER PROGRAMS AND SYSTEMS UPON WHICH WE DEPEND. We rely on computer applications to manage and monitor our accounting, sales, development and administrative functions. Further, the sophisticated equipment used in our centers is dependent on computer applications and embedded technology for its operation. In addition, the ophthalmologists who use our centers and our suppliers and service providers are reliant upon computer applications, some of which contain technology which may fail as a result of the upcoming change in century. Such failures could affect the interactions of these third parties with us. While we do not believe our computer systems, applications or embedded technologies currently in use will be materially adversely affected by the upcoming change in century, we or our technology may be adversely affected by the change in century. Failure of our software, hardware or embedded technology or that of our customers, suppliers or service providers could have a material adverse impact on our business, financial condition and results of operations. For a more detailed discussion of Year 2000 readiness issues, see "Business -- Year 2000." WE COULD BE SUED FOR PATIENT INJURIES, AND SUCH CLAIMS COULD NEGATIVELY AFFECT OUR BUSINESS TO THE EXTENT PATIENTS ARE UNINSURED. A partially or completely uninsured claim against us could have a material adverse effect on our business, financial condition and results of operations. The laser vision correction procedures performed in our centers involve a potential risk of physical injury to patients. Such risk could result in product liability, malpractice or other claims brought against us based upon injuries or alleged injuries associated with a defect in a product's performance or malpractice by an ophthalmologist or technician. Some injuries or defects may 12 15 not become evident for a number of years. Therefore, the operation of any excimer laser, microkeratome or other equipment may result in substantial claims against us by patients who allege they were injured as a result of vision correction procedures. Although we have "umbrella" product and professional liability insurance in the amount of $1.0 million per occurrence and $5.0 million in the aggregate, we primarily rely and intend to continue to rely on ophthalmologists' professional liability insurance policies and manufacturers' insurance policies for product liability coverage. We require the ophthalmologists who use our centers to maintain certain levels of professional liability insurance. We cannot assure you that these ophthalmologists will continue to be able to obtain sufficient insurance. WE DO NOT PLAN TO PAY ANY DIVIDENDS IN THE NEAR FUTURE. We have not declared or paid, and for the near future we do not anticipate declaring or paying, dividends on our common stock. Under the existing credit agreement with our bank, we are not permitted to pay dividends without first obtaining the bank's consent. MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE NET PROCEEDS AND IT MAY NOT EFFECTIVELY UTILIZE THESE FUNDS. We have not designated any specific uses for the net proceeds of this offering. Therefore, we will have broad discretion in how we use such net proceeds, which may include opening additional laser vision correction centers, purchasing additional equipment, marketing our centers and our brand name, completing future strategic acquisitions and for working capital and general corporate purposes. CERTAIN SHAREHOLDERS CONTROL A NUMBER OF SHARES SUFFICIENT TO INFLUENCE CORPORATE ACTIONS. Following this offering, Stephen and Sandra Joffe together will beneficially own 24.8% of our outstanding common stock (22.4% if the underwriters' over-allotment options are exercised in full). If these persons acted together, they would have sufficient voting power to influence the outcome of corporate actions submitted to the stockholders for approval and to influence the management and affairs of LCA-Vision, including the election of our Board of Directors. 13 16 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about LCA-Vision, including, among other things: - Our belief that the market for laser vision correction is growing, - Our strategy to expand through internal growth, through adding new centers and through possible strategic acquisitions, - Our belief that substantial increases in marketing and advertising will create higher demand for our laser vision correction services, - Our expectations and estimates concerning future financial performance, financing plans and the impact of competition, - Our belief that we will be able to conform our operations in all material respects to applicable healthcare laws and obtain any necessary licenses and certificates of need, - General economic and business conditions, both nationally and in our markets, - Our belief that our systems and those of our key vendors will be fully Year 2000 compliant before the end of 1999, and - Other risk factors set forth under "Risk Factors" in this prospectus. In addition, in this prospectus, the words "believe", "may", "will", "estimate", "continue", "anticipate", "intend", "expect" and similar expressions, as they relate to LCA-Vision, our business or our management, are intended to identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. 14 17 USE OF PROCEEDS The net proceeds to LCA-Vision from the sale of common stock in the offering, assuming a public offering price of $10.5625 per share, and $119,531 from the exercise of stock options by a selling stockholder, are estimated to be $52.6 million after deducting underwriting discounts and commissions and estimated offering expenses of $365,000 of LCA-Vision. We will not receive any proceeds from the sale of shares by the selling stockholders. We intend to use these net proceeds 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. PRICE RANGE OF COMMON STOCK Since 1996 our common stock has been included for quotation in the Nasdaq SmallCap Market under the symbol "LCAV". The following table sets forth the high and low sale prices of the common stock as reported by the Nasdaq SmallCap Market.
PRICE RANGE ----------------- HIGH LOW ------- ------ 1997 First Quarter.............................................. $ 6.875 $2.375 Second Quarter............................................. 7.125 2.688 Third Quarter.............................................. 3.875 2.750 Fourth Quarter............................................. 3.625 1.000 1998 First Quarter.............................................. $ 2.125 $0.844 Second Quarter............................................. 4.156 1.688 Third Quarter.............................................. 3.500 1.250 Fourth Quarter............................................. 1.500 1.000 1999 First Quarter.............................................. $ 4.000 $1.375 Second Quarter (through June 4, 1999)...................... 12.750 3.688
On June 4, 1999, the last reported sale price of the common stock on the Nasdaq SmallCap Market was $10.5625 per share. As of such date, there were approximately 3,150 holders of record of the common stock. Application has been made for quotation in the Nasdaq National Market following this offering. DIVIDEND POLICY We have not declared or paid, and we do not anticipate declaring or paying any dividends on our common stock in the near future. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including: - Our financial condition, - Results of operations, - Contractual restrictions, - Capital requirements, - Business prospects, and - Any other factors the board of directors deems relevant. In addition, under our existing credit agreement with our bank, we are not permitted to pay dividends without first obtaining the bank's consent. 15 18 CAPITALIZATION The following table sets forth the unaudited capitalization of LCA-Vision as of March 31, 1999 and as adjusted to reflect this offering and the application of the estimated net proceeds to LCA-Vision assuming a public offering price of $10.5625 per share and $119,531 from the exercise of options by a selling stockholder. See "Use of Proceeds." The following table should be read in conjunction with LCA-Vision's consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.
MARCH 31, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $ 7,199 $ 59,766 Certificate of deposit...................................... 2,100 2,100 Debt maturing in one year................................... 649 649 Total debt, excluding current portion....................... 642 642 Shareholders' investment: Common stock $.001 par value: authorized 110,000,000 shares, 45,281,950 (50,566,973 as adjusted) issued and outstanding(1)......................................... 109 114 Preferred stock First and Second Interim Series Class B, par value $.001, 7% dividend rate, 12.6 shares issued and outstanding, liquidation preference of $1,200,000............................................. 2,500 2,500 Contributed capital....................................... 47,485 100,047 Treasury stock and foreign currency translation adjustment............................................. (25) (25) Accrued preferred stock dividend.......................... (403) (403) Accumulated (deficit)..................................... (23,949) (23,949) -------- -------- Total shareholders' investment.............................. 25,717 78,284 -------- -------- Total capitalization........................................ $ 26,359 $ 78,926 ======== ========
- --------------- (1) Excludes 4,707,792 shares reserved for issuance upon exercise of options, warrants and convertible preferred stock as of March 31, 1999. 16 19 DILUTION Purchasers of the common stock in this offering will experience immediate and substantial dilution in the net tangible book value of the common stock from the initial public offering price. Net tangible book value per share represents the amount of the total tangible assets less total liabilities of LCA-Vision, divided by the number of shares of common stock outstanding. At March 31, 1999, LCA-Vision had a net tangible book value of $17.0 million or $0.38 per share of common stock. After giving effect to the sale of 5,000,000 shares of common stock offered by LCA-Vision at an assumed public offering price of $10.5625 per share and after the deduction of underwriting discounts and commissions and estimated offering expenses of LCA-Vision, and adding $119,531 from the exercise of options to purchase 100,000 shares of common stock by a selling stockholder, the pro forma net tangible book value of LCA-Vision at March 31, 1999 would have been $69.6 million or $1.38 per share. This represents an immediate increase in such net tangible book value of $1.00 per share to existing shareholders and an immediate and substantial dilution of $8.18 per share to new investors purchasing common stock in this offering. The following table illustrates this per share dilution: Assumed public offering price...................................... $10.56 Net tangible book value as of March 31, 1999.............. $0.38 Increase attributable to new investors.................... 1.00 ----- Pro forma net tangible book value after this offering.............. 1.38 ------ Dilution in pro forma net tangible book value to new investors..... $ 8.18 ======
17 20 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated statement of operations data set forth below for the years ended December 31, 1996, 1997 and 1998 and the balance sheet data at December 31, 1997 and 1998 are derived from the respective audited consolidated financial statements of LCA-Vision which are included in this prospectus. The statement of operations data set forth below with respect to the years ended December 31, 1994 and 1995 and the balance sheet data at December 31, 1994, 1995 and 1996 are derived from the audited financial statements of LCA-Vision which are not included or incorporated by reference in this prospectus. The following summary interim financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are unaudited and are derived from the interim financial statements included in this prospectus. In the opinion of management, the unaudited data have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation. Results for interim periods are not indicative of results for a full year. The data set forth below should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------- ------------------ 1994(1) 1995(1) 1996 1997 1998 1998 1999 ------- ------- ------- ------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Laser refractive surgery........................ $ -- $ 707 $ 3,715 $12,917 $ 32,963 $ 6,446 $13,389 Surgery management contracts and other.......... 16,932 12,944 10,045 4,677 2,237 763 478 ------- ------- ------- ------- -------- ------- ------- Total revenues................................ 16,932 13,651 13,760 17,594 35,200 7,209 13,867 Operating costs and expenses: Medical professional and license fees........... -- -- 795 4,489 13,700 2,656 6,015 Direct costs of services........................ 7,291 5,981 6,937 8,237 10,763 2,819 2,556 ------- ------- ------- ------- -------- ------- ------- Total operating costs and expenses............ 7,291 5,981 7,732 12,726 24,463 5,475 8,571 Expenses: General and administrative expenses............. 6,625 6,305 7,327 8,006 10,144 2,093 2,970 Depreciation and amortization................... 1,247 1,042 1,597 2,511 3,521 1,055 712 Other........................................... -- -- 225 162 -- -- -- Restructuring provision......................... -- -- -- 1,100 10,500 -- -- ------- ------- ------- ------- -------- ------- ------- Total expenses................................ 7,782 7,347 9,149 11,779 24,165 3,148 3,682 ------- ------- ------- ------- -------- ------- ------- Operating income (loss).......................... 1,769 323 (3,121) (6,911) (13,428) (1,414) 1,614 Equity in earnings (losses) from unconsolidated businesses...................................... 108 40 (906) (27) 354 56 323 Interest expense................................. 132 309 770 1,140 786 344 93 Interest income.................................. 54 158 89 216 441 112 147 Other income (expense)........................... (102) 10 651 77 358 25 (277) ------- ------- ------- ------- -------- ------- ------- Income (loss) before taxes on income............. 1,697 222 (4,057) (7,785) (13,061) (1,565) 1,714 Taxes on income.................................. -- 44 -- 68 157 28 -- ------- ------- ------- ------- -------- ------- ------- Net income (loss)................................ 1,697 178 (4,057) (7,853) (13,218) (1,593) 1,714 ------- ------- ------- ------- -------- ------- ------- Dividends to preferred shareholders.............. -- -- -- 183 518 43 84 ------- ------- ------- ------- -------- ------- ------- Income (loss) available to common shareholders... $ 1,697 $ 178 $(4,057) $(8,036) $(13,736) $(1,636) $ 1,630 ======= ======= ======= ======= ======== ======= ======= Income (loss) per common share: Basic........................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04 ======= ======= ======== ======= ======= Diluted......................................... $ (0.21) $ (0.30) $ (0.36) $ (0.04) $ 0.04 ======= ======= ======== ======= ======= Weighted average shares used in computation: Basic........................................... 19,610 26,709 37,669 36,665 43,779 Diluted......................................... 19,610 26,709 37,669 36,665 47,082 Pro forma income data(2): Net income as reported.......................... $ 1,697 $ 178 Provision for income taxes -- pro forma......... 645 41 ------- ------- Proforma net income............................. $ 1,052 $ 137 ======= ======= Pro forma income per common share: Basic........................................... $ 1.05 $ 0.02 ======= ======= Diluted......................................... $ 1.05 $ 0.02 ======= ======= Pro forma weighted average shares used in computation -- basic and diluted................ 1,000 5,659 SELECTED OPERATING DATA: Laser vision correction procedures performed: Wholly-owned centers.......................... -- 513 2,663 7,748 19,791 3,887 7,591 Including affiliates.......................... 964 1,459 3,620 9,715 23,080 4,450 9,064
18 21
DECEMBER 31, MARCH 31, --------------------------------------------------- ------------------------- 1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED(3) ------- ------- ------- ------- ------- ------- -------------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......... $ 1,861 $ 2,587 $ 724 $ 2,780 $ 6,496 $ 7,199 $59,766 Cash held in escrow................ -- -- -- 5,900 -- -- -- Working capital (deficit).......... 3,939 3,280 (3,187) (1,698) 3,577 4,042 56,609 Certificate of deposit............. -- -- -- -- 2,100 2,100 2,100 Total assets....................... 11,035 13,526 13,481 44,527 31,377 31,840 84,810 Debt maturing in one year.......... 52 351 824 10,182 787 649 629 Total debt, excluding current portion.......................... 1,864 8,477 6,423 2,850 4,224 2,142 2,142 Accumulated earnings (deficit)(4)..................... 7,502 (535) (4,592) (12,446) (25,664) (23,949) (23,949) Total shareholders' investment..... 7,998 2,619 1,198 26,714 23,199 25,717 78,926
- --------------- (1) On September 25, 1995, LCA-Vision Inc. merged with Laser Centers of America, Inc. At the time of the merger, two shareholders owned an aggregate of 92% of the outstanding voting stock of LCA-Vision and 100% of Laser Centers of America. LCA-Vision was inactive and non-operational at the time of the merger. The financial data for 1994 and 1995 reflect the historical financial position and results of operations for Laser Centers of America, except for shareholders' investment, which has been restated to show the capital structure of LCA-Vision at the time of the merger. (2) Prior to the merger, Laser Centers of America elected to be taxed as a subchapter S corporation. Income tax liabilities, other than certain state and local income taxes, were included in the tax returns of its shareholders. Pro forma statement of operations data for 1994 and 1995 reflects the adjustments to the historical information assuming that the conversion to a C corporation had taken place effective January 1, 1994. The provision for income taxes represents an effective tax rate of 38%. (3) As adjusted gives effect to this offering and the application of the estimated net proceeds to LCA-Vision assuming a public offering price of $10.5625 and $119,531 for the exercise of options by a selling stockholder. (4) Immediately prior to the merger, $6.4 million was distributed to the shareholders. This distribution represented a portion of the subchapter S corporation earnings previously included in their taxable income. The shareholders used the proceeds to acquire $2.0 million of LCA-Vision common stock and to loan the remainder to LCA-Vision. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with the "Selected Consolidated Financial Data" and the accompanying financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could contribute to such differences include, but are not limited to, those discussed in "Risk Factors." OVERVIEW We are a leading developer and operator of stand-alone laser vision correction centers. Our laser vision correction centers provide the facilities, equipment and support services for performing vision correction procedures using state-of-the-art laser technologies. The VISX Star S2 laser, which we have in each of our U.S. centers, can be used for correcting nearsightedness, farsightedness and astigmatism. Substantially all of the revenues from our laser vision correction procedures are derived from our U.S. centers. We also manage multi-specialty laser surgery programs at medical facilities on a contract basis, although we intend to substantially decrease our activity in this area. Our sources of revenue are: - Laser refractive surgery, including fees for procedures performed at our wholly-owned centers, and - Other, including 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 consist of: - Medical professional and license fees, including fees collected by us for the ophthalmologists performing laser vision correction and the license fee of $260 per procedure paid to VISX, - Direct costs of services, including center rent and utilities, equipment lease and maintenance costs, surgical supplies, center staff expense and costs related to other revenue, - General and administrative, including marketing and advertising, headquarters staff expense, and other overhead costs, and - Depreciation and amortization, including periodic charges to income for the costs of equipment and intangible assets recorded in the balance sheet. RESULTS OF OPERATIONS On August 18, 1997, we purchased 100% of the issued and outstanding common stock of Refractive Centers International, Inc., then a majority-owned subsidiary of Summit Technology, Inc., for 17,065,579 shares of our 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 year ended December 31, 1997 include the revenues and expenses of Refractive Centers International subsequent to August 18, 1997. 20 23 SOURCES OF REVENUES The table below summarizes our sources of revenue and their annual growth or decline:
1996 1997 1998 ------- ------- ------- (DOLLARS IN THOUSANDS) Laser refractive surgery........................... $ 3,715 $12,917 $32,963 Growth rate...................................... N/A 248% 155% Surgery management contracts....................... $ 4,665 $ 3,064 $ 1,496 Growth rate...................................... -30% -34% -51% Other.............................................. $ 5,380 $ 1,613 $ 741 Growth rate...................................... -23% -70% -54% Total.................................... $13,760 $17,594 $35,200
LASER REFRACTIVE SURGERY Laser refractive surgery revenue generally includes three components: facility fees, royalty fees 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 direct costs from centers in such states do not include the medical professionals' fee component. The contribution from laser refractive surgery procedures for each of the three years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 were:
QUARTERS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------- ----------------- 1996 1997 1998 1998 1999 ------ ------- ------- ------ ------- (DOLLARS IN THOUSANDS) Revenue............................ $3,715 $12,917 $32,963 $6,446 $13,389 Direct costs....................... 3,818 10,790 23,625 5,154 8,526 Contribution....................... (103) 2,127 9,338 1,292 4,863
Our results of operations in any period are significantly affected by the number of laser vision correction procedures performed. 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, which means that our financial statements include a percentage of these centers' earnings or losses equal to our ownership percentage.
WHOLLY-OWNED COMBINED ----------------------- ----------------------- 1997 1998 1999 1997 1998 1999 ----- ----- ----- ----- ----- ----- First quarter...................... 979 3,887 7,591 1,443 4,450 9,064 Second quarter..................... 1,506 4,891 2,078 5,737 Third quarter...................... 2,375 5,327 2,794 6,102 Fourth quarter..................... 2,888 5,686 3,400 6,791
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. Renewal of our contracts with hospital providers became increasingly difficult due to price pressures and a lengthening 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. 21 24 EXPENSES QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998 Medical professional and license fees: The increase of $3.4 million is 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: These costs decrease as a percentage of revenue because our costs represent, for the most part, the fixed costs of a laser vision correction center. These costs decreased in 1999 compared to 1998 because 1998 includes the costs of eight centers which were closed later in the year. General and administrative: These costs increased $877,000, although as a percentage of revenues they decreased by approximately eight percentage points to 21% of total revenues. The increase is due in part to the increased costs associated with our patient financing options. 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: Our share of the profits of unconsolidated affiliates is recorded in equity of earnings of unconsolidated affiliates. The increase of $267,000 is due to the increased profitability of these 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 $325,000 expense associated with the issuance of 165,076 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 $5.0 million of convertible preferred stock. We generated positive cash flow from operations for the quarter ended March 31, 1999. This was sufficient to finance our capital expenditures and debt repayment in the quarter. Our operating income of $1.6 million for the quarter, together with non-cash items appearing in the Statement of Operations, resulted in positive cash flow before working capital items of $2.3 million. Proceeds from option exercises were $279,000 for the quarter. Our $8.0 million credit facility has $7.0 million available for borrowing. $1.0 million of the facility is being used to secure letters of credit and operating leases with an affiliate of our lender. We had a cash balance of $7.2 million at March 31, 1999. We also have a $2.1 million certificate of deposit recorded as a long-term asset that matures on June 30, 2000. This instrument pays interest at a rate of 5.7% per annum. During the quarter 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 accrue dividends for this stock. Our repayment of the term loan during March 1999 will result in interest savings of approximately $40,000 and principal payments of $35,000 per quarter. At December 31, 1998 we had NOLs for federal and state income tax purposes of $35.3 million which expire in varying amounts from 2012 through 2019. Approximately $15.0 million of this amount 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. These operating losses are available to offset future taxable income. We have approximately $15.0 million of deferred tax assets which, because of our operating losses, we could not record as 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 NOLs will substantially reduce our cash obligation for payment of income taxes otherwise due over the next several years. 22 25 1998 COMPARED TO PRIOR YEARS The increase in direct operating expenses is primarily a result of the expansion of our laser vision correction 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 other sources of revenue are more variable and fluctuate generally with levels of revenue. We now have VISX Star S2 lasers in all of our U.S. centers. The VISX excimer lasers are leased and the monthly payments are recorded as direct operating expense. 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. During the second quarter of 1998, we implemented a plan to restructure operations by closing seven of our centers, primarily acquired centers. Costs associated with the restructuring include $7.3 million related to the write-off of goodwill and leasehold improvements and $677,000 for the accrual of lease terminations and employee severance costs. As a result of the closings, we have certain excimer lasers in storage. The restructuring provision also includes $2.5 million related to the write-down of these excimer lasers to their net realizable value. The balance of the accrual at December 31, 1998 was $748,000 and relates to facility rent and severance. Equity in income from unconsolidated businesses increased because of their increased profitability. Interest expense decreased due to significant reduction in debt. Interest income increased because we had cash to invest in overnight cash equivalents. LIQUIDITY AND CAPITAL RESOURCES QUARTER ENDED MARCH 31, 1999 COMPARED TO PRIOR QUARTERS Our primary sources of liquidity for the next year are expected to be: - Net proceeds from this offering, - Cash generated from operations, - Proceeds from the exercise of stock options, and - Credit facility and lease financing, as necessary. The ability to fund our marketing and advertising program and planned capital expenditures will depend on our future performance, which to a certain extent, is subject to general economic, competitive, legislative, regulatory and other factors that are beyond our control. Based upon our current level of operations and anticipated revenue growth, we believe that cash flow from operations and available cash, together with the net proceeds of this offering and available borrowings under the credit facility from The Provident Bank will be adequate to meet these needs. YEAR ENDED DECEMBER 31, 1998 COMPARED TO PRIOR YEARS On May 11, 1998, we issued 10,000 shares of 6% Series B-1 Convertible Preferred Stock for $10.0 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, approximately $9.5 million, were used for general corporate purposes, including debt reduction. At December 31, 1998, 4,298 shares of Convertible Preferred Stock and accrued dividends of $117,000 were converted into 4,088,856 shares of common stock. On June 29, 1998, we entered into an $8.0 million credit facility with Provident. In addition, we repaid the borrowings from, and terminated our 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 of our assets, including a mortgage on the headquarters building. 23 26 The facility can be used to support letters of credit totaling not more than $2.0 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, we have the option to convert up to $3.5 million of borrowings under the facility to a term loan basis. On August 21, 1998 we 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 $12,000 plus interest until June 30, 2000 at which time the remaining principal balance of $1.7 million becomes payable. The proceeds were used to purchase a certificate of deposit from Provident that matures on June 30, 2000. The certificate of deposit is recorded in other assets and interest is paid monthly at 5.7%. The credit facility also supports letters of credit and leased assets totaling $1.1 million at December 31, 1998. The credit facility, for which there is no formal compensating balance, requires us to pay a commitment fee of .25% based on the unused portion. At December 31, 1998 we had $4.9 million available to us under the credit facility. We are required to maintain certain financial ratios and amounts for the credit facility to be available for our use. On November 3, 1998 we received notice that the FDA had approved the VISX Star S2 laser to treat farsightedness (hyperopia). The VISX Star S2 laser, which we have in each of our U.S. centers, can now treat nearsightedness, farsightedness and astigmatism. Management believes that our ability to treat these disorders will result in increased procedures and profitability. YEAR 2000 ISSUE 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. We have completed an assessment of our computer software and hardware for compliance with Year 2000 and have determined that all business critical systems are compliant. Business critical systems include financial reporting systems and all lasers utilized in our centers. Costs associated with the assessment were internal costs, were expensed as incurred and were immaterial. We have not verified or tested compliance with our telemarketing information system because we are in the process of purchasing a new telemarketing system that will be Year 2000 compliant and installed and operational by September 30, 1999. The cost of this new system will be included in our capital expenditures or leased. We do not expect the cost to exceed $200,000. We have also completed an assessment of external risks and third party risks associated with Year 2000. Although management does not believe that such risks are significant, the loss of power or other telecommunication link difficulties could disrupt our operations. 24 27 BUSINESS THE U.S. EYE CARE INDUSTRY More than 160 million Americans, or approximately 60% of our nation's population, require eyeglasses or contact lenses to correct common refractive vision disorders and over 100 million Americans purchased eyewear in 1998. These consumers, with a median age of approximately 35 years old, spent a total of approximately $16 billion during 1998 on eyeglasses, contact lenses and other corrective lenses. Consumers purchased retail optical goods through three main retail channels: (1) independent ophthalmologists, optometrists and opticians, which accounted for 63% of sales, (2) retail chains, which accounted for 35% of sales and (3) health maintenance organizations, which accounted for 2% of sales. COMMON REFRACTIVE VISION DISORDERS The population segment described above usually suffers from one or more refractive vision disorders, which result from improper curvature of the cornea as related to the size and shape of the eye. If the cornea's curvature is not precisely correct, it cannot properly focus the light passing through it onto the retina, and the viewer will see a blurred image. The three most common refractive vision disorders are: - Myopia (nearsightedness) -- images are focused in front of the retina, resulting in the blurred perception of distant objects - Hyperopia (farsightedness) -- images are focused behind the retina, resulting in the blurred perception of near objects - Astigmatism -- images are not focused on any point due to the varying curvature of the eye along different axes LASER VISION CORRECTION PROCEDURES Laser vision correction procedures are designed to reshape the outer layers of the cornea to correct refractive vision disorders by changing its curvature with an excimer laser, which eliminates or reduces the need for corrective lenses. The excimer laser used in our U.S. centers is manufactured by VISX and is currently approved to treat nearsightedness of up to -12 diopters with astigmatism of up to -4 diopters, and farsightedness of up to +6 diopters. There are currently two outpatient procedures that use the excimer laser to correct common refractive vision disorders: Laser In-Situ Keratomileusis ("LASIK") and Photorefractive Keratectomy ("PRK"). In the case of both LASIK and PRK, prior to the procedure, an assessment is made of the correction required to program the excimer laser. The software of the excimer laser then calculates the optimal number of pulses needed to achieve the intended correction using a specially developed algorithm. An eyelid holder is inserted to prevent blinking and topical anesthetic eye drops are applied. The patient reclines in a chair, eyes focused on a fixed target, while the ophthalmologist positions the patient's cornea for the procedure. The excimer laser emits energy in a series of pulses with each pulse lasting only several billionths of a second. High- energy ultraviolet light produced by the excimer laser creates a "non-thermal" process known as ablation, which removes tissue and reshapes the cornea without damaging adjacent tissue. The amount of tissue removed depends upon the degree of the vision disorder being corrected. Following the procedure, the front surface of the eye is flatter when corrected for nearsightedness and steeper when corrected for farsightedness. In effect, the change made in the middle or periphery of the cornea is translated to the front surface of the cornea which results in vision correction. A series of patient follow-up visits are scheduled with an 25 28 optometrist or ophthalmologist to monitor the corneal healing process, to verify that there are no complications and to test the correction achieved by the laser vision correction procedure. The typical procedure takes 15 to 30 minutes from set-up to completion. The excimer laser is generally used for less than 40 seconds. LASIK. LASIK came into commercial use in Canada in 1994 and in the U.S. in 1996. Currently, the majority of laser vision correction procedures are LASIK since it is believed that LASIK generally allows for: - More precise correction than PRK for higher levels of myopia and hyperopia (with or without astigmatism), - Greater predictability of results, - Shorter patient recovery times and less discomfort, and - Decreased possibility of corneal regression. In LASIK, an FDA-approved automated microsurgical instrument called a microkeratome is used to create a thin corneal flap, which remains hinged to the eye. Patients do not feel or see the cutting of the corneal flap, which takes only a few seconds. The corneal flap is then laid back and excimer laser pulses are applied to the exposed surface of the cornea to treat the eye according to the patient's prescription. The corneal flap is then folded back to its original position and inspected to ensure that it remains secured in position by the natural suction within the cornea. Because the surface layer of the cornea remains intact with LASIK, no bandage contact lens is required and the patient experiences minimal discomfort. LASIK has the advantage of more rapid recovery than PRK, with most patients seeing well enough to drive a car the next day and healing completely within one to three months. The LASIK procedure allows an ophthalmologist to treat both eyes of a patient during the same visit. PRK. PRK has been used commercially since 1985. In PRK procedures, the ophthalmologist removes the thin layer of cells covering the outer surface of the cornea (the epithelium), rather than creating a corneal flap, in order to apply the excimer laser pulses to the surface of the cornea. Following the PRK procedure, a contact lens bandage is placed on the eye to protect it. The patient typically experiences discomfort for up to 24 hours and blurred vision for up to 72 hours until the epithelium heals. To assist in alleviating discomfort and to promote corneal healing, an ophthalmologist generally will prescribe certain topical pharmaceuticals. Although a patient usually experiences substantial improvement in clarity of vision within a few days following the procedure, it usually takes one to three months for the full benefit of the PRK procedure to be realized. Patients usually have one eye treated in one visit and the second eye treated at a later visit. THE LASER VISION CORRECTION MARKET In 1995, the FDA approved the first laser to perform laser vision correction procedures in the U.S. Currently, laser vision correction is the most rapidly growing surgical procedure in the U.S. with an estimated 480,000 procedures performed in 1998, an increase of 110% over the 215,000 procedures performed in 1997. Industry analysts forecast approximately 800,000 procedures will be performed in 1999 and 1.2 million procedures will be performed in 2000 indicating annual growth rates of 70% and 50%, respectively. Laser vision correction is an elective, private pay procedure performed on an outpatient basis. 26 29
105 '1996' - --- ------ 215 '1997' 480 '1998' 800 '1999E' 1200 '2000E'
The rapid growth of laser vision correction procedures performed in the U.S. is attributable to: - Word of Mouth -- As the number of procedures performed increases, so does the number of patients able to attest to the benefits of laser vision correction. - Improved Procedure -- The LASIK procedure results in immediate improvement, minimal patient discomfort and recovery in a matter of days. - Expanded Applications -- The excimer laser is now approved to treat the three most common types of refractive vision disorders: nearsightedness, farsightedness and astigmatism. - Demographic Trends -- Deteriorating eyesight experienced by aging baby boomers is anticipated to create increased demand for eye care services, including laser vision correction. OUR LASER VISION CORRECTION CENTERS We currently operate 22 laser vision correction centers, 19 of which are located in metropolitan markets throughout the United States, two of which are in Canada and one of which is in Europe. Our centers are supported by our fully credentialed network of approximately 760 ophthalmologists and 1,460 optometrists who perform laser vision correction procedures, pre-procedure evaluations and post-procedure follow-ups. Over 60,000 laser vision correction procedures have been performed at our centers since inception in 1991. Approximately 90% of the laser vision correction procedures performed in our centers today are LASIK. At our laser vision correction centers, we strive to meet the needs of our customers which include the ophthalmologists and optometrists, and the patient. WE PROVIDE OUR OPHTHALMOLOGISTS AND OPTOMETRISTS WITH: State-of-the-art equipment and facilities. We provide our ophthalmologists with the facilities, equipment and support services necessary to perform vision correction procedures using state-of-the-art laser technologies. Our ophthalmologists are able to focus on treating patients and are not burdened by the financial, management, administrative, maintenance and regulatory requirements associated with establishing and operating a laser vision correction center. Our laser vision correction centers typically include one or more laser procedure rooms, private examination rooms and patient waiting areas. Each center in the U.S. is equipped with a VISX Star S2 laser in addition to corneal topography instruments, ophthalmic examination equipment, computer systems and standard office equipment. 27 30 Trained technicians and support staff. Staffing at our laser vision correction centers depends on the procedure volume at a particular center. All of our centers are generally staffed with a center director, a technician and an office manager. The center director typically has a medical background and is responsible for the clinical management of the center including programming the excimer laser for procedures. The technician assists the ophthalmologists during the laser vision correction procedure and provides support services such as sterilization of surgical instruments. The technician is certified by both the excimer laser manufacturer and the microkeratome supplier. The office manager is responsible for day-to-day operations of the center, including patient administration, billing, scheduling and supply re-ordering. In addition, most centers are assigned a medical support director who works with our center director to support our network of ophthalmologists and optometrists, recruit additional ophthalmologists and optometrists, and assist in developing laser vision correction programs. Access to an expanded patient population. We have helped many of our ophthalmologists and optometrists develop laser vision correction practices through our strong marketing efforts which identify and capture potential new patients. We coordinate our efforts with our ophthalmologists to customize marketing programs using the ophthalmologist's name in media advertisements and when answering toll-free phone inquiries. We market each ophthalmologist's laser vision correction services directly to the consumer through radio, direct mail and print advertisements, videos, brochures and seminars. Opportunities for incremental income. Each laser vision correction procedure (one eye) yields a procedure fee for the ophthalmologist. Ophthalmologists and optometrists who perform pre-procedure evaluations or post-procedure follow-ups also receive a professional fee for such services. These procedure and professional fees represent for our ophthalmologists and optometrists an incremental source of income not subject to managed care or government reimbursement. Clinical training programs for new procedures and techniques. We strive to be the leader in clinical training programs, to educate our network of ophthalmologists and optometrists on laser vision correction, and to remain current with new procedures and techniques. We provide our ophthalmologists with live on-site procedure demonstrations and hands-on laser vision correction training. In addition, certain centers are involved in pre-FDA evaluation of new procedures and expanded applications for vision correction. WE PROVIDE OUR PATIENTS WITH: Convenient access to highly credentialed ophthalmologists and optometrists. We focus on recruiting leading ophthalmologists and optometrists who have a reputation for providing quality eye care within their respective markets. Our ophthalmologists have completed extensive FDA-mandated training and also have met our rigorous qualification criteria, including an extensive review of state licensure, Board certification, malpractice insurance and history, procedure experience and clinical outcomes. In addition, all newly-recruited ophthalmologists are placed under the supervision of a more experienced laser vision correction ophthalmologist to closely monitor clinical outcomes and patient satisfaction. Treatment environments designed to enhance customer satisfaction. Our centers are designed to create a patient friendly environment and reduce any anxiety associated with laser vision correction. Each center has an aesthetically pleasing and comfortable waiting area for patients and our center staff is focused on addressing each patient's needs. In addition, each center provides consultation areas where the patient and center staff can discuss procedures and financing alternatives in a private setting. Educational consultations and materials. The education process begins with our initial contact with the patient. All of our educational materials focus on information regarding vision correction procedures. Our call center personnel are trained to answer questions regarding procedures and have access to both an ophthalmologist to address more difficult inquiries and past patients to relate procedure experiences. Once in the center, potential patients receive a consultation focused on educating the patient on vision correction procedures, how the procedure corrects the specific refractive vision disorder that the patient presents and what results the patient should expect after the procedure. Patients are given written materials and can view a 28 31 video of the procedure or witness an actual procedure during their initial visit. We believe that an educated patient has realistic expectations and is therefore more satisfied with procedure results. Regularly scheduled post-procedure follow-ups. We strive towards 100% patient satisfaction and have established a "Continuum of Care" program which assures that the level of vision correction agreed to by the patient and the ophthalmologist is achieved. We schedule post-procedure follow-ups with patients to monitor procedure results and in those very few instances when the desired correction is not achieved in the initial procedure, the patient receives a no-cost enhancement. The results of an internally-prepared study of 2,072 procedures performed at our U.S. centers indicated that, of those procedures with at least six months of follow-up, 83% of the eyes were corrected to between 20/15 and 20/25 and 97% were corrected to at least 20/40. Affordable financing alternatives. Because laser vision correction procedures are elective and generally not reimbursable by third party payors, we offer patients several financing alternatives and in certain circumstances promotional discounts. Customers can pay for the procedure with cash, personal check, bank check, money order or credit card. In addition, we make available multiple payment plans offered by an unaffiliated finance company. We also provide information regarding installment plans, insurance coverage, home equity loans and payment through employer flexible benefit plans. In the majority of the procedures financed, we bear no credit risk. OUR BUSINESS STRATEGY We intend to increase penetration and market share in our current markets and expand into contiguous markets. The key elements of our business strategy include: Developing and implementing innovative direct marketing campaigns. Our marketing programs seek to reinforce the LCA-Vision brand name in addition to raising awareness concerning laser vision correction and promoting our centers and network of ophthalmologists and optometrists. We direct patient marketing efforts to three potential sources: our network's patient base, other eye care and medical professionals' patients and consumers in general. In each market, we target a specific demographic group within each of these potential populations that we believe is most likely to be interested in laser vision correction. These direct marketing programs include print, television and direct mail campaigns as well as brochures, videos and seminars. Our broader public relations and advertising efforts rely on radio spots and placement of news stories in various media to highlight the opening of new centers or the availability of laser vision correction services within a specific market. In most advertisements, prospective patients are provided a toll-free number to contact our call center representatives who screen prospective patients and record patient names and information into our centralized computer system for future mailings. We coordinate our call center efforts with our network of ophthalmologists and optometrists by answering calls and customizing follow-up brochures using a local network ophthalmologist's or optometrist's name. Once patient information has been recorded, our representatives schedule eye evaluation appointments for prospective patients with a local network ophthalmologist or optometrist to determine whether the prospective patient is a candidate for laser vision correction. If a prospective patient elects not to proceed with a laser vision procedure following an initial evaluation, the prospective patient's name is kept on a follow-up mailing list and additional materials are sent out to the patient for a certain period of time. Attracting leading ophthalmologists and optometrists. We believe the most effective way to attract leading ophthalmologists and optometrists is to establish ourselves as a leading provider and operator of laser vision correction centers within the eyecare community. We assign a medical support director to each of our markets who is responsible for identifying the leading ophthalmologists and optometrists located within that market. Our medical support director establishes contacts and promotes our laser vision correction services and capabilities through attending professional meetings and conferences, advertisements in trade journals, direct mailings, our web site and newsletters. We then continue to work closely with ophthalmologists and optometrists who have indicated an interest in participating in our laser vision correction programs by educating them as to how to develop their laser vision correction business and providing training and 29 32 credentialing for the laser vision correction procedure, including pre-procedure evaluations and post-procedure follow-ups. Building and operating new laser vision correction centers. We plan to expand our business primarily through the development of new centers in contiguous markets and within existing markets. In evaluating new and current markets for building a laser vision correction center, we first evaluate population demographics, determine the number of existing excimer lasers and interview local ophthalmologists and optometrists to assess interest in developing a laser vision correction center. The targeted market must exhibit a potential for generating break-even procedure volume within the first 6 to 8 months, including the necessary ophthalmologist and optometrist participation to support such levels. We seek to lease 2,000 to 3,000 square feet of space in professional office buildings located in high volume traffic areas. In addition, we have developed standardized center plans and designs to be used in building each new center. Acquiring established laser vision correction centers. We will evaluate select acquisition opportunities located in existing and contiguous markets. We perform an extensive evaluation of each potential laser vision correction center's historical operating performance and clinical outcomes and verify all credentialing, licensures and certifications for the ophthalmologists performing procedures. Furthermore, we assess each targeted center's physical structure, geographic location and support staff qualifications. We seek to acquire laser vision correction centers that have established profitability and can benefit from our management and marketing programs. OUR CENTER LOCATIONS Our centers are located in the following U.S. metropolitan and international markets: Concord, CA Newport Beach, CA San Bernardino, CA San Jose, CA Torrance, CA Clearwater, FL Schaumburg, IL Annapolis, MD* Baltimore, MD* Bethesda, MD Edina, MN Charlotte, NC Albany, NY Amherst, NY Centerville, OH Cincinnati, OH Columbus, OH Holland, OH Falls Church, VA Ft. Erie, Ontario, Canada Willowdale, Ontario, Canada Helsinki, Finland* - --------------- * We do not wholly-own these centers. They are owned by joint ventures in which we have a substantial ownership interest. PROCEDURE VOLUME Approximately 90% of the procedures performed in our laser vision correction centers in the U.S. for the three month period ended March 31, 1999 were LASIK procedures. During the same period in 1998, approximately 65% of the procedures were LASIK procedures. 30 33 The table below illustrates the quarterly growth in the number of combined procedures performed in our centers since the first quarter of 1996.
613 Q1 - --- -- 1054 Q2 864 Q3 1089 Q4 1443 Q1 2078 Q2 2794 Q3 3400 Q4 4450 Q1 5737 Q2 6102 Q3 6791 Q4 9064 Q1
COMPETITION Laser vision correction, whether performed at one of our centers or elsewhere, competes with several surgical and non-surgical treatments to correct refractive vision disorders including eyeglasses, contact lenses, other types of refractive surgery (such as radial keratotomy) and corneal implants. In addition, other technologies currently under development may ultimately prove to be more attractive to consumers than laser vision correction. We face competition from other providers of laser vision correction. Eye care services in the U.S., including laser vision correction services, are delivered through a fragmented system of local providers, including individual or small groups of opticians, optometrists and ophthalmologists and chains of retail optical stores and multi-site eye care centers. Laser vision correction chains, like LCA-Vision, are a specialized type of multi-site eye care center that primarily provide laser vision correction. Among the laser vision correction center chains, we believe we are one of the largest providers in terms of number of centers in the U.S. The market for providing access to excimer lasers is highly competitive. We compete with laser centers operated by other national operators of laser vision correction centers as well as with local operators and ophthalmologists who have purchased their own laser. Other companies which have indicated they intend to operate or already operate laser centers in the U.S. are Clear Vision Laser Centers, Laser Vision Centers, Inc., NovaMed Eyecare, Inc., Omega Health Systems, Inc., Physicians Resource Group, Inc., TLC The Laser Center Inc. and Vision Twenty-One, Inc. In addition, we face competition from companies which own or operate mobile excimer laser facilities which they bring to ophthalmologists on a regularly-scheduled basis, or an as-needed basis, rather than operating fixed site open access centers like ours. Our largest competitor of this type is Laser Vision Centers, Inc. Other companies pursuing this mobile strategy include Omega Health Systems, Inc., and possibly, Nidek, Inc., an excimer laser manufacturer. In addition to competition from other chains of laser vision correction centers, we face competition from hospitals, clinics and ophthalmologists, either as sole practitioners or as a group, who practice in the same geographic area as one of the centers. Furthermore, retail optical chains could potentially provide laser vision correction procedures. Certain chains have entered the laser vision correction market. Management believes they have had moderate success and have limited their involvement in the industry. Other retail optical chains are not currently focusing on providing laser vision correction. 31 34 EMPLOYEES As of May 31, 1999, we had 145 employees, 107 of whom were full-time. None of our employees are subject to a collective bargaining agreement nor have we experienced a work stoppage. TRADEMARKS Our trademarked names have not yet been formally registered. Where the trademark symbol is used, it is our intention to claim a trademark on such names under common law by using the "TM" symbol. The duration of such trademarks under common law is the length of time we continue to use them. In the future, we plan to formally register our trademarks with the U.S. Trademark Office. GOVERNMENT REGULATION Excimer lasers used in the U.S. are regulated by the FDA and cannot be sold in the U.S. until the FDA approves the device. In the U.S., VISX, Summit, Autonomous and Nidek are the only excimer laser manufacturers with FDA approval. Excimer laser manufacturers that obtain FDA approval for use of their excimer lasers are subject to continuing regulation by the FDA, including periodic inspections to determine compliance with regulations. Although the FDA has not sought to regulate ophthalmologists' use of approved and unmodified excimer lasers, it enforces numerous regulations including regulations prohibiting the sale and promotion of excimer lasers for non-indicated uses. While excimer lasers are not approved by the FDA for LASIK, ophthalmologists in the U.S., including those affiliated with us and our competitors, have performed LASIK using their discretion as a practice of ophthalmology matter. The FDA may seek to challenge this practice in the future. The following is a more detailed description of certain laws and regulations that affect our operations. Restrictions on medical devices In the U.S., the FDA regulates the manufacturing, labeling, distribution and marketing of medical devices, including excimer lasers and microkeratomes. The excimer lasers and other major equipment that we use have been authorized by the FDA for certain uses. Once FDA approval is obtained, however, medical device manufacturers are subject to continuing FDA obligations. For example, the FDA requires that medical devices be manufactured in accordance with its Quality System Regulations. In essence, this means that medical devices must be manufactured and records must be maintained in a prescribed manner with respect to production, testing and control activities. In addition, the FDA sometimes imposes restrictions and requirements regarding the labeling and promotion of medical devices, with which users (such as LCA-Vision) as well as manufacturers must comply. Non-compliance with FDA requirements could subject manufacturers and LCA-Vision to enforcement action, including: - Product seizures, - Recalls, - Withdrawal of approvals, and - Civil and criminal penalties. Any such enforcement action could have a material adverse effect on our business, financial condition and results of operations. To authorize new uses of medical devices, manufacturers are required to obtain a supplemental FDA authorization. Obtaining these authorizations is time consuming and expensive, and we cannot be sure that manufacturers of the devices we use will be able to obtain any such additional FDA authorizations. Further, later discovery of problems with the medical devices we use or the manufacture or failure to comply with manufacturing or labeling requirements may result in restrictions on use of the devices or enforcement action 32 35 against the manufacturers, including withdrawal of devices from the market. Changes in legislation or regulation could affect whether and how we can use the devices. These and other regulatory actions could limit the supply of devices we use or our ability to use them, which could have a material adverse effect on our business, financial condition and results of operations. Anti-kickback statutes In the U.S., the federal anti-kickback statute prohibits the knowing and willful solicitation, receipt, offer or payment of any kickback in connection with: - The referral of patients, and - The ordering or purchasing of items or services payable in whole or in part under Medicare, Medicaid or other federal healthcare programs. Some courts have interpreted the federal anti-kickback statute broadly to prohibit payments intended to induce the referral of Medicare or Medicaid business, regardless of any other legitimate motives. Sanctions for violations of the anti-kickback statute include: - Criminal penalties, - Civil penalties of up to $50,000 per violation, and - Exclusion from Medicare, Medicaid and other federal programs. According to the U.S. Office of the Inspector General, ophthalmologists and optometrists who engage in agreements to refer business may be violating the anti-kickback statute. Further, violations may occur even with respect to non-Medicare or Medicaid services if the arrangement has an impact on the referral pattern for Medicare or Medicaid services. Some states have enacted statutes similar to the federal anti-kickback statute which are applicable to all referrals of patients. Although we have endeavored to structure our contractual relationships in compliance with these laws, authorities could determine that our business practices are in violation of such laws. This could have a material adverse effect on our business, financial condition and results of operations. Fee-splitting Many states prohibit professionals (including ophthalmologists and optometrists) from paying a portion of a professional fee to another individual unless that individual is an employee or partner in the same professional practice. Violation of a state's fee-splitting prohibition may result in civil or criminal fines, as well as loss of licensing privileges. Many states offer no clear guidance on what relationships constitute fee-splitting, particularly in the context of providing management services for doctors. Although we have endeavored to structure our contractual relationships in material compliance with these laws, state authorities could find that fee-splitting prohibitions apply to our business practices. This could have a material adverse effect on our business, financial condition and results of operations. Corporate practice of medicine and optometry The laws of many states prohibit business corporations, such as LCA-Vision, from practicing medicine and employing or engaging physicians to practice medicine. Some states in which we currently operate prohibit business corporations from practicing optometry or employing or engaging optometrists to practice optometry. Such laws preclude companies that are not owned entirely by eye care professionals from: - Employing eye care professionals, - Controlling clinical decision making, and - Engaging in other activities that are deemed to constitute the practice of optometry or ophthalmology. 33 36 This prohibition is generally referred to as the prohibition against the corporate practice of medicine or optometry. Violation of this prohibition may result in civil or criminal fines, as well as sanctions imposed against the professional through licensing proceedings. In those states in which we operate centers, including California, Illinois and New York, our revenues and direct costs do not include the medical professionals' fee component. Although we have endeavored to structure our contractual relationships in compliance with these laws, if any aspect of our operations were found to violate state corporate practice of medicine or optometry prohibitions, this could have a material adverse effect on our business, financial condition and results of operations. Self-referral laws The U.S. federal self-referral law (the "Stark Law") prohibits physicians (including optometrists) from referring their Medicare or Medicaid patients for certain health services to any provider with which they (or their immediate family members) have a financial relationship. Certain referrals, however, fit within specific exceptions in the statute or regulations. The penalties for violating the Stark Law include: - Denial of payment for the health services performed, - Civil fines of up to $15,000 for each service provided pursuant to a prohibited referral, - A fine of up to $100,000 for participation in a circumvention scheme, and - Possible exclusion from Medicare and Medicaid programs. Currently, it is unclear how eye doctors are affected under the law. While we believe that our present business practices will not be affected, there can be no assurance that we fully comply with the Stark Law or similar state laws. Any such actions could have a material adverse effect on our business, financial condition and results of operations. Other anti-fraud provisions Certain federal and state laws impose penalties on healthcare providers and those who provide services to such providers (including businesses such as LCA-Vision) that fraudulently or wrongfully bill government or other third-party payors for healthcare services. Such penalties include substantial civil and criminal fines and imprisonment. In addition, the federal law prohibiting false Medicare/Medicaid billings allows a private person to bring a civil action in the name of the U.S. government for violations of its provisions. Such private individuals can obtain a portion of the false claims recovery if the action is successful. We believe that we operate in material compliance with these laws. We do not know whether any of our activities will be challenged or reviewed by governmental authorities or private parties asserting false claims. Any such actions could have a material adverse effect on our business, financial condition and results of operations. Center licensure and certificate of need State Departments of Health may require us to obtain licenses in the various states in which we have or acquire laser vision correction centers or other business operations. We believe that we have obtained the necessary licensure in states where licensure is required and that we are not required to obtain licenses in other states. However, some of the regulations governing the need for licensure are unclear and there is little guidance available regarding certain interpretative issues. Therefore, it is possible that a state regulatory authority could determine that we are improperly conducting business operations without a license. This could subject us to significant fines or penalties, result in our being required to cease operations in that state and could otherwise have a material adverse effect on our business, financial condition and results of operations. We have no reason to believe that we will be unable to obtain necessary licenses without unreasonable expense or delay, but there can be no assurance that we will be able to obtain any required license. Some states require permission by the State Department of Health in the form of a Certificate of Need ("CON") prior to the construction or modification of an ambulatory care facility or the purchase of certain medical equipment in excess of a certain amount. Currently, we do not believe we need any CONs to operate 34 37 our laser vision correction centers. However, some of the regulations governing the need for CONs are unclear and there is little guidance to cover certain interpretive issues. Therefore, it is possible that a state regulatory authority could determine that we are improperly conducting business operations without a CON. This could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will be able to acquire a CON in all states where it is required. Healthcare reform Healthcare reform is considered by many in the U.S. to be a national priority. Several states are also currently considering healthcare proposals. We cannot predict what additional action, if any, the federal government or any state may ultimately take with respect to healthcare reform or when any such action will be taken. Healthcare reform may bring radical changes in the financing and regulation of the healthcare industry, which could have a material adverse effect on our business, financial condition and results of operations. YEAR 2000 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 of 1999. 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. 35 38 Costs to address Year 2000 issues We expect that any remaining costs for Year 2000 compliance will be less than $400,000 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 our 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 reasonably likely worst case Year 2000 scenario would be that a solution to the VISX laser printing and storing 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 procedures 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. LEGAL PROCEEDINGS 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. Various current and former employees, officers and directors are also named as co-defendants. 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 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. The actions, which have been consolidated, are in the discovery stage. In management's opinion neither action will have a material adverse effect on our financial position or results of operations. 36 39 MANAGEMENT The directors, executive officers and key personnel of LCA-Vision and their positions with LCA-Vision are as follows:
NAME POSITION ---- -------- Chairman of the Board and Chief Executive Stephen N. Joffe............................ Officer Thomas E. Wilson............................ President and Chief Operating Officer Larry P. Rapp............................... Treasurer and Chief Financial Officer Sandra F. N. Joffe.......................... Secretary William O. Coleman(1)(2).................... Director John H. Gutfreund(1)(2)..................... Director John C. Hassan(1)........................... Director
- --------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee Stephen N. Joffe, age 56, is LCA-Vision's Chairman of the Board and Chief Executive Officer. He was the founder of the Company's corporate predecessor, Laser Centers of America, Inc. and served as its Chairman of the Board and Chief Executive Officer from its founding in 1985 until its merger into the Company in 1995. In addition, he is an Esteemed Professor of Surgery at the University of Cincinnati Medical Center, a position he has held since 1990. He was a full-time Professor of Surgery at the University of Cincinnati Medical Center for nine years prior to 1990. He has held faculty appointments at the Universities of London, Glasgow and Cincinnati and holds fellowships of the American College of Surgeons and the Royal College of Surgeons of Edinburgh and Glasgow. Thomas E. Wilson, age 60, is LCA-Vision's President and Chief Operating Officer, a position he has held since December 1998. He served as a management consultant to LCA-Vision from June 1998 through December 1998. Mr. Wilson was the Vice President of Manufacturing of Pease Industries (residential door manufacturer) from 1996-1998; Vice President of Operations of Cincinnati Mine Machinery Company (manufacturer of coal mining equipment) from 1995-1996. Prior to 1995, he served in a variety of management positions with the GE Aircraft Engines Division of the General Electric Company for more than five years. Larry P. Rapp, age 51, has been LCA-Vision's Treasurer since December 1998 and Chief Financial Officer since April 1996. He has over 15 years of senior financial management experience in publicly traded and privately held companies, as well as 13 years of public accounting experience with Price Waterhouse. Immediately prior to joining LCA-Vision, he was a principal of Sanctuary Financial Group, Inc. (a strategic management consulting firm) from 1993-1996. Sandra F.N. Joffe, age 56, is LCA-Vision's Secretary, a position she has held since 1995. Prior to that she was the Secretary of Laser Centers of America, Inc., one of LCA-Vision's predecessor companies, for more than five years. William O. Coleman, age 70, is a Director and formerly held positions at The Procter & Gamble Company from 1955-1989 that included General Sales Manager, Vice President Food Products, Vice President International/Latin America, and most recently, Vice President Professional Affairs, Special Projects. Mr. Coleman continues to serve as a Trustee of the Procter & Gamble Retirement Trusts. John H. Gutfreund, age 69, is a Director and is President of Gutfreund & Company, Inc., a New York-based financial consulting firm that specializes in advising select corporations and financial institutions in the United States, Europe and Asia. Formerly, Mr. Gutfreund was with Salomon Brothers from 1953-1991, most recently as its Chief Executive Officer. Mr. Gutfreund is: Director, Foamex International, Inc.; Director, Baldwin Piano & Organ Company; Director, Montefiore Medical Center, New York City and a Member of 37 40 the Executive Committee of the Board of Trustees and Finance and Real Estate Committees; Member, Council on Foreign Relations; Member, the Board of Trustees, New York Public Library, Astor, Lenox and Tilden Foundations; Honorary Trustee, Oberlin (Ohio) College; and Trustee, Aperture Foundation. John C. Hassan, age 56, is a Director and has been the President of Champion Printing, Inc. for more than five years. Previously, he was Vice President, Marketing of the Drackett Company, a division of Bristol-Meyers Squibb. He currently serves as Treasurer of Printing Industries of Southern Ohio, and is a board member of the Ohio Graphics Arts Health Fund, the Camargo Club and serves on the Greater Cincinnati United Way and Fine Arts campaigns. There are no family relationships between any of the directors or executive officers of LCA-Vision except that Stephen N. Joffe and Sandra F. W. Joffe are married to one another. 38 41 CERTAIN TRANSACTIONS Since January 1, 1997, LCA-Vision has been a party, directly or indirectly, to the transactions described below with its current directors, executive officers and principal stockholders (including any of their associates or affiliates). All of these transactions were with Stephen N. Joffe, our Chairman and Chief Executive Officer, and his wife, Sandra F.W. Joffe, who is our Secretary. Certain of these transactions arose out of the process of establishing LCA-Vision as a publicly traded corporation rather than a corporation privately owned by the Joffe family. The net result of the various transactions described in detail below is that as of March 31, 1999, Mr. and Mrs. Joffe were indebted to LCA-Vision, directly or indirectly, in the total amount of $343,000. The individual transactions, all of which were approved by the independent members of LCA-Vision's Board of Directors and are believed to be on terms no less favorable to LCA-Vision than comparable third party transactions would have been, are as follows: In 1995, LCA-Vision borrowed a total of $4.4 million from Mr. and Mrs. Joffe. The loans were made under two promissory notes which specified an interest rate of 6.91% per annum and a maturity date of September 26, 2005. In two separate transactions in December 1996, the note holders converted $2.5 million of their notes into 12.6 shares of Class B Preferred Stock, First and Second Interim Series. As of January 1, 1997, the total amount due under these notes, including outstanding principal and accrued interest, was $2.0 million. In August 1997, in connection with LCA-Vision's acquisition of Refractive Centers International, Inc. from Summit Technology, Inc., LCA-Vision and Mr. and Mrs. Joffe agreed to amend the promissory notes to provide that LCA-Vision could not make principal payments under the notes to Mr. and Mrs. Joffe in any year unless during the prior fiscal year LCA-Vision's earnings before taxes, amortization and depreciation net of capital expenditures exceeded $1.0 million, and then payments could be made only up to 25% of such excess. No payments were made under these loans in 1997 or 1998, and as of December 31, 1998 the total amount of principal and accrued interest due under these loans was $2.1 million. In February 1999, Summit agreed to waive the payment restriction which prevented any payments to be made under these notes in 1997 and 1998. The balance of this loan and accrued interest totaling $2.1 million were paid in March 1999. Prior to August 1997, Mr. Joffe was the guarantor of approximately $11.1 million in bank loans to LCA-Vision, including a mortgage note in the amount of $3.1 million, and a working capital credit line of up to $8.0 million. Mr. Joffe was not compensated for these personal guarantees. In 1998, LCA-Vision loaned Mr. and Mrs. Joffe a total of $2.1 million. This loan bears interest at the rate of 8.5% per annum collateralized with Mr. and Mrs. Joffe's pledge to LCA-Vision of their rights under the promissory notes evidencing their loans to LCA-Vision. In March 1999, this advance was reduced by the $2.1 million due the Joffes for notes payable and accrued interest due them. Mr. Joffe is sole owner of The LCA Center for Surgery, Ltd. (the "Surgery Center"). LCA-Vision does not hold an investment in the Surgery Center. During 1997 and approximately half of 1998, LCA-Vision leased a portion of its headquarters building to the Surgery Center at an annual rental of $190,000. In February 1997, LCA-Vision agreed to forego rent in exchange for the Surgery Center providing LCA-Vision with certain systems and processes for research and development and additional staffing, and for giving LCA-Vision unlimited use of the leased premises for research, testing, educational and other agreed upon purposes. In 1997, LCA-Vision recorded rent, administrative and marketing income of approximately $74,000 related to the Surgery Center. In August 1997, we pledged to The Fifth Third Bank a $985,000 certificate of deposit issued by the Fifth Third as security for a $985,000 loan made by Fifth Third to the Surgery Center. LCA-Vision pledged the certificate of deposit for up to 30 days while the Surgery Center arranged to replace the certificate of deposit as collateral for this loan. When Mr. Joffe's personal guarantee of our prior facility with Fifth Third expired in August 1997, he remained personally obligated to LCA-Vision with respect to replacing the certificate of deposit as collateral for Fifth Third's loan to the Surgery Center. Mr. Joffe fulfilled this obligation to LCA-Vision by pledging the required collateral, and LCA-Vision is no longer obligated to Fifth Third with respect to the certificate of deposit. 39 42 In June 1998, LCA-Vision purchased the leasehold improvements that had been paid for by the Surgery Center for their book value of approximately $872,000 and also advanced approximately $576,000 to the Surgery Center. As of March 31, 1999, the Surgery Center owed us approximately $635,000. PRINCIPAL AND SELLING STOCKHOLDERS The following table and notes set forth certain information with respect to the beneficial ownership of LCA-Vision's common stock as of March 31, 1999, both before and after giving effect to the sale of shares of common stock in this offering (excluding over-allotments, if any) for the following: - Each of our directors and executive officers, - All directors and executive officers as a group, - The selling stockholders, and - Each person who is known by us to be the beneficial owner of more than 5% of our outstanding common stock. The table below sets forth the names of the selling stockholders and the number of shares which may be sold by each of the selling stockholders pursuant to this prospectus. "Shares Beneficially Owned" prior to and after the offering include those shares that could be acquired through the possible exercise of outstanding options granted under one or more of our stock option plans which are presently exercisable. SEC rules provide that shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown on the table. The information included below is based upon information provided by the selling stockholders. Because this offering may not result in the sale of all additional shares pursuant to over-allotments, no definitive estimate as to the percentage of common stock that will be held by the selling stockholders after this offering can be provided. The table below has been prepared on the assumption that the over-allotment option has not been exercised, and that all of the shares offered under this prospectus will be sold to unaffiliated parties. See "Underwriting."
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING(1) AFTER THE OFFERING --------------------- SHARES --------------------- NAME NUMBER PERCENT OFFERED NUMBER PERCENT ---- ---------- ------- --------- ---------- ------- Stephen N. Joffe ................... 15,475,400(2) 33.4% 1,500,000 12,775,400(2) 24.8% Sandra F.W. Joffe................... 15,475,400(2) 33.4% 1,200,000 12,775,400(2) 24.8% ---- Summit Technology, Inc.............. 7,164,361 15.8% 500,000 6,664,361 13.2% ---- Craig P.R. Joffe.................... 2,500,313 5.5% -- 2,500,313 4.9% ---- William O. Coleman.................. 241,250(3) * -- 241,250(3) * John H. Gutfreund................... 126,900(4) * -- 126,900(4) * John C. Hassan...................... 154,500(5) * -- 154,500(5) * Larry P. Rapp....................... 255,500(6) * 100,000 155,500(6) * Thomas E. Wilson.................... 100,000(7) * -- 100,000(7) * All directors and executive officers as a group persons(8)............. 16,353,550(8) 34.8% 2,800,000 13,553,550(8) 26.1% ----- ----
40 43 - --------------- * Less than 1% (1) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws, where applicable, and the information contained in other footnotes to this table. (2) Stephen N. Joffe and Sandra F.W. Joffe are married to one another and each is therefore deemed to be the beneficial owner of all shares owned by the other. The total shown consists of 10,777,950 shares of common stock owned of record by Mr. Joffe (9,277,950 shares after the offering), 3,851,649 shares of common stock owned of record by Mrs. Joffe (2,651,649 shares after the offering), 1,000 shares of common stock owned of record by Mr. and Mrs. Joffe jointly, 750 shares of common stock issuable to Mrs. Joffe in the event of her exercise of a currently exercisable stock option, 736,309 shares of common stock issuable to Mr. Joffe in the event of conversion of 11 shares of Class B Preferred Stock owned by him, and 107,742 shares of common stock issuable to Mrs. Joffe in the event of conversion of 1.6 shares of Class B Preferred Stock owned by her. (3) Includes 165,000 shares owned of record by Mr. Coleman and 76,250 shares of common stock issuable to Mr. Coleman upon the exercise of certain unexercised stock options. (4) Includes 50,000 shares owned of record by Mr. Gutfreund, 650 shares owned of record by him as custodian for his minor child, and 76,250 shares of common stock issuable to Mr. Gutfreund upon the exercise of certain unexercised outstanding stock options. (5) Includes 2,000 shares owned of record by Mr. Hassan and 152,500 outstanding shares of common stock issuable to Mr. Hassan upon the exercise of certain unexercised stock options. (6) Includes 500 shares owned of record by Mr. Rapp and 255,000 shares of common stock issuable to Mr. Rapp upon the exercise of certain unexercised outstanding stock options (155,000 shares after the offering). (7) Includes 100,000 shares of common stock issuable to Mr. Wilson upon the exercise of certain unexercised outstanding stock options. (8) Consists of 14,848,749 shares owned of record directly or indirectly by such persons (12,148,749 shares after the offering), 844,051 shares issuable upon conversion of Class B Preferred Stock owned by such persons, and 660,750 shares issuable upon the exercise of stock options held directly or indirectly by such persons (560,750 shares after the offering). 41 44 DESCRIPTION OF SECURITIES Our Amended and Restated Certificate of Incorporation authorizes 110,000,000 shares of common stock, $.001 par value, 1,688 shares of Class A Preferred Stock, $.001 par value, and 5,000,000 shares of Class B Preferred Stock, $.001 par value. The holders of shares of common stock and Class A Preferred Stock have one vote per share. Neither the common stock nor the Class A Preferred Stock has any conversion rights. The closing sale price of the common stock on the Nasdaq SmallCap Market at the close of business June 4, 1999 was $10.5625 per share. Application has been made for quotation of the common stock in the Nasdaq National Market. The holders of shares of common stock are entitled to dividends when and as declared by the Board of Directors from legally available funds. We do not anticipate declaring or paying any cash dividends for the foreseeable future. There are currently 1,182 shares of Class A Preferred Stock issued and outstanding. The holders of shares of Class A Preferred Stock have one vote per share. The Class A Preferred Stock does not have any conversion rights. We have issued a total of 12.6 shares of two series of Interim Class B Preferred Stock. Each of the 12.6 shares of our Interim Series Class B Preferred Stock and Second Interim Series Class B Preferred Stock is convertible into the number of fully paid and nonassessable shares of common stock that results from dividing $3.50 into the sum of $200,000 plus all accrued but unpaid dividends on each such share at the time of conversion. Our Amended and Restated Certificate of Incorporation provides holders of each series of Interim Class B Preferred Stock with a liquidation preference payable upon any voluntary or involuntary liquidation, dissolution or winding up of LCA-Vision of $200,000 per share, plus all accrued and unpaid dividends to be paid prior to any distributions to the holders of Class A Preferred Stock or common stock, and holders of Class A Preferred Stock with a liquidation preference payable upon any voluntary or involuntary liquidation, dissolution or winding up of LCA-Vision of $40 per share, plus all accrued and unpaid dividends to be paid prior to any distributions to the holders of common stock. Subject to those preferential rights, the holders of common stock are entitled to receive, ratably, all of our remaining assets. None of the Class A Preferred Stock, either Series of Interim Class B Preferred Stock, or common stock has preemptive or cumulative voting rights, is redeemable, or is liable for assessments or further calls. On May 7, 1998, we filed a Certificate of Designation (as corrected on May 11, 1998 and May 12, 1998) with the Delaware Secretary of State governing the rights, preferences and privileges of Series B-1 Stock. We subsequently issued 10,000 shares of Series B-1 Stock. As of March 31, 1999, no shares of Series B-1 Preferred Stock remained outstanding. At the time we issued the Series B-1 Stock in May 1998, we agreed with the six purchasers that on or before May 11, 1999, upon notice from the holders of a majority of the Series B-1 Stock, we would sell them up to 5,000 shares of a Series B-2 Preferred Stock with rights, preferences and privileges similar to those of the Series B-1 Preferred Stock. Prior to May 11, 1999, we issued a total of 165,076 shares of our common stock to three of the six original purchasers, holding a majority of the Series B-1 Stock, in exchange for their agreement not to purchase Series B-2 Stock. Subsequently, two of the remaining three purchasers of the Series B-1 Stock filed suit against us in New York seeking to compel the issuance of the Series B-2 Stock. Although we did not believe there to be any merit to their allegations, we agreed to settle the litigation by issuing 25,396 shares of our common stock to the plaintiffs. 42 45 SHARES ELIGIBLE FOR FUTURE SALE The market price of our common stock could drop due to sales of large number of shares of our common stock or the perception that such sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. After this offering, 50,566,973 shares of common stock will be outstanding. Of these shares, 29,421,700 shares, including the 8,300,000 shares (9,545,000 shares if the underwriters exercise their over-allotment options in full) sold in this offering, will be freely tradeable without restriction under the Securities Act except for any shares purchased by any of our "affiliates" as defined in Rule 144 under the Securities Act. The remaining 21,145,273 shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. The restricted securities generally may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. Our officers and directors and certain stockholders, including the selling stockholders, have entered into lock-up agreements pursuant to which they have agreed not to offer or sell any shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the underwriters. See "Underwriting". Prudential Securities may, at any time and without notice, waive any of the terms of these lock-up agreements specified in the underwriting agreement. Following the lock-up period, these shares will not be eligible for sale in the public market without registration under the Securities Act unless such sales meet the conditions and restrictions of Rule 144 as described below. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (1) 1% of the then-outstanding shares of common stock and (2) the average weekly trading volume in the common stock during the four calendar weeks immediately preceding the date on which the notice of such sale on Form 144 is filed with the SEC. Sales under Rule 144 are also subject to certain provisions relating to notice and manner of sale and the availability of current public information about us. In addition, a person (or persons whose shares are aggregated) who has not been an affiliate of ours at any time during the 90 days immediately preceding a sale, and who has beneficially owned the shares for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitation and other conditions described above. The foregoing summary of Rule 144 is not intended to be a complete description. 43 46 UNDERWRITING We and the selling stockholders have entered into an underwriting agreement with the underwriters named below, for whom Prudential Securities Incorporated, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Raymond James & Associates, Inc. are acting as representatives. We and the selling stockholders are obligated to sell, and the underwriters are obligated to purchase, all of the shares offered on the cover page of this prospectus, if any are purchased. Subject to certain conditions of the underwriting agreement, each underwriter has severally agreed to purchase the shares indicated opposite its name:
NUMBER UNDERWRITERS OF SHARES - ------------------------------------------------------------ --------- Prudential Securities Incorporated.......................... Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.............................................. Raymond James & Associates, Inc............................. --------- Total.................................................. 8,300,000 =========
The underwriters may sell more shares than the total number of shares offered on the cover page of this prospectus and they have, for a period of 30 days from the date of this prospectus, over-allotment options to purchase up to 1,245,000 additional shares from a selling stockholder. If any additional shares are purchased, the underwriters will severally purchase the shares in the same proportion as per the table above. The representatives of the underwriters have advised us and the selling stockholders that the shares will be offered to the public at the offering price indicated on the cover page of this prospectus. The underwriters may allow to selected dealers a concession not in excess of $ per share and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the shares are released for sale to the public, the representatives may change the offering price and the concessions. We and the selling stockholders have agreed to pay to the underwriters the following fees, assuming both no exercise and full exercise of the underwriters' over-allotment options to purchase additional shares:
TOTAL FEES ------------------------------------------------------------ FEE WITHOUT EXERCISE OF FULL EXERCISE OF OVER PER SHARE OVER-ALLOTMENT OPTIONS ALLOTMENT OPTIONS --------- ---------------------- --------------------- Fees paid by us....................... $ $ $ Fees paid by the selling stockholders........................ $ $ $
In addition, we estimate that we will spend approximately $365,000 in expenses for this offering including those of the selling stockholders. We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in respect of these liabilities. We, our officers and directors, and certain stockholders, including the selling stockholders, of LCA-Vision have entered into lock-up agreements pursuant to which we and they have agreed not to offer or sell any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days from the date of this prospectus without the prior written consent of Prudential Securities, on behalf of the underwriters. Prudential Securities may, at any time and without notice, waive the terms of these lock-up agreements specified in the underwriting agreement. 44 47 Prudential Securities, on behalf of the underwriters, may engage in the following activities in accordance with applicable securities rules: - Over-allotments involving sales in excess of the offering size, creating a short position. Prudential Securities may elect to reduce this short position by exercising some or all of the over-allotment options. - Stabilizing and short covering; stabilizing bids to purchase the shares are permitted if they do not exceed a specified maximum price. After the distribution of shares has been completed, short covering purchases in the open market may also reduce the short position. These activities may cause the price of the shares to be higher than would otherwise exist in the open market. - Penalty bids permitting the representatives to reclaim concessions from a syndicate member for the shares purchased in the stabilizing or short covering transactions. Such activities, which may be commenced and discontinued at any time, may be effected on the Nasdaq Small Cap Market, on the Nasdaq National Market, in the over-the-counter market or otherwise. Also and prior to the pricing of the shares, and until such time when a stabilizing bid may have been made, some of the underwriters who are market makers in the shares may make bids for or purchases of shares subject to certain restrictions, known as passive market activities. Each underwriter has represented that it has complied and will comply with all applicable laws and regulations in connection with the offer, sale or delivery of the shares and related offering materials in the United Kingdom, including: - The Public Offers of Securities Regulations 1995, - The Financial Services Act 1986, and - The Financial Services Act 1986, (Investment Advertisements) (Exemptions) Order 1996 (as amended). We have asked the underwriters to reserve shares for sale at the same offering price directly to our officers, directors, employees and other business affiliates or related third parties. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase the reserved shares. LEGAL MATTERS The validity of the common stock offered hereby and certain other legal matters will be passed upon for LCA-Vision by Dinsmore & Shohl LLP, Cincinnati, Ohio. Certain legal matters in connection with this offering will be passed upon for the underwriters by Stroock & Stroock & Lavan LLP, New York, New York. EXPERTS The consolidated financial statements of LCA-Vision as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 included in this prospectus and the consolidated financial statements of LCA-Vision as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 incorporated by reference to our Annual Report on Form 10-KSB have been so included or incorporated by reference in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We file reports, proxy statements and other information with the SEC. We have filed with the SEC a registration statement on Form S-3 under the Securities Act of 1933 to register the offering of the shares of common stock offered hereby. This prospectus constitutes a part of the registration statement. Prospective 45 48 investors may read and copy the registration statement and its exhibits and schedules without charge at the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Prospective investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, we are required to file electronic versions of these documents with the SEC through the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The SEC maintains a World Wide Web Site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. 46 49 INFORMATION INCORPORATED BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with the SEC, which means that we can disclose important information to you by referring you to those filed documents. The information incorporated by reference is considered part of this prospectus, and information that we file later with the SEC will automatically update and supersede the information in this prospectus. The following documents, which were previously filed with the SEC pursuant to the Exchange Act, are hereby incorporated by reference: - Our Annual Report on Form 10-KSB for the year ended December 31, 1998, - Our Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999, and - Current Reports on Form 8-K filed with the Commission on April 6, April 13, May 3 and May 14, 1999. All reports and other documents filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference into this prospectus and shall be a part hereof from the date of filing of such reports and documents. We will provide without charge to each person, including any beneficial owner, to whom a copy of this prospectus is delivered, upon such person's written or oral request that includes the address (including title or department) and telephone number to which such information is to be directed, a copy of any and all information incorporated by reference in this prospectus (other than exhibits to the information that is incorporated by reference, unless such exhibits are specifically incorporated by reference herein). You can request such documents by writing or calling us at 7840 Montgomery Road, Cincinnati, Ohio 45236 (513) 792-9292, Attention: Larry P. Rapp. 47 50 INDEX TO FINANCIAL INFORMATION Years Ended December 31, 1996, 1997 and 1998 (Audited): Report of Independent Accountants......................... F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Cash Flows..................... F-5 Consolidated Statement of Shareholders' Investment........ F-6 Notes to Consolidated Financial Statements................ F-8 Quarter Ended March 31, 1999 (Unaudited): Condensed Consolidated Balance Sheet...................... F-21 Condensed Consolidated Statements of Operations........... F-22 Condensed Consolidated Statements of Cash Flows........... F-23 Notes to Condensed Consolidated Financial Statements...... F-24
F-1 51 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of LCA-Vision Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' investment, and cash flows present fairly, in all material respects, the financial position of LCA-Vision Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Cincinnati, Ohio February 5, 1999 F-2 52 CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, -------------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Assets Current assets: Cash and cash equivalents................................. $ 6,496 $ 2,780 Cash held in escrow....................................... 5,900 Accounts receivable, net.................................. 1,119 2,047 Prepaid expenses, inventory and other..................... 1,416 1,892 ------- ------- Total current assets.............................. 9,031 12,619 ------- ------- Property and equipment, net................................. 9,433 18,462 Goodwill, net............................................... 8,304 11,987 Obligations due from shareholders, net...................... 471 Investment in unconsolidated businesses..................... 520 250 Other assets................................................ 3,618 1,209 ------- ------- Total assets...................................... $31,377 $44,527 ======= ======= Liabilities and Shareholders' Investment Current liabilities Accounts payable.......................................... $ 2,030 $ 1,831 Accrued liabilities and other............................. 2,637 2,304 Debt maturing in one year................................. 787 10,182 ------- ------- Total current liabilities......................... 5,454 14,317 ------- ------- Obligations due to shareholders, net........................ 2,146 Long-term debt.............................................. 2,724 1,350 Commitments and contingencies Shareholders' investment Preferred stock........................................... 7,687 2,522 Common stock ($0.001 par value; 40,973,741 shares and 36,664,816 shares issued).............................. 103 96 Contributed capital....................................... 41,701 36,776 Accumulated (deficit)..................................... (25,664) (12,446) Foreign currency translation adjustment................... (14) (21) ------- ------- 23,813 26,927 Less common stock in treasury at cost....................... 30 30 Less accrued preferred stock dividend....................... 584 183 ------- ------- 23,199 26,714 ------- ------- Total liabilities and shareholders' investment.... $31,377 $44,527 ======= =======
See Notes to Consolidated Financial Statements F-3 53 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues Laser refractive surgery.......................... $ 32,963 $ 12,917 $ 3,715 Surgery management contracts...................... 1,496 3,064 4,665 Other............................................. 741 1,613 5,380 ---------- ---------- ---------- 35,200 17,594 13,760 Direct costs of Laser refractive surgery.......................... 23,625 10,790 3,818 Surgery management contracts...................... 466 977 1,738 Other............................................. 372 959 2,176 ---------- ---------- ---------- 24,463 12,726 7,732 General and administrative expenses................. 7,961 6,747 5,663 Marketing and advertising........................... 2,183 1,259 1,664 Depreciation and amortization....................... 3,521 2,511 1,597 Restructuring provision............................. 10,500 1,100 Other............................................... 162 225 ---------- ---------- ---------- Operating (loss).................................... (13,428) (6,911) (3,121) Equity in earnings (losses) from unconsolidated businesses........................................ 354 (27) (906) Interest expense.................................... 786 1,140 770 Interest income..................................... 441 216 89 Other income........................................ 358 77 651 ---------- ---------- ---------- (Loss) before taxes on income....................... (13,061) (7,785) (4,057) Taxes on income..................................... 157 68 ---------- ---------- ---------- Net (loss).......................................... (13,218) (7,853) (4,057) Preferred stock dividends........................... 518 183 ---------- ---------- ---------- (Loss) applicable to common stock................... $ (13,736) $ (8,036) $ (4,057) ========== ========== ========== (Loss) per common share Basic............................................. $ (0.36) $ (0.30) $ (0.21) Diluted........................................... $ (0.36) $ (0.30) $ (0.21) Weighted average shares outstanding -- Basic............................................. 37,669,471 26,709,184 19,609,505 Diluted........................................... 37,669,471 26,709,184 19,609,505
See Notes to Consolidated Financial Statements F-4 54 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- ------- ------- (DOLLARS IN THOUSANDS) Cash flows from operating activities Net (loss).................................................. $(13,736) $(8,036) $(4,057) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities: Depreciation and amortization............................. 3,521 2,511 1,597 Restructuring provision................................... 10,500 1,100 Equity in (income) loss of unconsolidated businesses...... (354) 27 906 Other items, net.......................................... (378) Changes in certain assets and liabilities, net of effects from acquisition of businesses Accounts receivable.................................... 424 (989) 1,044 Prepaid expenses, inventory and other.................. 476 334 (14) Accounts payable....................................... 199 824 49 Accrued liabilities and other.......................... 69 219 (41) -------- ------- ------- Net cash provided (used) by operating activities............ 1,099 (4,010) (894) -------- ------- ------- Cash flows from investing activities Cash acquired in acquisition of business.................. 10,007 Purchase of property and equipment........................ (1,946) (603) (2,747) Proceeds from sale of property and equipment.............. 1,211 133 Investment in unconsolidated businesses, net.............. (1,099) Loans and advances to affiliated companies................ 570 (713) Loans to shareholders..................................... (2,100) Purchase of certificate of deposit........................ (2,100) Other, net................................................ (382) (64) 809 -------- ------- ------- Cash provided (used) in investing activities................ (4,747) 9,340 (3,617) -------- ------- ------- Cash flows from financing activities Proceeds from bank borrowings............................. 2,100 6,280 3,438 Repayment of bank borrowings.............................. (9,651) Principal payments of long-term debt and capital lease obligations............................................ (482) (3,743) (545) Proceeds from sale of convertible preferred stock, net.... 9,463 Proceeds from issuance of common stock.................... 51 56 100 Other, net................................................ (17) 33 (345) -------- ------- ------- Net cash provided by financing activities................... 1,464 2,626 2,648 -------- ------- ------- Increase (decrease) in cash and cash equivalents............ (2,184) 7,956 (1,863) Cash and cash equivalents at beginning of year.............. 8,680 724 2,587 -------- ------- ------- Cash and cash equivalents at end of year.................... $ 6,496 $ 8,680 $ 724 ======== ======= =======
See Notes to Consolidated Financial Statement F-5 55 CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------ ---------- ------ ---------- ------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Preferred Stock: Class A Balance at beginning of year...................... 1,668 1,668 1,668 Balance at end of year....... 1,668 1,668 1,668 ---------- ---------- ---------- Class B Interim Series Balance at beginning of year...................... 12.6 $2,522 12.6 $2,522 Shares issued -- shareholder debt conversion........... 12.6 $2,522 ---------- ------ ---------- ------ ---------- ------ Balance at end of year....... 12.6 2,522 12.6 2,522 12.6 $2,522 ---------- ------ ---------- ------ ---------- ------ Class B1 Convertible Balance at beginning of year Shares issued................ 10,000 10,000 Transaction fees............. (537) Shares converted to common stock..................... (4,298) (4,298) ---------- ------ Balance at end of year....... 5,702 5,165 ---------- ------ Total preferred stock.......... 7,687 ------ Common Stock Balance at beginning of year...................... 36,664,816 96 19,590,012 79 19,538,977 78 Shares issued: Acquisition agreement..... 200,000 17,065,579 17 Conversion of B1 Convertible Preferred Stock and dividends..... 4,088,856 4 Sale of stock............. 20,128 44,444 Employee plans............ 20,000 Other..................... 69 3 (10,903) 6,591 1 ---------- ------ ---------- ------ ---------- ------ Balance at end of year....... 40,973,741 103 36,664,816 96 19,590,012 79 ---------- ------ ---------- ------ ---------- ------ Contributed Capital............ 36,776 3,177 3,069 Balance at beginning of year Shares issued: Acquisition agreement..... 580 33,543 Conversion of B1 Convertible Preferred Stock................... 4,411 Sale of stock............. 56 100 Employee plans............ 51 Other..................... 8 Dividends on Conversion of Class B1 Convertible Preferred Stock........... (117) ------ ------ ------ Balance at end of year....... 41,701 36,776 3,177 ------ ------ ------
F-6 56 CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT (CONTINUED)
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1998 1997 1996 -------------------- -------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------- ---------- ------- ---------- ------ DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Accumulated (deficit) Balance at beginning of year................... (12,446) (4,592) (535) Net (loss)................ (13,218) (7,853) (4,057) ------- ------- ------ Balance at end of year.... (25,664) (12,446) (4,592) ------- ------- ------ Foreign Currency Translation Adjustment Balance at beginning of year................... (21) 12 7 Translation adjustments... 5 (33) 5 ------- ------- ------ Balance at end of year.... (14) (21) 12 ------- ------- ------ Treasury Stock Balance at beginning of year................... 10,909 (30) Shares received for payment of advance..... 10,909 (30) ---------- ------- ---------- ------- Balance at end of year.... 10,909 (30) 10,909 (30) ---------- ------- ---------- ------- Preferred Stock Dividend Balance at beginning of year................... (183) Dividends accrued Class B Interim...... (177) (183) Class B1 Convertible....... (341) Conversion of Class B1 Convertible Preferred Stock.................. 117 ------- ------- Balance at end of year.... (584) (183) ------- ------- Total Shareholders' Investment................ $23,199 $26,714 $1,198 ======= ======= ======
See Notes to Consolidated Financial Statements F-7 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 procedures performed in our centers are primarily laser in situkeratomileusis ("LASIK") and photorefractive keratectomy ("PRK"). On November 3, 1998, we received notice that the FDA had approved the VISX Star S2 excimer laser to treat farsightedness (hyperopia). The VISX Star S2 laser, which we have in each of our U.S. centers, can now treat nearsightedness, myopic astigmatism, and hyperopia. We also manage multi-specialty laser surgery programs at medical facilities on a contract basis. Revenue is derived from three sources: (i) fees for surgeries performed at our laser refractive surgery centers, (ii) contractual fees for managing multi-specialty laser surgery programs, and (iii) other including fees for marketing and education programs; management fees for operating laser vision correction centers of investees; and miscellaneous sources. Operating expenses are classified as follows: (a) direct operating expenses which include: (i) laser refractive surgery centers -- labor, physician fees, royalty fees paid to the manufacturers of the FDA-approved lasers of $260 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 headquarters staff expenses and other overhead costs; (c) marketing program costs; (d) center pre-opening expenses which include direct costs incurred prior to opening a laser vision correction center; and (e) depreciation and amortization. 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. Our consolidated financial statements include the accounts of: - LCA-Vision Inc., - LCA-Vision (Ohio), Inc., - Refractive Centers International, Inc. and Subsidiaries, and - LCA-Vision (Canada) Inc. and Subsidiaries THE 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. F-8 58 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 Income 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. 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. PROPERTY AND EQUIPMENT, GOODWILL, AND DEPRECIATION AND AMORTIZATION Property and Equipment: We report our property and equipment at its original cost. At the time property or equipment is retired, sold, or otherwise disposed of, the related cost and accumulated depreciation or amortization are deducted from the amounts reported in the Consolidated Balance Sheet and any gains or losses on disposition are recognized in the Consolidated Income Statement. Goodwill: Goodwill is the excess of the acquisition cost of the businesses over the fair value of the identifiable net assets acquired. We amortize goodwill using the straight-line method over 40 years. Depreciation and Amortization: We compute depreciation using the straight-line method which recognizes the cost of the asset over its estimated useful life. We use the following estimated useful lives for computing the annual depreciation expense: building, 5 to 31 years; furniture and fixtures, 5 to 7 years; medical equipment, 3 to 5 years; other equipment, 3 to 5 years. Amortization of leasehold improvements is recorded in the Consolidated Income Statements using the straight-line method based on the lesser of the useful life of the improvement or the lease term. We assess the impairment of property and equipment and goodwill related to our consolidated subsidiaries under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," whenever events or circumstances indicate that the carrying value might not be recoverable. Estimates of future cash flows are used to determine if there is impairment. FINANCIAL INSTRUMENTS Concentration of Credit Risk: Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. Our policy is to place our temporary cash investment in overnight repurchase agreements with The Provident Bank, the financial institution that now provides our line of credit. Concentrations of credit risk with respect to trade receivables is limited due to the number of accounts and overall stability of the health insurance and hospital industries. F-9 59 FAIR VALUES OF FINANCIAL INSTRUMENTS The fair value of our cash and cash equivalents, trade receivables and accounts payable approximate their fair values due to their short term maturities. We were unable to determine the fair values of our borrowings under our line of credit because there is no liquid market for this debt. STOCK-BASED COMPENSATION We account for stock-based employee compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Effective January 1, 1996, we adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation," and related interpretations. PER SHARE DATA Basic loss per share data is loss applicable to common shareholders divided by weighted average common shares outstanding. Diluted per share data is loss applicable 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 result in a reduced loss per share. RECENT ACCOUNTING PRONOUNCEMENTS In 1998 we adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 130 established standards for the reporting and display of comprehensive income, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 had no impact on our financial statements because our net loss approximates comprehensive income. SFAS No. 131 establishes standards for reporting financial information about operating segments in annual financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by chief operating decision makers in deciding how to allocate resources and in assessing performance. We now operate in one segment -- laser refractive surgery. The adoption of SFAS No. 131, which affected disclosure only, had no impact on our consolidated results of operations, financial condition, or cash flows. The FASB issued in 1998 Statements No. 132, "Employees Disclosures about Pensions Benefits", No. 133, "Accounting for Derivative Instruments and Hedging Activities", and No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise (an amendment of FASB Statement No. 65). These Statements do not currently have an impact on us because we have no activities covered by them. 2. SHAREHOLDERS' INVESTMENT COMMON STOCK We are authorized to issue up to 110 million shares of common stock. PREFERRED STOCK Class A: We are authorized to issue up to 1,688 shares of Class A Preferred Stock which has an aggregate liquidation preference of $68 thousand at December 31, 1998. F-10 60 Class B: We are authorized to issue up to 5 million shares of Class B Preferred Stock with terms and conditions at the direction of our Board of Directors. However, the holders of the Class B Preferred Stock cannot be granted voting rights superior to those of any other existing class of our stock authorized for issuance. FIRST AND SECOND INTERIM SERIES The Interim shares of Series Class B preferred Stock have a par value of $0.001 and a 7% dividend. 6 shares of the First Series are issued and have an aggregate liquidation preference of $1.2 million; 6.6 shares of the second Series are issued and have an aggregate liquidation preference of $1.32 million. When we acquired RCII the conversion price of the First and Second Interim Series of the Class B Preferred Stock was amended. Each share of the Interim Series is convertible into the number of our common shares that results from dividing the sum of $200,000 plus accrued, but unpaid, dividends on that share by $3.50. 6% SERIES B-1 CONVERTIBLE On May 11, 1998 we issued 10,000 shares of 6% Series B-1 Convertible Preferred Stock for $10 million. Each share has a par value of $0.001 and a stated value of $1 thousand per share. These shares were recorded at their stated value less issuance costs of $537 thousand. These shares are convertible into our common shares at a price that floats with the closing bid price of our common stock. The conversion price of the lesser of $3.90625 per share or the average of the 4 lowest closing bid prices per share of our common stock during the 22 trading days prior to the date of conversion. We can require conversion if our common stock trades at a price greater than $5.46875 per share for 15 consecutive trading days. Dividends on these shares are cumulative from the date of issuance and are payable on a quarterly basis on June 30, 1998. We have the option to pay the dividends in cash or in shares of our common stock. Accrued, unpaid dividends on shares being converted are to be paid in shares of our common stock at the same conversion price of the shares being converted. Holders of these shares have converted 4,298 shares and dividends totaling $117 thousand into 4,088,856 shares of our common stock through December 31, 1998. An additional 3,037 shares and dividends totaling $129.5 thousand were converted into 2,330,857 shares of common stock through February 5, 1999. The holders of these shares have the right to purchase an additional $5 million of these shares under the same terms and conditions until May 11, 1999. 3. ACQUISITIONS REFRACTIVE CENTERS INTERNATIONAL, INC. On August 18, 1997, we issued 17,065,579 shares of our common stock to Summit Technology, Inc. ("Summit") and certain individuals for 100% of the issued and outstanding common stock of Refractive Centers International, Inc. ("RCII"). On May 4, 1998, we issued 200,000 shares of our common stock to an investment banking firm as compensation for services related to the acquisition of RCII. The shares were recorded at their fair value on the date of issuance. We accounted for the acquisition of RCII using the purchase method of accounting as described in Accounting Principles Board Opinion No. 16, "Business Combinations," and related interpretations. The purchase method required us to record in our Consolidated Balance Sheet the fair values of the assets and liabilities at the date of the acquisition. We recorded the difference between the acquisition cost and the fair value of the identifiable net assets acquired as goodwill. The fair value of the assets acquired and liabilities assumed consisted of cash -- $10,007,000; other net working capital -- $664,000; equipment -- $9,511,000; and goodwill -- $12,802,000. F-11 61 The revenues and expenses of RCII are included in our Consolidated Statements of Operations beginning August 18, 1997. Our Consolidated Statement of Operations prior to August 18, 1997 were not restated to include the historical results of RCII. Unaudited pro forma data assuming we had acquired RCII at the beginning of 1996 follows (dollars in thousands except per share amounts):
1997 1996 ------- ------- Revenues.................................................... $22,276 $16,778 Net (loss).................................................. (14,353) (22,814) (Loss) per share............................................ (0.39) (0.62)
The pro forma data does not purport to be indicative of operating results which would have occurred had we acquired RCII at the beginning of 1996 or of the operating results which may occur in the future. 4. RESTRUCTURING PROVISION During the second quarter of 1998 we implemented a plan to close seven centers that were not contributing to our profitability. The centers closed were primarily centers which had been operated by RCII. Costs associated with the closings include $7,287,000 related the write-off of goodwill and leasehold improvements, $677,000 for the accrual of costs for terminating leases and employees, and $2,536,000 for the write-down of idled lasers to their net realizable values. At the time of completing the acquisition of RCII, we implemented a program to close certain centers, both acquired and existing, and reduce overhead costs. We recorded a 1.1 million restructuring provision for these closings and $620 thousand was recorded for facility rent and employee severance associated with closing the RCII centers as part of the purchase price. Our 1997 Consolidated Statement of Operations includes revenues of $414 thousand and operating losses of $343 thousand for these centers. We also wrote-off our investment in two of our unconsolidated businesses that had closed their laser refractive surgery centers and wrote-down certain product inventory to its net realizable value. We recorded a restructuring provision of $1.1 million in the third quarter of 1997 for the anticipated costs of these decisions. Costs totaling $848 thousand and $899 thousand were charged against these accruals in 1998 and 1997, respectively. The balance of these accruals was $748 thousand at December 31, 1998 and relates to facility rent and severance. 5. CREDIT ARRANGEMENTS On June 29, 1998, we entered into an $8 million credit facility with The Provident Bank ("Provident"). At the same time we repaid our borrowing from, and terminated our relationship with, another lender. The Provident facility, as amended, matures on June 30, 2000. The facility can be used to support up to $2 million of letters of credit issued by Provident and to support up to $2.5 million of capital costs financed by leases entered into with an affiliate of Provident. Borrowings under the working credit portion of the facility bear interest at 1/2% above Provident's prime rate. We have the option to convert up to $3.5 million of working capital borrowings to a term loan. Substantially all of our assets are pledged as collateral. The credit facility also supports letters of credit and leased assets totaling $1.1 million at December 31, 1998. The credit facility, for which there is no formal compensating balance, requires us to pay a commitment fee based of .25% on the unused portion. At December 31, 1998 we had $4.9 million available to us under the credit facility. The credit facility requires us to maintain certain financial ratios and amounts. We are to maintain tangible net worth of at least $14 million and the ratio of total liabilities less subordinated debt to tangible net worth must be less than .75 to 1. The credit facility defines tangible net worth as Shareholders' Investment plus Subordinated Debt less unamortized Goodwill as shown on our Consolidated Balance Sheets. Beginning with the quarter ended December 31, 1998 the ratio of our earnings before interest expense, taxes F-12 62 and depreciation and amortization ("EBITDA") on a trailing 12 month basis must be greater than 1.5 times the sum of our current maturities of capital lease obligations, trailing 12 months interest expense and $140 thousand. 6. DEBT The following table displays the details of debt maturing within one year:
AT DECEMBER 31, ----------------------- 1998 1997 ------- ---------- (DOLLARS IN THOUSANDS) Bank line of credit........................................ $ 6,641 Bank term loan............................................. $167 2,998 Capital lease obligations.................................. 620 543 ---- ------- $787 $10,182 ==== =======
We borrowed $2.1 million under the Provident credit facility on a term loan basis. This loan bears interest at 7.45% and requires to pay monthly installments of $12 thousand plus interest until June 30, 2000 when the remaining principal balance of $1.705 million is due. We used the proceeds of the borrowing to purchase a certificate of deposit from Provident with a maturity date of June 30, 2002. The certificate of deposit pays interest monthly at a rate of 5.7% per annum. We recorded the certificate of deposit as other assets in our Consolidated Balance Sheet at December 31, 1998. 7. OBLIGATIONS DUE FROM/DUE TO SHAREHOLDERS AND THEIR AFFILIATES, NET The following table displays the details of net obligations due to us in 1998 and net obligations due from us in 1997 as reported in our Consolidated Balance Sheets:
AT DECEMBER 31, ---------------------- 1998 1997 -------- -------- (DOLLARS IN THOUSANDS) Due from us: Notes payable shareholders.............................. $1,500 $1,500 Accrued interest........................................ 568 463 Accrued Interim Series B preferred stock dividend....... 359 183 Due to us: Note receivable shareholders............................ 2,100 Accrued interest........................................ 60 Receivable from shareholder's affiliated company........ 738 ------ ------ Net obligation.......................................... $ 471 $2,146 ====== ======
The notes payable -- shareholders mature on September 25, 2005, and bear interest at 6.91%. In connection with the acquisition of RCII the shareholders agreed to amend the notes to limit payment of principal and accrued interest to 25% of the amount our earnings for the prior fiscal year exceed $1 million. For this purpose earnings are defined as income before taxes, amortization and depreciation reduced by purchases of property and equipment for the year. In February 1999 Summit agreed to waive our compliance with the repayment restrictions. The notes are subordinate to any of borrowings under the Provident credit facility. We loaned $2.1 million to the holders of these notes payable. The loan is collateralized by the $1.5 million notes held by the shareholders and the accrued interest thereon and the preferred stock dividends due them. The loan bears interest at 8.5% and matures on September 26, 2005. Our principal shareholder is the majority stockholder of The LCA Center for Surgery, Ltd. ("Surgery Center") which is inactive. We have no investment in the Surgery Center. We previously leased a portion of our headquarters building to, and performed other services for, the Surgery Center. We recorded rent and administrative and marketing income of $74 thousand in 1997 and $162 thousand in 1996. In June 1998 we F-13 63 purchased the leasehold improvements that had been paid by the Surgery Center for $872 thousand, their book value at the time of purchase. During 1998 we also advanced $576 thousand to the Surgery Center. Generally accepted accounting principles required us to record a portion of the Surgery Center's losses using the equity method of accounting. We recorded losses of $265 thousand in 1998. 8. INVESTMENTS IN UNCONSOLIDATED BUSINESSES Our investments in unconsolidated businesses are comprised of the following:
AT DECEMBER 31, ----------------------------------------------- 1998 1997 ---------------------- ---------------------- OWNERSHIP INVESTMENT OWNERSHIP INVESTMENT --------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) The Baltimore Laser Sight Center, Ltd............. 45% $417 45% $150 Silmalaseri Oy.................................... 43% 103 43% 24
Combined summary financial information for these investments follows:
1998 1997 -------- -------- (DOLLARS IN THOUSANDS) Financial Position: Current assets.......................................... $1,830 $ 597 Total assets............................................ 2,604 1,364 Total liabilities....................................... 1,443 1,057 Members' equity......................................... 1,161 307 Operating Results: Revenue................................................. $3,787 $3,241 Net income (loss)......................................... $1,365 $ (114)
In 1997, we wrote off our investments in Excimer Associates LLC and The Georgia Laser Sight Center, Ltd. resulting in a charge to income of $250 thousand which was included in the restructuring provision. In 1996, we sold the preferred stock of another investment accounted for using the equity method of accounting for $1 million. The gain of $546 thousand from this sale was included in other income. 9. INCOME TAXES We have not recorded a provision for U.S. income taxes for each of the three years ended December 31, 1998 because of our operating losses. The income tax expense in our Consolidated Statements of Operations consists primarily of Canadian income taxes. We are required to pay franchise taxes in most of the states in which we have operations due to our net operating losses. We include the franchise taxes paid in general and administrative expenses in our Consolidated Statements of Operations. At December 31, 1998, we have net operating loss carryforwards for Federal and state income tax purposes of $35.3 million which expire in varying amounts from 2012 through 2019. Approximately $15 million of net operating loss carryforwards were acquired when we bought RCII. Our ability to use these acquired net operating loss carryforwards is subject to utilization limitations contained in Section 382 of the Internal Revenue Code. F-14 64 Deferred taxes arise because of differences in the book and tax bases of certain assets and liabilities. Significant components of our deferred tax assets (liabilities) are shown in the following table:
AT DECEMBER 31, ---------------------- 1998 1997 -------- -------- (DOLLARS IN THOUSANDS) Net operating loss carryforward.......................... $ 13,750 $ 12,320 Accounts receivable...................................... 140 140 Inventories.............................................. 173 144 Marketable securities.................................... 138 138 Property and equipment................................... 215 195 Notes payable to shareholders............................ 185 185 Equity investments....................................... 351 262 Other.................................................... 115 115 -------- -------- Deferred tax assets...................................... $ 15,067 $ 13,499 ======== ======== Valuation allowance...................................... $(15,067) $(13,499) ======== ========
The valuation allowance primarily represents tax benefits of net operating loss carry forwards which may expire prior to being utilized. 10. LEASING ARRANGEMENTS We lease office space for our centers and equipment for use in our operations under both capital and operating leases. Capital leases were primarily used for financing the lasers in our first five centers; we now finance the cost of lasers using operating leases. This table displays our aggregate minimal rental commitments under noncancellable leases for the periods shown:
AT DECEMBER 31, --------------- CAPITAL OPERATING YEAR LEASES LEASES ---- ------- --------- (DOLLARS IN THOUSANDS) 1999........................................................ $ 753 $ 5,029 2000........................................................ 695 4,425 2001........................................................ 62 2,135 2002........................................................ 454 2003........................................................ 288 Thereafter.................................................. 101 ------ ------- Total minimum rental commitment............................. 1,510 $12,432 ======= Less interest............................................... 75 ------ Present values of minimum lease payments.................... 1,435 Less current installments................................... 620 ------ Long-term obligation at December 31, 1998................... $ 815 ======
Total rent expense under operating leases amounted to $3.9 million in 1998, $1.7 million in 1997, and $267 thousand in 1996. As of December 31, 1998, the total minimum sublease rentals to be received in the future under noncancellable operating leases was approximately $970 thousand. 11. EMPLOYEE BENEFITS SAVINGS PLAN We sponsor a savings plan under Internal Revenue Code Section 401(k) to provide an opportunity for eligible employees to save for retirement on a tax-deferred basis. Under this plan, we make discretionary F-15 65 contributions to the participants' accounts. We made contributions of $26,000 in 1998 and none in 1997 and 1996. STOCK OPTION PLANS We have fixed stock option plans under which options to purchase shares of our common stock are granted at a price equal to the market price of the stock at the date of grant. The awards under the plans are determined by the Compensation Committee of the Board of Directors. Under the 1995 Long term Stock Incentive Plan ("1995 Plan"), employees and/or consultants may be granted incentive and/or nonqualified stock options. The 1995 Plan permits the issuance of stock appreciation rights and stock awards to employees. A maximum of 2.5 million shares of common stock are reserved for the 1995 Plan. This table is a summary of the status of our 1995 Plan:
WEIGHTED-AVERAGE STOCK OPTIONS EXERCISE PRICE ------------- ---------------- Outstanding, December 31, 1995 Granted............................................ 1,996,750 $4.92 Forfeited.......................................... (178,125) 5.25 --------- Outstanding, December 31, 1996..................... 1,818,625 4.06 Granted............................................ 647,500 3.26 Forfeited.......................................... (634,563) 4.95 --------- Outstanding, December 31, 1997..................... 1,831,562 4.03 Granted............................................ 843,600 1.02 Exercised.......................................... (20,000) 2.56 Forfeited.......................................... (650,337) 2.84 --------- Outstanding, December 31, 1998..................... 2,004,825 $1.82 ========= Options exercisable, December 31: 1996............................................... 334,113 $4.77 1997............................................... 405,913 4.34 1998............................................... 524,625 2.31
In October 1998 our stockholders approved the adoption of the 1998 Long Term Stock Incentive Plan ("1998 Plan"). Under the 1998 Plan employees may be granted incentive and/or nonqualified stock options in addition to stock awards. A total of 5 million shares of common stock are reserved for the 1998 Plan. No options have been granted under the 1998 Plan. The 1998 Plan will also be used to grant stock options to our non-employee directors. Under the 1998 Plan, non-employee directors will receive an option to purchase 75,000 shares of common stock upon initial election or appointment and an annual automatic grants of options to purchase 12,500 shares of common stock. Non-employee directors previously received stock options under the LCA-Vision Inc. director's Nondiscretionary Stock Option Plan which has been discontinued. The Compensation Committee of the Board of Directors administers the 1995 and 1998 Plans. Options are granted with an exercise price not less than fair market value on the date of grant. Options granted have generally been exercisable ratably over 5 years and expire in 10 years from the date of grant. The 1998 Plan allows for options to become exercisable or in part six months after the date the option is granted or may become exercisable in one or more installments. In 1998 the Compensation Committee decided to reprice the exercise prices of 973,750 stock options previously granted to $1.1875 per share, the market price at the date of repricing. These options had a weighted average exercise price of $4.02 per share. As of December 31, 1998, a total of 486,175 shares were available for the granting of options under the 1995 Plan. F-16 66 This table summarizes information about the 1995 Plan stock options outstanding as of December 31, 1998:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE ---------------------------- ------------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE --------- ---------------- --------- REMAINING EXERCISE EXERCISE RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE ------------------------ ------ ---------------- -------- ------ -------- 0.8750....................... 352,400 9.0 years $0.8750 1.1250-1.1875................ 1,007,000 8.8 years 1.1844 314,325 $1.1875 1.2500-3.5000................ 391,650 8.9 years 2.0726 101,650 2.6431 5.2500....................... 253,775 7.4 years 5.2500 108,650 5.2500
This table is a summary of the status of our now discontinued Director's Nondiscretionary Stock Option Plan:
WEIGHTED-AVERAGE STOCK OPTIONS EXERCISE PRICE ------------- ---------------- Outstanding, December 31, 1995 Granted............................................ 150,000 $8.00 ------- Outstanding, December 31, 1996..................... 150,000 8.00 Granted............................................ 151,250 3.25 Forfeited.......................................... (75,000) 8.00 ------- Outstanding, December 31, 1997..................... 226,250 4.83 Granted............................................ 78,750 3.25 ------- Outstanding December 31, 1998...................... 305,000 $4.42 =======
As of December 31, 1998, a total of 60,250 options with a weighted-average exercise price of $5.67 are exercisable under this plan. We apply APB No. 25 and related interpretations in accounting for our stock option plans. We have adopted the disclosure-only provisions of SFAS No. 123. We recognize no compensation expense for our stock options granted to employees or directors. Compensation expense for options granted to non-employees in each of the three years ended December 31, 1998 was immaterial. If we had elected to recognize compensation expense based on the fair value at the grant dates consistent with the provisions of SFAS no. 123, net loss and loss per share would have been changed to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net (loss) As reported...................... $ (13,736) $(8,036) $(4,057) Pro forma........................ (15,453) (9,588) (4,863) Diluted (loss) As reported...................... (0.36) (0.30) (0.21) Pro forma........................ (0.41) (0.36) (0.25)
These results may not be representative of the effects on pro forma amounts for future years. F-17 67 We determined the pro forma amounts using the Black-Scholes option-pricing model based on the following assumptions:
1998 1997 1996 ----- ---------- ---------- Dividend yield................................... 0% 0% 0% Expected volatility.............................. 92% 98% 98% Risk free interest rate.......................... 4.9% 5.34-6.82% 5.46-5.56% Expected lives (in years)........................ 5 5 5
The weighted-average fair value of options granted was $.75 per option during 1998, $1.14 per option during 1997, and $4.15 per option during 1996. 12. 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. Both actions are in the discovery stage. In the opinion of management neither action will have a material adverse effect on our financial position or results of operations. 13. ADDITIONAL FINANCIAL INFORMATION The tables below provide additional financial information related to our consolidated financial statements: F-18 68 Balance Sheet Information
AT DECEMBER 31, ---------------------- 1998 1997 -------- -------- (DOLLARS IN THOUSANDS) Receivables Trade receivables -- vision............................... $ 1,482 $ 1,250 Trade receivables -- other................................ 1,034 1,690 Allowances................................................ (1,397) (893) ------- ------- $ 1,119 $ 2,047 ======= ======= Prepaid Expenses, Inventory and Other Prepaid expenses.......................................... $ 1,235 $ 1,334 Notes receivables......................................... 304 Inventory................................................. 44 103 Other..................................................... 137 151 ------- ------- $ 1,416 $ 1,892 ======= ======= Property and equipment Land...................................................... $ 375 $ 375 Building and improvements................................. 5,278 4,933 Leasehold improvements.................................... 1,930 1,729 Furniture and fixtures.................................... 1,556 1,684 Equipment................................................. 6,702 13,231 Equipment under capital leases............................ 784 2,429 Other..................................................... 186 141 ------- ------- 16,811 24,522 Accumulated depreciation and amortization................. (7,398) (6,101) Construction in progress.................................. 20 41 ------- ------- $ 9,433 $18,462 ======= ======= Other assets Certificate of deposit.................................... $ 2,100 Other..................................................... 1,518 $ 1,209 ------- ------- $ 3,618 $ 1,209 ======= =======
F-19 69 Cash Flow Information
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Cash paid during the year for Interest.................................................. $ 854 $ 985 $ 489 Income Taxes.............................................. 157 68 Non cash investing and financing activities Common stock issued for acquisitions...................... 580 32,786 Acquisition of equipment under capital leases............. 2,265 Preferred stock issued for conversion of notes payable-shareholders................................... 2,522 Inventory sold for long-term note......................... 248 Transfer of equipment under capital lease to unconsolidated business................................ 486 Segment Information Canadian operations Revenues.................................................. $ 2,016 $ 2,083 $ 2,096 Operating profit.......................................... 471 298 79 Statement of Operations Information Direct costs of laser refractive surgery: Medical professional and license fees..................... $13,700 $ 4,489 $ 795 Employee costs............................................ 4,094 2,940 1,746 Equipment rent and maintenance............................ 3,045 1,180 -- Facility rent and utilities............................... 1,472 1,002 318 Supplies, gases and other................................. 1,314 1,179 959 ------- ------- ------- Total................................................ $23,625 $10,790 $ 3,818 ======= ======= =======
F-20 70 LCA-VISION INC. CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998 (AUDITED)
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Assets Current assets: Cash and cash equivalents................................... $ 7,199 $ 6,496 Accounts receivable, net.................................. 686 1,119 Prepaid expenses, inventory and other..................... 1,638 1,416 ------- ------- Total current assets.............................. 9,523 9,031 Property and equipment, net................................. 9,051 9,433 Goodwill, net............................................... 8,241 8,304 Obligations due from shareholders, net...................... 343 471 Investment in unconsolidated businesses..................... 886 520 Certificate of deposit...................................... 2,100 2,100 Other assets................................................ 1,696 1,518 ------- ------- Total assets...................................... $31,840 $31,377 ======= ======= Liabilities and Shareholders' Investment Current liabilities Accounts payable.......................................... $ 1,810 $ 2,030 Accrued liabilities and other............................. 3,022 2,637 Debt maturing in one year................................. 649 787 ------- ------- Total current liabilities......................... 5,481 5,454 Long-term debt.............................................. 642 2,724 Commitments and contingencies Shareholders' investment Preferred stock........................................... 2,501 7,687 Common stock ($0.001 par value; 45,282 shares and 40,974 shares issued)......................................... 109 103 Contributed capital....................................... 47,485 41,701 Accumulated (deficit)..................................... (23,949) (25,664) Foreign currency translation adjustment................... 4 (14) ------- ------- 26,150 23,813 Less common stock in treasury at cost..................... 30 30 Less accrued preferred stock dividend..................... 403 584 ------- ------- 25,717 23,199 ------- ------- Total liabilities and shareholders' investment.... $31,840 $31,377 ======= =======
The Notes to Condensed Consolidated Financial Statements are an integral part of this statement. F-21 71 LCA-VISION INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Laser refractive surgery.................................. $13,389 $ 6,446 Other..................................................... 478 763 ------- ------- Total revenues.................................... 13,867 7,209 Operating costs and expenses: Medical professional and license fees..................... 6,015 2,656 Direct costs of services.................................. 2,556 2,819 General and administrative expenses....................... 2,970 2,093 Depreciation and amortization............................. 712 1,055 ------- ------- Operating income (loss)..................................... 1,614 (1,414) Equity in earnings from unconsolidated businesses........... 323 56 Interest expense............................................ (93) (344) Interest income............................................. 147 112 Other income (expense)...................................... (277) 25 Income (loss) before taxes on income........................ 1,714 (1,565) Taxes on income............................................. (28) ------- Net income (loss)........................................... 1,714 (1,593) Dividends to preferred shareholders......................... (84) (43) ------- ------- Income (loss) available to common shareholders.............. $ 1,630 $(1,636) ======= ======= Income (loss) per common share Basic..................................................... $ 0.04 $ (0.04) Diluted................................................... $ 0.04 $ (0.04) Weighted average shares used in computation Basic..................................................... 43,779 36,665 Diluted................................................... 47,082 36,665
The Notes to Condensed Consolidated Financial Statements are an integral part of this statement F-22 72 LCA-VISION INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------- 1999 1998 ------------ ------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss)........................................... $ 1,630 $(1,636) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................. 712 1,055 Equity in income of unconsolidated affiliates............. (323) (56) Compensation paid in common stock......................... 325 Changes in working capital: Accounts receivable.................................... 433 (466) Prepaid expenses, inventory and other.................. (222) 366 Accounts payable....................................... (220) 165 Accrued liabilities and other.......................... 385 (23) ------- ------- Net cash provided by (used in) operations................... 2,721 (595) ------- ------- Cash flows from investing activities: Purchase of property and equipment........................ (23) (482) Other, net................................................ (54) (56) ------- ------- Net cash (used) by investing activities..................... (77) (538) ------- ------- Cash flows from financing activities: Proceeds from bank borrowing.............................. 294 Principal payments of long-term notes, debt and capital lease obligations...................................... (2,220) (310) Exercise of stock options................................. 279 ------- ------- Net cash provided (used) by financing activities............ (1,941) (16) ------- ------- Increase (decrease) in cash and cash equivalents............ 703 (1,149) Cash and cash equivalents at beginning of period............ 6,496 8,680 ------- ------- Cash and cash equivalents at end of period.................. $ 7,199 $ 7,531 ======= =======
The Notes to Condensed Consolidated Financial Statements are an integral part of this statement. F-23 73 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The March 31, 1999 and 1998 financial data are unaudited; however, in our opinion, such data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim periods. The December 31, 1998 condensed consolidated balance sheet was derived from audited financial statements and, due to its summary nature, does not include all information required by generally accepted accounting principles. 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. F-24 74 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 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 months ended March 31, 1999 (in thousands, except per share amounts):
INCOME SHARES PER-SHARE NUMERATOR DENOMINATOR AMOUNT --------- ----------- --------- Net income........................................ $1,714 Dividends to preferred shareholders............... (84) ------ Basic EPS Income available to common shareholders......... 1,630 43,779 $0.04 ===== Effect of Dilutive Securities Convertible preferred stock..................... 84 2,314 Stock options................................... 989 ------ Diluted EPS Income available to common shareholders and assumed conversions............................. $1,714 47,082 $0.04 ====== ====== =====
The weighted average shares for the March 31, 1998 diluted calculation does not assume exercise of any stock options or conversion of other securities since they would result in a reduced loss per share. F-25 75 2. SHAREHOLDERS' INVESTMENT COMMON STOCK During the three months ended March 31, 1999, 138,050 shares of common stock were issued to individuals who exercised stock options. The average exercise price was $2.02 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. This agreement resulted in a non-cash charge of $325,000 recorded as other expense in the Condensed Consolidated Statement of Operations for the quarter. 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. This repayment resulted in increasing the amount of borrowing capability under the current credit facility to $7,000,000. 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 March 31, 1999 Condensed Consolidated Balance Sheet: Due to us: Receivable from shareholder's affiliated company.......... $635,000 Accrued interest.......................................... 105,000 Note receivable shareholders.............................. 6,000 Due from us: Accrued Interim Series B preferred stock dividend......... 403,000 -------- Net due us.................................................. $343,000 ========
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 this quarter 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. F-26 76 5. SEGMENT INFORMATION We operate in one segment -- laser refractive surgery. Following is a table summarizing the results of our Canadian operations included in the Condensed Consolidated Statement of Operations for the three months ended March 31, 1999 and 1998 (in thousands):
1999 1998 ---- ---- Revenues.................................................... $362 $520 Operating profit............................................ 16 91
6. 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. The actions, which have been consolidated, are in the discovery stage. In the opinion of management neither action will have a material adverse effect on our financial position or results of operations. 7. ADDITIONAL FINANCIAL INFORMATION The table below provides additional financial information related to our Condensed Consolidated Statement of Operations.
MARCH 31, ------------------ 1999 1998 ------ ------ Direct costs of laser refractive surgery: Employee costs............................................ $ 953 $1,042 Equipment rent and maintenance............................ 857 727 Facility rent and utilities............................... 295 446 Supplies, gases and other................................. 406 283 ------ ------ Total.................................................. $2,511 $2,498 ====== ======
F-27 77 [INSIDE BACK COVER OF PROSPECTUS] THE LASIK PROCEDURE Nearsightedness, farsightedness and astigmatism can now be corrected using LASIK. In LASIK, a thin flap of cornea is painlessly lifted permitting laser treatment of the exposed surface. Following treatment, the flap is repositioned and reconnects almost instantly. LASIK offers many patients the potential of a virtually painless procedure, rapid visual recovery, and reduced follow-up care (as compared to other laser treatments). PATIENTS REPORT RAPID VISUAL RECOVERY WITH MINIMAL (IF ANY) DISCOMFORT. [Color drawing of eye with lifted corneal flap and area of eye being treated] [Photograph of smiling woman] ALL LCA VISION PHYSICIANS ARE BOARD CERTIFIED/ QUALIFIED AND CREDENTIALED. 78 - -------------------------------------------------------------------------------- LCAV Logo PRUDENTIAL SECURITIES DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED RAYMOND JAMES & ASSOCIATES, INC. - -------------------------------------------------------------------------------- 79 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following sets forth the approximate costs and expenses, other than underwriting discounts and commissions, payable by LCA-Vision in connection with the sale of common stock being registered hereunder: SEC Registration fees....................................... $ 25,540 Blue Sky expenses........................................... $ 10,000* Printing cost............................................... $100,000* Legal fees and expenses..................................... $ 60,000* Accounting fees and expenses................................ $ 40,000* NASD filing fee............................................. $ 5,000* Nasdaq National Market listing fees......................... $ 95,000* Miscellaneous............................................... $ 29,460* -------- Total....................................................... $365,000* ========
- --------------- * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS LCA-Vision's Certificate of Incorporation provides for indemnification of the officers and directors of LCA-Vision to the fullest extent permitted by the laws of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware provides generally and in pertinent part that a Delaware corporation may indemnify its directors and officers against expenses, judgments, fines and settlements actually and reasonably incurred by them in connection with any civil suit or action, except actions by or in the right of the corporation, or in connection with any administrative or investigative proceedings if, in connection with the matters in issue, they acted in good faith and in a manner they reasonable believed to be in, or not opposed to, the best interests of the corporation and in connection with any criminal suit or proceeding, if in connection with the matters in issue, they had no reasonably cause to believe their conduct was unlawful. Section 145 further permits a Delaware corporation to grant its directors and officers additional rights of indemnification through bylaw provisions and otherwise and to purchase indemnity insurance on behalf of its directors and officers. The Registrant maintains a policy of insurance under which the directors and officers of the Registrant are insured, subject to the limits of the policy, against certain losses arising from claims made against such directors and officers by reason of any acts or omissions covered under such policy in their respective capacities as directors or officers. S-1 80 ITEM 16. EXHIBITS 1.1 Form of Underwriting Agreement 3(a)(i) Amended Certificate of Incorporation of Registrant Note A 3(a)(ii) Amended Certificate of Designation as to Interim Preferred Note E Stock 3(b) Amended Bylaws of Registrant Note A 5.1 Opinion of Dinsmore & Shohl LLP with respect to the shares being registered 10(a) LCA-Vision Inc. 1995 Long-Term Stock Incentive Plan Note B 10(b) LCA-Vision Inc. 401(k) Plan Note A 10(c) Loan Agreement dated June 29, 1998 between Registrant and Note C The Provident Bank 10(d) LCA-Vision Inc. 1998 Long-Term Stock Incentive Plan Note D 23.1 Consent of Independent Accountants, PricewaterhouseCoopers LLP 23.2 Consent of Dinsmore & Shohl LLP to use its opinion letter filed herewith (contained in Opinion Letter at Exhibit 5.1) 24.1 Power of Attorney executed by LCA-Vision's officers and directors appointing Stephen N. Joffe and Larry P. Rapp as attorneys-in-fact (contained on signature page)
NOTE REFERENCES: A. Incorporated by reference to the Company's Registration Statement on Form 10-SB No. 0-27610, which became effective on January 25, 1996. B. Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. C. Incorporated by reference to Form 8-K filed July 2, 1998. D. Incorporated by reference to the Company's Proxy Statement relating to its October 16, 1998 Special Stockholders Meeting. E. Incorporated by reference to Form 8-K filed December 4, 1996. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. LCA-Vision hereby undertakes: (1) To file, during any period in which offers or sales are being made, a Post-Effective Amendment to this registration statement: (i) To include any prospectus required by section 10(a) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the Effective Date of the registration statement (or the most recent Post-Effective Amendment thereof) which, individually or S-2 81 in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") that are incorporated by reference in the registration statement. (2) That, for the purpose of determining liability under the Securities Act, each Post-Effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a Post-Effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (5) That for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Exchange Act (and where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (6) That for the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. S-3 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on a Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cincinnati, State of Ohio on the 7th day of June, 1999. LCA-VISION INC. By: /s/ STEPHEN N. JOFFE ------------------------------------ Stephen N. Joffe Chairman and Chief Executive Officer S-4 83 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Stephen N. Joffe and Larry P. Rapp, and each of them, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution, and each with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this Registration Statement on Form S-3, and to perform any acts necessary to be done in order to file such amendment with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, and each of the undersigned does hereby ratify and confirm all that said attorneys-in-fact and agents, or their or his substitutes, shall do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- Chairman and /s/ STEPHEN N. JOFFE Chief Executive Officer - ----------------------------------------------------- (Principal Executive Stephen N. Joffe Officer) June 7, 1999 /s/ LARRY P. RAPP Chief Financial Officer - ----------------------------------------------------- (Principal Financial and Larry P. Rapp Accounting Officer) June 7, 1999 /s/ JOHN C. HASSAN - ----------------------------------------------------- John C. Hassan Director June 7, 1999 /s/ STEPHEN N. JOFFE - ----------------------------------------------------- Stephen N. Joffe Director June 7, 1999 /s/ JOHN H. GUTFREUND - ----------------------------------------------------- John H. Gutfreund Director June 4, 1999 /s/ WILLIAM O. COLEMAN - ----------------------------------------------------- William O. Coleman Director June 7, 1999
S-5 EX-1.1 2 EXHIBIT 1.1 1 Exhibit 1.1 LCA-VISION INC. 8,300,000 Shares(1) Common Stock UNDERWRITING AGREEMENT June __, 1999 PRUDENTIAL SECURITIES INCORPORATED Dain Rauscher Wessels, a division of Dain Rauscher Incorporated Raymond James & Associates, Inc. As Representatives of the several Underwriters c/o Prudential Securities Incorporated One New York Plaza New York, New York 10292 Ladies and Gentlemen: LCA-Vision Inc., a Delaware corporation (the "Company"), and the Selling Stockholders (as defined herein) hereby confirm their respective agreements with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized to act as representatives (in such capacities, the "Representatives"), as set forth below. If you are the only Underwriters, all references herein to the Representatives shall be deemed to be to the Underwriters. 1. Securities. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the several Underwriters an aggregate of 5,000,000 shares of the Company's common stock, par value $0.001 per share ("Common Stock"). Certain stockholders of the Company named in Schedule 2 hereto (each, a "Selling Stockholder" and together, the "Selling Stockholders") propose to sell to the several Underwriters an aggregate of 3,300,000 shares, with each Selling Stockholder selling the number of shares of Common Stock set forth opposite such Selling Stockholder's name in Column (1) of Schedule 2 hereto. The shares to be sold by the Company and the shares to be sold by the Selling Stockholders are referred to herein - -------- (1) Plus an option to purchase from a Selling Stockholder up to 1,245,000 additional shares to cover over-allotments. 2 as the "Firm Securities." In addition, solely for the purpose of covering over-allotments, one of the Selling Stockholders proposes to sell to the Underwriters, at the option of the Underwriters, up to an additional 1,245,000 shares of Common Stock. Any and all shares of Common Stock to be purchased by the Underwriters pursuant to such option are referred to herein as the "Option Securities", and the Firm Securities and any Option Securities are collectively referred to herein as the "Securities". 2. Representations and Warranties of the Company and the Selling Stockholders. The Company and the Selling Stockholders jointly and severally represent and warrant to, and agree with, each of the several Underwriters that: (a) A registration statement on Form S-3 (File No. 333-_________) with respect to the Securities, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the Securities, that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Securities, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means the registration statement initially filed relating to the Securities, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time such Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time -2- 3 it was or is declared effective); the term "Prospectus" means: (A) if the Company relies on Rule 434 under the Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act; or (C) if the Company does not rely on Rule 434 under the Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Act, the prospectus included in the Registration Statement; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. (b) The Commission has not issued any order preventing or suspending use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The documents which are incorporated by reference in any Preliminary Prospectus, the Prospectus or any Term Sheet or from which information is so incorporated by reference, when they became effective or were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed) with the Commission, as the case may be, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as -3- 4 amended (the "Exchange Act") and the rules and regulations thereunder, and did not, when such documents became effective or were so filed, as the case may be, include any untrue statement of a material fact required to be stated therein or necessary in order to make the statements therein not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (d) The Company and each of its subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole. (e) The Company and each of its subsidiaries have full power (corporate and other) to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and the Company has full power (corporate and other) to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. (f) The issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims. (g) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Firm Securities and the Option Securities have been duly authorized and at the Firm Closing Date or the related Option Closing Date (as the case may be), after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. No holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any right which has not been fully exercised or waived to require -4- 5 the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this agreement. (h) The capital stock of the Company conforms to the description thereof contained in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (i) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding (A) securities or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (j) The consolidated financial statements and schedules of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial position of the Company and its consolidated subsidiaries and the results of operations and changes in financial condition as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the caption "Selected Consolidated Financial Information" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. (k) PricewaterhouseCoopers LLP, who have certified certain financial statements of the Company and its consolidated subsidiaries and delivered their report with respect to the audited consolidated financial statements and schedules included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act and the applicable rules and regulations thereunder. (l) The execution and delivery of this Agreement have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company, and is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. (m) No legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and no such proceedings have been threatened against the Company or any of its subsidiaries or with respect to any of their respective properties; and no contract or other -5- 6 document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or filed as required. (n) The issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws and, if the registration statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or any of its subsidiaries. (o) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business prospects, net worth, or results of the operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (p) The Company has not, directly or indirectly, (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Securityholders under this Agreement). (q) The Company has not distributed and, prior to the later of (i) the Closing Date and (ii) the completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or other materials, if any permitted by the Act. -6- 7 (r) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (1) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (3) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its consolidated subsidiaries, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (s) The Company and each of its subsidiaries have good and marketable title in fee simple to all items of real property and marketable title to all personal property owned by each of them, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary, and any real property and buildings held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (t) No labor dispute with the employees of the Company or any of its subsidiaries exists or is threatened or imminent that could result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (u) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent applications, trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by them in connection with their respective businesses, and neither the Company nor any such subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (v) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the -7- 8 Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (w) No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (x) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (y) The Company will conduct its operations in a manner that will not subject it to registration as an investment company under the Investment Company Act of 1940, as amended, and this transaction will not cause the Company to become an investment company subject to registration under such Act. (z) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the Company and its subsidiaries) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (aa) Neither the Company nor any of its subsidiaries is in violation of any federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company and its subsidiaries have received all permits, licenses or other approvals required of them under applicable federal and state occupational safety and health and environmental laws and regulations to conduct their respective businesses, and the Company and each such subsidiary is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or -8- 9 regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (bb) Each certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (cc) Except for the shares of capital stock of each of the subsidiaries owned by the Company and such subsidiaries, neither the Company nor any such subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (dd) There are no holders of securities of the Company, who, by reason of the filing of the Registration Statement, have the right (and have not waived such right) to request the Company to register under the Act, or to include in the Registration Statement, securities held by them. (ee) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (ff) No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties is bound or may be affected in any material adverse respect with regard to property, business or operations of the Company and its subsidiaries. 3. Representations and Warranties of the Selling Stockholders. The Selling Stockholders severally, and not jointly, represent and warrant to, and agree with, each of the several Underwriters that: (a) The execution and delivery of this Agreement has been duly executed and delivered by such Selling Stockholder, and is the valid, binding agreement of such Selling -9- 10 Stockholder, except (i) as enforceability hereof may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles and (ii) that enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy. (b) Such Selling Stockholder has full legal right and authority to enter into this Agreement. The execution, delivery and performance by each Selling Stockholder of this Agreement and the consummation by such Selling Stockholder of the transactions contemplated hereby will not conflict with or result in a breach of any of the terms or provisions, or constitute a default or cause an acceleration of any obligation under any material license, indenture, lease, mortgage, deed of trust, bank loan, credit agreement, or other material agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound, or to which any of the property or assets of such Selling Stockholder is subject, or any order of any court or governmental agency or authority entered into in any proceeding to which such Selling Stockholder was or is a party or by which such Selling Stockholder is bound, or violate or conflict with any applicable foreign, federal, state or local law, rule, administrative regulation or ordinance or administrative or court decree applicable to such Selling Stockholder or such Selling Stockholder's property. (c) Other than as permitted by the Act, such Selling Stockholder has not distributed, nor will such Selling Stockholder distribute, any prospectus or other offering material in connection with the offering and sale of the Securities. (d) Any certificate signed by the Selling Stockholder and delivered to the Representatives or to counsel for the Underwriters shall also be deemed a representation and warranty made by such Selling Stockholder to each Underwriter as to the matters covered thereby and shall also be deemed incorporated herein in its entirety and shall be effective as if such representation and warranty were made herein. No statement, representation, warranty or covenant made by such Selling Stockholder in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Representatives was or will be, when made, inaccurate, untrue or incorrect in any material respect. (e) Other than pursuant to this Agreement, the Selling Stockholder has not, directly or indirectly, (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (f) Such Selling Stockholder is the lawful owner of the Securities to be sold by such Selling Stockholder hereunder and upon sale and delivery of, and payment for, such Securities, as provided herein, such Selling Stockholder will convey and the Underwriters will acquire, to the extent that the Underwriters are purchasing for value, without notice of adverse claims, good, -10- 11 valid and marketable title to such Securities, free and clear of any security interests, liens, encumbrances, equities, claims or other defects. (g) Such Selling Stockholder has reviewed the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and the Registration Statement, and the information regarding such Selling Stockholder set forth therein under the caption "Principal and Selling Stockholders" is complete and accurate in all material respects. (h) There are no outstanding options, warrants, rights or other agreements or arrangements requiring such Selling Stockholder at any time to transfer any Securities to be sold hereunder by it. (i) To the knowledge of such Selling Stockholder, there are no pending actions, suits, arbitrations or other proceedings or investigations (domestic or foreign, formal or informal) against such Selling Stockholder which (A) questions the validity of this Agreement or of any action taken or to be taken by it pursuant to or in connection with this Agreement or (B) is required to be disclosed in the Registration Statement which is not so disclosed. (j) On the Firm Closing Date, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Securities to be sold by such Selling Stockholder to the several Underwriters hereunder will have been fully paid or provided for by such Selling Stockholder and all laws imposing such taxes will have been fully complied with. (k) The sale of the Securities proposed to be sold by the Selling Stockholders is not prompted by the Selling Stockholder's knowledge of any material adverse, non-public information concerning the Company or any of its subsidiaries. 4. Purchase, Sale and Delivery of the Securities. (a) On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, and at a purchase price of $_____ per share of Common Stock, (A) the Company agrees to sell to the several Underwriters, and the Underwriters severally and not jointly, agree to purchase from the Company the number of Securities set forth opposite the respective names of the Underwriters in Column (1) of Schedule 1 hereto and (B) each Selling Stockholder, severally and not jointly, agrees to sell to the Underwriters, a pro rata portion of the total number of Securities set forth opposite the name of such Selling Stockholder in Column (1) of Schedule 2. (b) One or more certificates in definitive form for the Firm Securities that the several Underwriters have agreed to purchase hereunder, and in such denomination or denominations and registered in such name or names as the Representatives request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company and the Selling Stockholders to the Representatives for the respective accounts of the Underwriters, against payment by or on behalf of the Underwriters of the purchase price therefor by wire transfer in same-day funds (the "Wired Funds") to the account of the Company and the -11- 12 Selling Stockholders. Such delivery of and payment for the Firm Securities shall be made at the offices of Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038 at 9:30 A.M., New York time, on ________ __, 1999, or at such other place, time or date as the Representatives, the Company and the Selling Stockholders may agree upon or as the Representatives may determine pursuant to Section 10 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date". The Company will make such certificate or certificates for the Firm Securities available for checking and packaging by the Representatives at the offices in New York, New York of the Company's transfer agent or registrar or of Prudential Securities Incorporated at least 24 hours prior to the Firm Closing Date. (c) For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Securities as contemplated by the Prospectus, one of the Selling Stockholders designated on Schedule 2 hereto grants to the several Underwriters an option to purchase, severally and not jointly, the Option Securities. The purchase price to be paid for any Option Securities shall be the same price per share as the price per share for the Firm Securities set forth above in paragraph (a) of this Section 4. The option granted hereby may be exercised as to all or any part of the Option Securities from time to time within (thirty) days after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option Securities prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Selling Stockholder setting forth the aggregate number of Option Securities as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Securities. Any such date of delivery shall be determined by the Representatives but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representatives and the Selling Stockholder may agree upon or as the Representatives may determine pursuant to Section 10 hereof, is herein called the "Option Closing Date" with respect to such Option Securities. Upon exercise of the option as provided herein, the Selling Stockholder shall become obligated to sell to each of the several Underwriters, and, subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Selling Stockholder, the same percentage of the total number of the Option Securities as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Securities, calculated as set forth in (a) above, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Securities, one or more certificates in definitive form for such Option Securities, and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 4, except that reference therein to the Firm Securities and the Firm Closing Date shall be deemed, for purposes of this paragraph (b), to refer to such Option Securities and Option Closing Date, respectively. (d) Each of the Company and the Selling Stockholders hereby acknowledge that the -12- 13 wire transfer by or on behalf of the Underwriters of the purchase price for any Shares does not constitute closing of a purchase and sale of the Securities. Only execution and delivery of a receipt for Shares by the Underwriters indicates completion of the closing of a purchase of the Securities from the Company and the Selling Stockholders. Furthermore, in the event that the Underwriters wire funds to the Company and the Selling Stockholders prior to the completion of the closing of a purchase of Shares, each of the Company and the Selling Stockholders hereby acknowledge that until the Underwriters execute and deliver a receipt for the Shares, by facsimile or otherwise, the Company and the Selling Stockholders will not be entitled to the Wired Funds and shall return the Wired Funds to the Underwriters as soon as practicable (by wire transfer of same-day funds) upon demand. If the closing of a purchase of Shares is not completed and the Wired Funds are not returned by the Company and the Selling Stockholders to the Underwriters on the same day the Wired Funds were received by the Company and the Selling Stockholders, each of the Company and the Selling Stockholders agree to pay to the Underwriters in respect of each day the Wired Funds are not returned by it, in same-day funds, interest on the amount of such Wired Funds in an amount representing the Underwriters' cost of financing as reasonably determined by Prudential Securities Incorporated. (e) It is understood that any of you, individually and not as one of the Representatives, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Securities to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. 5. Offering by the Underwriters. Upon your authorization of the release of the Firm Securities, the several Underwriters propose to offer the Firm Securities for sale to the public upon the terms set forth in the Prospectus. 6. Covenants of the Company and the Selling Stockholders. The Company covenants and agrees with each of the Underwriters as to the matters set forth in subparagraphs (a) through (m) below. Each of the Selling Stockholders, severally and not jointly, covenants and agrees with each of the Underwriters as to the matters set forth in subparagraphs (n) through (s) below. (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act, the Company (i) will comply with all requirements imposed upon it by the Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the prospectus, Term Sheet or the amendment referred to in the second sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus, Term Sheet or any amendment to the -13- 14 Registration Statement or any Rule 462(b) Registration Statement of which the Representatives previously have been advised and furnished with a copy for a reasonable period of time prior to the proposed filing and as to which filing the Representatives shall not have given their consent. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representatives or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Securities by the several Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. (b) The Company will advise the Representatives, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Original Registration Statement or any Rule 462(b) Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose or (iv) any request made by the Commission for amending the Original Registration Statement or any Rule 462(b) Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Company will arrange for the qualification of the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Securities, provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (d) If, at any time prior to the later of (i) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (ii) the Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the rules or regulations of the Commission thereunder, the Company will promptly notify the Representatives thereof and, subject to Section 5(a) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. -14- 15 (e) The Company will, without charge, provide (i) to the Representatives and to counsel for the Underwriters a signed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto), (ii) to each other Underwriter, a conformed copy of such registration statement or any Rule 462(b) Registration Statement and each amendment thereto (in each case without exhibits thereto) and (iii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request; without limiting the application of clause (iii) of this sentence, the Company, not later than (A) 6:00 P.M., New York City time, on the date of determination of the public offering price, if such determination occurred at or prior to 10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New York City time, on the business day following the date of determination of the public offering price, if such determination occurred after 10:00 A.M., New York City time, on such date, will deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representatives may reasonably request for purposes of confirming orders that are expected to settle on the Firm Closing Date. (f) The Company, as soon as practicable, will make generally available to its securityholders and to the Representatives a consolidated earnings statement of the Company and its subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (g) The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus. (h) The Company will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 90 days after the date hereof, except pursuant to this Agreement and except for issuances pursuant to the exercise of employee stock options outstanding on the date hereof, pursuant to the Company's dividend reinvestment plan or pursuant to the terms of convertible securities of the Company outstanding on the date hereof. (i) The Company will not, directly or indirectly, (i) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Securityholders under this Agreement). (j) The Company will obtain the agreements described in Section 8(f) hereof prior to the Firm Closing Date. -15- 16 (k) If at any time during the 25-day period after the Registration Statement becomes effective or the period prior to the Option Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (m) The Company will cause the Securities to be duly included for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") prior to the Firm Closing Date. The Company will ensure that the Securities remain included for quotation on the Nasdaq National Market following the Firm Closing Date. (n) Such Selling Stockholder consents to the use of the Prospectus and any amendment or supplement thereto by the Underwriters and all dealers to whom the Firm Securities and Option Securities may be sold, both in connection with the offering or sale of the Securities and the Option Securities and for such period of time thereafter as the Prospectus is required by law to be delivered in connection therewith. (o) Such Selling Stockholder will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities or the Additional Securities. (p) Such Selling Stockholder will not at any time, directly or indirectly (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or the Additional Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities and the Additional Securities by the Selling Stockholders under this Agreement). (q) During the period of 90 days from the date of the Prospectus, such Selling Stockholder will not, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, directly or indirectly, issue, offer, sell, pledge, offer to sell, contract to sell, pledge, grant any option to purchase, or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of, any shares of Common Stock or other capital stock of the Company (or any -16- 17 securities convertible into, or exchangeable or exercisable for, any shares of Common Stock or other capital stock of the Company), (r) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, such Selling Stockholder will deliver to the Representatives prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (s) As soon as any Selling Stockholder is advised thereof, such Selling Stockholder will advise the Representatives (and immediately confirm such advice in writing), (A) of receipt by such Selling Stockholder, or by any representative or agent of such Selling Stockholder, of any communication from the Commission relating to the Registration Statement, the Prospectus or any Preliminary Prospectus, or any notice or order of the Commission relating to the Company or such Selling Stockholder in connection with the transactions contemplated by this Agreement and (B) of the happening of any event which makes or may make any statement made in the Registration Statement, the Prospectus or any Preliminary Prospectus relating to such Selling Stockholder untrue or that requires the making of any changes in the Registration Statement, the Prospectus or any Preliminary Prospectus, as the case may be, in order to make the statements therein not misleading. 7. Expenses. The Company will pay all costs and expenses incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 12 hereof, including all costs and expenses incident to (i) the printing or other production of documents with respect to the transactions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendment thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (iv) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (v) the qualification of the Securities under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters relating thereto, (vi) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities, (vii) any quotation of the Securities on the Nasdaq SmallCap Market and, (viii) any meetings with prospective investors in the Securities (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters) and (ix) advertising relating to the offering of the Securities (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters). If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 8 hereof is not satisfied, because this Agreement is terminated pursuant to Section 12 hereof or because of any failure, refusal or inability on the part of the Company to perform all -17- 18 obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. The Company shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 8. Conditions of the Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Firm Securities shall be subject, in the Representatives' sole discretion, to the accuracy of the representations and warranties of the Company and the Selling Stockholders contained herein as of the date hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers and the Selling Stockholders made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective covenants and agreements hereunder and to the following additional conditions: (a) If the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to the registration statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2), or with respect to the Original Registration Statement, or such later time and date as shall have been consented to by the Representatives; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) The Representatives shall have received an opinion, dated the Firm Closing Date, of Dinsmore & Shohl LLP, counsel for the Company and the Selling Stockholders, to the effect that: (i) the Company and each of its subsidiaries listed in Schedule 3 hereto (the "Subsidiaries") have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except -18- 19 where the failure to be so qualified does not amount to a material liability or disability to the Company and the Subsidiaries, taken as a whole; (ii) the Company and each of the Subsidiaries have corporate power to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus, and the Company has corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; (iii) the issued shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any perfected security interests or, to the best knowledge of such counsel, any other security interests, liens, encumbrances, equities or claims; (iv) the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus; all of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities; the Firm Securities have been duly authorized by all necessary corporate action of the Company and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the Securities have been duly included for trading on the Nasdaq National Market; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities; and no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (v) the statements set forth under the heading "Description of Securities" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions; and the statements set forth under the headings "Business--Government Regulation" and "Business--Legal Proceedings" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, provide a fair summary of such legal matters, documents and proceedings; (vi) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement has been duly executed and delivered by the Company; (vii) (A) no legal or governmental proceedings are pending to which the Company or any of the Subsidiaries is a party or to which the property of the Company or any of the Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and, to the best knowledge of -19- 20 such counsel, no such proceedings have been threatened against the Company or any of the Subsidiaries or with respect to any of their respective properties and (B) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (viii) the issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of the Subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company or Subsidiaries; (ix) the Registration Statement is effective under the Act; any required filing of the Prospectus, or any Term Sheet that constitutes a part thereof, pursuant to Rules 434 and 424(b) has been made in the manner and within the time period required by Rules 434 and 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best knowledge of such counsel, are contemplated by the Commission; (x) the Registration Statement originally filed with respect to the Securities and each amendment thereto, any Rule 462(b) Registration Statement and the Prospectus (in each case, other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules and regulations of the Commission thereunder; (xi) if the Company elects to rely on Rule 434, the Prospectus is not "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time of its effectiveness or an effective post-effective amendment thereto (including such information that is permitted to be omitted pursuant to Rule 430A); (xii) each Selling Stockholder who is not an individual has full power and authority (corporate, partnership or other, as applicable) to enter into this agreement and to sell, transfer and deliver the Firm Securities and Option -20- 21 Securities, as the case may be, being sold by such Selling Stockholder in the manner provided in this Agreement; the delivery and execution of this Agreement has been duly authorized by all necessary corporate action of each Selling Stockholder that is corporation; this Agreement this Agreement has been duly executed and delivered by or on behalf of each Selling Stockholder; (xiii) upon the delivery by each Selling Stockholder to the several Underwriters of certificates for the Firm Securities or Option Securities, as the case may be, being sold hereunder by such Selling Stockholder against payment therefor as provided herein, assuming that each of the Underwriters which has severally purchased such Firm Securities or Option Securities, as the case may be, acquires such Firm Securities or Option Securities, as the case may be, in good faith and without notice of any adverse claim (within the meaning of the applicable Uniform Commercial Code), such Underwriter will have acquired all of the rights of such Selling Stockholder to the Firm Securities or Option Securities, as the case may be, sold by such Selling Stockholder hereunder, and in addition will have acquired title to such Firm Securities or Option Securities, as the case may be, free and clear of any adverse claim; and (xiv) the sale of Firm Securities or Option Securities, as the case may be, to the Underwriters by each Selling Stockholder pursuant to this Agreement, the compliance by such Selling Stockholder with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) to such counsel's knowledge, require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or (B) to such counsel's knowledge, conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument known to such counsel to which such Selling Stockholders is a party or by which such Selling Stockholder or any of such Selling Stockholder's properties are bound, or, in the case of a Selling Stockholder that is a corporation, the charter documents or bylaws of such Selling Stockholder; and nothing has come to such counsel's attention which causes such counsel to believe that the sale of Firm Securities or Option Securities, as the case may be, to the Underwriters by each Selling Stockholder pursuant to this Agreement, the compliance by such Selling Stockholder with the other provisions of this Agreement and the consummation of the other transactions herein contemplated will result in a violation of any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel to be applicable to such Selling Stockholder. Such counsel shall also state that they have no reason to believe that the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein -21- 22 not misleading or that the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (c) The Representatives shall have received an opinion, dated the Firm Closing Date, of Stroock & Stroock & Lavan LLP, counsel for the Underwriters, with respect to the issuance and sale of the Firm Securities, the Registration Statement and the Prospectus, and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (d) The Representatives shall have received from PricewaterhouseCoopers LLP a letter or letters dated, respectively, the date hereof and the Firm Closing Date, in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent accountants with respect to the Company and its consolidated subsidiaries within the meaning of the Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited consolidated financial statements and schedules examined by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iii) on the basis of a reading of the latest available interim unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries, carrying out certain specified procedures (which do not constitute an examination made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company and each of its consolidated subsidiaries, and inquiries of certain officials of the Company and its consolidated subsidiaries who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that: (A) the unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries included in the Registration Statement and the -22- 23 Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Registration Statement and the Prospectus; and (B) at a specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or long-term debt of the Company and its consolidated subsidiaries or any decreases in not current assets or stockholders' equity of the Company and its consolidated subsidiaries, in each case compared with amounts shown on the March 31, 1999 consolidated balance sheet included in the Registration Statement and the Prospectus, or for the period from April 1, 1999 to such specified date there were any decreases, as compared with March 31, 1999 in sales, net revenues, net income before income taxes or total or per share amounts of net income of the Company and its consolidated subsidiaries except in all instances for changes, decreases or increases set forth in such letter; and (iv) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and its consolidated subsidiaries and are included in the Registration Statement and the Prospectus under the captions "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data" and in Exhibit 11 to the Registration Statement, and have compared such amounts, percentages and financial information with such records of the Company and its consolidated subsidiaries and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation. In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that (A) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary, and (B) such changes, decreases or increases do not, in the sole judgment of the Representatives, make it impractical or inadvisable to proceed with the purchase and delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this paragraph (d) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (e) The Representatives shall have received a certificate, dated the Firm Closing Date, of Stephen N. Joffe and Larry P. Rapp of the Company to the effect that: (i) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue -23- 24 statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of the Company's knowledge, are contemplated by the Commission; and (iii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business prospects, net worth or results of operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). (f) The Representatives shall have received from each person who is a director or officer of the Company or who owns _______ shares of Common Stock and from each Selling Stockholder an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 90 days after the date of this Agreement. (g) The Representatives shall have received a certificate, dated the Firm Closing Date, executed by each Selling Stockholder to the effect that the representations and warranties of such Selling Stockholder in this Agreement are true and correct in all material respects on and as of the Firm Closing Date; such Selling Stockholder has complied wityh all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; and the Registration Statement and the Prospectus, as amended or supplemented as of the Firm Closing Date contain all statements required to be included therein regarding such Selling Stockholder, and none of the Registration Statement nor any amendment thereto includes any untrue statement of a material fact regarding such Selling Stockholder or omits to state any material fact regarding such Selling Stockholder required to be stated therein or necessary to make the statements therein regarding such Selling Stockholder not misleading, and neither the -24- 25 Prospectus (and any supplements thereto) or any Preliminary Prospectus includes or included any untrue statement of a material fact regarding such Selling Stockholder or omits or omitted to state a material fact regarding such Selling Stockholder required to be stated therein or necessary in order to make the statements therein regarding such Selling Stockholder, in the light of the circumstances under which they were made, not misleading. (h) On or before the Firm Closing Date, the Representatives and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. (i) Prior to the commencement of the offering of the Securities, the Securities shall have been included for trading on the Nasdaq National Market. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representatives and counsel for the Underwriters. The Company shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and counsel for the Underwriters shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Securities shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Securities, except that all references to the Firm Securities and the Firm Closing Date shall be deemed to refer to such Option Securities and the related Option Closing Date, respectively. 9. Indemnification and Contribution. (a) The Company and the Selling Stockholders, severally and not jointly, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, caused by, related to, based upon or arising out of or in connection with: (i) any untrue statement or alleged untrue statement made by the Company in Section 2 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"), (iii) the omission or alleged omission to state in the Registration Statement or -25- 26 any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials, including, without limitation, slides, videos, films and tape recordings used in connection with the marketing of the Securities, including, without limitation, statements communicated to securities analysts employed by the Underwriters, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that neither the Company nor the Selling Stockholders will be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company and the Selling Stockholders by such Underwriter through the Representatives specifically for use therein; and provided, further, that neither the Company nor the Selling Stockholders will be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 6(d) and (e) of this Agreement. This indemnity agreement will be in addition to any liability which the Company and the Selling Stockholders may otherwise have. Neither the Company nor the Selling Stockholders will, without the prior written consent of the Underwriter or Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the Securities, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Underwriter or any person who controls any such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (b) Notwithstanding the other provisions of this Section 9, no Selling Stockholder shall be liable for indemnification under this Section 9 for an amount exceeding the total proceeds received by such Selling Stockholder from the Underwriters for the Firm Securities and/or Option Securities sold by such Selling Stockholders hereunder. The Company and the -26- 27 Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. (c) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each Selling Stockholder, each of the Company's directors, each of the Company's officers who signed the Registration Statement and each person, if any, who controls the Company or each Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company, a Selling Stockholder or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or the Selling Stockholder by such Underwriter through the Representatives specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company, a Selling Stockholder or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or any action in respect thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 9, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 9. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the -27- 28 indemnifying party will not be liable to such indemnified party under this Section 9 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of paragraph (a) of this Section 9, representing the indemnified parties under such paragraph (a) who are parties to such action or actions) or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party. (e) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 9 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion (i) with respect to the Company, the total proceeds from the offering (before deducting expenses) received by the Underwriters and (ii) with respect to the Selling Stockholders, the sum of the total proceeds from the Offering (before deducting expenses) received by the Selling Stockholders, to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company, each Selling Stockholder and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (e). Notwithstanding any other provision of this paragraph (e), no Underwriter shall be obligated -28- 29 to make contributions hereunder that in the aggregate exceed the total public offering price of the Securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, no Selling Stockholder shall be required to contribute an amount in excess of the total proceeds received by such Selling Stockholder from the Underwriters for the Firm Securities and/or Option Securities sold by such Selling Stockholder hereunder, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Prudential Securities Incorporated Master Agreement Among Underwriters. For purposes of this paragraph (e), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, each Selling Stockholder and each person, if any, who controls the Company or a Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company and the Selling Stockholder. 10. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Securities or Option Securities hereunder and the aggregate number of such Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Securities or Option Securities to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Securities by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Securities or Option Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Securities that is more than ten percent of the aggregate number of Firm Securities or Option Securities, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives) of the Securities with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 11 hereof. In the event of any default by one or more Underwriters as described in this Section 10, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 4 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Securities or Option Securities, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. Nothing herein shall relieve any defaulting Underwriter from liability for its default. -29- 30 11. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers, the Selling Stockholders and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, the Selling Stockholders, any Underwriter or any controlling person referred to in Section 9 hereof and (ii) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 7 and 9 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 12. Termination. (a) This Agreement may be terminated with respect to the Firm Securities or any Option Securities in the sole discretion of the Representatives by notice to the Company and the Selling Stockholders given prior to the Firm Closing Date or the related Option Closing Date, respectively, if the Company or the Selling Stockholders shall have failed, refused or been unable to perform all obligations and satisfy all conditions on their part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing Date or such Option Closing Date, respectively, (i) the Company or any of its subsidiaries shall have, in the sole judgment of the Representatives, sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of the Company), in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in the Common Stock shall have been suspended by the Commission, the Nasdaq SmallCap Market or the Nasdaq National Market or trading in securities generally on the New York Stock Exchange, Nasdaq SmallCap Market or the Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on either such exchange; (iii) a banking moratorium shall have been declared by New York or United States authorities; or (iv) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering -30- 31 or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. (b) Termination of this Agreement pursuant to this Section 12 shall be without liability of any party to any other party except as provided in Section 11 hereof. 13. Information Supplied by Underwriters. The statements set forth under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representatives to the Company for the purposes of Sections 2(b) and 9 hereof. The Underwriters confirm that such statements (to such extent) are correct. 14. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Prudential Securities Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity Transactions Group; if sent to the Company, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Company at 7840 Montgomery Road, Cincinnati, Ohio 45236, Attention: Stephen N. Joffe, and if sent to Stephen N. Joffe, Sandra Joffe or Larry P. Rapp, c/o LCA-Vision Inc., at 7840 Montgomery Road, Cincinnati, Ohio 45236, and if to Summit at _____________. 15. Successors. This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company, the Selling Stockholders and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company and the Selling Stockholders contained in Section 9 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 9 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement, and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 16. Applicable Law. The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws. 17. Consent to Jurisdiction and Service of Process. All judicial proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York, and by execution and delivery of this Agreement, each Selling Stockholder accepts for itself and in connection with its properties, generally and -31- 32 unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The Selling Stockholders collectively designate and appoint __________________, and such other persons as may hereafter be selected by the Selling Stockholders acting together irrevocably agreeing in writing to so serve, as its agent to receive on their behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by each Selling Stockholder to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to each Selling Securityholder at its address provided in Section 14 hereof; provided, however, that, unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Selling Stockholders refuses to accept service, each Selling Stockholder hereby agrees that service of process sufficient for personal jurisdiction in any action against the Selling Stockholders in the State of New York may be made by registered or certified mail, return receipt requested, to the Selling Stockholder at the address provided in Section 14 hereof, and each Selling Stockholder hereby acknowledges that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Underwriter to bring proceedings against the Selling Stockholders in the courts of any other jurisdiction. 18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -32- 33 If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company, the Selling Stockholders and each of the several Underwriters. Very truly yours, LCA-VISION INC. By: ________________________ The foregoing Agreement is hereby confirmed and accepted as of the date first above written. PRUDENTIAL SECURITIES INCORPORATED DAIN RAUSCHER WESSELS, a division of Dain Rauscher Incorporated RAYMOND JAMES & ASSOCIATES, INC. By: PRUDENTIAL SECURITIES INCORPORATED By _____________________ Jean-Claude Canfin Managing Director For itself and on behalf of the Representatives. -33- 34 SCHEDULE 1 UNDERWRITERS
(1) (2) Number of Number of Securities to Securities to be be Purchased Purchased from Underwriter from the Company the Selling Stockholders Prudential Securities Incorporated................... Dain Rauscher Wessels, a division of Dain Rauscher Incorporated....................................... Raymond James & Associates, Inc...................... Total................. 5,000,000 3,300,000
-34- 35 SCHEDULE 2 SELLING STOCKHOLDERS
(1) (2) Number of Firm Maximum Number of Securities Option Securities Name to be Sold to be Sold Stephen N. Joffe 1,500,000 1,245,000 Sandra Joffe 1,200,000 -- Summit 500,000 -- Larry P. Rapp 100,000 -- ----------- --------- Total 3,300,000 1,245,000
-35- 36 SCHEDULE 3 SUBSIDIARIES Name Jurisdiction of Incorporation -36- EX-5.1 3 EXHIBIT 5.1 1 EXHIBITS 5.1 AND 23.2 Charles F. Hertlein, Jr. hertlein@dinslaw.com (513) 977-8315 June 7, 1999 LCA-Vision Inc. 7840 Montgomery Road Cincinnati, Ohio 45236 Ladies and Gentlemen: This opinion is rendered for use in connection with the Registration Statement on Form S-3, prescribed pursuant to the Securities Act of 1933, to be filed by LCA-Vision Inc. (the "Company") with the Securities and Exchange Commission on or about June 7, 1999, under which 8,300,000 shares of the Company's Common Stock, $.001 par value ("Common Stock") are to be registered. We hereby consent to the filing of this opinion as Exhibits 5 and 23.2 to the Registration Statement and to the reference to our name in the Registration Statement. As counsel to the Company, we have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of such statutes, documents, corporate records, certificates of public officials, and other instruments as we have deemed necessary for the purpose of this opinion, including the Company's Amended Certificate of Incorporation and Amended Bylaws and the record of proceedings of the stockholders and directors of the Company. Based upon the foregoing, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing and in good standing as a corporation under the laws of the State of Delaware. 2. When the Registration Statement shall have been declared effective by order of the Securities and Exchange Commission, such 8,300,000 shares of Company Common Stock will be legally and validly issued and outstanding, fully-paid and nonassessable. Very truly yours, DINSMORE & SHOHL LLP /s/ Charles F. Hertlein, Jr. Charles F. Hertlein, Jr. Encl. EX-23.1 4 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report dated February 5, 1999 relating to the consolidated financial statements of LCA-Vision Inc., which appears in LCA-Vision Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998 and to the inclusion in this Registration Statement on Form S-3 of our report dated February 5, 1999 relating to the consolidated financial statements of LCA-Vision as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 which are included in this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Cincinnati, Ohio June 7, 1999 -----END PRIVACY-ENHANCED MESSAGE-----