Debt blurs LCA-Vision's strategy Company seeks $12 million, new credit line
Cincinnati Business Journal, Monday, July 14, 1997 at 20:05
With its cash flow crunched and its bank credit line expired, laser
eye surgery pioneer LCA-Vision Inc. has put its aggressive expansion
plans on hold.
The locally based public company is trying to raise $12 million from
private investors in an effort to jump-start its growth plans.
"When we raise the cash, we'll start the roll-out again," said Dr.
Stephen Joffe, chairman, president and chief executive officer of
Kenwood-based LCA-Vision.
Since becoming a publicly traded company in early 1996, LCA-Vision
has grown from one to 18 freestanding laser eye surgery centers in
the United States, Canada and Europe.
It wants to add at least a half-dozen others, but that won't happen
unless or until LCA-Vision raises additional money.
The centers perform photorefractive keratectomy, a procedure in
which surgeons use lasers to permanently correct nearsightedness.
The procedure was approved in the United States by the Food and Drug
Administration beginning in January 1996.
While in 1994 the company had $16.9 million in revenue and $1.7
million in net income, by 1996 revenue had fallen to $13.6 million
with a net loss of $4.1 million. Shareholders' equity has been hit
even worse, falling from $2.6 million in 1994 to a minus-$624,000 at
the end of the first quarter this year.
To raise the $12 million through a private placement, LCA-Vision has
hired the New York investment banking firm Donaldson Lufkin &
Jenrette.
Since the search for investors began in March, Joffe said, some
offers have come in, "but they are not acceptable yet. Sure, you can
raise money, but sometimes you have to give away the whole shop.
We're not ready to do that."
That's vital to Joffe, who owns about 90 percent of LCA-Vision's
stock. While the stock market has climbed to dizzying heights in the
last three months, LCA-Vision has languished. From its high of $8.50
per share April 28, it has lost two-thirds of its value. LCA-Vision
stock closed trading July 9 at $2.87 per share, making Joffe's stake
worth about $50 million.
Joffe said Donaldson Lufkin told him the private placement could
take up to nine months.
But at least one analyst said LCA-Vision has bigger financial
problems in simply trying to remain afloat.
"LCA-Vision's growth rates are declining, its profitability measures
leave (much) to be desired, and, as of March 31, the company was
completely funded by debt," said Terry Dunlap, president of
Cincinnati-based Summit Research & Consulting, which does
independent equity research.
Warning that LCA-Vision's overall financial situation "is in
jeopardy," Dunlap said the company needs to move quickly to avoid
possible foreclosure on its outstanding debt. He also said private
placements like the $12 million LCA-Vision is trying to raise
usually take less time than LCA-Vision is taking, another indication
that the company right now is "a tough sell."
As of July 6, LCA-Vision was still negotiating with a Cincinnati
bank that Joffe declined to identify. The negotiations center on new
terms for LCA-Vision's $8 million revolving credit line, which
expired July 1 with almost $5.5 million outstanding.
Calling Dunlap's analysis "on-target in a black-and-white sense,"
Joffe admitted that "in bare numbers, it's dismal. We know that.
It's not been an easy road."
"But it's not for lack of trying," Joffe, a South African native,
said. "You have to remember, it's a new industry, a new procedure
and a new market. And we've had to bear the burden of educating
consumers, with no support from laser manufacturers," who Joffe
claims had promised marketing funds. "Still, we're ahead of
projections."
As of late June, the company had completed its 10,000th successful
laser eye procedure. But even that has not been enough to return
LCA-Vision to profitability.
Joffe incorporated LCA-Vision in the mid-1980's to develop
multi-specialty laser surgery centers in hospitals. During the past
decade, the company has implemented 80 such hospital-based programs,
many of which have provided excellent cash flow.
By the end of last year, however, it still managed only 26 of those
centers.
In its 1996 annual report, LCA-Vision explained that "the renewal of
the company's contracts with hospital providers is becoming
increasingly difficult due to increasing price pressures and the
lengthening of the sales cycle."
Since the FDA approved photorefractive keratectomy in the United
States, LCA-Vision's strategy has been to refocus itself on owning
freestanding laser eye surgery centers.
It was a natural for LCA-Vision, which since 1991 had been
performing the procedure in the company's Toronto facility. After
all, one in four adults are potential candidates for the laser
surgery.
But ironically, 10-year-old LCA-Vision's revenue and net income have
plummeted, despite the explosive growth in its number of new
facilities. It is now the third-largest chain of laser eye surgery
centers in the United States.
Joffe said the firm is now focusing on expanding business within its
18 current centers. Four of the 18 are "running at an operating
profit," he said. "And we project more than half of the centers will
be profitable by the third or fourth quarter."
"We're ahead of projections,' he said. "The average center takes
nine quarters to break even. Our oldest center (excluding Toronto)
is only six quarters old."
But will that leave the company enough time to outgrow the cash
crunch that threatens its current existence?
"That's a good question," Joffe said. "We believe so. We are going
to keep going."
Joffe said the company has also slashed its advertising budget,
which was $2 million last year.
"We're trying to maximize what we've spent in the past," he said.
"Rather than continue the media blitz, we're in the process of
contacting the 40,000 people directly that have contacted us."
If and when the private placement comes through, Joffe said the next
two facilities the company would build will likely be in Pittsburgh
and Atlanta.
But more likely for the short term, he said, would be "acquisitions
for stock." Joffe said LCA-Vision has its eye on a center in San
Francisco, three centers in Denver and two in Salt Lake City.
"We've spoken to the owners over the last 12 months, but we're not
in negotiations," Joffe said. "What we're waiting to do is get the
private investment finalized before aggressively pursuing any
expansion over the next six months."
That may mean giving up more of the shop than Joffe is willing to
give.
"We may have to at a certain stage," he said. "We're looking at all
our options." |
