U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2001.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT.
For the transition period from __________ to __________
Commission file number 0-27610
LCA-Vision Inc.
(Exact name of registrant as specified in its charter)
Delaware | 11-2882328 | ||||||
(State or other jurisdiction of | (IRS Employer | ||||||
incorporation or organization) | Identification No.) |
7840 Montgomery Road, Cincinnati, Ohio 45236 | ||
(Address of principal executive offices) | ||
(513) 792-9292 | ||
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
-------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 46,045,525 shares as of November 12, 2001.
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LCA-Vision Inc.
INDEX
Facing Sheet | 1 | |||||||||||||
Index | 2 | |||||||||||||
Part I. | Financial Information | |||||||||||||
Item 1. Financial Statements | ||||||||||||||
Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 | ||||||||||||||
3 | ||||||||||||||
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2001 and 2000 | ||||||||||||||
4 | ||||||||||||||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 | 5 | |||||||||||||
Notes to Condensed Consolidated Financial Statements | 6 | |||||||||||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 8 | |||||||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 10 | |||||||||||||
Part II. | Other Information | 11 | ||||||||||||
Item 1. Legal Proceedings | ||||||||||||||
Item 2. Changes in Securities and Use of Proceeds | ||||||||||||||
Item 3. Defaults Upon Senior Securities | ||||||||||||||
Item 4. Submission of Matters to a Vote of Security Holders | ||||||||||||||
Item 5. Other Information | ||||||||||||||
Item 6. Exhibits and Reports on Form 8-K | ||||||||||||||
Signatures | 12 |
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LCA-Vision Inc. | |||
Condensed Consolidated Balance Sheets | |||
(Dollars in thousands except per share data) | |||
Assets | September 30, 2001 (1) | December 31, 2000 | |
Current assets: | |||
Cash and cash equivalents | $20,119 | $19,692 | |
Short-term investments | - | 8,626 | |
Accounts receivable, net | 668 | 1,417 | |
Receivable from vendor | 491 | 2,280 | |
Deferred tax asset | - | 521 | |
Prepaid expenses, inventory and other | 1,682 | 2,001 | |
Total current assets | 22,960 | 34,537 | |
Property and equipment | 36,537 | 31,860 | |
Accumulated depreciation and amortization | (13,949) | (10,340) | |
Property and equipment, net | 22,588 | 21,520 | |
Goodwill, net | 294 | 753 | |
Deferred tax asset | - | 16,085 | |
Obligations due from shareholders | 51 | 190 | |
Investment in unconsolidated businesses | 216 | 295 | |
Other assets | 842 | 2,217 | |
Total assets | $46,951 ======= | $75,597 ======= | |
Liabilities and Shareholders' Investment | |||
Current liabilities: | |||
Accounts payable | $1,657 | $7,587 | |
Accrued liabilities and other | 2,526 | 2,709 | |
Debt maturing in one year | 51 | 178 | |
Total current liabilities | 4,234 | 10,474 | |
Long-term debt | 7 | 48 | |
Commitments and contingencies | - | - | |
Minority equity interest | 17 | 30 | |
Shareholders' investment | |||
Preferred stock | - | - | |
Common stock ($0.01 par value; 52,248,554 and 52,112,404 shares and | |||
46,045,525 and 47,393,508 shares issued and outstanding, respectively) | 112 | 112 | |
Contributed capital | 90,833 | 90,858 | |
Warrants | 2,105 | 2,105 | |
Notes receivable from shareholders | (1,474) | (1,013) | |
Common stock in treasury, at cost (6,203,029 shares and 4,718,896 shares) | (12,983) | (9,875) | |
Accumulated deficit | (35,878) | (17,137) | |
Foreign currency translation adjustment | (22) | (5) | |
Total shareholders' investment | 42,693 | 65,045 | |
Total liabilities and shareholders' investment | $46,951 ======= | $75,597 ======= | |
(1) Unaudited |
The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. |
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LCA-Vision Inc. | |||||||
Condensed Consolidated Statements of Income | |||||||
(Dollars in thousands except per share data) | |||||||
Three months ended | Nine months ended | ||||||
September 30, | September 30, | ||||||
2001(1) | 2000(1) | 2001(1) | 2000(1) | ||||
Revenues | |||||||
Laser refractive surgery | $13,286 | $15,590 | $57,151 | $48,745 | |||
Other | 2 | 68 | 50 | 194 | |||
Total revenues | 13,288 | 15,658 | 57,201 | 48,939 | |||
Operating costs and expenses | |||||||
Medical professional and license fees | 2,531 | 3,379 | 11,497 | 12,456 | |||
Direct costs of services | 8,101 | 7,186 | 26,565 | 19,538 | |||
General and administrative expenses | 2,178 | 2,220 | 6,697 | 7,070 | |||
Marketing and advertising | 3,021 | 2,808 | 9,680 | 11,076 | |||
Depreciation and amortization | 1,401 | 1,036 | 4,239 | 2,657 | |||
Special charges | 1,774 | - | 1,774 | - | |||
Operating loss | (5,718) | (971) | (3,251) | (3,858) | |||
Equity in earnings from unconsolidated businesses | 45 | 15 | 309 | 24 | |||
Minority equity interest | 17 | (22) | 13 | (16) | |||
Interest (expense) | - | (10) | (7) | (50) | |||
Interest income | 208 | 648 | 814 | 2,044 | |||
Other income (expense) | (1) | 37 | (10) | 585 | |||
Loss before taxes on income | (5,449) | (303) | (2,132) | (1,271) | |||
Income tax expense (benefit) | 15,345 | (102) | 16,609 | (464) | |||
Net loss | ($20,794) ======= | (201) ======= | ($18,741) ======= | (807) ====== | |||
Income per common share | |||||||
Basic | $(0.45) | $0.00 | $(0.40) | $(0.02) | |||
Diluted | $(0.45) | $0.00 | $(0.40) | $(0.02) | |||
Weighted average shares outstanding | |||||||
Basic | 46,472 | 50,921 | 46,995 | 51,559 | |||
Diluted | 46,472 | 50,921 | 46,995 | 51,559 | |||
(1) Unaudited | |||||||
The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. |
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LCA-Vision Inc. | ||||
Condensed Consolidated Statements of Cash Flow | ||||
(Dollars in thousands except per share data) | ||||
Nine months ended September 30, | ||||
2001(1) | 2000(1) | |||
Cash flow from operating activities: | ||||
Net loss | ($18,741) | ($807) | ||
Adjustments to reconcile net income to net cash provided by operating activities | ||||
Depreciation and amortization | 4,239 | 2,657 | ||
Deferred income taxes | 16,606 | - | ||
Amortization of warrant | 526 | 720 | ||
Equity in earnings of unconsolidated affiliates | (309) | (7) | ||
Special charges | 1,726 | - | ||
Changes in working capital: | ||||
Accounts receivable | 749 | 850 | ||
Receivable from vendor | 1,789 | - | ||
Prepaid expenses, inventory and other | 306 | 30 | ||
Accounts payable | (5,930) | 1,581 | ||
Accrued liabilities and other | (715) | (398) | ||
Net cash provided by operations | 246 | 4,626 | ||
Cash flow from investing activities: | ||||
Purchase of property and equipment | (5,585) | (8,607) | ||
Purchase of short-term investments | (4,378) | (52,756) | ||
Maturity of short-term investments | 13,004 | 75,527 | ||
Loans to shareholders | (461) | (906) | ||
Other, net | 589 | (288) | ||
Currency translation adjustment | (75) | - | ||
Net cash provided in investing activities | 3,094 | 13,884 | ||
Cash flows from financing activities: | ||||
Principal payments of long-term notes, debt and capital lease obligations | (168) | (535) | ||
Shares repurchased for treasury stock | (3,108) | (5,004) | ||
Exercise of stock options and warrants | 160 | 918 | ||
Distribution from (to) minority equity investees | 203 | (6) | ||
Increase in notes payable | - | 8 | ||
Net cash used by financing activities | (2,913) | (5,525) | ||
Increase in cash and cash equivalents | 427 | 12,985 | ||
Cash and cash equivalents at beginning of period | 19,692 | 11,891 | ||
Cash and cash equivalents at end of period | $20,119 ======= | $24,876 ======= | ||
(1) Unaudited | ||||
The notes to the Consolidated Condensed Financial Statements are an integral part of this statement. |
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LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements
for the Three and Nine Months Ended September 30, 2001 and 2000
1. Summary of Significant Accounting Policies
The September 30, 2001 and 2000 financial data are unaudited; however, in the opinion of the Company, such data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim periods. The December 31, 2000 Condensed Consolidated Balance Sheet has been derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. We suggest that these financial statements be read together with the financial statements and notes included in our annual report on Form 10-K.
Business
We are a leading developer and operator of free-standing laser refractive surgery centers. Our laser refractive surgery centers provide the staff, facilities, equipment and support services for performing various corrective eye surgeries that employ state-of-the-art laser technologies to correct nearsightedness, farsightedness and astigmatism. The Company currently utilizes two primary excimer lasers: the Bausch & Lomb Technolas 217 and the VISX Star S2 laser. Substantially all of the revenues from our laser vision correction procedures are derived from our U.S. Centers.
Operating costs and expenses consist of:
- Medical professional and license fees, including per procedure fees for the ophthalmologist performing laser vision correction and the license fee of $110 per procedure paid to VISX and Bausch & Lomb,
- Direct costs of services, including center rent and utilities, equipment lease and maintenance costs, surgical supplies, center staff expense, costs related to other revenue, and all other costs associated with providing services in our centers,
- General and administrative associated with corporate overhead costs,
- Marketing and advertising costs, and
- Depreciation and amortization 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. Our condensed consolidated financial statements include the accounts of:
- LCA-Vision Inc.,
- LCA-Vision (Ohio), Inc.,
- Refractive Centers International, Inc. and Subsidiaries
- LCA-Vision (Canada) Inc. and Subsidiaries, and
- The Baltimore Laser Sight Center, Ltd
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 Condensed Consolidated Balance Sheets, and
- our percentage share of the earnings (losses) in our Condensed Consolidated Statements of Operations.
We own 43% of Silmalaseri Oy and 50% of both Cole LCA Vision LLC and Eyemed LCA Vision LLC and report our investments under the equity method.
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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 Condensed Consolidated Balance Sheets at the dates of the financial statements,
- our disclosure of contingent liabilities at the dates of the financial statements, and
- our reported amounts of revenues and expenses in our Condensed Consolidated Statements of Income during the reporting periods.
Actual amounts could differ from those estimates.
Per Share Data
Basic per share data is income applicable to common shareholders divided by the weighted average common shares outstanding. Diluted per share data is income applicable to common shareholders divided by the weighted average common shares outstanding plus the potential issuance of common shares if stock options or warrants were exercised or convertible preferred stock were converted into common stock.
Following is a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2001 and 2000 (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | ||||
September 30, | September 30, | ||||
2001 | 2000 | 2001 | 2000 | ||
Basic earnings per share | |||||
Net loss | ($20,995) | ($201) | ($18,941) | ($807) | |
Weighted average shares outstanding | 46,472 | 50,921 | 46,995 | 51,559 | |
Basic earnings (loss) per share | ($0.45) | $0.00 | ($0.40) | (0.02) | |
Diluted earnings per share | |||||
Net loss | ($20,995) | ($201) | ($18,941) | (807) | |
Weighted average shares outstanding | 46,472 | 50,921 | 46,995 | 51,559 | |
Effect of dilutive securities | |||||
Stock options | 0 | 0 | 0 | 0 | |
Warrants | 0 | 0 | 0 | 0 | |
Weighted average common shares and potential dilutive shares | 46,472 | 50,921 | 46,995 | 51,559 | |
Diluted earnings per share | ($0.45) | $0.00 | ($0.40) | ($0.02) |
Special Charges
During the third quarter of 2001, management implemented a restructuring plan to close unprofitable locations and to reduce operating expenses. The cost of the plan is $1,375,000 which is comprised of a $535,000 restructuring charge and a $840,000 asset impairment charge for leasehold improvements, equipment and goodwill associated with the locations to be closed. The restructuring charges included $384,000 in lease termination costs and $151,000 in severance payments for 71 employees.
As of September 30, 2001 the balance of the restructuring accrual was $487,000 which relates to future facility rent and severance payments.
Also during the third quarter of 2001, the Company provided a reserve of $399,000 on a loan made to REI Corporation which operated a licensed facility in Tokyo, Japan. During the quarter, management determined that the loan may not be recoverable.
As a result of the Company's operating loss during the third quarter of 2001, and continuing uncertainties regarding the general economic conditions in the United States and the impact on ongoing operations, the Company recorded a $15,345,000 valuation reserve for deferred tax assets as of September 30, 2001. This reserve was established according to the requirements of SFAS No. 109 "Accounting for Income Taxes."
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Shareholders' Investment
Common Stock
During the three months ended September 30, 2001, 72,000 shares of common stock were issued to individuals who exercised stock options. The average exercise price was $1.18 per share.
Segment Information
We operate in one segment - laser refractive surgery.
Commitments and Contingencies
None.
Item 2. Management's Discussion and Analysis of Financial Condition Results of Operations.
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect our results, refer to the Overview and financial statement line item discussions set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
"MD&A" is an analysis of our operating results for the three and nine months ended September 30, 2001 and 2000 and our financial condition as of September 30, 2001. It explains why our revenues and costs changed, our overall financial condition, and other matters.
Results of Operations - Revenues
Laser refractive surgery
Laser refractive surgery revenue generally includes three components: facility fee, royalty fee, and medical professional fees. Certain states prohibit us from practicing medicine, employing physicians to practice medicine on our behalf or employing optometrists to render optometry services on our behalf. Revenues and 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 and nine months ended September 30, 2001 and 2000 were (dollars in thousands):
Three Months Ended | Nine Months Ended | ||||||
September 30, | September 30, | ||||||
2001 | 2000 | 2001 | 2000 | ||||
Revenue | $13,286 | $15,590 | $57,151 | 48,745 | |||
Less: | |||||||
Medical professional and license fees | 2,531 | 3,379 | 11,497 | 12,456 | |||
$10,755 | $12,211 | $45,654 | $36,289 | ||||
Contribution Margin | 80.9% | 78.3% | 79.9% | 74.4% | |||
The following table illustrates the number of laser vision correction procedures performed at our centers. Procedure volumes in the third quarter of 2001 declined from the second quarter of 2001 as a result of the difficult economic environment in the United States.
Consolidated | ||
2001 | 2000 | |
Q1 | 25,061 | 12,504 |
Q2 | 22,940 | 13,888 |
Q3 | 13,340 | 16,341 |
Q4 | 16,411 | |
Year | 59,144 |
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Medical professional and license fees
Medical professional expenses and license fees decreased by $848,000 from the third quarter of 2000 as a result of lower procedure volumes.
Direct costs of services
Direct costs of services include the salary component of physician compensation, staffing, equipment, medical supplies, and facility costs to operate laser vision correction centers. These direct costs increased in the third quarter of 2001 by $915,000 over the third quarter of 2000, largely because of an increase in the number of centers in operation. Medical supplies increased by $51,000 in the third quarter of 2001 from the third quarter of 2000. Exclusive of medical supplies, the average direct cost per center per month decreased to $76,900 in the third quarter of 2001 from $82,900 in the second quarter of 2001 because of cost-reduction efforts of center expenses due to decreases in volume.
General and administrative
General and administrative expenses decreased by $42,000 in the third quarter of 2001 from the third quarter of 2000. This is the result of decreased warrant amortization expense offset by third quarter 2000 recovery of bad debt.
Marketing and advertising expenses
Marketing and advertising expenses increased by $213,000 in the third quarter of 2001 from the third quarter of 2000. Compared to the second quarter of 2001, marketing and advertising expenditures decreased by $228,000 due to lower advertising rates and the cancellation of media placements in the month of September.
Depreciation and amortization
Depreciation and amortization expense increased by $365,000 in the third quarter of 2001 from the third quarter of 2000 because of the depreciation of capitalized costs of new center openings and an increase in the number of lasers in operation.
Non-operating income and expenses
Equity earnings in unconsolidated businesses increased by $285,000 in the first nine months of 2001 as compared with the first nine months of 2000. A growth in the managed care business, combined with improving results of our Helsinki affiliate, generated the increase in equity earnings.
Special Charges
During the third quarter of 2001, management implemented a restructuring plan to close unprofitable locations and to reduce operating expenses. The cost of the plan is $1,375,000 which is comprised of a $535,000 restructuring charge and a $840,000 asset impairment charge for leasehold improvements, equipment and goodwill associated with the locations to be closed. The restructuring charges included $384,000 in lease termination costs and $151,000 in severance payments for 71 employees.
The expected annual operating cost savings associated with the restructuring plan total $4,649,000, and the plan is expected to be fully implemented by the end of the year 2001. As of September 30, 2001 the balance of the restructuring accrual was $487,000 which relates to future facility rent and severance payments.
Also during the third quarter of 2001, the Company provided a reserve of $399,000 on a loan made to REI Corporation which operated a licensed facility in Tokyo, Japan. During the quarter, management determined that the loan may not be recoverable.
As a result of the Company's operating loss during the third quarter of 2001, and continuing uncertainties regarding the general economic conditions in the United States and the impact on ongoing operations, the Company recorded a $15,345,000 valuation reserve for deferred tax assets as of September 30, 2001. This reserve was established according to the requirements of SFAS No. 109 "Accounting for Income Taxes."
Liquidity and Capital Resources
Net cash provided by operating activities in the first nine months of 2001 was $246,000 which, when combined with beginning of year cash and short-term investment balances, was used to purchase property and equipment to fund the Company's treasury stock purchases.
As of September 30, 2001 we have cash and cash equivalents of $20,119,000.
9
During the second quarter of 2000, the directors initiated a program to encourage additional direct stock ownership by senior management of the company. The Company offered loans to nine key managers and directors for the purpose of purchasing shares in the open market. Each loan is a personal obligation of the borrower, and is evidenced by a promissory note. The interest rate on the notes is prime less one and one-half percent. The notes have a maximum term of three years, and contain provisions for early repayment. A total of $1,474,000 has been loaned under this program.
As of September 30, 2001 we maintained a $10,000,000 revolving credit facility with The Provident Bank ("Provident"). In addition to the revolving credit facility, the company has a discretionary credit line of $10,000,000 to fund acquisitions. Both of these credit arrangements expire June 30, 2002.
Factors That May Affect Future Results and Market Price of Stock
For a detailed discussion that may affect future results, please refer to the Company's last 10-K and 10-Q. No material new risks have developed since the filing of these reports.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The carrying values of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments.
We have historically had very low exposure to changes in foreign currency exchange rates, and as such, have not used derivative financial instruments to manage foreign currency fluctuation risk.
10
Part II. | Other Information | |||
Item 1. | Legal Proceedings | |||
None | ||||
Item 2. | Changes in Securities and Use of Proceeds. | |||
None | ||||
Item 3. | Defaults upon Senior Securities. | |||
None | ||||
Item 4. | Submission of Matters to a Vote of Security Holders | |||
None | ||||
Item 5. | Other Information. | |||
None | ||||
Item 6. | Exhibits and Reports on Form 8-K. | |||
(a) | Exhibits | |||
None | ||||
(b) | Reports on Form 8-K | |||
1) | Form 8-K dated July 31, 2001, containing a press release reporting financial results for the three and six months ended June 30, 2001 | |||
2) | Form 8-K dated September 10, 2001, containing a press release announcing a branding partnership with Bausch & Lomb. |
11
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
LCA-VISION INC.
Date | November 14, 2001 | /s/ Stephen N. Joffe Stephen N. Joffe President and Chief Executive Officer | ||||
Date | November 14, 2001 | /s/ Alan Buckey Alan Buckey Chief Financial Officer | ||||
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