SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
SCHEDULE
14A INFORMATION
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PRELIMINARY
COPY
SUBJECT
TO COMPLETION DATED JANUARY 23, 2009
7840
Montgomery Road
Cincinnati,
Ohio 45236
_________________,
2009
Dear
Fellow Stockholder:
Stephen N. Joffe, Craig P.R. Joffe and
Alan H. Buckey (collectively, the “
Joffe Group
”) have
commenced a process seeking to remove, without cause, all members of your Board
of Directors. The Joffe Group is also asking that you fill the
vacancies created by such removals with individuals handpicked by the Joffe
Group. In short, the Joffe Group is asking that you turn over control
of LCA-Vision Inc. (the “Company”) to Stephen Joffe. In return, the
Joffe Group is not providing you with a control premium nor a clear and concrete
path to building value of your investment in the Company.
Your Board believes that the Joffe
Group’s actions are not in the best interest of all of the Company’s
stockholders. The Company’s directors and officers are committed to
acting in the best interests of all of the stockholders. We believe
that your current Board and management should be permitted to continue to pursue
the Company’s business plan, which has been thoughtfully developed and
refined. Accordingly, we strongly urge you to reject the Joffe
Group’s efforts to remove your Board.
You can reject the Joffe Group’s
efforts to hijack the Company. First, do
not
sign the Joffe Group’s
WHITE
consent card. Second, if you have previously signed a
WHITE
consent card, you may
revoke that consent by signing, dating and mailing the enclosed
GOLD
Consent Revocation Card
immediately. Finally, even if you have not signed the Joffe Group’s
consent card, you can show your support for
your
Board by
signing, dating and mailing the enclosed
GOLD
Consent Revocation
Card. Regardless of the number of shares you own, your revocation of
consent is important. Please act today. Thank you for your
support.
Very
truly yours,
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E.
Anthony Woods
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Chairman
of the Board
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Steven
C. Straus
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Chief
Executive Officer
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If you
have any questions about revoking any consent you may have previously granted or
if you require assistance, please contact the Company’s consent revocation
solicitor:
199 Water
Street, 26
th
Floor
New York,
NY 10038
Banks and
Brokers Call 212.440.9800
All
others call Toll-Free 1.800.457.0109
[Date]
CONSENT
REVOCATION STATEMENT
BY
THE BOARD OF DIRECTORS OF LCA-VISION INC.
IN
OPPOSITION TO
A
CONSENT SOLICITATION BY STEPHEN N. JOFFE,
CRAIG
P.R. JOFFE AND ALAN H. BUCKEY
This
Consent Revocation Statement is furnished by the Board of Directors (the “
Board
”) of LCA-Vision
Inc., a Delaware corporation (the “
Company
”), to the
holders of outstanding shares of the Company’s common stock, par value $0.001
per share (the “
Common
Stock
”), in connection with your Board’s opposition to the solicitation
of written stockholder consents by Stephen N. Joffe, Craig P.R. Joffe and Alan
H. Buckey (collectively, the “
Joffe
Group
”).
The Joffe
Group is attempting to seize control of your Board and Company by asking you to
remove the directors that you elected on May 12, 2008 at the 2008 Annual Meeting
of Stockholders, and replace them with a slate of nominees handpicked by the
Joffe Group. Specifically, the Joffe Group is asking you
to: (i) repeal any amendments to the Company’s Bylaws (“
Bylaws
”) adopted
after December 31, 2008; (ii) remove, without cause, all of the current
directors of the Company; and (iii) elect as directors the Joffe Group’s own
handpicked nominees: Stephen N. Joffe, Jason T. Mogel, Robert B. Probst, Edward
J. VonderBrink and Robert H. Weisman (the “
Joffe Group
Nominees
”). The Joffe Group has stated in its consent
solicitation statement filed with the Securities and Exchange Commission (the
“
SEC
”) that it
will propose that its nominees, if elected, remove the Company’s current senior
executive officers and replace them with Stephen Joffe, his son Craig Joffe and
Alan Buckey.
Your
directors were selected through processes designed by the Board to foster good
corporate governance and representation of all stockholders. All but one of the
current directors are “independent” as defined in the Marketplace Rules of the
NASDAQ Stock Market, and all of them are experienced as directors of public
companies.
For these
reasons, among others, your Board unanimously opposes the consent solicitation
by the Joffe Group
.
Your Board is
comprised primarily of independent directors, and it is committed to acting in
the best interests of all of the Company’s stockholders. Your Board
believes that it is well positioned to recognize and act upon the Company’s
strategic opportunities and to maximize the value to be extracted through the
Company’s business plan.
This
Consent Revocation Statement and the enclosed
GOLD
Consent Revocation Card
are being mailed to stockholders on or about ____________, 2009.
Your
Board urges you not to sign any
WHITE
consent card sent to you
by the Joffe Group but instead to sign and return the
GOLD
card included with these
materials.
If you
have previously signed and returned the
WHITE
consent card, you have
every right to change your mind and revoke your consent. Whether or
not you have signed the
WHITE
consent card, we urge
you to mark the “REVOKE CONSENT” boxes on the enclosed
GOLD
Consent Revocation Card
and to sign and date and mail the card in the postage-paid envelope
provided. Even if you have not submitted a
WHITE
consent card, we urge
you to submit a
GOLD
Consent Revocation Card, as it will help us keep track of the progress of the
consent process. Regardless of the number of shares you own, your
consent revocation is important. Please act today.
If your
shares are held in “street name,” only your broker or your banker can vote your
shares. Please contact the person responsible for your account and
instruct him or her to submit a
GOLD
Consent Revocation Card
on your behalf today.
In
accordance with Delaware law and the Company’s Bylaws, on ___________, 2009, the
Board set _________, 2009 as the record date (the “
Record Date
”) for the
determination of the Company’s stockholders who are entitled to execute,
withhold or revoke consents relating to the Joffe Group’s consent
solicitation. The Company will be soliciting consent revocations from
stockholders of record as of the Record Date and only holders of record as of
the close of business on the Record Date may execute, withhold or revoke
consents with respect to the Joffe Group’s consent solicitation.
199 Water
Street, 26
th
Floor
New York,
NY 10038
Banks and
Brokers Call 212.440.9800
All
others call Toll-Free 1.800.457.0109
TABLE
OF CONTENTS
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PAGE
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FORWARD-LOOKING
STATEMENTS
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5
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DESCRIPTION
OF THE JOFFE GROUP CONSENT SOLICITATION
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6
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REASONS
TO REJECT THE JOFFE GROUP’S CONSENT SOLICITATION PROPOSALS
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6
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BACKGROUND
OF THE JOFFE GROUP SOLICITATION
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15
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QUESTIONS
AND ANSWERS ABOUT THIS CONSENT REVOCATION SOLICITATION
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19
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THE
CONSENT PROCEDURE
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SOLICITATION
OF REVOCATION
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PROFESSIONAL
ADVISORS
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APPRAISAL
RIGHTS
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23
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CURRENT
DIRECTORS OF LCA-VISION INC.
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CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
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24
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MEETINGS
OF THE BOARD OF DIRECTORS AND DIRECTOR INDEPENDENCE
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25
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COMMITTEES
OF THE BOARD OF DIRECTORS
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25
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DIRECTOR
COMPENSATION
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27
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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29
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EXECUTIVE
OFFICERS
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30
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COMPENSATION
COMMITTEE REPORT
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31
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COMPENSATION
DISCUSSION AND ANALYSIS
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31
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EXECUTIVE
COMPENSATION
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36
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AUDIT
COMMITTEE REPORT
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42
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2009
ANNUAL MEETING OF STOCKHOLDERS
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43
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SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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43
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STOCKHOLDER
COMMUNICATIONS
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43
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HOUSEHOLDING
PROXY MATERIALS
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43
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CERTAIN
INFORMATION REGARDING PARTICIPANTS IN THIS CONSENT REVOCATION
SOLICITATION
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45
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REQUESTS
FOR CERTAIN DOCUMENTS
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45
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FORWARD-LOOKING
STATEMENTS
This
Consent Revocation Statement 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. These forward-looking statements are
based on information available to the Company as of the date
hereof. Actual results could differ materially from those stated or
implied in such forward-looking statements due to risks and uncertainties
associated with the Company’s business, including, without limitation, those
concerning economic, political and sociological conditions; the acceptance rate
of new technology, and the Company’s ability to successfully implement new
technology on a national basis; market acceptance of the Company’s services; the
successful execution of marketing strategies to cost effectively drive patients
to the Company’s vision centers; competition in the laser vision correction
industry; an inability to attract new patients; the possibility of long-term
side effects and adverse publicity regarding laser vision correction;
operational and management instability; legal or regulatory action against the
Company or others in the laser vision correction industry; the Company’s ability
to operate profitably vision centers and retain qualified personnel during
periods of lower procedure volumes; the relatively high fixed cost structure of
the Company’s business; the continued availability of non-recourse third-party
financing for the Company’s patients on terms similar to what the Company has
paid historically; and the future value of revenues financed by the Company and
its ability to collect on such financings which will depend on a number of
factors, including the worsening consumer and credit environment and the
Company’s ability to manage credit risk related to consumer debt, bankruptcies
and other credit trends. In addition, an ongoing FDA study about
post-Lasik quality of life matters could potentially impact negatively the
acceptance of Lasik. Except to the extent required under the federal
securities law and the rules and regulations promulgated by the Securities and
Exchange Commission, the Company assumes no obligation to update the information
included herein, whether as a result of new information, future events or
circumstances, or otherwise. In addition to the information given
herein, please refer to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2007 and its subsequent Quarterly Reports on Form 10-Q
for discussion of important factors that could affect the Company’s
results.
DESCRIPTION
OF THE JOFFE GROUP CONSENT SOLICITATION
As set
forth in its definitive consent solicitation materials filed with the SEC, the
Joffe Group is asking you to consent to the following proposals:
Proposal
No. 1 - Repeal any provision of the Bylaws in effect at the time the proposal
becomes effective that were not included in the Bylaws that became effective on
December 31, 2008 and were filed with the SEC on January 6, 2009;
Proposal
No. 2 - Remove without cause William F. Bahl, John H. Gutfreund, John C. Hassan,
Steven C. Straus and E. Anthony Woods and any person (other than those elected
by the consent solicitation) elected or appointed to the Board to fill any
vacancy on the Board by such directors or any newly-created directorships;
and
Proposal
No. 3 - Elect each of Stephen N. Joffe, Jason T. Mogel, Robert Probst, Edward J.
VonderBrink and Robert H. Weisman to serve as directors of the Company (or, if
any such nominee is unable or unwilling to serve as a director of the Company,
any other person designated as a nominee by the remaining nominee or
nominees).
**********
In its
consent solicitation materials, the Joffe Group has also stated that, if
successful in obtaining control of the Board, it will propose that the
Board:
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·
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remove
the senior executive officers of the
Company;
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·
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appoint
Stephen Joffe, his son Craig Joffe, and Alan Buckey as the senior
executive officers of the Company;
and
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·
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cause
the Company, without seeking stockholder approval, to reimburse the
expenses of its consent solicitation, which the Joffe Group estimates to
be approximately $_______________.
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REASONS
TO REJECT THE JOFFE GROUP’S
CONSENT
SOLICITATION PROPOSALS
Your
Board urges you to reject the Joffe Group’s consent solicitation for the
following reasons, each of which is explained in greater detail
below:
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·
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Your
Board believes it is not in the best interests of all stockholders to turn
over control of the Company to the Joffe
Group.
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·
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Your
Board believes that Stephen Joffe’s past history indicates that he
exhibits unfettered concern for his own personal
benefits.
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·
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Your
Board and management have a thoughtful plan for the Company and are
implementing it.
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·
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By
contrast, the Joffe Group has not presented a concrete plan for the
Company.
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·
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Your
Board believes the principal reasons for the Company’s recent financial
results are the declines in consumer confidence and discretionary
spending.
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·
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The
Joffe Group’s allegations contain inconsistencies, omissions and
inaccuracies.
|
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·
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If
the Joffe Group’s consent solicitation is successful, the resulting change
in control of the Company may have a material adverse effect on the
Company’s financial condition.
|
Your Board
Believes it is Not in the Best Interests of All Stockholders to Turn Over
Control of the Company to the Joffe Group.
The Joffe
Group is asking you to remove all of your directors, without cause, and replace
them with individuals handpicked by the Joffe Group. In effect, the
Joffe Group is asking you to give it control without providing you with a
control premium. Your Board believes that it is not in the best
interests of all stockholders to turn over control of the Company to any
individual stockholders or group of stockholders. Your Board is
firmly committed to acting in the best interests of the Company and
all
of its
stockholders.
All but one of the Company’s current
directors are independent, that is, not also a member of the Company’s
management. The Joffe Group seeks to replace these independent
directors with persons handpicked by Stephen Joffe.
Your
Board Believes that Stephen Joffe’s Past History Indicates that He Exhibits
Unfettered Concern for his Own Personal Benefits.
As described in more detail below, in
“Background of the Joffe Group Solicitation”:
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·
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In
2006, while serving as Chief Executive Officer of the Company, Stephen
Joffe rejected a substantially increased compensation package offered by
the Company as inadequate and resigned his executive
position. Although in its consent solicitation statement the
Joffe Group criticizes Mr. Straus’ compensation, Mr. Straus’ compensation
for 2008 (including equity awards and perquisites) is substantially less
than 50% of the compensation package Stephen Joffe rejected, which
included a base salary of $750,000, a bonus of up to 150% of base salary
and up to 170,000 shares of Common Stock, and is less than Stephen Joffe’s
2006 base salary of $600,000.
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|
·
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While
negotiating his compensation with the Board and still serving as Company
Chairman and CEO, Stephen Joffe began acquiring without the Company’s
knowledge approximately 7.2% of the common stock of the Company’s largest
competitor, TLC Vision Corporation, which the Board determined was a
violation of the Company
’
s ethics
policy.
|
|
·
|
When
Stephen Joffe refused to divest his interest in TLC Vision on terms
acceptable to the Board, the Board replaced him as Chairman of the Company
and declined to nominate him for re-election as a
director.
|
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·
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Stephen
Joffe then sought, unsuccessfully, at various times to acquire TLC Vision,
to become CEO of TLC Vision with substantial cash and equity compensation
for himself and to gain election for himself and two designees to the TLC
Board.
|
Rebuffed
in his attempts to acquire TLC Vision, Stephen Joffe returned his focus to your
Company.
Before
and during the current consent solicitation, Stephen Joffe and the Joffe Group
have repeatedly contacted the Company’s surgeons, employees and outside
consultants to seek support for their solicitation and to undermine confidence
in your Board and management. Your Board has been advised that
members of the Joffe Group have threatened to terminate surgeons and Company
employees who do not support their takeover bid if their consent solicitation is
successful. Your Board believes that these tactics are divisive,
undermine surgeon and employee morale and seek to benefit the Joffe Group at the
expense of other stockholders.
In 2007
and 2008, Stephen Joffe and Craig Joffe launched private clinics called Joffe
MediCenter operating in Minneapolis, Minnesota and Louisville, Kentucky,
respectively, which offer LASIK surgery and aesthetic laser enhancement
procedures. The Joffes’ clinics compete directly with the Company,
which operates LASIK centers in the same markets. The Board believes
that Stephen Joffe should be forthcoming with the Company’s stockholders as to
what he and his son intend to do with their latest refractive surgery investment
if the Joffe Group’s consent solicitation is successful. In their
December 17, 2008 letter to stockholders, Stephen Joffe and Craig Joffe said
they would explore selling the Joffe MediCenter to the Company, but did not
commit to doing so or disclose what terms they would seek for the
transaction.
The Board
believes that Stephen Joffe’s pursuit of his personal objectives at the
Company’s expense is not new. In July 1999, the Company first
revealed it had formed a joint venture with Cole National Corporation, a
traditional eyeglass retailer, to manage a referral
network. According to a press release, Cole was to market the
Company’s LASIK centers to plan sponsors and employees. In August
1999, while Chairman and Chief Executive Officer of the Company, Stephen Joffe
and his wife revealed that they purchased a 6.7% interest in Cole National for
investment purposes.
Then on
February 22, 2000, Stephen Joffe wrote an open letter to Cole National’s
management stating he was “very disappointed in the performance of the Company
over the last several years. I think it is reasonable to assume that
most of the investors share my belief.” On December 31, 2001, Stephen
Joffe reported that he had liquidated his position in Cole
National.
Your
Board views Stephen Joffe’s tactics with Cole National as questionable given
that he was publicly criticizing the Company’s new joint venture
partner. The Board believes Stephen Joffe’s actions were not in the
best interests of the Company and its stockholders.
Your Board believes that
these prior actions raise valid questions as to Stephen Joffe’s judgment and
motives, as well as showing a pattern of conflicts of interest that could
distract from his duties as a director and officer.
The
Company’s stockholders deserve a management team and Board that are focused on
creating value for all stockholders. By inserting himself and his
nominees on the Board, Stephen Joffe is looking to advance his own agenda, which
is to install himself as Chief Executive Officer and his son as Chief Operating
Officer and to gain control of your Company without paying anything to the
Company’s stockholders.
Stockholders should ask themselves,
where is Stephen Joffe’s loyalty? What are his true
motives? What are his plans for the Company? What are his
plans for the Joffe MediCenter?
Your
Board and Management Have a Thoughtful Plan for the Company and Are Implementing
It.
The
Company owns and operates 75 vision centers in 32 states under the Lasik
Plus
® brand. The
Company’s management firmly believes that the core strength of the
Company resides in its knowledge of and ability to treat conditions
of the eye.
Since
Steven C. Straus became the Company’s Chief Executive Officer in November 2006,
the Company’s management has rapidly implemented processes and procedures which
were sorely lacking under the prior management led by Stephen Joffe and Craig
Joffe. In doing so, management has professionalized the operations of
the Company from a start-up enterprise to an industry leader poised for future
success.
After
joining the Company, Mr. Straus assembled a leadership team with expertise in
healthcare, expense and cash management, multi-site operational management,
consumer marketing and human resources development. The Company then embarked on
parallel paths of professionalizing the management of the Company, which had
been a family led, start-up enterprise, and preparing the Company for the next
stage of profitable growth.
The
Company operated since inception with neither detailed annual vision
center-level operating budgets nor a formal strategic plan. Starting in July
2007, under the leadership of Mr. Straus, the Company’s new management has
engaged in a dedicated ongoing strategic planning process to address all aspects
of the Company’s business. The strategic process has
enabled the Company to understand better its market, its competitors
and its competencies. The operational changes and results to date of
this strategic planning process are far too numerous to identify, but the
following are some of the more significant achievements:
● in
the area of patient experience, management has upgraded the laser technology in
all of its vision centers and empowered decision-making at the vision center
level to be more responsive to patient needs in individual markets;
● in
the area of staff development, the Company has implemented various training,
recruitment and succession planning programs for surgeons, optometrists and
staff, which has resulted in improvements in exam show-rate, patient conversion
and treatment show-rate;
● in
the area of operations, management has reorganized and strengthened the
organizational structure, including the hiring of senior executives in the areas
of operations, human resources and call center management, opened
state-of-the-art national call and data centers, and evaluated the Company’s
laser platforms to streamline operational and clinical processes;
● in
the area of financial/accounting management, management has created the
first-ever detailed annual operating budget process and improved the timeliness
of financial reporting;
● in
the area of leadership, management has created the Optometric Advisory Board,
which complements the previously established Medical Advisory Board, and has
created strong partnerships between field staff and corporate support
departments, and increased and improved communications across the entire
Company, which helps all members say connected and improve morale.
The
impact of these initiatives started to pay dividends in 2008,
including:
● the
Company performed over 115,000 successful laser vision correction
procedures;
● the
Company expanded its relationships with major managed care health and
vision plans, and now has exclusive or preferred agreements with seven of the
eight top U.S. health and vision plans and signed agreements with an additional
five insurers;
● the
Company has in place aggressive cash management initiatives, such as improved
management of vendor terms, that generated approximately $3.0 million in cash
flow;
● the
Company reduced expenses, such as labor cost reductions, that generated
approximately $14.0 million of annualized savings;
● the
Company reduced marketing spend from approximately $66.5 million in 2007 to
approximately $52.4 million in 2008;
● the
Company reduced general and administrative overhead expense from
approximately $22.7 million in 2007 to approximately $20.3 million in
2008;
● the
Company reduced capital expenditures from approximately $28.9 million in 2007 to
approximately $14.9 million in 2008;
● the
Company negotiated a five-year even-payment $20 million term loan with a fixed
interest rate below 5%; and
● the
Company ended 2008 with a cash and investment balance of nearly $60
million.
As a
result of these initiatives, in 2009, the Company expects to be cash flow
positive at 2008 procedure levels and to have a three-year cash reserve position
at a 90,000 annual procedures level.
Ongoing
initiatives to strengthen further the Company’s balance sheet and financial
performance include negotiations to rationalize the number of excimer lasers in
each vision center to reduce costs while maintaining clinical outcomes and
patient satisfaction, further improvement in collection results from internally
financed patients using FICO scores to qualify patients for
appropriate financing options, and continued migration toward part-time
workforce to complement a core work group of full-time employees.
In
addition to the reduction of marketing costs in 2008, the Company has
aggressively refocused its marketing efforts on local marketing and advertising.
These efforts include: local market pricing, a disciplined approach to
individual market planning and budgeting as well as in depth use of analytics to
evaluate marketing efficiency. Following research and a
segmentation study, we developed cost-effective, market-specific plans that
deliver a message that clearly differentiates LasikPlus® to targeted audiences,
while building brand awareness through integrated marketing
materials. The Company’s test of this new concept in 13 markets over
a three-week period resulted in a 34% increase in eye procedures performed
compared with a control group of 46 markets over a four-week
period.
Another
key component of the Company’s strategy is to institute a “Lifetime Vision”
model, which allows the Company to leverage its currently installed fixed asset
base and to fully utilize the highly trained and skilled ophthalmic surgeons and
optometrists associated with the LCA family. The “Lifetime Vision” model is
based on the concept that an individual should be a patient of the Company for
life and rejects the old “Catch & Release” model that does not allow for
repeat sources of revenue. The Company believes that with a phased
approach, there is a potential annual revenue increase of $30.0 million by
instituting Intra Ocular Lens (IOL) replacement alone. The advancement and
development of the “Lifetime Vision” model will be the primary focus of the
Company’s management in 2009.
In
addition, the Company has also completed the first funded LASIK insurance
program in the industry, underwritten by Standard Security Life Insurance
Company of New York. This funded LASIK program provides partially funded Lasik
insurance coverage and will be available through vision and health care plans
and employer and labor union benefit plans. The Company believes that this new
program will further strengthen and broaden its ability to penetrate its
targeted market segments.
The
Joffe Group Has Not Presented a Concrete Plan for the Company.
The Joffe
Group makes a number of bold statements about the shortcomings of the current
Board and management and about its ability to improve the Company’s
performance. In particular, the Joffe Group says it has a “plan to
right the ship,” but has failed to disclose it. By comparison, as
described above, your Board and management have articulated a concrete,
thoughtful plan for the future of the Company, and the Company has invested
heavily in that plan.
Stephen Joffe has criticized the
Company’s strategy but has not offered any concrete plan of his
own. Instead, it appears he has the following intentions: (1) to
install himself as Chief Executive Officer, with his son Craig Joffe as Chief
Operating Officer and Alan Buckey as Chief Financial Officer, and (2) to step in
and take credit for the Company’s turn-around just as current management’s
strategy begins to bear fruit and financial performance begins to improve, or to
change the Company’s direction and disrupt all of the progress the Company has
made implementing its new strategy before stockholders have had an
opportunity to benefit from the Company’s investment in that
strategy. Your Board believes that the Joffe Group’s plans will not
benefit you as a stockholder and are disruptive and damaging to the Company and
its current strategy.
Your Board believes that the “plan”
proposed by the Joffe Group in its consent solicitation statement is vague,
conclusory and contradictory. For example:
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·
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It
proposes to “restore positive physician relationships and confidence,”
which the Board believes the Joffe Group itself has sought to
undermine.
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·
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It
proposes to implement “aggressive cost reduction,” while hiring “key
operational employees” but at the same time it is criticizing the
Company’s current management for closing underperforming centers and
reducing staff. The Joffe Group does not describe how it will
accomplish this.
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·
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It
proposes to “restore patient quality” without presenting any convincing
evidence that patient quality has
declined.
|
The Joffe
Group states that it can not assure you that its “plan” will be implemented if
its nominees are elected or that the election of its nominees will improve the
Company or enhance your stockholder value.
Your Board and management have a
business plan and are implementing it. Stephen Joffe has made only
vague proclamations with no specifics whatsoever as to how or what he intends to
deliver on these proclamations. If the Joffe Group’s consent
solicitation is successful, the progress that has already been made with respect
to the new strategy will be disrupted. Your Board urges you not to
take that risk.
Your Board believes that the Principal
Reasons for the Company’s Recent Financial Results are the Declines in Consumer
Confidence and Discretionary Spending.
An
October 28, 2008 research report on the Company by Maxim Group stated, “[w]e
believe that it is too soon to call a bottom in the refractive market due to
continued erosion in many key economic indicators, particularly rising
unemployment and declining consumer spending…On the expense side of the
equation, we applaud management’s effort to rein in expenditures across all
operations during the present softening market conditions.”
As
shown below, the operating metrics of the laser vision correction industry are
closely correlated to consumer confidence. Furthermore, the Company
experienced a similar downturn in 2001 when Stephen Joffe was its
CEO.
Although
today the Company is a market leader in laser vision correction and operates 75
Lasik
Plus
vision
centers across the U.S., 10 years ago the Company operated only 22 centers,
including 19 in the United States, two in Canada and one in Finland. The
four-fold increase in domestic centers coincided with growth in consumer
confidence and was accomplished by strategic de novo center openings, meaning
each center was "built” and not "bought." The Company's growth was facilitated
by then-innovative consumer marketing, including a heavy emphasis on
direct-response mail and local advertising.
As shown
in the following tables, the Company’s business and industry are extremely
sensitive to adverse changes in the economy and especially to declines in
consumer confidence.
The
resulting decline in procedure volume has been felt consistently across the
industry, including by the two major service providers (the Company and TLC
Vision), as well as the dominant technology manufacturer (AMO). Over the past
two years, each of these companies lost approximately 90% of its market
valuation.
The
Company’s management and the Board take no comfort in the argument that the
impact on Company performance by declining consumer confidence is “outside its
control.” Rather, it serves as a sharp catalyst to review decisions recently
made and to test and implement changes that promote future success.
As the
sole (albeit loose) period of comparison to current economic times when the
Company was operating at meaningful scale, the U.S. economy was in an economic
down cycle for eight months as of March 2001. During this period of economic
decline, which was less severe in magnitude and duration than the current
recession, our country experienced a significant drop in consumer confidence,
which correlated to a drop in LASIK vision correction procedure volume.
Beginning then, under the leadership of Stephen Joffe, the Company reported five
consecutive quarters of year-over-year revenue declines, reported a loss
(excluding one-time items) for five of six consecutive quarters, postponed new
center openings and restructured operations. From the first quarter of 2001 to
the third quarter of 2002, the Company closed five of 31 LasikPlus vision
centers (16% of its total). As a result, the Company’s estimated market share
declined 40% from 6.5% in the first quarter of 2001 to 3.9% in fourth quarter of
2001.
In
response to the decline, Stephen Joffe took limited actions by reducing the
number of centers and decreasing operating expenses. No major initiatives were
undertaken to change the marketing strategy or marketing messages, or to
strengthen field or corporate leadership. Management maintained its sole
dependence on elective, self-pay laser vision correction service, rather than
diversifying the business model. The Company reported pre-tax operating losses
in 2001 and 2002, and indeed in five of the most recent 10 years (1996 to 2005)
under Stephen Joffe’s management.
The
Joffe Group’s Allegations Contain Inconsistencies, Omissions and
Inaccuracies
The Board
believes the Joffe Group’s consent solicitation statement contains many
inconsistencies, omissions and inaccuracies, including the
following:
·
The
Joffe Group expresses “concerns” over the compensation of the Company’s senior
management. Yet Mr. Straus’s compensation is substantially less than
Stephen Joffe’s $600,000 base salary in 2006 and the $750,000 base salary he
rejected when he resigned as CEO in 2006. The Joffe Group does not
disclose the compensation arrangements it will propose for Stephen Joffe, his
son Craig Joffe, and Alan Buckey if it is successful in gaining control of the
Company.
·
Similarly,
the Joffe Group alleges that the Board's compensation is excessive without
disclosing the compensation arrangements it will propose for the Board if it is
successful in obtaining control of the Company. Furthermore, the
Joffe Group does not tell you that the compensation arrangements for the Board
which it criticizes were adopted in 2006 when Craig Joffe was a director and
acting CEO of the Company and Alan Buckey was CFO of the Company.
·
The
Joffe Group states that Craig Joffe resigned “over concerns about the strategic
direction of the Company under the leadership of the Board and the recently
appointed CEO” and that Alan Buckey resigned from the Company over
disappointment with the CEO and the Board. The Joffe Group does not
tell you that both of them resigned after the Board declined to appoint them as
CEO. The Joffe Group does not disclose why Stephen Joffe resigned as
CEO. The Board believes he resigned because the Board would not meet
his compensation demands, which substantially exceeded the compensation paid to
the Company's current CEO and that recommended by the Company's independent
compensation consultant.
·
The
Joffe Groups states part of its plan is to “appoint new members of the Board of
Directors with the relevant experience and expertise to turn around the Company”
but:
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·
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Other
than Stephen Joffe, none of its nominees have any apparent expertise in
healthcare. Two are lawyers, one is an accountant and the
fourth is a professor of graphic
design.
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·
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The
Joffe Group’s consent solicitation materials do not disclose whether its
nominees (other than Stephen Joffe and Mr. VonderBrink), have any
experience as a director of a public company. Mr. VonderBrink
is a director of Streamline Health Solutions. Since 2006, when
Mr. VonderBrink became a director of Streamline Health Solutions, its
stock price has declined by approximately 66%
percent.
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·
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The
Joffe Group complains that the members of the Board do not own enough
shares of Common Stock, while ignoring the fact that four of its five
nominees for director do not own a single share of Common
Stock.
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·
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The
Joffe Group criticizes the current Board, without acknowledging that
Stephen Joffe participated in the recruitment of, and approved the
nomination and election of, all of the independent
directors.
|
If
the Joffe Group’s consent solicitation is successful, the resulting
change-in-control of the Company may have a material adverse effect on the
Company’s financial conditios.
·
If
the Joffe Group’s consent solicitation is successful, a material change in the
Company’s executive management will result in an “Event of Default” under the
Company’s Loan and Security Agreement dated as of April 24, 2008 with PNC
Equipment Finance, LLC. An Event of Default would permit the lender
to require immediate repayment of the approximately $16.6 million currently
outstanding under the Loan Agreement. The Joffe Group had not
informed you that such acceleration could occur or how it would repay the debt
and replace this financing, which bears interest at less than 5% per
annum. The Board believes that doing so under current economic
conditions would be very difficult at best, and that the loss of this financing
could have a material adverse effect on the Company.
·
A
change in control of the Company also will permit GE Money Bank to terminate the
open-end patient financing program for the Company’s customers under the
CareCredit Program and Card Acceptance Agreement dated as of October 30,
2007. During 2008, approximately 50% of the Company’s revenues were
financed through this program. The Board believes that a termination
would also have a material adverse effect on the Company.
·
In
addition, if the Joffe Group’s solicitation is successful, and the Joffe Group’s
designated directors discharge the Company’s current executive officers, their
employment agreements would require the Company to pay them approximately $1.5
million in lump sum severance payments plus benefit continuation.
·
Finally,
in its consent solicitation the Joffe Group stated that, if successful, it would
ask the new Board to reimburse its expenses in connection with the solicitation
of approximately $_______.
BACKGROUND
OF THE JOFFE GROUP
SOLICITATION
From 2006
to the present, the members of the Joffe Group abruptly resigned their
respective positions with the Company to pursue alternative
objectives. By early 2005, then Company CEO/Chairman Stephen Joffe,
who had been the Company’s largest stockholder, had divested virtually all of
his holdings in the Company. SEC filings indicate that he transferred
approximately 1 million shares to his son Craig Joffe in early
2005. He did not advise the Board in advance of his intent to do
so.
Stephen
Joffe’s annual monetary compensation as CEO of the Company increased from
$325,000 in 2004 to $600,000 in 2005, substantially more than Steven Straus is
paid today. In 2005, Stephen Joffe hired an outside compensation
consultant to assist him in negotiating his compensation for the 2006 to 2008
period. The Board’s Compensation Committee, on the advice of its
independent compensation consultant, was willing to increase Stephen Joffe’s
compensation substantially. However, the Committee’s proposed
increase (to $750,000, with a bonus of up to 150% of salary, 95,000 restricted
shares of Common Stock and up to 75,000 additional shares of Common Stock on the
achievement of specified performance targets) did not reach the level Stephen
Joffe was seeking – a level the Committee deemed excessive – and Stephen Joffe
resigned his CEO position as of March 1, 2006.
In
connection with his resignation, Stephen Joffe negotiated an arrangement that
would pay him $1.0 million to remain as Chairman of the Company until the end of
2006. While negotiating with the Board and still serving as Company
Chairman and CEO, Stephen Joffe, without the Company’s knowledge, began
acquiring 4.3 million shares of common stock of the Company’s largest
competitor, TLC Vision Corporation. The Board believed that his
sizable equity stake in TLC Vision violated the Company’s business code of
ethical conduct. In March 2006, when Stephen Joffe refused to concur
with the Board’s proposal for divesting his interest in TLC Vision, the Board
replaced Stephen Joffe as Company Chairman and decided not to nominate him for
reelection as a director at the 2006 Annual Meeting of
Stockholders. Stephen Joffe was paid a lump sum severance of $1.0
million in cash.
With no
succession plan in place, the Board immediately named as interim CEO Stephen
Joffe’s son Craig Joffe, who had been serving as Chief Operating Officer and
General Counsel. The Board hired an industry-leading national
recruitment firm, SpencerStuart, to seek a permanent CEO with Craig Joffe among
the candidates under consideration for the position. In November
2006, Steven Straus was named Company CEO and a member of the
Board. Craig Joffe remained with the Company as Chief Operating
Officer and General Counsel and a member of the Board for five additional months
until he unexpectedly resigned in late March 2007.
In
January 2007, Stephen Joffe engaged in discussions to acquire TLC
Vision. According to TLC Vision:
“[TLC
Vision] engaged in good faith negotiations with [Stephen Joffe] over several
months, including negotiating the terms of an acquisition
agreement. Late in the process, however, [Stephen] Joffe and his
advisors became unresponsive for a period of time and then presented the [TLC
Vision] board of directors with a list of new demands, many of which related to
significant issues that had been the subject of previous negotiations and which
the board of directors and its advisors thought had been agreed
upon. Based on [Stephen] Joffe’s new demands, [the TLC Vision] board
of directors concluded that [Stephen] Joffe’s offer was not bona fide and
requested that he make a firm offer or discussions would be
terminated. [Stephen] Joffe was unwilling to present a firm bona fide
offer [and] discussions were terminated…”
TLC
Vision also reported that in May 2007, Stephen Joffe approached TLC Vision’s
board of directors about joining TLC Vision’s board and taking an executive
position with TLC Vision. Over the course of approximately four weeks
of discussions, Stephen Joffe made clear to the TLC Vision board that he would
require a compensation package including stock options for himself and his
management team exercisable for approximately 15% of TLC Vision’s outstanding
shares. TLC Vision and Stephen Joffe were unable to reach
agreement.
Stephen
Joffe then proposed in early 2008 that TLC Vision shareholders elect himself and
two of his designees to the TLC Vision board of directors. Stephen
Joffe stated that he intended to solicit proxies to elect his nominees at the
TLC Vision 2008 annual meeting, but TLC Vision’s board opposed his proposal,
and, on May 7, 2008, he announced he had abandoned this effort.
After
eight years of service to the Company, Alan Buckey resigned abruptly in June
2008 from his position as Executive Vice President and Chief Financial Officer
and promptly joined the Joffe Group.
Beginning
in October 2008, when the Company’s Common Stock was trading at historic lows,
the Joffe Group began to purchase Common Stock. On November 5, 2008, the Joffe
Group filed a Schedule 13D with the SEC reporting that they had purchased an
aggregate of 2,115,320 shares of Common Stock at prices ranging from $2.29 to
$3.20 per share between October 6, 2008 and November 4, 2008. In the
filing, the Joffe Group stated that its intent in purchasing the shares was
investment and that it had no present plan or proposal relating to changing the
management of the Company.
At a
meeting held on November 11, 2008, the Board approved a Stockholders Rights Plan
(the “
Plan
”),
which was later finalized and announced on November 24, 2008. The
Board had been considering the adoption of the Plan for more than six
months. The Board determined that the Plan was desirable to preserve
the long-term value for the Company in the event of a takeover. The
Plan is not intended, and will not, prevent a takeover of the Company, but is
intended to ensure that all Company stockholders receive equal treatment in a
takeover and to guard against tactics that could impair the Board’s ability to
represent stockholders’ interests fully. Contrary to assertions by
the Joffe Group in its letter of November 24, 2008 and in its consent
solicitation materials, the Plan’s terms, including the “adverse person”
provisions, are similar to those adopted by many other public
companies. Furthermore, the Board has not invoked, and has no current
intention to invoke, the “adverse person” provision against the Joffe
Group.
On
November 13, 2008, at his request, the Joffe Group met with Anthony Woods and
William Bahl, independent directors of the Company. In that meeting,
Stephen Joffe expressed concern about the business and management of the Company
but declined to offer any concrete proposals to improve the Company’s results of
operations.
On
November 18, 2008, the Board discussed the meeting with Stephen
Joffe. On November 19, 2008, Mr. Woods advised Stephen Joffe that the
Board had discussed the November 13 meeting, but the Board was not prepared to
replace its current management team with the Joffe Group.
On
November 21, November 24, December 4 and December 9, 2008, the Joffe Group sent
letters to Mr. Woods and the Board criticizing the Board and management,
criticizing the adoption of the Plan, requesting Board representation and
calling for a special meeting of stockholders to approve the Plan.
On
December 10, 2008, the Board responded in writing to the Joffe Group, as
follows:
December
10, 2008
VIA EMAIL
& CERTIFIED MAIL
Stephen
N. Joffe
Craig P.
Joffe
Alan H.
Buckey
9650
Montgomery Road
Cincinnati,
Ohio 45242
Gentlemen:
The Board
of Directors of LCA-Vision has received and reviewed each of your
letters.
The Board
is, of course, concerned about the Company's recent operating results and aware
of the business challenges the Company faces, although it does not agree with
your description of the Company's condition as "dire" or its prognosis as
"poor." As in prior economic downturns, a decline in consumer confidence and
discretionary spending has adversely affected the Company's performance. The
Company has adopted and is implementing a business plan, including the actions
described in its recent SEC filings, which the Board believes are appropriate
during the current difficult economic situation. The Board is confident in the
ability of its current management team to execute this business
plan.
With
respect to your recent request for Board representation and appointment to
management positions at the Company, as you have noted repeatedly, each of you
has previously served as an executive officer of LCA-Vision and, in the case of
Steve and Craig, also as a Director. Each of you voluntarily resigned from those
positions of trust to pursue alternative personal or business objectives. It
seems to the Board for you to request such appointments is disingenuous after
previously abandoning the Company.
Finally,
the Board's rationale for taking certain recent actions has been adequately
explained in the Company's public announcements regarding those actions. In
particular, the stockholders' rights plan is designed to benefit all
stockholders by ensuring that all stockholders receive equal treatment in the
event of any proposed takeover, and to guard against tactics that could impair
the Board's ability to represent stockholders' interests fully and
independently. Under the Company's policies, the Board is authorized to adopt a
rights plan without prior approval if the plan is submitted for stockholder
approval within 12 months of adoption. Accordingly, the plan provides that it
will expire if its adoption is not ratified by the stockholders within 12
months. Consequently, the Board does not believe that it is necessary or prudent
to call an immediate special meeting of stockholders for this
purpose.
The Board
is certainly open to hearing the suggestions of the Company's stockholders, as
evidenced by our arranging a meeting between you and certain members of the
Board. However, your recent letter writing campaign has become a distraction to
executing our strategic plan. Thus, we do not intend to respond to your letters
individually, as they tend to repeat certain themes with which we don't
agree.
Sincerely,
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|
/s/ E. Anthony Woods
|
E. Anthony Woods
|
Chairman
of the Board
|
The Joffe
Group continued to criticize publicly and privately the Company’s Board and
management, without offering any concrete suggestions for changing the Company’s
strategic plan, culminating in the publication, on December 17, 2008, of a
letter to stockholders demanding the ouster of the entire Board and its
replacement with members and designees of the Joffe Group and announcing the
proposed consent solicitation.
In
private conversations with representatives of the Company, Stephen Joffe
rejected any solution that did not include the Joffe Group’s obtaining control
of the Board, the ouster of the Company’s current senior management and their
replacement by the Joffe Group.
On December 22, 2008, Craig Joffe
delivered a letter to the Company requesting a complete list of the Company’s
stockholders and other corporate records. The Company promptly
supplied him with all information required by law.
On December 29, 2008, the Company
issued the following press release:
CINCINNATI,
Dec 29, 2008 — The LCA-Vision Inc. (Nasdaq: LCAV) Board of Directors
strongly opposes the consent solicitation threatened by the Joffe group. The
Board believes that the Company has undertaken a prudent and achievable
strategic plan to return the Company to profitability and that the Joffe
intervention is a poorly designed effort to take control of your Company. The
Board further believes that the Joffe effort is an undue distraction to the
Company that would damage shareholder value. The Board of Directors strongly
encourages stockholders to refrain from taking any action regarding the Joffe
group's consent solicitation until they have had the benefit of the Board's
recommendation and accompanying explanation.
On December 31, 2008, the Board adopted
amendments to the Bylaws to ensure that all stockholders have advance notice of
nominations of directors and the proposal of other business, as applicable, to
be brought before stockholders at an annual meeting. The Joffe Group
is not seeking the repeal of these amendments.
On January 16, 2009, the Joffe Group
filed its preliminary consent solicitation statement with the
SEC.