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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 20, 2001 was $3,331,924. Trading in the registrant's
Common Stock was halted on April 20, 2001. The last reported sale price was
$0.26 per share.
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of November 1, 2001 was 12,815,092 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
OPTICARE HEALTH SYSTEMS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.......................................................3
ITEM 2. PROPERTIES....................................................17
ITEM 3. LEGAL PROCEEDINGS.............................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................20
ITEM 6. SELECTED FINANCIAL DATA.......................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...............34
ITEM 11. EXECUTIVE COMPENSATION........................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K .......................55
SIGNATURES..............................................................61
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PART I
ITEM 1. BUSINESS
GENERAL
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing managed care and professional eye care services. We provide
managed eye care services to health plans in eight states, and we own and
operate integrated eye health centers, including laser and ambulatory surgery
facilities and retail optical stores, in Connecticut and North Carolina. We
generate fee income by providing support services, such as wholesale buying
services, to eye care professionals around the country. We also develop and sell
integrated practice management systems, including Internet-based software
solutions, to eye care professionals.
RECENT DEVELOPMENTS
Proposed New Capital Structure for OptiCare
In November 2001, certain letters of intent were entered into concerning a
major capital restructuring of the company. If certain conditions are met and
the transactions contemplated by these letters of intent are consummated, these
transactions as presently proposed are expected (as of November 2001) to lower
the company's long-term debt by approximately $9.9 million, increase its equity
by approximately $9.0 million and reduce its next-12-months' debt service by
approximately $3.7 million.
One of the company's major shareholders, Palisade Concentrated Equity
Partnership, L.P. ("Palisade") reached preliminary agreement with the company's
senior lender, Bank Austria Creditanstalt Corporate Finance, Inc. ("Bank
Austria"), concerning new terms for refinancing all of the company's borrowings
and other direct and indirect obligations to Bank Austria. Those terms, if
accepted by Bank Austria and implemented as proposed, would provide that, in
exchange for payments to the bank by the company of approximately $23.4 million
(payable partly in cash at the closing and partly by issuance of a two-year
promissory note of the company), Bank Austria:
o Would cancel the company's existing principal and interest
obligations, which total approximately $31.6 million (approximately
$29.7 million in principal and $1.9 million in interest);
o Would eliminate the company's contingent exposure to Bank Austria,
which, as of November 1, 2001, totaled approximately $2.7 million;
o Would relinquish to the company (which would retire) all of Bank
Austria's stock, warrants and other ownership interests in the
company.
As part of Palisade's proposal, if the proposed transactions are
consummated, Palisade would also, subject to a number of conditions, provide
funds with which the company could satisfy bridge loans of $2.3 million, plus
interest, owed to Alexander Enterprise Holdings, Inc.
In this capital restructuring, if the proposed transactions are
consummated, Palisade would invest in the company a total of $3.5 million of
cash and provide letter of credit backing for obligations of the company
totaling $16.7 million. A portion of the letter of credit backing would support
new, secured credit facilities to be provided by CapitalSource Finance, LLC,
which is an asset-based lender specializing in the health care industry.
Palisade may also consider providing letter of credit backing for an
as-yet-undetermined amount of undertakings by the company which would be
required to support the company's growth.
After carefully considering its alternatives the company has concluded
that, without the very substantial cash investment and credit support being
offered by Palisade, or without a comparable amount of cash and credit support
from another source, the company would not be able to obtain the
substantial--and necessary--reduction, described above, of the company's debt
to Bank Austria, nor would the company be able to obtain the other financing
involved in this proposed transaction. If the company is unable to refinance its
debt to Bank Austria, which is now due and payable in full, with the
arrangements proposed by Palisade (or a comparable proposal from another source
not presently known or available to the company), Bank Austria would have the
right to commence foreclosure proceedings on substantially all the company's
assets.
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In exchange for the investment and credit support Palisade has proposed,
Palisade would acquire 2.5 million shares of the company's newly authorized
Series B 12.5% Voting Convertible Redeemable Participating Preferred Stock
(convertible into common stock on an one-for-ten basis) and warrants to purchase
approximately 16.7 million additional shares of the company's common stock.
Palisade would also convert an existing bridge loan to the company into
preferred stock. This would raise Palisade's effective ownership of voting stock
of the company from the present 18.5% to approximately 75% (on a fully diluted
basis). (See "New Capital Structure.")
There can be no assurance that these proposals will be carried out on the
terms presently proposed, or on other terms comparably favorable to the company,
or at all on any terms, or that, if the proposals are implemented, the company
will be able to recover its financial strength and become profitable.
Changes in the Board of Directors
On January 3, 2001, Martin Franklin and Ian Ashken resigned from the Board
of Directors. Allan Barker, resigned from the Board of Directors on January 9,
2001, as did William Goss on January 25, 2001 and Norman S. Drubner on February
23, 2001. Carl Schramm and Steven Ditman resigned from the Board of Directors
effective June 1, 2001 and June 15, 2001, respectively.
Effective November 1, 2001, Raymond W. Brennan, Alan J. Glazer, Norman S.
Drubner, and Frederick A. Rice were appointed by the sole Director then serving,
Dean J. Yimoyines, M.D., President of the Company, to fill vacancies on the
company's Board of Directors. (See Item 10, Directors and Executive Officers of
the Company.)
William Blaskiewicz Named Chief Financial Officer
On September 1, 2001, William A. Blaskiewicz was named Chief Financial
Officer, replacing Steven Ditman, who resigned on August 24, 2001 to pursue
another opportunity. A certified public accountant since 1987, Mr. Blaskiewicz
joined OptiCare in 1998 after four years as director of a billion-dollar budget
at a large insurance company. Since then, as our Chief Accounting Officer, he
worked very closely with Mr. Ditman in overseeing all aspects of our financial
and cash management operations. For information about Mr. Blaskiewicz's business
and professional background, see "Item 10, Directors and Executive Officers of
the Company."
Proposed Sale of Connecticut Operations Cancelled
On May 21, 2001, we announced a decision to terminate an agreement relating
to a proposed sale of our Connecticut-based medical, surgical and retail
operations. That proposed sale, which was announced in November 2000, was to
have been made to an investor group which included ophthalmologists employed
through our Connecticut operations.
Also on May 21, 2001, we announced that the Connecticut operations would be
managed by Gordon Bishop as President, and Nancy Noll as Vice President. Mr.
Bishop is an industry veteran with broad experience who has been an employee of
the company since 1999; Ms. Noll has held positions of increasing responsibility
with OptiCare over a 23-year career.
OptiCare Stock Trading Suspended by American Stock Exchange
On April 20, 2001, the American Stock Exchange suspended trading of the
company's common stock, and the stock has not traded since that date. Due to a
number of factors, including late filing of this and other SEC-required reports
and the company's non-compliance with the continued listing requirements of the
exchange, there is a possibility that de-listing proceedings with respect to our
stock may be commenced by the stock exchange. If a de-listing proceeding is
commenced, the company expects to immediately file an appeal. There can be no
assurance that any appeal would be successful.
If the proposed new capital structure were in place, and the company becomes
current in its SEC filings, the company believes it would be eligible, subject
to review by the exchange, for the resumption of the trading of its common stock
on the American Stock Exchange. However, there can be no assurance that trading
will resume, or, if trading is resumed, the prices at which the stock will be
traded.
The last reported sale price of our common stock, on April 20, 2001, was
$0.26 per share.
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For further information concerning the company's listing with the American
Stock Exchange, see "Part II. Item 5. Market for the Company's Common Equity and
Related Stockholder Matters."
Pre-Workout Agreement Signed with Bank Austria
On February 26, 2001, we entered into a Pre-Workout Agreement with Bank
Austria Creditanstalt Corporate Finance, Inc. Bank Austria provides a term loan
and revolving credit facility, which totaled at December 31, 2000, $29.7
million. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.") The
Pre-Workout Agreement established certain understandings between the bank and
ourselves including the fact that we were in default under the loan documents,
which govern the term loan and revolving credit facility. Such defaults included
our failure to pay principal and interest when due and our failure to observe or
perform certain affirmative covenants and other covenants.
On March 23, 2001, Bank Austria formally notified us of the occurrence of
events of default under the aforementioned credit facility. The bank forbid the
company from making any payments on account of debt junior to that of the bank,
including under certain Seller Notes representing long-term obligations of the
company to certain medical practices.
Pursuant to an understanding reached with the bank shortly after receiving
such notice, we engaged Morris-Anderson & Associates, Ltd., a management
consulting firm, to assist us in restructuring our long-term debt. Although in
its March 23 notice the bank had formally reserved its rights under the terms of
the credit facility, the aforementioned understanding was that, during a period
of unspecified duration, the events of default referred to in that notice would,
on an operating basis, be considered waived while we worked with Morris-Anderson
to restructure our debt. We continued, however, to be prohibited from paying any
junior debt, including Seller Notes.
On September 25, 2001, Bank Austria gave the company formal notice of: (i)
the occurrence of certain additional defaults under the credit facility loan
documents; (ii) the immediate termination of the commitments under the loan
documents; and (iii) the requirement that all amounts outstanding under the
credit facility were to be immediately due and payable. The company continues to
negotiate in good faith with Bank Austria and with other parties in an effort to
replace the Bank Austria credit facility with another financing arrangement
which would provide adequate capital support, at a manageable cost, to the
company. It believes that the proposed transactions involving Bank Austria,
Palisade Concentrated Equity Partnership, L.P. and CapitalSource Finance, LLC,
described below in "Item 1. Business - New Capital Structure," comprise such an
arrangement.
Alexander Enterprise Bridge Loan
On October 10, 2000 the company obtained $2.25 million through a bridge
financing arrangement with Alexander Enterprise Holdings Corp. and entered into
a second amendment to the Bank Austria credit facility. Of the $2.25 million of
proceeds from the bridge loan, $1.2 million was paid to Bank Austria as required
by the amended credit facility, and the remaining $1.1 million was used for
general working capital purposes. Of the $1.2 million paid to Bank Austria, $0.3
million was applied to past due interest, $0.4 million was used to repay
principal and $0.5 million was applied as a prepayment of interest. On January
5, 2001, the company borrowed an additional $0.5 million under the Alexander
Enterprise bridge loan. Funds for this addition to the bridge loan were provided
by Palisade ($400,000), Dean J. Yimoyines, M.D., president and chief executive
officer of the company ($50,000), and Alexander Enterprise ($50,000). The
lenders under this bridge loan also received warrants to purchase the company's
common stock. See "Item 1. New Capital Structure - Background" and "Item 13.
Certain Relationships and Related Transactions - Participations in the Alexander
Bridge Loans."
Termination of Agreement to Acquire Vision Twenty-One
Effective June 29, 2000, the company terminated a merger agreement with
Vision Twenty-One dated February 10, 2000. The transaction was subject to
certain closing conditions, which were not met, resulting in the termination. In
June 2000, we recorded a charge of $1.8 million of merger-related costs,
primarily professional fees, associated with the proposed merger.
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Sale of Registered Shares
During January 2000, we sold in the aggregate 3,571,429 registered shares of
common stock at a price of $3.50 per share. We received proceeds from the
offering of approximately $12.5 million, including the cancellation of a $2
million note previously issued by us. See "Certain Relationships and Related
Transactions - Arrangements with Marlin Capital, LLP." The proceeds have been
used to pay down indebtedness, to expand our laser correction and professional
services division, and for general corporate purposes.
THE EYE CARE INDUSTRY
Overview
The eye care market includes both eye care services and optical products. In
the eye care services market, eye health professionals, including
ophthalmologists and optometrists, provide diagnostic eye examinations and
treatment interventions to address complex eye and vision conditions. The most
common conditions addressed by eye care professionals are nearsightedness,
farsightedness and astigmatism. These eye and vision conditions have
historically been treated with pharmaceuticals, prescription glasses, contact
lenses or some combination of these treatments. With the introduction of LASIK
in 1996, eye care professionals are using laser correction as an additional
treatment alternative for these three conditions. The optical products portion
of the eye care market consists of the manufacture, distribution and sale of
optical goods, including corrective lenses, eyeglasses, frames, contact lenses
and other related optical products.
In the U.S., eye care services have traditionally been delivered by
ophthalmologists and optometrists. Ophthalmologists are specifically trained
physicians who have completed four years of medical school, obtained a medical
degree and have received specialty training in ophthalmology. Ophthalmologists
are licensed to conduct diagnostic examinations and to perform ophthalmic
surgery. Optometrists complete four years of optometry school and are generally
licensed to perform routine eye exams and prescribe corrective optical devices
(principally eyeglasses and contact lenses). Optometrists do not perform
surgery, but often provide pre- and post-operative care. There are approximately
31,000 practicing optometrists and 20,000 practicing ophthalmologists in the
U.S.
The U.S. market for eye care services and products is very large and
growing. Approximately 60% of the U.S. population--165 million people--require
some form of vision correction; and over 100 million--or some 60% of those
consumers--purchase eye wear each year.
Annual market growth rates of 5% are expected to continue for the next
several years. As the median age of the population increases, the number of
Americans requiring vision correction will inevitably grow. Further, the rise of
third party plan providers continues to fuel growth in the industry. Since 1989,
the coverage rate in the eye care population has grown from 40% to 54%.
Spending in 2001 for health care services related to eye care is estimated
to be over $29 billion, and spending on retail optical products is projected at
$18 billion. The company does substantial business in both parts of this $47
billion market.
Managed Care
According to InterStudy, a health care research firm, total 2000 U.S.
enrollment in health maintenance organizations, the most common type of managed
care plan, was 80.9 million. This represents a 23% increase in membership versus
1997. An additional 84.5 million Americans were enrolled in preferred provider
organizations in 2000. Almost all managed care plans cover medical/surgical
treatment of eye disorders and many also provide vision care benefits, including
routine eye exams or optical products.
We believe that enrollment in managed care plans, which provide coverage of
eye care services, will continue to grow. We believe this trend will be
supported by managed care plans offering enhanced vision and eye care benefits
in order to more aggressively compete for potential membership. We believe
several factors would be responsible for this:
o Demographics, specifically the aging baby boom segment of the
population;
o Increasing acceptance of the managed care model for provision of
health services; and
o Increasing market acceptance of the proposition that management of
insurance claims processing
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services for as specialized a medical sector as eye care services and
products is best provided by companies that focus on that sector.
As a result, we believe this market segment has significant growth potential,
and we believe we are positioning ourselves to capitalize on that, although
favorable results cannot be assured.
Eye Care Products and Services
Although vision correction techniques and technologies are growing
dramatically, the demand for basic optical goods, including corrective lenses,
eyeglass frames and other optical products, and eye health surgery, remains
substantial. Of the $47 billion eye care market, consumers spend approximately
$18 billion on retail optical products. Approximately 83%, or $14..9 billion, is
spent on lenses and frames, while approximately 12%, or $2.2 billion, is spent
on contact lenses.
We also expect the demand for eye surgery to show steady growth. Common eye
disorders include glaucoma, macular degeneration, diabetic retinopathy and
cataracts. We believe that the aging of the population, including the "baby
boom" generation, will increase the demand for medical and surgical treatment of
these disorders. Glaucoma affects approximately 3 million people in the U.S. and
is projected by industry sources to double by 2030. Cataract surgery, the most
widely performed eye care surgical procedure in the U.S., is typically done on
an outpatient basis using local anesthesia, and the procedure time is typically
less than 30 minutes. In 2000, an estimated 2.7 million cataract procedures were
performed in the U.S. Since the preponderance of these other eye disorders
affect patients over the age of 65, the Medicare program is the primary payer
for treatment of these disorders, including surgery.
DESCRIPTION OF BUSINESS DIVISIONS
OptiCare's business operations are managed through three divisions which,
together, cover every sector of the eye care industry:
o Managed Care Services. We contract with managed care plans to manage
the eye health portion of those plans.
o Professional Services. We operate ambulatory surgical and laser
correction centers and provide marketing, systems, software and other
services to eye care professionals.
o Other Integrated Services. We own and operate fully integrated eye
health centers, retail optical stores and a buying group program.
Managed Care Services Division
We have significant expertise in providing managed care services for
insurance companies, HMOs and other third-party payers and have leveraged our
leadership position in key markets to build a strong provider base of eye care
professionals. We believe that we are well positioned to compete for all types
of eye care contracts because of our managed care expertise, sophisticated
information systems and operating history.
As of November 1, 2001, we administered eye care benefits for over 5 million
lives, delivered through networks of eye care professionals nationwide. The
types of products administered include: capitated, fee for service, discount,
and medical management plan arrangements. Types of benefits administered include
routine wellness eye examinations, optical hardware, and medical/surgical eye
care.
Under each managed care contract, we credential eye care professionals who
provide the eye care services specified under the contract to the third-party
payer's members. We also perform other services, including quality assurance and
utilization review, member services, provider relations, and claim data
analysis. Most contracts have a term of three years and contain an automatic
renewal provision for additional one-year periods and grant either party the
right to terminate the contract upon 90-180 days' notice.
Upon obtaining a managed care contract, we typically develop a network of
eye care professionals to provide the eye care services required under the
contract. Generally, we attempt to contract first with eye care professionals
with whom we have a business relationship. Additionally, we seek to enter into
contracts with independent eye care professionals as well as to work in
conjunction with our health plan partners to build networks that meet set access
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standards. We undertake a thorough credential review process on each prospective
eye care professional, which includes obtaining a copy of the state license and
Drug Enforcement Agency number, verifying hospital privileges, liability
insurance and board certification, and reviewing work history for each provider.
Eye care professionals who are on our panels are recredentialed every two years.
All credentialed eye care professionals must meet the guidelines of the National
Committee for Quality Assurance (NCQA), a leading quality assurance authority.
OptiCare has received full accreditation and was re-awarded accreditation as a
Credentialing Verification Organization by NCQA.
We believe that our managed care services provide significant value to
third-party payers by delivering high quality, cost-effective managed eye care
to plan members and comprehensive administrative services to the third-party
payer. Some of the services provided include:
Plan Member Relations. Service representative staff are available to answer
questions on members' benefits and the status of claims and to resolve any
complaints about the service rendered.
Simplified Pre-Authorization Process. Network eye care professionals, with
the assistance of our staff, may obtain required authorizations for the plan
members prior to performing an eye care procedure. We believe that this approach
simplifies the process for the plan members and thereby increases such members'
overall satisfaction with their eye care benefits. During 2000, we reduced the
number of procedures requiring pre-authorization from over 250 to approximately
40. In 2001, we further reduced pre-authorization requirements to procedures
associated with two diseases. This increases our risk of adverse claims
experience, and there can be no assurance that adverse claims experience will
not develop. To enhance our claim payment administration, we utilize proprietary
systems which allow us to strictly follow CMS (formerly HCFA) rules for payment
of eye care claims. In addition, the company offers internet accessibility for
eye-care-specific clinical criteria for contract providers, allowing for
improvements in education and training. The company also has Internet
capabilities for claim submission, claim tracking, provider locator, and
eligibility and benefit verification. We feel this will continue to help lower
our cost of operations, improve service, and speed the payment cycle to our
providers.
Quality Assurance Program. We solicit patient comments through monthly
patient satisfaction surveys sent to a sample of members of our managed care
customers. In addition, we track unsolicited comments that typically are in the
nature of telephone complaints. If a plan member is dissatisfied with the
service received, a service representative can quickly resolve routine
complaints relating to matters such as eyeglasses, contact lenses and the
quality of the eye examination. We believe that our issue-resolution structure
is unique to the industry and increases plan members' satisfaction with their
eye care benefits. In addition, we perform prospective-outcome studies and other
quality assessment studies on the care rendered by our network of providers.
Utilization Review Services. We periodically monitor eye care professionals
in our network to verify that he or she is properly coding the medical services
and treatment provided. Using proprietary clinical criteria for eye care
procedures that are based on Center for Medicare and Medicaid Services (CMS,
formerly HCFA) local carrier policy and the American Academy of Ophthalmology's
own guidelines, we work with eye care professionals regarding the appropriate
eye care treatment of members. While these practices are intended to control our
costs, there can be no assurance that costs may not become excessive.
Credentialing. We provide credentialing services according to national
standards set forth by the National Committee of Quality Assurance by which
health plans are measured for compliance with quality assurance initiatives. The
credentialing process includes collection of data from applications prepared by
physicians; verification of licenses, insurance and education; and review of the
physician's file in the National Practitioner Data Bank.
Periodic Cost Reports. Periodic analytical reports on costs are prepared
for the company's health plans. These reports show, among other things, the
application of such health plan's funds for the benefit of its participants. We
utilize our systems technology to regularly and carefully monitor the economic
and qualitative performance of the networks, individual providers and health
plan customers.
Licensing Requirements. Our managed care division provides services to
customers in eight states. Texas requires the company to be licensed, and our
subsidiary, AECC Total Vision of Texas, is licensed as a single-service HMO in
Texas. We hold licenses as a third-party administrator in Florida and are a
licensed utilization review agent in Texas, Tennessee, New York, and
Connecticut.
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Professional Services Division
Surgical Centers. We own and operate two surgery centers in Connecticut,
one of which is a laser correction center. In our ambulatory surgery center in
Waterbury, CT, ophthalmic surgeons perform a range of eye care surgical
procedures, including cataract surgery, and surgical treatment of glaucoma,
macular degeneration and diabetic retinopathy. In our laser center in Danbury,
CT, we use a state of the art VISX excimer laser for the correction of
nearsightedness, farsightedness and astigmatism. In these centers, we bill
patients (or their insurers, HMOs, Medicare, Medicaid or other responsible
third-party payers) for use of the surgery facility, which becomes Professional
Services Division revenue. Our surgeons bill the patients separately for their
services, which becomes Other Integrated Services Division revenue (see "Other
Integrated Services Division" below). For laser correction, patients are billed
directly and generally we are not reimbursed by third party payers. Our
ambulatory facility in Waterbury is state licensed, approved for the payment of
facility fees by most health plans and is Medicare approved. We have contracted
with OptiCare P.C. to provide surgical and other services to patients at the
ambulatory surgical centers. (See "Item 13. Certain Relationships and Related
Transactions.")
Management Services. We sell a broad range of management services and eye
care systems to eye care professionals, principally ophthalmologists and
optometrists.
Through our wholly-owned subsidiary, Cohen Systems, Inc., we develop and
provide point-of-sale software systems for optometry practices, retail optical
locations and manufacturing laboratories. These products support eye health
practice management, billing, collections, record-keeping and inventory control
applications.
As of November 1, 2001, we had approximately 150 retail customers and 100
lens manufacturing customers using our eye care systems and software services
throughout the United States and Canada. We have developed and we sell
Internet-based order entry software systems which capture and link all eye
health patient data, provide such data to a remote manufacturing location for
immediate custom processing of optical goods, such as eyeglasses and contact
lenses, and generate invoices and other record-keeping data. One of the great
advantages of these systems is that they involve a seamless, error-free
interface between the patient examination and testing phase and the
computer-driven eyeglass manufacturing phase.
Health Services Organization. Our Health Services Organization ("HSO")
provides marketing, managed care and other administrative services to individual
ophthalmology and optometry practices. As of November 1, 2001, we had HSO
agreements in place with 26 ophthalmology and optometry practices. Most of these
agreements run for 15 years from their respective commencement dates. Under
them, we receive a percentage (generally 3%) of the revenues earned by these
practices in exchange for the core services we provide. In addition, the
practices may obtain various supplemental services, including certain laser
correction programs, systems administration and human resources services, which
they may purchase at agreed-upon rates on a menu basis. HSO participants also
have access to our buying group program.
We believe that there will be increasing demand for management and
information systems solutions for independent practitioners who are not
interested in a traditional physician practice management model. Management
believes that these independent practitioners, which make up the majority of
practicing ophthalmologists, still require assistance in a range of
administrative, marketing and information systems and software services. We
believe these doctors have the potential to benefit from the company's services
in this area.
The company is having disputes with a number of its Health Services
Organization practices, some of which are not paying their services fees. The
company is confident of the validity and enforceability of its agreements with
these practices and expects to collect substantially all fees in accordance with
the terms of the HSO agreements. There is pending litigation between the company
and certain of these practices. (See "Item 3. Legal Proceedings.")
Other Integrated Services Division
The Other Integrated Services division provides eye care services and
products to consumers through our 46 integrated eye health centers and retail
optical stores located in Connecticut and North Carolina. The division also
provides wholesale distribution of eye health products.
Integrated Eye Health Centers. Our integrated eye health centers provide
comprehensive eye care services to consumers, including medical and surgical
treatment of eye diseases and disorders by ophthalmologists, and vision
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measuring and non-surgical correction services by optometrists. We operate 21
centers in Connecticut and conduct all management, billing, systems and related
procedures for the operation of these centers.
Retail Optical Stores. Our retail optical stores, both owned and franchised,
provide vision correction services by optometrists, and/or sell eyeglasses and
other optical products. The optical facilities are either free-standing or are
located within fully integrated eye health centers. These retail optical stores
provide all customary optical goods and are supported by the company's billing,
collection, and information systems. We operate 43 retail optical locations in
Connecticut and North Carolina. In Connecticut, we also have a complete
manufacturing facility in which lenses are manufactured, surfaced and ground to
specifications and supplied to all of our Connecticut locations.
For both the integrated eye health centers and retail optical stores, we
contract with professional corporations--OptiCare, P.C., and Optometric Eye Care
Center, P.A.--which employ ophthalmologists and optometrists to provide
surgical, medical and other professional services to consumers. We provide
management services to OptiCare P.C. under a renewable 5-year professional
services and support agreement, and to Optometric Eye Care Center, P.A. under a
renewable 15-year professional administrative services and support agreement.
In addition to our owned and operated locations, we have entered into
license agreements regarding our franchise of 29 retail optical locations in
North Carolina and South Carolina. Pursuant to these license agreements, we
permit these establishments to utilize our proprietary trademarks and trade
names, including "Optometric Eye Care Center," and offer specific marketing
programs and group purchasing services. Though these agreements are generally
for five year terms, we usually grant the licensee the right to terminate the
agreement upon 90 days' notice. The licensees pay us a fee based on a percentage
of their gross revenue and have the option of requesting additional services
from us on a separate fee basis.
Optical Supplies. We purchase most of our eyeglasses, contact lenses and
other optical goods and devices through our buying group.
Buying Group Program. We operate one of the largest U.S. wholesale optical
goods distribution or "buying group" programs. This program supplies our
integrated eye health centers and retail optical operations, as well as
independent ophthalmology and optometric practices with optical and ophthalmic
goods and medical supplies (i.e., eyeglass frames and lenses, contact lenses,
clinical equipment and other supplies). Over 4,000 eye care professionals
nationwide participate in our buying group. This program leverages the
purchasing strength of the large number of participating optometrists and buys
from a national panel of approximately 175 vendors. We enter into a
non-exclusive account relationship with the buying ophthalmologists and
optometrists who place orders directly with our contracted vendors. The vendors
are required to furnish a discount to the purchasers, ship the product directly
to the practice and bill us at the predetermined price. We, in turn, bill the
participating practices and bear the credit risk. Earnings of the buying group
are based on the spread between the merchandise cost to us and the prices paid
for the merchandise by group members.
TRADEMARKS
We own the following U.S. trademark registrations: OPTICARE(R) and the
miscellaneous curve design, which is the OptiCare Health Systems, Inc. logo;
EYECARE FOR A LIFETIME(R); EYEWEAR AND EYECARE FOR A LIFETIME(R); CONNECTICUT
VISION CORRECTION(R); THE DIFFERENCE IS CLEAR(R); THE VISION OF HEALTH(R); and
TLC(R). Other trademarks for which applications for U.S. registration are
pending are: RBNI(TM); KEEPING YOU AHEAD OF THE CURVE(TM); DOCTOR'S EXPRESS(TM);
OPTICARE LASER ADVANTAGE(TM); LOSE THE GLASSES, and KEEP THE VISION(TM). We also
own the following domain names: opticare.com; opticareeye.com; opticare.net;
opticarenas.net; and opticareonline.com. We consider these trademarks and domain
names important to our business. However, our business is not dependent on any
individual trademark or trade name.
COMPETITION
The market for eye care services is highly competitive in each segment of
our business. While some of the competition is local and regional, we do have
national competitors.
Our Managed Care Services Division competes with several regional and
national eye health companies which
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provide services to managed care plans. These include Vision Twenty-One and
Vision Service Plan of America. We also compete for managed care contracts with
HMOs, PPOs and private insurers, many of which have larger provider networks
and greater financial and other resources. Managed care organizations compete
on the basis of administrative strength, size, quality and geographic coverage
of their provider networks, marketing abilities, information systems, operating
efficiencies and price.
With respect to Professional Services, we generally compete with a range of
services-specific operators catering to eye health professionals. Such service
providers include marketing companies, and systems and software vendors. We have
identified few, if any, integrated providers of eye health services other than
physician practice management companies. These operate under a significantly
different business model, requiring substantial capital investment by the
practice management company and equity participation by ophthalmologists and
optometrists.
For our Integrated Services Division, the most direct form of competition is
with independent ophthalmologists and optometrists, as well as regional
operators of retail optical locations. On a national basis, companies that
compete in this sector include retail optical chains, such as LensCrafters, Cole
National, Sight Resources, Eye Care Centers of America, and Sterling Vision.
Retail optical operators compete on price, service, product availability and
location. Buying group organizations compete on the basis of price, size and
purchasing power of their member buying group; the strength of their credit; and
the strength of their supplier agreements and relationships.
Several competitors of each of our divisions have greater capital or may
charge less for certain services. However, we believe the integrated nature of
our business model provides significant competitive advantages in the
marketplace.
FORMATION AND HISTORY
Our present form is the result of two mergers completed on August 13, 1999
(more fully described below) between (i) a subsidiary of the company and
OptiCare Eye Health Centers, Inc., a Connecticut corporation ("OptiCare Eye
Health Centers"), and (ii) another subsidiary of the company and PrimeVision
Health, Inc., a Delaware corporation ("PrimeVision Health"). As a result of the
mergers, OptiCare Eye Health Centers and PrimeVision Health are wholly owned
subsidiaries of the company. At the time of the mergers, PrimeVision Health and
OptiCare Eye Health Centers each was an integrated vision services company, with
PrimeVision Health headquartered in North Carolina, and OptiCare Eye Health
Centers headquartered in Connecticut.
The company was incorporated in Delaware in 1994 under the name "Saratoga
Resources, Inc." ("Saratoga"). At the time the company was formed, it succeeded
by merger to the assets of an oil exploration and production business.
Saratoga, while engaged in the oil business prior to 1999, experienced
several years of losses and in 1998 determined to spin off its oil assets and
seek a merger partner or other transaction to take advantage of Saratoga's
status as a publicly held company. On April 12, 1999, Saratoga entered into a
merger agreement with PrimeVision Health and OptiCare Eye Health Centers.
Pursuant to the merger agreement, Saratoga spun off or otherwise disposed of its
assets other than a modest amount of cash and two "shell" subsidiaries, and
PrimeVision Health and OptiCare Eye Health Centers merged with the shell
subsidiaries. The merger agreement closed on August 13, 1999, and, pursuant to
the merger agreement, Saratoga changed its name to "OptiCare Health Systems,
Inc.," which is now the name of our company.
At the closing of the merger agreement, the Board of Directors and
management of Saratoga resigned and, in accordance with the terms of the merger
agreement, were replaced by persons selected by PrimeVision Health and OptiCare
Eye Health Centers. Likewise, the capital structure of the company was altered
by amendments to the certificate of incorporation and by the filing of a
certificate of designation establishing a class of preferred stock designated as
the Series A Convertible Preferred Stock.
GOVERNMENT REGULATION
The federal and state governments extensively regulate the health care
industry. Our business is subject to numerous federal and state laws and
regulations, including the following:
Excimer Laser Regulation. Medical devices, including the excimer lasers used
in our eye surgery and laser
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centers, are subject to regulation by the U.S. Food and Drug Administration,
referred to as the FDA. Medical devices may not be marketed for commercial sale
in the United States until the FDA grants pre-market approval for them..
The FDA has not specifically approved the use of LASIK or the use of excimer
lasers to treat both eyes on the same day, commonly referred to as "bilateral
treatment." The FDA considers these uses to be a practice of medicine decision.
Ophthalmologists, including our affiliated ophthalmologists, often perform LASIK
and bilateral treatment in an exercise of professional judgment in connection
with the practice of medicine.
Failure to comply with applicable FDA requirements could subject the
company, our affiliated providers or laser manufacturers to enforcement action,
product seizures, recalls, withdrawal of approvals and civil and criminal
penalties. Further, failure to comply with regulatory requirements, or any
adverse regulatory action, including a reversal of the FDA's current position
that the "off-label," or non-FDA-approved, use of excimer lasers by physicians
outside the FDA approved guidelines is a practice of medicine decision, which
the FDA is not authorized to regulate, could result in a limitation on, or
prohibition of, the company's use of excimer lasers.
Regulation of Laser Vision Marketing. The marketing and promotion of laser
correction and other vision correction surgery procedures in the United States
are subject to regulation by the FDA and the Federal Trade Commission, referred
to as the FTC. The FDA and FTC have released a joint communique on the
requirements for marketing these procedures in compliance with the laws
administered by both agencies. The FTC staff also issued more detailed staff
guidance on the marketing and promotion of these procedures and has been
monitoring marketing activities in this area through a non-public inquiry to
identify areas that may require further FTC attention. The FDA has traditionally
taken the position that the promotion and advertising of lasers by manufacturers
and physicians should be limited to the uses approved by the FDA. Although the
FDA does not prevent surgeons from using excimer lasers off-label, the FDA
reserves the right to regulate advertising and promotion of off-label uses.
Insurance Licensure. Most states impose strict licensure requirements on
health insurance companies, HMOs, and other companies that engage in the
business of insurance or pre-paid health care. In most states, these laws do not
apply to discounted fee-for-service arrangements or networks that are paid on a
capitated basis,. There are exceptions to these rules in some states. For
example, certain states, such as Texas, require a license for a capitated
arrangement with any party unless the risk-bearing entity is a professional
corporation that employs the eye care providers. If we are required to become
licensed under these laws, the licensure process can be lengthy and time
consuming. Unless the regulatory authority permits us to continue to operate
while the licensure process is progressing, we could suffer losses of revenue
that would result in material adverse changes in our business while the
licensing process is pending. In addition, many of the licensing requirements
mandate strict financial and other requirements we may not immediately be able
to meet. Once licensed, we would be subject to continuing oversight by and
reporting to the licensing authority. These same requirements can also serve as
barrier to entry to competition in states where the company holds such
licensure.
Regulation of Our HMO Subsidiary. We hold one single service HMO license in
Texas. Texas requires the filing of quarterly and annual reports, submission to
periodic on-site audits, and maintenance of statutory capital reserves within
the state. The Texas managed care business is highly regulated. Such regulation
can include, but is not limited to, caps on permissible premiums charged to
customers; mandated benefits; and rules governing relationships with, and
payments to, network providers. Texas also requires pre-approval from its
Department of Insurance prior to allowing a significant change of ownership
control to take place. In Texas, a single service HMO must maintain a minimum
net worth of $500,000 and may be required to have additional capitalization
based on a risk-based capital requirement.
Texas Commissioner of Insurance Order. Our wholly owned Texas HMO, AECC
Total Vision Health Plan of Texas, Inc., is required by the terms of the Order
of the Commissioner of Insurance, dated August 12, 1999, as modified on February
8, 2001, to maintain a minimum net worth of $1,000,000. The modified order no
longer requires the HMO to obtain prior approval from the Texas Department of
Insurance to pay dividends or make other payments to affiliated companies
subject to the statutes, rules and regulations that govern such payments. We
have a cost allocation agreement with our Texas HMO subsidiary, approved by the
Texas Department of Insurance, which permits this subsidiary to reimburse us,
the parent company, for shared administrative costs. The cost allocation
agreement may be amended only with approval of the Texas Department of
Insurance.
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Third Party Administration Licensing. Some states require licensing for
companies providing administrative services in connection with managed care
business. We hold a third-party administrator license in Florida. We intend to
seek licenses in the states where they are available for eye care networks.
Physician Incentive Plans. Medicare regulations impose certain disclosure
requirements on managed care networks that compensate providers in a manner that
is related to the volume of services provided to Medicare patients (other than
services personally provided by the provider). Additionally, if what Medicare
defines as "incentive payments" exceed 25% of the provider's potential payments,
the network is also required to: a) show that the provider has certain "stop
loss" financial protections; and b) conduct certain Medicare enrollee surveys.
"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
qualified and licensed provider who is willing to abide by the terms of the
network's contracts. These laws could limit our ability to develop effective
managed care networks in such states. The company believes that the medical
management and eye care claim data analysis services we offer would provide
greater value to our clients if such legislation were adopted in states where we
do business. There are currently no states in which we operate our managed care
business that have "any willing provider" requirements.
Corporate Practice of Optometry and Ophthalmology. The laws of many states
prohibit corporations that are not owned entirely by eye care professionals
from:
o Employing eye care professionals;
o Receiving for their own account reimbursements from third party
payers for health care services rendered by licensed professionals;
o Controlling clinical decision-making; or
o Engaging in other activities that constitute the practice of
optometry or ophthalmology.
To comply with these requirements, we:
o Contract with professional associations (which are owned by one or
more licensed optometrists or ophthalmologists), which in turn employ
or contract with licensed optometrists or ophthalmologists to provide
professional services to patients;
o Perform only non-professional services;
o Do not represent to the public or customers that we provide
professional eye care services; and
o Do not exercise influence or control over the practices of the eye
care practitioners employed by the professional associations.
Our agreements with eye care providers specifically provide that all
decisions required by law to be made by licensed ophthalmologists or
optometrists shall be made only by such licensed persons, and that we shall not
engage in any services or activities which would constitute the practice of
ophthalmology or optometry. If health care regulations and their interpretations
change in the future, we may have to revise the terms of such agreements to
comply with regulatory changes. (See "Item 13. "Certain Relationships and
Related Transactions - OptiCare P.C. Professional Services and Support
Agreement;" and "- Optometric Eye Care Center, P.A. Professional Services and
Support Agreement.")
State Fee-Splitting and Anti-Kickback Law. Most states have laws prohibiting
the paying or receiving of any remuneration, direct or indirect, that is
intended to induce referrals for health care products or services. Many states
also prohibit "fee-splitting" by health care professionals with any party except
other health care professionals in the same professional corporation or practice
association. In most cases, these laws apply to the paying of a fee to another
person for referring a patient or otherwise generating business, and do not
prohibit payment of reasonable compensation for facilities and services other
than the generation of business, even if the payment is based on a percentage of
the revenues of the professional practice. However, in some states,
"fee-splitting" has been interpreted to include payments by health professionals
of a portion of fees in return for certain services.
The North Carolina Medical Board stated in an Official Position Statement,
which was adopted in 1993 and amended in 1996, that sharing profits between a
non-physician and physician partner on a percentage basis is fee-splitting and
is grounds for disciplinary action. In the past year, this issue has been raised
in several lawsuits in the
13
state. In each of these cases, the court was asked to find that the profit
sharing arrangement between a physician or physician group and management
company is unethical and void as against public policy. To date, no court in
North Carolina has ruled on this issue. There is a risk that a court could find
that our arrangements with physicians are unethical and void as against public
policy or that the Medical Board could determine that the company's
arrangements with physicians in the state constitute unethical fee-splitting
and that these physicians are subject to disciplinary action. This risk could
also extend to arrangements with optometrists since the North Carolina
Optometry Board has informally indicated that it takes a similar view on
fee-splitting.
North Carolina law also prohibits health care providers from paying any type
of financial compensation to any person, firm or corporation for recommending or
securing the provider's employment by a patient, or as a reward for having made
a recommendation resulting in the provider's employment by a patient.
Federal Fee-Splitting and Anti-Kickback Law. Federal law prohibits the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of patients covered by federally funded health care programs
such as Medicare and Medicaid, or in return for purchasing, leasing, ordering or
arranging for the purchase, lease or order of any product or service that is
covered by a federal program.
On April 15, 1998 the Office of Inspector General of the U.S. Department of
Health and Human Services (the "OIG") issued Advisory Opinion 98-4, which raised
questions about whether a percentage of revenue management fee arrangement could
be viewed as violating the federal anti-kickback law if the manager is involved
in helping generate revenues derived from Medicare and Medicaid programs. Under
the arrangement reviewed by the OIG, the manager's duties included management
and marketing services, negotiation and oversight of health care contracts with
various payers, including federal healthcare programs, and setting up provider
networks that included physicians. Payments to the management company included a
"fair market value payment" for operating services provided by the manager, a
payment based on a percentage of the cost of capital assets, and an additional
20% of net revenues of the practice for management services. The OIG noted that
since the manager was paid a percentage of net revenue, including revenue from
business derived from managed care contracts arranged by the manager, a
potential technical violation of the anti-kickback statute existed. The OIG
further noted that, since the manager would presumably receive some compensation
for management efforts in connection with the development and operation of
specialist networks, any evaluation by the OIG would require information about
the relevant financial relationships. The OIG summarized that while the
management arrangement "may" violate the anti-kickback statute, a definitive
conclusion would require a determination of the parties' intent, which is beyond
the scope of the advisory opinion process.
Our services agreements are different from the arrangements reviewed by the
OIG in its advisory opinion. Therefore, we believe that the opinion is
inapplicable to our relationships with our eye care professionals. As a result,
there are no present plans to change the terms of these relationships, but we
will continue to monitor any clarifications or determinations in this area. If
the forms of our services agreements are ever determined to be in violation of
the federal anti-kickback statute, it is likely that there would be a material
adverse impact on our business, financial condition and results of operation.
Advertising Restrictions. Many states, including Connecticut and North
Carolina, prohibit licensed eye care professionals from using advertising which
includes any name other than their own, or from advertising in any manner that
is likely to mislead a person to believe that a non-licensed professional is
eligible to be engaged in the delivery of eye care services. Certain of our
forms of services agreements provide that all advertising shall conform to these
requirements, but there can be no assurance that the interpretation of the
applicable laws or our advertising will not inhibit us or result in legal
violations that could have a material adverse effect on us.
The laws described above have civil and criminal penalties and have been
subject to limited judicial and regulatory interpretation. They are enforced by
regulatory agencies that are vested with broad discretion in interpreting their
meaning. Our agreements and activities have not been examined by federal or
state authorities under these laws and regulations. There can be no assurance
that review of our business arrangements will not result in determinations that
adversely affect our operations or that certain material agreements between us
and eye care providers or third-party payers will not be held invalid and
unenforceable.
In addition, these laws and their interpretation vary from state to state.
The regulatory framework of certain jurisdictions may limit our expansion into,
or ability to continue operations within, such jurisdictions if we are unable to
modify our operational structure to conform to such regulatory framework. Any
limitation on our ability to continue
14
operating in the manner in which we have operated in the past could have an
adverse effect on our business, financial condition and results of operations.
NEW CAPITAL STRUCTURE
In November 2001, certain letters of intent were entered into concerning a
major capital restructuring of the company. If certain conditions are met and
the transactions contemplated by these letters of intent are consummated, these
transactions as presently proposed are expected (as of November 2001) to lower
the company's long-term debt by approximately $9.9 million, increase its equity
by approximately $9.0 million and reduce its next-12-months' debt service by
approximately $3.7 million.
Background
At November 1, 2001, the company owed its current senior lender, Bank
Austria Creditanstalt Corporate Finance, Inc., a total of approximately $31.6
million, consisting of $29.7 million of principal and $1.9 million of interest.
The company was in default with respect to its obligations under this Bank
Austria credit facility, and Bank Austria had accelerated all amounts owed under
the credit facility. In addition, the company had contingent exposure to Bank
Austria in connection with approximately $2.7 million of note and services fee
payments which were originally due to the company and which had been assigned to
the bank.
Much of this debt was accumulated by one of the company's two principal
subsidiaries, PrimeVision Health, Inc., in the course of purchasing physician
practices in the mid-1990s, when PrimeVision was an independent company. In
1999, PrimeVision and OptiCare Eye Health Centers, Inc., the company's other
principal subsidiary, each merged with one of our wholly-owned subsidiaries.
At the time of the 1999 mergers, it was expected that a significant portion
of the debt accumulated by PrimeVision Health, Inc. could be converted into
equity through a public offering of the company's stock. However, the company
was only successful in completing an offering of approximately 3.7 million
shares of common stock early in 2000, with net proceeds of approximately $12.5
million. The proceeds of this offering were applied, in part, to reduce the
company's debt, but a substantial portion of the company's debt remained
outstanding. (Among the investors in this private placement was Palisade
Concentrated Equity Partnership, L.P. ("Palisade") which invested $7.0 million.)
On October 10, 2000, the company obtained a $2.25 million bridge loan from
Alexander Enterprise Holdings, Inc. In January 2001, that bridge loan was
increased by $0.5 million to $2.75 million. (Of that $500,000 increase, $400,000
was provided by Palisade; $50,000 by Dean J. Yimoyines, M.D., President and
Chief Executive Officer of the company; and $50,000 by Alexander.) The bridge
loan was used to support operations while the company continued seeking a
capital structure which it could service.
The company believes that the plans described below for equity infusion and
for debt forgiveness and refinancing comprise such a structure.
THE PROPOSED NEW CAPITAL STRUCTURE
The proposed restructuring involves the company and three other
principal parties: its current senior lender, Bank Austria; a proposed new
senior lender, CapitalSource Finance, LLC, which is an asset-based financial
institution specializing in the health care industry; and Palisade. At the
request of Palisade, Dean J. Yimoyines, M.D., who is a founder of the company,
the Chairman of its Board of Directors, and its President and Chief Executive
Officer, will also participate as an investor in the planned restructuring.
Three preliminary, non-binding agreements (which are subject to the
completion of binding, formal agreements and numerous, substantial conditions)
have been signed by these parties:
o A letter of intent between Palisade and Bank Austria which
establishes terms on which the company's debt to Bank Austria would
be refinanced and repaid at a significant discount;
15
o A commitment letter from CapitalSource to the company offering to
loan the company sufficient funds to make the upfront cash payment
required in connection with the repayment of the Bank Austria debt at
the discount negotiated between Palisade and Bank Austria; and
o A letter of intent between Palisade and the company setting terms on
which Palisade would provide:
-- Sufficient funds to enable the company to repay the Alexander
bridge loan; and
-- Letter of credit backing for the portion of the bank debt, which
Bank Austria has agreed to refinance, and for a portion of the
loans from CapitalSource.
These documents are not, themselves, legally binding. The company,
Palisade, Bank Austria and CapitalSource are currently negotiating binding,
formal agreements. If such binding, formal agreements are executed, they would
be subject to the fulfillment of substantial conditions, including the company
being in compliance with the requirements of the American Stock Exchange, and
approved by the company's stockholders. There can be no assurance that all the
necessary parties will agree to the terms as presently proposed, or that all
conditions to implementation of the new capital structure will be fulfilled on a
timely basis.
If the terms as outlined in the letters of intent and commitment letter are
approved by all parties, and all conditions are fulfilled, and all the
definitive agreements as outlined above are executed and implemented, the terms
of the agreements as outlined above would enable the company to:
o Settle with Bank Austria all of its debts and other obligations,
direct and contingent by making an initial cash payment and issuing
a two-year promissory note;
o Buy and retire all of Bank Austria's stock, stock rights, warrants
and other ownership interests in the company;
o Buy from Bank Austria certain notes due from physicians and rights to
payment under certain Health Services Organization contracts which
had previously been assigned to the bank; and
o Satisfy in full the Alexander bridge loan.
If the transactions were completed as described above--of which there can
be no assurance--they would be expected to have the following effects on the
balance sheet for the company (compared with our November 2001 position):
o $1.35 million in physician notes receivable would be added to the
company's assets;
o Long-term debt would decline by $9.9 million; and
o Equity would increase by $9.0 million.
If the transactions were completed as described above, annual principal and
interest payments in the first year following the transaction are expected to
decrease from an estimated $5.6 million under the current financing from Bank
Austria to $1.9 million under the new capital structure. In the second 12 months
following implementation of the transactions described above, principal and
interest payments are estimated to be $1.9 million, assuming no increase in
prevailing interest rates, of which there can be no assurance.
The proposed new capital structure is expected to enable the company to do
business on a more secure footing. Growth opportunities--particularly in managed
care--require substantial, dependable financial strength, and without a stable
financial base, the company would expect to be unable to sustain and grow its
managed care business, in particular, as well as its other business segments.
Palisade's Prior and Projected Ownership and Support
In 2000, as part of a private placement (more fully described in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources"), Palisade provided a cash
infusion of $7.0 million in exchange for 2.0 million shares of common stock. In
early 2001, when the company was very short of cash, Palisade, along with the
company's president and chief executive officer, Dean
16
Yimoyines, M.D., provided, within the framework of the Alexander bridge loan,
an additional $450,000.
In the course of the proposed capital restructuring, if the proposed
transactions are consummated, Palisade would:
o Invest in the company an additional $3.5 million of cash and receive
preferred stock having voting rights equal to 25 million shares of
the company's common stock;
o Provide letter of credit backing for obligations of the company
totaling $16.7 million and receive warrants to purchase approximately
16.7 million additional shares of the company's common stock; and
o Convert its participation ($400,000 of principal, plus accrued
interest) in the Alexander bridge loan to preferred stock having
voting rights equal to approximately 3.2 million shares of the
company's common stock;
These transactions, if implemented, would raise Palisade's effective
ownership of voting stock of the company from the present 18.5% to approximately
75% (on a fully diluted basis).
EMPLOYEES
We and our affiliates have approximately 733 employees, including, 235
licensed ophthalmologists, optometrists, and opticians and 93 ophthalmologist
assistants. These amounts include an aggregate of 113 part-time personnel (i.e.,
working fewer than 30 hours per week). We believe that our relations with our
employees are good. We are not a party to any collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTIES
We have executive offices in Waterbury, Connecticut and Rocky Mount, North
Carolina. The Waterbury facility, which contains corporate offices and an
integrated eye health center, is leased under four separate leases with
remaining terms ranging from five to 13 years. Each of these leases also has
renewal options ranging from 5 to 20 years in total. The combined annual base
rent is $848,000 for a total of 44,400 square feet.
The Rocky Mount facilities, which contain executive offices, HMO offices and
an operations center, are adjacent facilities leased under four separate leases
with remaining terms of three to five years. The combined base rent for these
four facilities is $239,000 for a total of 23,400 square feet.
Each of the foregoing offices is leased from a party that is affiliated or
associated with one or more of our present or former directors or executive
officers. (See "Item 13. Certain Relationships and Related Transactions -
Certain Leases.")
We and our affiliate, Optometric Eye Care Center, lease 45 additional
offices in the states of Connecticut, North Carolina, Florida and Texas,
principally for our eye health services and retail optical operations. These
leases have remaining terms of 1 to 11 years. Many of these leases are also
subject to renewal options. We believe our properties are adequate and suitable
for our business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
HEALTH SERVICES ORGANIZATION LAWSUITS
The company and/or its subsidiaries are involved in two lawsuits, described
below, each initiated by a medical practice which was unwound from the former
PrimeVision Health network and which remained affiliated with the
17
company through an Health Services Organization ("HSO") agreement. Both suits
are in the earliest stages of litigation, and there can be no assurance of a
favorable outcome.
Fogg, Maxwell & Lanier, M.D., Inc., et al. v. PrimeVision Health, Inc. and
OptiCare Health Systems, Inc., et al., filed August 30, 2001, Superior Court of
California. Plaintiffs, a California medical practice and its principal
shareholders, contend that, since the amount of the "services fee" (calculated
as a percentage of practice revenue) the practice pays to Prime, a subsidiary of
the company, allegedly exceeds the value of the "core services" received from
Prime by the practice, the HSO agreement is unlawful, as it violates the
California Business and Professions Code. At Prime's request, the case has been
removed from California state court to the U.S. District Court in California.
OptiCare and Prime have denied the plaintiffs' allegations and have filed
counterclaims for payment of past due services fees. Among other things, the
company has argued that the HSO agreements were part of a larger unwind package
which conveyed valuable benefits to the participating practices and that such
benefits are part of the consideration the practices receive in exchange for
their services fees. Though the company strongly believes in the merits of its
position and intends to vigorously defend itself, the case is in its earliest
stages and no assurance can be given of a favorable outcome.
Charles Retina Institute, P.C. and Steven T. Charles, M.D. v. OptiCare
Health Systems, Inc., filed on September 18, 2001, Chancery Court of Tennessee.
Plaintiffs, a Tennessee medical practice and its principal owner, sought court
approval to cease making required services fees payments on grounds that the
magnitude of such payments is not warranted by the allegedly low value of the
core services received. The company has removed the case to the U.S. District
Court in Tennessee. Prime filed a suit against Charles Retina Institute, P.C.
and Steven T. Charles, M.D. in U.S. District Court in North Carolina setting out
in some detail the history of the relationship with plaintiffs in the Tennessee
case. Among other things, the company has argued that the HSO agreements were
part of a larger unwind package which conveyed valuable benefits to the
participating practices and that such benefits are part of the consideration the
practices receive in exchange for their services fees. Though the company
strongly believes in the merits of its position and intends to vigorously
prosecute its claim, the case is in its earliest stages and no assurance can be
given of a favorable outcome.
BILLING COMMUNICATION ERROR IN CONNECTICUT
OptiCare Eye Health Centers, Inc., our Connecticut subsidiary, has been
involved in discussions with the Attorney General of Connecticut concerning a
potential consensual administrative order relating to confusing statements sent
to some of our customers in the 1995-99 period showing balances due to us.
Though the statements were marked "This Is Not A Bill," some customers paid
balances, duplicating amounts later received by OptiCare from insurers. When the
misunderstanding was discovered, OptiCare reimbursed all customers who
mistakenly paid. The terms of the written order are still being finalized.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of OptiCare Health Systems, Inc. was held
on October 30, 2000. There were represented, in person or by proxy, 8,328,473
shares of common stock entitled to vote at the meeting, constituting a quorum.
At the meeting, the directors nominated were elected by the following votes:
NUMBER
OF SHARES NUMBER
VOTED OF SHARES
FOR: VOTE WITHHELD:
--------------------- --------------------
Dean J. Yimoyines, M.D. 8,272,401 56,072
Steven L. Ditman 8,293,190 35,283
Allan L.M. Barker, O.D. 8,292,701 35,772
Ian G.H. Ashken 8,292,964 35,509
Martin E. Franklin 8,293,190 35,283
William J. Goss 8,293,610 34,863
18
NUMBER
OF SHARES NUMBER
VOTED OF SHARES
FOR: VOTE WITHHELD:
--------------------- --------------------
Carl J. Schramm 8,293,610 34,863
At the same meeting, the election of Deloitte & Touche LLP as independent
auditors of the company, for the year ended December 31, 2000, was ratified by a
vote of 8,050,853 in favor, 18,070 votes against and 259,550 abstentions.
There were no broker non-votes on any of the above proposals.
19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information about the market prices of our common stock should
be read in light of the material and substantial qualitative changes in our
business that became effective upon the closing of the mergers of Saratoga with
PrimeVision Health and OptiCare Eye Health Centers on August 13, 1999. Among
other changes: (i) Saratoga effected a 0.06493-for-1 reverse stock split on
August 13, 1999, (ii) Saratoga spun off to its stockholders of record,
immediately prior to the mergers, the capital stock of certain subsidiaries, and
(iii) approximately 8.7 million shares of post-reverse-stock-split common stock
were issued to effectuate the mergers. The prices reported below for periods
ending on or before August 13, 1999 have been adjusted to reflect the reverse
stock split.
Commencing August 16, 1999, our common stock has been listed on the American
Stock Exchange and traded under the symbol "OPT" (or, from August 16 through
September 20, 1999, under the symbol "OPTWI"). Prior to August 16, 1999, our
common stock was not listed on any stock exchange, but quotations from time to
time were reported by the NASD on the OTC Bulletin Board under the symbol
"SRIK."
On April 20, 2001, the American Stock Exchange suspended trading of the
company's common stock, and the stock has not traded since that date. Due to a
number of factors, including late filing of this and other SEC-required reports
and the company's non-compliance with the continued listing requirements of the
exchange, there is a possibility that de-listing proceedings with respect to our
stock may be commenced by the stock exchange. If a de-listing proceeding is
commenced, the company expects to immediately file an appeal. There can be no
assurance that any appeal would be successful
If the proposed new capital structure were in place, and the company becomes
current in its SEC filings, the company believes it would be eligible, subject
to review by the exchange, for the resumption of the trading of its common stock
on the American Stock Exchange. However, there can be no assurance that trading
will resume, or, if trading is resumed, the prices at which the stock will be
traded.
The last reported sale price of our common stock, on April 20, 2001, was
$0.26 per share.
The company cannot assure that the current suspension of trading of the
company's common stock will be lifted, or that, once lifted, the company's
common stock will always be listed without further suspensions, or that the
exchange will not, presently or at any time in the future, seek to de-list the
company's common stock. The exchange's rules for continued listing include
stockholders' equity requirements, which the company may not meet if it
experiences further losses; and market value requirements, which the company may
not meet if the price of the common stock declines.
If the company's common stock is de-listed or if, once the pending
suspension of trading is lifted, it is then de-listed from the exchange, trading
in the company's common stock would be conducted, if at all, in the over-the
counter market. This would make it more difficult for stockholders to dispose of
their common stock and more difficult to obtain accurate quotations on the
company's common stock. This could have an adverse effect on the price of the
common stock. There are separate rules regulating broker-dealers who trade on
behalf of customers in unlisted stocks. These rules require the following:
o Broker-dealers may sell the common stock only to established
customers and accredited investors (generally defined as investors
with a net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with a spouse);
o Broker-dealers must make special suitability determinations about the
purchaser; and
o Broker-dealers must receive the purchaser's written consent to the
transaction prior to sale.
The effect of these requirements may be to limit the ability or incentive of
broker-dealers to sell the company's common stock, and that in turn diminishes
the ability of stockholders to sell their common stock in the secondary
20
market.
The Securities and Exchange Commission has adopted regulations that define
"penny stock" to include common stock that has a market price of less than $5.00
per share, subject to certain exceptions. These rules include the following
requirements:
o Broker-dealers must deliver, prior to the transaction, a disclosure
schedule prepared by the SEC relating to the penny stock market.
o Broker-dealers must disclose the commissions payable to the
broker-dealer and its registered representative.
o Broker-dealers must disclose current quotations for the securities.
o If a broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the
market.
o Finally, the broker-dealer must furnish its customers with monthly
statements disclosing recent price information for all penny stocks
held in the customer's account and information on the limited market
in penny stocks.
Many securities listed on the exchange would be covered by the definition of
penny stock, but transactions in a security listed on the exchange are exempt
from such rules (except the "sole market-maker" provision mentioned above) if:
o The issuer has $2,000,000 in tangible assets;
o The customer is an institutional accredited investor; and
o The transaction is not recommended by the broker-dealer.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules.
The high and low prices for the period from August 16, 1999 through December
31, 2000 are based on trades effected on the American Stock Exchange. The range
of high and low bid information for the shares of our common stock for January 1
through August 13, 1999, as set forth below, was reported by the National
Quotation Bureau. Such quotations represent prices between dealers, do not
include retail markup, markdown or commission, and may not represent actual
transactions.
2000 HIGH LOW
---- ---- ---
4th Quarter $0.875 $ 0.25
3rd Quarter 2.125 0.688
2nd Quarter 3.50 2.00
1st Quarter 4.50 3.00
1999 HIGH LOW
---- ---- ---
4th Quarter $ 5.00 $ 2.75
3rd Quarter*:
August 16 - September 30* 12.50 5.00
July 1 - August 13** 0.106 0.037
2nd Quarter 0.067 0.004
1st Quarter 0.004 0.004
_______________________________________________________________________________________
* The range of prices and quotations in the 3rd Quarter of 1999 is reported
separately for periods ending on or before August 13, 1999, which is the
last trading day before the reverse stock split and the mergers of OptiCare
Eye Health Centers and PrimeVision Health became effective.
21
** Quotations for all periods ending on or before August 13, 1999 have been
adjusted to give effect to a 0.06493-for-1 reverse stock split that became
effective at the close of business on August 13, 1999.
________________________________________________________________________________
As of November 1, 2001, there were approximately 202 stockholders of record
of our common stock. The number of record holders was determined from the
records of the company's transfer agent, ChaseMellon Shareholder Services, and
does not include beneficial owners of our common stock whose shares are held in
the names of various securities brokers, dealers and registered clearing
agencies.
We have never paid any cash dividends on our common stock and do not intend
to pay any cash dividends for the foreseeable future. It is our present policy
that any retained earnings will be used for repayment of indebtedness, working
capital, capital expenditures and general corporate purposes. Furthermore, we
are precluded from declaring or paying any cash dividends, or making a
distribution to our stockholders under the covenants of our revolving credit and
term loan agreement, until the termination of such agreement and the repayment
of all amounts due to such lender.
Recent Sales of Unregistered Securities
Described below is information regarding equity securities we issued in 2000
and 1999, which were not registered under the Securities Act. (See, also, "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
On October 10, 2000, in connection with a $2.25 million loan from Alexander
Enterprise Holdings Corp, we issued warrants to a designee of Alexander
Enterprise to purchase 2.25 million shares of our common stock at $1.00 per
share for an aggregate purchase price of $2.25 million. On January 5, 2001, the
amount of that loan was increased by $500,000, funds for which were provided by
Palisade Concentrated Equity Partnership, L.P.; Dean J. Yimoyines, M.D.,
president and chief executive officer of the company; and Alexander Enterprise.
In connection with that increase, the warrants issued in October 2000 to
purchase 2.25 million shares were cancelled and new warrants were issued to
purchase 2.0 million shares of common stock at an exercise price of $1.00 and
750,000 shares at an exercise price of $0.40, for an aggregate purchase price of
$2.3 million. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.")
In August 2000, pursuant to a share adjustment agreement, we issued an
aggregate of 31,133 shares of common stock to two physicians formerly affiliated
with the company. In addition, pursuant to a settlement agreement and mutual
general release, the company issued an aggregate of 31,167 shares of common
stock to two other physicians formerly affiliated with the company in exchange
for, among other things, a $200,000 reduction of convertible subordinated
promissory notes issued by PrimeVision Health, Inc.
On October 1, 1999, we entered into a stock purchase agreement with Stephen
Cohen, Robert Airola, Gerald Mandel and Reginald Westbrook. Pursuant to the
agreement, we acquired all of the issued outstanding shares of capital stock of
Cohen Systems, Inc., d/b/a CC Systems, Inc., in exchange for, among other
things, a base purchase price comprised of 110,000 shares of our common stock,
and $750,000 in the form of installment payments over a two year period and a
promissory note.
On or about August 13, 1999, in connection with the closing of the mergers
of OptiCare Eye Health Centers and PrimeVision Health, we granted options to
purchase 631,367 shares of our common stock under the Performance Stock Program,
at an average exercise price of $5.44 per share, in replacement of options
previously granted by each of PrimeVision Health, Inc. and OptiCare Eye Health
Centers, Inc. We also granted options to purchase an additional 721,250 shares
of our common stock under the Performance Stock Program, at an average exercise
price of $5.85 per share.
On August 13, 1999, in connection with obtaining a new a credit facility, we
issued to Bank Austria Creditanstalt Corporate Finance, Inc.: (i) 418,803 shares
of the Series A Convertible Preferred Stock upon conversion by Bank Austria of
debt in the amount of $2.45 million and (ii) as a financing fee, 100,000
warrants to purchase, at an exercise price of $5.85 per warrant, 100,000 shares
of: (A) our common stock, or (B) Series A Convertible Preferred Stock, or (C) a
combination of our common stock and Series A Convertible Preferred Stock
aggregating 100,000 shares.
22
On August 13, 1999, in connection with the mergers of OptiCare Eye Health
Centers and PrimeVision Health, we issued a convertible promissory note in the
aggregate principal amount of $4.0 million to Marlin Capital, L.P. in exchange
for, among other things, the cancellation of 4,000 shares of Preferred Stock of
PrimeVision Health, Inc. (See "Item 13. Certain Relationships and Related
Transactions - Arrangements with Marlin Capital, L.P.")
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. No underwriter was engaged in connection with
the foregoing sales of securities. We have reason to believe that: (i) all of
the foregoing purchasers were familiar with or had access to information
concerning our operations and financial condition, (ii) all of those individuals
purchasing securities represented that they acquired the shares for investment
and not with a view to the distribution thereof, and (iii) other than with
respect to the options, the foregoing purchasers are accredited investors within
the meaning of Regulation D promulgated under the Securities Act. At the time of
issuance, all of the foregoing securities of our common stock were deemed to be
restricted securities for purposes of the Securities Act and the certificates
representing such securities bore or will bear legends to that effect.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data has been
derived from audited historical financial statements and should be read in
conjunction with the consolidated financial statements of the company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere herein. The company in its
present form is the result of mergers completed on August 13, 1999 among
Saratoga, PrimeVision Health and OptiCare Eye Health Centers. For accounting
purposes, PrimeVision Health was treated as the accounting acquirer and,
therefore, the predecessor business for historical financial statement reporting
purposes.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 (1) 1998 1997 1996
---- ----- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Total net revenues $127,883 $ 94,633 $ 64,612 $ 58,346 $ 52,157
Income (loss) from continuing operations (14,171) 351 (3,239) (2,034) (767)
Weighted average shares outstanding (2) 12,354 4,776 2,256 1,856 693
Income (loss) from continuing operations per share $ (1.15) $ (0.05) $ (2.54) $ (1.10) $ (1.11)
(1) The company acquired OptiCare Eye Health Centers, Inc. on August 13, 1999
and Cohen Systems, Inc. on October 1, 1999, which were accounted for as
purchases. Accordingly, the results of operations of OptiCare Eye Health
Centers and Cohen Systems, Inc. are included in the historical results of
operations since September 1, 1999 and October 1, 1999, respectively, the
deemed effective dates of the acquisitions for accounting purposes.
(2) The weighted average common shares outstanding prior to 2000 have been
adjusted to reflect the conversion associated with the reverse merger with
Saratoga in 1999.
(3) Income (loss) from continuing operations per share for 1999 and 1998 was
calculated after giving effect to preferred stock dividends.
________________________________________________________________________________
23
AS OF DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Net assets of discontinued operations - - $ 5,582 $69,473 $13,845
Total current assets $14,913 $ 21,345 20,237 18,274 20,306
Total assets 55,513 66,740 26,556 86,397 26,296
Total current liabilities 49,454 20,654 51,198 8,289 4,138
Total debt (including current portion) 34,214 43,148 39,976 46,536 22,273
Mandatorily redeemable preferred stock - - 9,200 - -
Total stockholders' equity (deficit) 3,877 5,274 (34,690) 4,546 4,683
________________________________________________________________________________________________________________
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto of OptiCare Health Systems, Inc., which
are included elsewhere herein. (See the "Index to Financial Statements,"
beginning at page F-1.)
Overview. OptiCare Health Systems, Inc. is an integrated eye care services
company that delivers a range of services and systems for eye health
professionals and consumers, including, managed care and professional eye care
services. On August 13, 1999, Saratoga Resources, Inc. ("Saratoga"), a Delaware
corporation, PrimeVision Health, Inc. and OptiCare Eye Health Centers, Inc.
merged pursuant to the terms of an Agreement and Plan of Merger dated as of
April 12, 1999. In this transaction, PrimeVision Health merged with Saratoga
through a reverse acquisition by PrimeVision Health of Saratoga at book value
with no adjustments reflected to historical values. Immediately following the
PrimeVision Health merger, OptiCare Eye Health Centers was acquired by Saratoga,
which was accounted for under the purchase method of accounting with the excess
of purchase price over the estimated fair value of net assets acquired recorded
as goodwill.
In connection with the mergers, our shareholders approved an amendment to
the Articles of Incorporation changing, among other things, the company's name
to OptiCare Health Systems, Inc., effective August 13, 1999.
For accounting purposes, PrimeVision Health was the accounting acquirer and
the surviving accounting entity. Accordingly, the operating results of OptiCare
Eye Health Centers have been included in the accompanying consolidated financial
statements since September 1, 1999, the deemed effective date of the acquisition
for accounting purposes. The impact of results from August 13, 1999 through
August 31, 1999 are deemed immaterial to the consolidated financial statements.
Financial results for periods prior to September 1, 1999 are based solely upon
the results reported by Prime and its subsidiaries. The excess of the aggregate
purchase price including merger costs of $29.1 million over the fair value of
the net assets acquired was approximately $20.7 million. Of this excess, $18.5
million has been recorded as goodwill and is being amortized on a straight-line
basis over 25 years and $2.2 million has been used to eliminate the valuation
allowance related to Prime's deferred tax assets. In addition, the company
recorded an intangible asset of $7.1 million in connection with a new
administrative services agreement that is being amortized over 25 years.
On October 1, 1999, we purchased Cohen Systems, Inc. (the "Cohen
Acquisition"), a software systems provider specializing in point of sale and
internet-based solutions for optical retail stores and optical manufacturing
laboratories. The total purchase price of approximately $1.7 million was
comprised of approximately $0.9 million in cash and notes payable and 110,000
shares of common stock (having a value on that date of approximately $0.8
million). The Cohen Acquisition was accounted for under the purchase method of
accounting, whereby the purchase cost has been allocated to the fair value of
assets acquired and liabilities assumed with the excess identified as goodwill.
Fair values were based on valuations and other studies. The goodwill resulting
from this transaction was approximately $1.4 million and is being amortized on a
straight-line basis over 25 years. The results of operations of Cohen Systems,
Inc. are included in our consolidated financial statements from the purchase
date.
The company conducts its business through three business segments: (1)
managed care services (2) professional services and (3) other integrated
services. The managed care services segment contracts with managed care plans to
manage the eye health portion of managed care plans. The professional services
segment operates ambulatory surgical and laser correction centers and provides
marketing, systems, software and other services to eye care
24
professionals. The other integrated services segment owns and operates fully
integrated eye health centers, retail optical stores and a buying group program
for optical products.
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Managed Care revenue. Managed care revenue increased to $35.7 million for
the year ended December 31, 2000 from $24.4 million for the year ended December
31, 1999, an increase of $11.3 million or 46.3%. This increase is primarily due
to revenue associated with managed care contracts held by OptiCare Eye Health
Centers that were acquired in connection with the mergers as well as new managed
care contracts and growth in existing member lives.
Effective December 1, 2000, Anthem Blue Cross and Blue Shield of Connecticut
("Anthem"), a managed care customer in Connecticut, ended its managed care
contract with the company on Anthem's commercial Health Maintenance Organization
("HMO") business. Anthem also withdrew from the Medicare + Choice market in
Connecticut, effective January 1, 2001. The Commercial HMO Medicare + Choice
contracts represent approximately $6.4 million in total annual revenue to the
company.
Professional Services revenue. Professional services revenue increased to
$8.3 million for the year ended December 31, 2000 from $4.1 million for the year
ended December 31, 1999, an increase of $4.2 million or 103.4%. Of this
increase, $2.4 million represents revenue from laser vision correction and
ambulatory surgery services as a result of the merger with OptiCare Eye Health
Centers in August 1999 and $0.6 million represents revenue associated with sales
of software systems by Cohen Systems, Inc., which was acquired by the company in
October 1999. In addition, $1.0 million of this increase represents Health
Services Organization ("HSO") revenue from agreements with various ophthalmology
practices.
Other Integrated Services revenue. Integrated services and product sales
revenue increased to $83.9 million for the year ended December 31, 2000 from
$66.1 million for the year ended December 31, 1999, an increase of $17.7 million
or 26.8%. This increase represents a $21.0 million increase in optometry and
ophthalmology revenue, primarily as a result of the merger with OptiCare Eye
Health Centers and is partially offset by a $3.0 million decrease in buying
group revenue resulting primarily from a decrease in purchasing volume.
Cost of product sales. Cost of product sales decreased to $40.2 million for
the year ended December 31, 2000 from $41.2 million for the year ended December
31, 1999, a decrease of $1.0 million or 2.5%. This decrease represents a $3.0
million decrease in cost of sales associated with the buying group program as a
result of the decrease in its sales, and is partially offset by an increase in
cost of sales of optometry, ophthalmology and ambulatory surgery center
operations associated with the merger with OptiCare Eye Health Centers.
Medical claims expense. Medical claims expense increased to $29.7 million
for the year ended December 31, 2000 from $19.5 million for the year ended
December 31, 1999, an increase of $10.2 million or 51.8%. The medical loss ratio
(MLR) representing medical claims expense as a percentage of managed care
revenue increased from 80.0% in 1999 to 83.0% in 2000. This increase in MLR is
primarily due to increased utilization coupled with increased reimbursement
rates to providers.
Salaries wages & benefits. Salaries, wages and benefits increased to $40.0
million for the year ended December 31, 2000 compared to $20.1 million for the
year ended December 31, 1999, an increase of $19.9 million or 99.4%. Of this
increase approximately $15.6 million represents compensation expense associated
with the company's optometry, ophthalmology and ambulatory surgery center
operations, primarily due to the mergers in August 1999. In addition,
compensation expense increased $1.0 million as a result of increased personnel
from the Cohen Acquisition in October 1999. The remaining increase primarily
represents increased employee costs associated with an increase in corporate and
operations staff added to support the company's combined business and growth in
managed care business subsequent to the merger. This increase in staff was later
reduced in 2000 in connection with the company's restructuring plan and other
cost cutting measures, whereby the company eliminated certain positions in its
corporate and operating areas. The decrease in costs associated with these
workforce reductions are expected to be realized in 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $15.6
25
million for the year ended December 31, 2000 from $7.9 million for the year
ended December 31, 1999, an increase of $7.7 million or 97.1%. Of this
increase, approximately $5.3 million represents general and administrative
expenses of OptiCare Eye Health Centers and $0.3 million represents general and
administrative expenses of Cohen Systems, as a result of the mergers in 1999.
In addition, $0.7 million represents increased general and administrative costs
of managed care operations primarily incurred to support the company's growth
in its managed care business. The remaining $1.4 million primarily represents
an increase in corporate and other costs associated with the company's overall
growth or 31.7%.
Restructuring and other one-time charges. Restructuring and other one-time
charges includes a restructuring charge of $2.3 million, terminated merger costs
of $1.8 million and other non-recurring charges of $0.2 million. The
restructuring charge was recorded to cover restructuring costs associated with
the company's restructuring plan, which included closing and consolidating
certain facilities, reducing overhead and streamlining operations. The
restructuring charge was comprised of $0.2 million of employee termination
costs, $1.2 million of lease related charges, $0.8 million of fixed asset
write-offs and $0.1 million of other related expenses. The terminated merger
costs represent non-recurring costs associated with the merger with Vision
Twenty-One, which was terminated in June 2000. The company also recorded a $0.2
million charge consisting of one-time costs related to the canceled sale of the
Connecticut operations. These costs consisted primarily of professional fees and
related transaction expenses.
Depreciation. Depreciation expense increased to $2.8 million for the year
ended December 31, 2000 from $1.4 million for the year ended December 31, 1999,
an increase of $1.4 million. This increase is primarily due to depreciation on
fixed assets acquired in connection with the mergers with OptiCare Eye Health
Centers in August 1999 as well as depreciation on fixed asset purchases and
leasehold improvements which were made to support the integration and growth of
the company subsequent to the mergers.
Amortization and write-off of goodwill. Amortization expense increased to
$2.9 million for the year ended December 31, 2000 from $0.6 million for the year
ended December 31, 1999, an increase of $2.3 million. Of this increase, $1.3
million represents a write-off of goodwill. That write-off represents the
unamortized goodwill balance allocated to the managed care operations in
Connecticut which were closed. The remaining increase is primarily due to the
amortization of intangibles recorded in connection with the mergers with
OptiCare Eye Health Centers in August 1999.
Interest expense. Interest expense increased to $3.5 million for the year
ended December 31, 2000 from $3.2 million for the year ended December 31, 1999,
an increase of $0.3 million or 7.8%. The increase in interest expense is
primarily due to an increase in the average interest rate associated with our
bank indebtedness as well as interest costs associated with the $2.3 million of
additional financing obtained by the company on October 10, 2000 from Alexander
Enterprise.
Income (loss) from continuing operations before income taxes. Income from
continuing operations before income taxes was a loss of $(11.2) million for the
year ended December 31, 2000 compared to income of $0.6 million for the year
ended December 31, 1999, a decrease of $11.8 million. This decrease was
primarily attributed to restructuring and other one-time charges of $4.3
million, a write-off of goodwill of $1.3 million, and an increase of $2.4
million in depreciation and amortization. The remaining change is primarily due
to other increases in corporate and operating expenses described above.
Income tax expense. The company recorded income tax expense of $3.0 million
for the year ended December 31, 2000. The tax expense is primarily due to the
establishment of a valuation allowance against the company's deferred tax
assets. The valuation was based on the uncertainty regarding the company's
ability to utilize its net operating loss carryforwards.
Loss from discontinued operations, net of tax. Discontinued operations
represent the loss from Prime's ophthalmology division. During 1999, the company
revised its estimate of loss on those disposed operations and recorded an
additional loss of $2.5 million, net of a tax benefit of $0.2 million. The
disposal of these operations was substantially completed by December 31, 1999.
There was no loss from discontinued operations recorded during 2000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
26
Managed Care revenue. Managed care revenue increased to $24.4 million for
the year ended December 31, 1999 from $14.9 million for the year ended December
31, 1998, an increase of $9.5 million or 63.8%. Of this increase, $3.7 million
represents managed care revenue of OptiCare Eye Health Centers for the months of
September through December 1999. The remaining increase is due to new managed
care contracts and growth in existing member lives.
Professional Services revenue. Laser correction and professional services
revenue was $4.1 million for the year ended December 31, 1999. This revenue was
comprised of $1.5 million from laser vision correction and ambulatory surgery
services, $1.6 million from HSO service agreements and $1.0 million of revenue
from Cohen Systems, Inc. for the three months ended December 31, 1999. There was
no such revenue from these operations in 1998.
Integrated Services revenue. Integrated services and product sales revenue
increased to $66.1 million for the year ended December 31, 1999 from $49.7
million for the year ended December 31, 1998, an increase of $16.4 million or
33.0%. Of this increase $10.4 million represents optometry and ophthalmology
revenue of OptiCare Eye Health Centers for the months of September through
December 1999. The increase is also a result of growth in revenue from the
company's buying group that increased from $30.0 million for the year ended
December 31, 1998 to $33.4 million for the year ended December 31, 1999, an
increase of $3.4 million or 11.3%. The remaining increase is attributable to
growth in the other optometry and retail areas.
Cost of product sales. Cost of product sales increased to $41.2 million for
the year ended December 31, 1999 from $35.2 million for the year ended December
31, 1998, an increase of $6.0 million or 17.1%. Of this increase approximately
$3.3 million represents an increase in costs of product sales related to the
buying group program, representing an increase of approximately 11.9% from 1998
and is consistent with the related increase in buying group revenue. In
addition, approximately $1.8 million of this increase relates to cost of product
sales associated with the optometry, ophthalmology and surgical centers
operations of OptiCare Eye Health Centers for the months of September through
December 1999. The remaining increase is consistent with the increases in
revenues in the other optometry and software sales areas.
Medical claims expense. Medical claims expense increased to $19.5 million
for the year ended December 31, 1999 from $11.0 million for the year ended
December 31, 1998, an increase of $8.5 million or 77.3%. This increase is
primarily due to new managed care contracts and growth in existing member lives
and is consistent with the increase in managed care services revenue. The
remaining increase of approximately $2.7 million represents medical claims
expenses of OptiCare Eye Health Centers for the four months ended December 31,
1999.
Salaries, wages and benefits. Salaries, wages and benefits increased to
$20.1 million for the year ended December 31, 1999 from $9.3 million for the
year ended December 31, 1998, an increase of $10.8 million or 116.1%. Of this
increase $8.0 million represents compensation expenses of OptiCare Eye Health
Centers for the months of September through December 1999. The remaining
increase primarily represents increased employee costs associated with servicing
increased managed care contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $7.9 million for the year ended December
31, 1999 from $6.0 million for the year ended December 31, 1998, an increase of
$1.9 million or 31.7%. This increase is primarily attributed to the general and
administrative expenses of OptiCare Eye Health Centers for the period September
1 through December 31, 1999.
Interest expense. Interest expense decreased to $3.2 million for the year
ended December 31, 1999 from $4.5 million for the year ended December 31, 1998,
a decrease of $1.3 million or 28.9%. Interest expense primarily relates to our
bank indebtedness and notes payable to sellers in connection with acquisition
activities. The decrease in interest expense is primarily due to the reduction
in outstanding bank debt and reduced interest rates associated with the mergers
in August 1999 and the reduction in the seller notes payable in connection with
the disposal of PrimeVision Health's ophthalmology division in December 1998.
Income (loss) from continuing operations before income taxes. Income from
continuing operations before income taxes increased to $0.6 million for the year
ended December 31, 1999 from a loss of $(2.8) million for the year ended
December 31, 1998, an increase of $3.4 million or 121.4%. This increase was
primarily attributed to revenue growth and the reduction of interest expense as
described above.
Income tax expense. The effective tax rate for the year ended December 31,
1999 of 45.2% represents the tax expense on the book income for the year. The
1999 rate differs from the statutory rate primarily due to state income
27
taxes and non-deductible goodwill amortization.
Loss from discontinued operations, net of tax. Discontinued operations
represents the loss from Prime's ophthalmology division. Loss from discontinued
operations for the year ended December 31, 1998 was $34.9 million. Discontinued
operations for the year ended December 31, 1999 includes an additional loss on
disposal of $2.3 million, which represents our revised estimate of loss.
Net income (loss). The company had a net loss of $2.0 million for the year
ended December 31, 1999 compared to a net loss of $38.1 million for the year
ended December 31, 1998, a decrease of $36.1 million. This change was the result
of an increase in net income from continuing operations of $3.6 million and a
decrease in the loss from discontinued operations of $32.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The company's principal sources of liquidity are from cash flows generated
from operations and from borrowings under the company's credit facility. The
company's principal uses of liquidity are to provide working capital and meet
debt service requirements. As of December 31, 2000, the company had cash and
cash equivalents of approximately $1.4 million, no additional borrowing capacity
under its revolving credit facility and was in violation of certain covenants
under its credit facility.
The company was unable to pay the interest and principal of approximately
$1.7 million due on January 2, 2001 to its senior lender, Bank Austria, under
the credit facility. Bank Austria formally declared an event of default under
the credit facility on March 23, 2001, and on September 25, 2001, Bank Austria
demanded payment in full of all outstanding obligations of the company to Bank
Austria. In addition, on October 5, 2001, Alexander Enterprise formally declared
an event of default under its loan to the company, as a result of the company's
aforementioned default under its credit facility. As of November 1, 2001 the
company has not made its scheduled principal payments due in 2001 under its
credit facility and the company's arrearage with respect to such delinquent
principal and interest totaled approximately $6.2 million. Total principal and
accrued interest due to Bank Austria under its credit facility and to Alexander
Enterprise Holdings Corp. under its bridge loan was approximately $34.5 million
at November 1, 2001. Without new financing, the company cannot pay its
obligations to Bank Austria and Alexander Enterprise, and Bank Austria and
Alexander Enterprise have the right to commence foreclosure upon the assets of
the company.
The company will need to obtain additional financing or refinancing of its
existing debt to ensure sufficient funding of its operations and to have the
ability to service its debt obligations. In November 2001, the company signed
preliminary, non-binding agreements with certain third parties, including the
company's bank, to reduce and replace its existing credit facility. However,
there can be no assurance that the company will complete such refinancing.
Failure to obtain such refinancing would have a material adverse effect on the
company's business, financial condition and results of operations.
The Bank Austria credit facility described below was established in 1999 at
the time of the mergers of PrimeVision Health and OptiCare Eye Health Centers.
Bank Austria Credit Facility, Alexander Enterprise Bridge Loan
In August 1999, in connection with the mergers of PrimeVision Health and
OptiCare Eye Health Centers, the company established a credit facility by
entering into a loan agreement with Bank Austria Creditanstalt Corporate
Finance, Inc., as agent for the lenders. Borrowings from the credit facility
were used to pay certain indebtedness of PrimeVision Health and OptiCare Eye
Health Centers and to fund the company's business operations. The credit
facility is comprised of a term loan and up to a $12.7 million revolving credit
facility, and is secured by a security interest in substantially all of the
assets of the company. The company is required to maintain certain financial
ratios, which are calculated on a quarterly and annual basis, as part of the
financial covenants set forth in the credit facility. After giving effect to the
amendment discussed below, the credit facility is to terminate on June 1, 2003.
As of November 1, 2001, the company had $17.4 million of borrowings outstanding
under the term loan and $12.3 million of advances outstanding under the
revolving credit facility.
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The interest rate applicable to the Bank Austria credit facility equals the
Base Rate or the Eurodollar Rate (each, as defined in the credit facility
agreement with Bank Austria), as the company may from time to time elect. The
Base Rate, after giving effect to the amendment discussed below, is generally
the higher of: (a) the prime rate of Bank Austria for domestic commercial loans
in effect on such applicable day, or (b) the federal funds rate in effect on
such applicable day plus three-quarters of one percent (3/4 of 1%), which
generally equals LIBOR plus 2.25%. The Eurodollar Rate has generally equaled the
offered rate quoted by Bank Austria in the inter-bank Eurodollar market for U.S.
dollar deposits of an aggregate amount comparable to the principal amount of the
Eurodollar loan to which the quoted rate is to be applicable.
The company's subsidiaries guaranteed the payments and other obligations
under the credit facility, and the company (including certain subsidiaries)
granted a security interest in substantially all assets in favor of the Bank
Austria lenders. The company also pledged the capital stock of certain of
subsidiaries to the lenders.
The Bank Austria credit facility contains certain restrictions on the
conduct of our business, including restrictions on incurring debt, declaring or
paying any cash dividends or making any other payment or distribution on our
capital stock, and creating liens on the company's assets. We are required to
maintain certain financial covenants, including a minimum fixed charge coverage
ratio, a leverage ratio, a senior leverage ratio, and an interest coverage
ratio. The company is also restricted from incurring capital expenditures in
excess of a specified amount and is required to achieve minimum cash flows.
The occurrence of certain events or conditions described in the credit
facility constitute an "event of default," including:
o Failure to make payment of principal or interest when due;
o Failure to observe or perform certain affirmative covenants and other
covenants; or
o The occurrence of a vacancy in the offices of the chief executive or
chief financial officer which is not filled by a person reasonably
acceptable to the lenders.
Effective June 30, 2000, the Bank Austria credit facility was amended to
provide, among other things, that: (i) the terminated merger costs associated
with the Vision Twenty-One merger were excluded from the calculation of the
financial covenants and the company's borrowing availability; (ii) the interest
rate was increased by one-half of one percent (1/2 of 1%) to the amount set
forth above; (iii) the term was reduced by one year with the termination date
changing from June 1, 2004 to June 1, 2003; and (iv) the company agreed to
raise, or enter into binding commitments to raise, no less than $5.0 million by
January 1, 2001 through the issuance of equity or subordinated indebtedness or
other means reasonably approved by Bank Austria. In accordance with the terms of
the amended credit facility, 50% of any capital raised through the issuance of
equity or subordinated indebtedness would be used to reduce indebtedness under
the credit facility. The remainder would be used for capital expenditures and to
meet working capital requirements. In the event other means were used to raise
such capital, the company could be required to use all of such funds to reduce
indebtedness under the Credit Facility.
On October 10, 2000 the company obtained $2.25 million through a bridge
financing arrangement with Alexander Enterprise Holdings Corp. and entered into
a second amendment to the Bank Austria credit facility. Of the $2.25 million of
proceeds from the bridge loan, $1.2 million was paid to Bank Austria as required
by the amended credit facility, and the remaining $1.1 million was used for
general working capital purposes. Of the $1.2 million paid to Bank Austria, $0.3
million was applied to past due interest, $0.4 million was used to repay
principal and $0.5 million was applied as a prepayment of interest.
The bridge loan was secured through a security agreement in which Alexander
Enterprise was granted a security interest in substantially all of the assets of
the company, which is junior to the security interests of Bank Austria.
The bridge loan was evidenced by a secured promissory note (the "Note")
issued to Alexander Enterprise which accrues interest at the Eurodollar rate,
generally equal to LIBOR, plus two and one-quarter percent (2-1/4%). It is to
mature on June 1, 2003, the same date as the maturity of the Bank Austria credit
facility.
Also on October 10, 2000, Alexander Enterprise and Bank Austria entered into
an intercreditor agreement pursuant to which Bank Austria agreed that, in the
event of a "Qualified Sale" (a sale or other disposition of collateral securing
the credit facility or the bridge loan; or a principal repayment of either the
credit facility or the bridge loan as a result of a bankruptcy proceeding
involving the company) from which Bank Austria receives at least $5.0 million,
then, to the
29
extent that the proceeds from such Qualified Sale exceed $5.0 million, such
excess proceeds would be payable to Alexander Enterprise.
In connection with the bridge loan, the company issued a warrant to a
designee of Alexander Enterprise to purchase 2,250,000 shares of common stock at
$1.00 per share. The estimated fair value of the warrant at the date of issuance
was $0.6 million. This value was determined using the Black-Scholes pricing
model. This value was recorded as a discount to the bridge loan and is being
amortized to interest expense over the life of the loan.
On January 5, 2001, the bridge loan from Alexander Enterprise was amended.
In connection with the amended bridge loan, the company received an additional
$0.5 million of cash; it cancelled warrants issued in October 2000 to purchase
2,250,000 shares of common stock at $1.00; and it issued new warrants to
purchase (i) 2,000,000 shares of common stock at an exercise price of $1.00 per
share and (ii) 750,000 shares of common stock at an exercise price of $0.40 per
share. Funds for this $0.5 million addition to the bridge loan were provided by
Palisade Private Concentrated Equity Partnership, L.P ($400,000); Dean J.
Yimoyines, M.D., president and chief executive officer of the company ($50,000);
and Alexander Enterprise ($50,000).
On February 26, 2001, we entered into a Pre-Workout Agreement with Bank
Austria Creditanstalt Corporate Finance, Inc. Bank Austria provides a term loan
and revolving credit facility which totaled at December 31, 2000, $29.7million.
The Pre-Workout Agreement established certain understandings between the bank
and ourselves including the fact that we were in default under the loan
documents which govern the term loan and revolving credit facility. Such
defaults included our failure to pay principal and interest when due and our
failure to observe or perform certain affirmative covenants and other covenants.
On March 23, 2001, Bank Austria formally notified us of the occurrence of
events of default under the aforementioned credit facility. The bank forbid the
company from making any payments on account of debt junior to that of the bank,
including under certain Seller Notes representing long-term obligations of the
company to certain medical practices.
Pursuant to an understanding reached with the bank shortly after receiving
such notice, we engaged Morris-Anderson & Associates, Ltd., a management
consulting firm, to assist us in restructuring our long-term debt. Although in
its March 23 notice the bank had formally reserved its rights under the terms of
the credit facility, the aforementioned understanding was that, during a period
of unspecified duration, the events of default referred to in that notice would,
on an operating basis, be considered waived while we worked with Morris-Anderson
to restructure our debt. We continued, however, to be prohibited from paying any
junior debt, including Seller Notes.
On September 25, 2001, Bank Austria gave the company formal notice of: (i)
the occurrence of certain additional defaults under the credit facility loan
documents; (ii) the immediate termination of the commitments under the loan
documents; and (iii) the requirement that all amounts outstanding under the
credit facility were to be immediately due and payable. The company continues to
negotiate in good faith with Bank Austria and with other parties in an effort to
replace the Bank Austria credit facility with another financing arrangement
which would provide adequate capital support, at a manageable cost, to the
company. It believes that the proposed transactions involving Bank Austria,
Palisade Concentrated Equity Partnership, L.P. and CapitalSource Finance, LLC,
described above in "Item 1. Business - New Capital Structure," comprise such an
arrangement.
New Capital Structure for OptiCare
In November 2001, certain letters of intent were entered into concerning a
major capital restructuring of the company. If certain conditions are met and
the transactions contemplated by these letters of intent are consummated, these
transactions as presently proposed are expected (as of November 2001) to lower
the company's long-term debt by approximately $9.9 million, increase its equity
by approximately $9.0 million and reduce its next-12-months' debt service by
approximately $3.7 million.
One of the company's major shareholders, Palisade Concentrated Equity
Partnership, L.P. ("Palisade") reached preliminary agreement with Bank Austria
Creditanstalt Corporate Finance, Inc. ("Bank Austria") concerning new terms for
refinancing all of the company's borrowings and other direct and indirect
obligations to Bank Austria. Those terms if implemented as proposed, provide
that, in exchange for payments to the bank by the company which payments would
total approximately $23.4 million (payable partly in cash at the closing and
partly by issuance of a 2-year promissory note of the company), Bank Austria
would:
o Cancel the company's existing principal and interest obligations,
which total approximately $31.6 million (approximately $29.7 million
in principal and $1.9 million in interest);
30
o Eliminate the company's contingent exposure to Bank Austria, which,
as of November 1, 2001, totaled approximately $2.7 million;
o Relinquish to the company (which will retire) all of Bank Austria's
stock, warrants and other ownership interests in the company.
As part of its letter of intent with the company, Palisade also--subject to
a number of conditions--tentatively agreed if the proposed transactions are
consummated, to provide funds with which the company could satisfy bridge loans
of $2.3 million, plus interest, from Alexander Enterprise Holdings, Inc.
In this capital restructuring, if the proposed transactions are
consummated, Palisade would invest in the company a total of $3.5 million of
cash and provide letter of credit backing for obligations of the company
totaling $16.7 million. A portion of the letter of credit backing would support
new, secured credit facilities to be provided by CapitalSource Finance, LLC,
which is an asset-based lender specializing in the health care industry.
Palisade may also consider providing letter of credit backing for an
as-yet-undetermined amount of undertakings by the company which would be
required to support the company's growth.
After carefully considering options available to the company, both
management and the special committee of the company's Board of Directors has
concluded that, without the cash investment and credit support being offered by
Palisade, the company would not be able to obtain the substantial--and
necessary--reduction, described above, of the company's debt to Bank Austria,
nor would the company be able to obtain the other financing involved in this
proposed transaction.
In exchange for that investment and support, Palisade would acquire 2.5
million shares of the company's newly authorized Series B 12.5% Voting
Convertible Redeemable Participating Preferred Stock (convertible into common
stock on an one-for-ten basis) and warrants to purchase approximately 16.7
million additional shares of the company's common stock. Palisade would also
convert an existing bridge loan to the company into preferred stock. This would
raise Palisade's effective ownership of voting stock of the company from the
present 18.5% to approximately 75% on a fully-diluted basis. (See "Item I.
Business - New Capital Structure.")
There can be no assurance that these proposals will be carried out on the
terms presently proposed, or on other terms comparably favorable to the company,
or at all on any terms, or that, if the proposals are implemented, the company
will be able to recover its financial strength and become profitable.
Statements in this Form 10-K regarding the proposed capital restructuring
have not been reviewed or approved by Bank Austria and Bank Austria has
assumed no responsibility for such statements.
31
Cash Flows from Operations
For the year ended December 31, 2000 the company used $3.2 million in
operating activities and $1.8 in investing activities while net cash provided by
financing activities was $3.6 million. Cash used in operating activities
included an $14.2 million loss from continuing operations, and a $0.7 million
decrease in accounts payable, accrued expenses and other liabilities. These and
other changes in working capital were partially offset by $9.5 million of
non-cash charges for deferred income taxes, restructuring, depreciation,
amortization and write-off of goodwill. The company invested $1.8 million in
purchases of fixed assets in the year 2000. Fixed asset purchases were comprised
of improvements to existing facilities, the purchase of equipment and the
upgrade of certain information systems. The latter were incurred primarily to
support the integration and growth of the company subsequent to the mergers.
Cash provided by financing activities included $10.0 million of net proceeds
from the sale of 3,571,429 registered shares of common stock in January 2000,
$2.3 million of proceeds from a bridge loan in October 2000 and $0.8 million in
advances under the company's revolving credit facility. Cash provided by
financing activities was partially offset by approximately $9.5 million of
principal payments on long-term debt.
For the year ended December 31, 1999 the company used $0.4 million in
operating activities, $1.2 million in investing activities and $1.5 million in
financing activities. Cash used in operating activities included $2.3 million of
discontinued operations partially offset by a non-cash charge of $2.0 million
for depreciation and amortization. Cash used in investing activities included
$1.9 million of capital expenditures. Net cash used in financing activities
included $32.5 million for the repayment of the old credit facility and $33.0
million of proceeds from the new credit facility.
As of December 31, 2000, under agreement with the Texas Department of
Insurance, the company was required to maintain restricted investments of
$500,000. In addition, the company is not to declare or pay dividends or
otherwise transfer any funds from its limited purpose health maintenance
organization in Texas without prior approval from the Department of Insurance.
As of February 8, 2001, the Texas Department of Insurance reduced the required
restricted investment to $250,000. In addition, it no longer requires the
company to obtain written approval to declare and pay dividends.
As of January 1, 2000, the company voluntarily relinquished its HMO license
in North Carolina and is no longer subject to any liquidity restrictions with
the North Carolina Department of Insurance.
Stock Offering
In January 2000, the company completed the sale of 3,571,429 registered
shares of common stock. Gross proceeds from the offering, based on the offering
price of $3.50 per share, totaled $12.5 million, including the cancellation of a
$2.0 million subordinated note payable previously issued by the company. The
shares were issued under a registration statement filed with the Securities and
Exchange Commission on January 18, 2000. The company used $7.0 million of the
net proceeds to pay down long-term debt and used the remaining proceeds for,
among other things, business expansion, working capital and general corporate
purposes.
IMPACT OF INFLATION AND CHANGING PRICES
The company's revenue is subject to pre-determined Medicare reimbursement
rates which, for certain products and services, have decreased over the past
three years. A decrease in Medicare reimbursement rates could have an adverse
effect on the company's results of operations if it cannot offset these
reductions through increases in revenues or decreases in operating costs. To
some degree, prices for health care services and products are driven by Medicare
reimbursement rates, so that the company's non-Medicare business is also
affected by changes in Medicare reimbursement rates.
Management believes that inflation has not had a material effect on the
company's revenues for the past three years.
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-K and elsewhere (such as in other filings
by the company with the Securities and Exchange Commission, press releases,
presentations by the company or its management and oral statements)
32
may constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include those relating to the proposed new financial structure for the company,
the end of the suspension of the trading of the company's common stock by the
American Stock Exchange and the continued listing of the stock on the Exchange,
future opportunities, the outlook of customers, the reception of new services,
technologies and pricing methods, existing and potential strategic alliances,
the likelihood of incremental revenues offsetting expense related to new
initiatives, and expected improvements in the company's financial condition as
a result of the proposed new capital structure. In addition, such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements
of the company to be materially different from any future results expressed or
implied by such forward-looking statements. Such factors include: changes in
the regulatory environment applicable to the company's business, demand and
competition for the company's products and services, general economic
conditions, risks related to the eye care industry, the company's ability to
successfully integrate and profitably manage its operations, and other risks
detailed from time to time in the company's periodic earnings releases and
reports filed with the Securities and Exchange Commission, as well as the risks
and uncertainties discussed in this Form 10-K. The company undertakes no
obligation to publicly update or revise forward looking statements to reflect
events or circumstances after the date of this Form 10-K or to reflect the
occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is subject to market risk from exposure to changes in interest
rates based on its financing activities. The nature and amount of the company's
indebtedness may vary as a result of future business requirements, market
conditions and other factors. The extent of the company's interest rate risk is
not quantifiable or predictable due to the variability of future interest rates
and financing needs.
The company does not expect changes in interest rates to have a material
effect on income or cash flows in the year 2001, although there can be no
assurances that interest rates will not significantly change. An increase of 10%
in the interest rate payable by the company would increase the annual interest
expense by $0.3 million, assuming that the company's borrowing level is
unchanged. The company did not use derivative instruments to adjust the
company's interest rate risk profile during the year ended December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the company and the reports of
independent certified public accountants thereon are set forth herein beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Our Board of Directors formally approved the appointment of Deloitte &
Touche LLP as its independent accountants on August 30, 1999, and at the same
time, determined not to engage Ernst & Young LLP as the company's independent
accountants for the year ended December 31, 1999. Ernst & Young LLP audited
Saratoga's consolidated financial statements as of, and for the year ended,
December 31, 1998. The Board of Directors of Saratoga formally approved the
appointment of Ernst & Young LLP, of Dallas, Texas, as its independent
accountants to audit Saratoga's consolidated financial statements for 1998 on
March 29, 1999.
The report of Ernst & Young LLP on Saratoga's consolidated financial
statements for 1998 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principle. In connection with Ernst & Young's audit of Saratoga's financial
statements for 1998, and
33
through March 29, 1999, Ernst & Young LLP had no disagreements with the company
or Saratoga on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Ernst & Young LLP, would have caused them
to make reference to those disagreements in their report on Saratoga's
consolidated financial statements for 1998. At Saratoga's request, Ernst &
Young LLP furnished a letter addressed to the Securities and Exchange
Commission stating that it agrees with the previous statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and position of each of our
directors and executive officers as of November 1, 2001. Each director will hold
office until the next annual meeting of stockholders or until his or her
successor has been elected and qualified. Our executive officers are appointed
by and serve at the discretion of the Board of Directors.
NAME AGE POSITION
Dean J. Yimoyines, M.D. 53 Chairman of the Board of Directors, President and Chief Executive Officer
William A. Blaskiewicz 39 Vice President and Chief Financial Officer
Allan L.M. Barker, O.D. 54 President of the Professional Services Division
Gordon A. Bishop 52 President of Connecticut Operations and the Buying Group
Raymond W. Brennan 63 Director
Stephen Cohen 54 President of Cohen Systems
Norman S. Drubner, Esq. 61 Director
Alan J. Glazer 60 Director
D. Blair Harrold, O.D. 55 President of Retail Optometry, North Carolina Operations
Jason M. Harrold 31 President of the Managed Care Division
Frederick A. Rice 56 Director
Dr. Yimoyines has served as Chairman of the Board, Chief Executive Officer
and President since August 13, 1999. Dr. Yimoyines is a founder of OptiCare Eye
Health Centers and served as the Chairman, President and Chief Executive Officer
of OptiCare Eye Health Centers since 1985. Dr. Yimoyines has been instrumental
in the development and implementation of OptiCare Eye Health Centers' business
for nearly twenty years. He graduated with distinction from the George
Washington School of Medicine. He completed his ophthalmology residency at the
Massachusetts Eye and Ear Infirmary, Harvard Medical School. Dr. Yimoyines
completed fellowship training in vitreoretinal surgery at the Retina Associates
in Boston. He is a graduate of the OPM (Owner / President Management) program at
Harvard Business School and is a Fellow of the American Academy of
Ophthalmology.
Mr. Blaskiewicz has served as Chief Financial Officer of OptiCare Health
Systems, Inc. since September 1, 2001. Mr. Blaskiewicz had served as Director of
Finance, Corporate Controller, Vice President of Finance and, most recently,
Chief Accounting Officer for the company from February 1998 to August 2001.
Prior to joining the company, Mr. Blaskiewicz held various positions, including
Director of Budgeting, with Massachusetts Mutual Life Insurance Company (1993 to
1998), Manager with Ernst & Young (1989 to 1993) and Field Auditor with the
Internal Revenue Service (1986 to 1989). Mr. Blaskiewicz holds a Master of
Business Administration from the University of Hartford and a Bachelor of
Science in Accounting from Central Connecticut State University. Mr. Blaskiewicz
is a member of the American Institute of Certified Public Accountants (AICPA),
the Connecticut Society of Certified Public Accountants (CSCPA) and the
Institute of Management Accountants (IMA). Mr. Blaskiewicz is a certified public
accountant in Connecticut and holds Certified Management Accountant (CMA) and
Certified in Financial Management (CFM) designations from the IMA.
Dr. Barker has served as President of the Professional Services Division
since August 13, 1999 and was a director
34
of the company from August 1999 to January 2001. Dr. Barker was a senior
executive officer and director of PrimeVision Health from 1996 to 1999. He is a
licensed optometrist with 25 years experience in the eye care industry. From
October 1989 to July 1996, Dr. Barker served as co-president of Consolidated
Eye Care, Inc., the parent company of AECC/Pearlman Buying Group and AECC Total
Vision Health Plan, Inc. Also during this period, Dr. Barker served as vice
president and secretary of Optometric Eye Care Center, P.A. Dr. Barker received
his Doctor of Optometry degree in 1975 from Southern College of Optometry in
Memphis, Tennessee.
Mr. Bishop has served as President of our Buying Group since August 1999 and
as President of our Connecticut Operations since May 2001. From June 1998 to
August 1999, Mr. Bishop directed the retail operations of OptiCare Eye Health
Centers, Inc. Mr. Bishop has over 30 years' of experience in the optical
industry, having served in a variety of different capacities with companies in
the United States and Canada. From August 1997 to April 1998, he served as Vice
President of Operations for Public Optical. From July 1994 to April 1997, he
served as Operations Manager for Vogue Optical. From June 1990 to July 1994, he
held positions of increasing responsibility with Standard Optical Ltd.,
ultimately holding the position of Vice President of Operations for that
company. Mr. Bishop received his Business Administration Diploma from
Confederation College of Applied Arts and Technology and subsequently obtained
an Ophthalmic Dispensing Diploma from Ryerson Polytechnic University. He holds a
variety of eye care professional certifications, including certification by the
American Board of Opticianry. He holds a Fellowship in the National Academy of
Opticianry.
Mr. Brennan was elected as a director effective November 1, 2001. Following
a banking career which spanned more than 20 years, he became president and owner
of a number of substantial automobile dealerships in the central Connecticut
area. Currently President of Thrifty Car Sales in Waterbury, CT, a position he
has held since 2000, Mr. Brennan previously (1993-1999) owned and operated Pride
Auto Center in Waterbury, a Dodge and Chrysler Plymouth dealership. From 1976 to
1991, Mr. Brennan owned and operated Dodge and Toyota automobile dealerships.
With a Bachelor of Arts degree from Bentley College, Mr. Brennan held positions
of increasing responsibility in the installment lending divisions of the
Waterbury National Bank, the New Britain Bank & Trust Company and the
Connecticut Bank & Trust Company, where he was Vice President of Installment
Lending and Credit Card Merchant Sales.
Mr. Cohen has been President of Cohen Systems, a wholly-owned subsidiary
of the company, since October 1999. From 1986 to 1999, Mr. Cohen was president
of C.C. Systems, now Cohen Systems. Cohen Systems develops and markets software
for the ophthalmologic industry, including production, management and inventory
systems for labs, optometrists, opticians and ophthalmologists. Prior to
founding C.C. Systems, Mr. Cohen was, from 1981-85, general manager at Welling
International, an optical frame and lens distributor; from 1976-1980, president
of Plastic Plus in Toronto, one of the first plastic lens fabricators in
Canada; and, from 1972-1975, national sales manager for Monarch Optical, a
distributor of frames, lenses and supplies to the optical industry in Canada.
Mr. Cohen has over 30 years of experience in the optical industry.
Mr. Drubner was elected as a Director effective November 1, 2001. He is
senior partner in the law firm of Drubner, Hartley, O'Connor & Mengacci, which
he founded in 1971, and is the owner of Drubner Industrials, a commercial real
estate brokerage firm. Mr. Drubner has been practicing law in Connecticut since
1963, specializing in real estate, zoning, and commercial transactions. He is a
member of the Connecticut Bar and the Waterbury, CT Bar Association. Mr.
Drubner has been admitted to practice before the U.S. District Court, District
of Connecticut. He is a former trustee of Teikyo Post University and is a
Director of American Bank of Connecticut (AMEX-BKC). Mr. Drubner holds a
Bachelor of Arts degree from Boston University and received his Juris Doctor
degree from Columbia University in 1963.
Mr. Glazer was elected as a Director effective November 1, 2001. Mr.
Glazer is a Principal at Morris Anderson & Associates, Ltd., a management
consulting firm, which he joined in 1984. Prior to that, Mr. Glazer was Senior
Vice President and Chief Financial Officer for Consolidated Foods Corporation,
a large international manufacturer and distributor of branded consumer
products. Mr. Glazer played a major role in Consolidated Foods' strategic
planning, including raising capital and working with "problem plagued"
divisions. He also supervised all treasury, tax, insurance, MIS, controllership
and internal audit activities. Before joining Consolidated Foods, Mr. Glazer
spent 13 years at Arthur Andersen & Co., the last five as a partner, where he
managed some of the firm's client relationships with major national and
international companies, primarily in the consumer products and health care
industries. He has extensive experience in corporate reorganizations, including
the structuring of mergers and acquisitions and of debt. Mr. Glazer received a
Bachelor of Science degree in Business Administration from Roosevelt
University, did graduate work at Northwestern University and is a certified
public accountant.
35
Dr. D. Blair Harrold has served as the President of Retail Optometry,
North Carolina Operations, since August 13, 1999. Prior thereto, Dr. Harrold
served as a senior executive and director of PrimeVision Health since its
acquisition of Consolidated Eye Care, Inc., renamed OptiCare Eye Health
Network, Inc., in July 1996. Dr. Harrold founded Consolidated Eye Care in 1989
and served as its Co-President until its acquisition by PrimeVision Health. Dr.
Harrold is a licensed optometrist, having graduated from Ohio State University
with a Bachelor of Science degree in physiological optics and a Doctor of
Optometry degree in 1971. Dr. Harrold also is President of Optometric Eye Care
Center, P.A., a North Carolina professional association. He is a member of the
American Optometric Association and the North Carolina State Optometric
Association and is a Fellow in the American Academy of Optometry. Dr. Harrold
is an uncle of Mr. Jason Harrold, President of the company's Managed Care
Services Division.
Mr. Jason Harrold has served as President of the Managed Care Services
Division since August 2000. Mr. Harrold served as Chief Operating Officer of
the Managed Care Services Division from January 2000 through July 2000 before
being appointed its President. Mr. Harrold served as Vice President of
Operations from July 1999 to December, 2000 and Vice President of Quality
Management from July 1996 to June 1999 for the Managed Care Services Division.
From November 1993 to July 1996, Mr. Harrold was employed by Alcon Laboratories
as a sales representative for its vision care division. Mr. Harrold graduated
from the University of South Carolina in 1992 with a Bachelor of Science degree
with dual majors in Business Administration for Management Science and
Insurance and Economic Security. He earned a Masters degree in Business
Administration from Appalachian State University in 1993. Mr. Jason Harrold is
the nephew of Dr. Blair Harrold, President of the company's Retail Optometry,
North Carolina Operations.
Mr. Rice was elected a Director effective November 1, 2001. He is Managing
Director of The Nauset Group, Inc., a turnaround management consulting firm he
established in 1995. Nauset provides financial advisory services to troubled
businesses and to financial institutions. With a Bachelor of Arts degree in
economics from American University and an MBA in finance from Rutgers Graduate
School of Business Administration, Mr. Rice held positions of increasing
responsibility in the banking sector, including vice president at National
Westminster Bank and senior vice president and chief credit officer at Urban
National Bank. A Certified Turnaround Professional (CTP) and an Accredited
Valuation Analyst (AVA), Mr. Rice is a director and past president of the
Turnaround Management Association (NJ Chapter) and a member of Garden State
Credit Associates, the Venture Association of New Jersey and the New York
Institute of Credit. Mr. Rice is an Adjunct Professor, teaching corporate
finance, banking and financial institutions, at Ramapo College in New Jersey
and St. Thomas Aquinas College in New York.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Mr. Jason Harrold was 3 days late in filing Form 3 following his
appointment as an officer of the company and the award to him of stock options
reported in his Form 3.
36
ITEM 11. EXECUTIVE COMPENSATION
The Executive Compensation discussion below for periods prior to the closing
of the mergers on August 13, 1999, includes executive compensation of directors
and officers earned from PrimeVision Health and OptiCare Eye Health Centers, as
the case may be, and does not include any information relating to Saratoga or
Saratoga's officers and directors prior to the mergers.
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal years ended December 31,
2000, 1999 and 1998, compensation paid by us to the chief executive officer and
our four other most highly compensated executive officers whose total
compensation exceeded $100,000.
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------- -----------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($) (9)
- --------------------------- ---- ---------- --------- ----------- --------------------
Dean J. Yimoyines, M.D. (1) 2000 410,000 28,505 0 15,127
Chairman of the Board of 1999 403,650 62,152 325,000 (8) 10,671
Directors, President and 1998 360,537 139,756 286,450 (7) 10,948
Chief Executive Officer
Steven L. Ditman (2) 2000 175,000 0 10,125
Former Executive Vice President, 1999 159,135 20,000 150,000 (8) 2,700
Chief Financial Officer 1998 145,673 32,000 72,977 (7) 0
and Director
Allan L.M. Barker, O.D. (3) 2000 150,000 0 0 3,000
President of Professional 1999 263,161 0 0 5,000
Services Division 1998 305,028 271 0 5,160
D. Blair Harrold, O.D. (4) 2000 150,000 0 0 3,000
President of Retail Optometry, 1999 263,485 0 0 3,566
North Carolina Operations 1998 305,028 0 0 5,000
Jason M. Harrold (5) 2000 122,740 0 45,000 2,455
President of the Managed 1999 85,240 13,692 11,250 4,947
Care Division 1998 70,962 7,317 3,914
Samuel Petteway (6) 2000 120,329 0 0 114,021
Former President of the 1999 294,590 63,868 45,000 (8) 5,000
Managed Care Division 1998 201,000 57,582 0 5,206
(1) The information includes the aggregate compensation paid by OptiCare Eye
Health Centers and OptiCare P.C. for the services of Dr. Yimoyines.
(2) The information includes the compensation paid by OptiCare Eye Health
Centers for the services of Mr. Ditman. Mr. Ditman resigned the company's
Board of Directors on June 15, 2001 and resigned as an officer of the
37
company effective August 24, 2001. All of Mr. Ditman's options expired on
November 24, 2001.
(3) The information includes the aggregate compensation paid by PrimeVision
Health and Consolidated Eye Care for the services of Dr. Barker.
(4) The information includes the aggregate compensation paid by PrimeVision
Health and Consolidated Eye Care for the services of Dr. Harrold.
(5) The information includes the aggregate compensation paid by PrimeVision
Health and Consolidated Eye Care for the services of Mr. Harrold.
(6) The information includes the aggregate compensation paid by PrimeVision
Health and Consolidated Eye Care for the services of Mr. Petteway. Mr.
Petteway's employment ended effective July 31, 2000. A severance payment
of $111,415 is included as Other Compensation.
(7) Awards reflected represent options currently held by our executive
officers which were received in connection with the mergers on August 13,
1999 in exchange for options of OptiCare Eye Health Centers capital stock
or PrimeVision Health common stock, as the case may be.
(8) Upon the closing of the mergers on August 13, 1999, we granted options to
purchase 325,000, 150,000 and 45,000 shares of common stock under our
Performance Stock Program to Dr. Yimoyines, Mr. Ditman and Mr. Petteway,
respectively.
(9) The executive officers were provided with certain group life, health,
medical and other non-cash benefits generally available to all salaried
employees and not included in this column pursuant to the rules
promulgated under the Exchange Act. The amounts shown include: (i)
matching contributions by us under a 401(k) retirement savings plan
maintained by us for each of Messrs. Yimoyines $5,250, $1,200 and $1,200;
Ditman $2,925, $0 and $0; Barker $3,000, $5,000 and $5,160; D.B. Harrold
$3,000, $3,566 and $5,000; J.M. Harrold $2,455, $4,957 and $3,914; and
Petteway $2,407, $5,000 and $5,206 for the years 2000, 1999 and 1998,
respectively; (ii) insurance premiums paid by us on behalf of Dr.
Yimoyines for disability insurance of $2,555 for each of the years 2000,
1999 and 1998; (iii) car allowance paid by us on behalf of Dr. Yimoyines
of $3,200, $3,438 and $3,025 for the years 2000, 1999 and 1998,
respectively, and on behalf of Mr. Ditman of $7,200 and $2,700 for the
years, 2000 and 1999, respectively; (iv) country club dues paid by us on
behalf of Dr. Yimoyines were $4,122, $3,478 and $4,168 for the years 2000,
1999 and 1998, respectively.
OPTIONS GRANTED IN 2000
The following table sets forth information regarding options granted in 2000
and currently held by the named executive officer. In accordance with the rules
of the Securities and Exchange Commission, the table sets forth the hypothetical
gains or "option spreads" that would exist for the options at the end of their
terms. These gains are based on assumed rates of annual compound stock price
appreciation of our common stock of 5% and 10% from the date the options were
granted to the end of the option terms.
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
PERCENTAGE OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR OPTION
SECURITIES GRANTED TO EXERCISE TERM
UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----
NAME GRANTED(#) FISCAL 2000 SHARE DATE 5 % 10 %
- ---- ----------- ----------- ----- ---- --------- ---------
Jason M. Harrold 45,000 (1) 100% $1.78 8/10 $50,374 $127,659
(1) Granted under our Performance Stock Program. Date of grant was August 2,
2000. Initial exercise date was August 2, 2001. Options vest in
installments over a period of four years.
________________________________________________________________________________
38
AGGREGATED OPTION EXERCISES IN 2000 AND YEAR END OPTION VALUES
The following table summarizes certain information regarding values of our
options as of December 31, 2000, held by the chief executive officer and each
of the other named executive officers.
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT 12/31/00 (#) 12/31/00 ($)
------------------------------------ ----------------------------------
NAME EXERCISABLE NON-EXERCISABLE EXERCISABLE NON-EXERCISABLE
- ---- ----------- --------------- ----------- ---------------
Dean J. Yimoyines, M.D. 224,474 386,976 0 0
Steven L. Ditman (1) 73,988 148,989 0 0
Jason M. Harrold 4,382 54,222 0 77,400
(1) Mr. Ditman resigned as a director of the company on June 15, 2001 and as an
officer of the company effective August 24, 2001. All of Mr. Ditman's
options will expire on November 24, 2001.
________________________________________________________________________________
COMPENSATION PLANS
We maintain the following plans for the benefit of employees, including
directors and executive officers:
o Performance Stock Program;
o 1999 Employee Stock Purchase Plan;
o 2000 Professional Stock Purchase Plan;
o 401(k) plans; and
o Health and other insurance plans.
We do not currently maintain a defined benefit pension plan or other
actuarial retirement plan for our named executive officers or otherwise.
PERFORMANCE STOCK PROGRAM
General
Our Performance Stock Program was adopted by the Board of Directors on May
14, 1999, and approved by our stockholders on August 13, 1999. The Program
provides for the issuance of awards of an aggregate maximum of up to the lesser
of: (a) 3,000,000 shares of our common stock, or (b) 15% of the sum of: (1) the
number of shares outstanding at the time the limitation in this clause (b) is
calculated, (2) the number of shares subject to options and performance shares
then outstanding, and (3) the number of shares then available for future awards
under the Program.
Awards may be comprised of incentive stock options, nonqualified stock
options, restricted stock, performance shares or cash units, each as described
below. No single individual may receive awards for: (a) more than 600,000 shares
in 1999 (excluding substitute options granted to option holders of OptiCare Eye
Health Centers and PrimeVision Health pursuant to the merger agreement) or (b)
more than 200,000 shares in any subsequent calendar year.
The number of persons currently eligible for awards is approximately 620.
Authorized but previously unissued shares, treasury shares and shares forfeited
under the Program may be issued again under the Program up to the maximum
aggregate limit.
The Program provides for administration by either the Board of Directors or
the compensation committee of the
39
Board of Directors. The compensation committee has the general authority to
interpret the provisions of the Program and adopt such rules as it deems
necessary or desirable for the administration of the Program. The compensation
committee also handles the selection of employees, consultants and other
service providers who will participate in the Program, and the determination of
the size and terms of awards made under the Program.
The Program will terminate upon adoption by the Board of Directors of a
resolution terminating the Program, or upon the award and vesting of the maximum
aggregate number of shares of common stock available under the Program.
On August 13, 1999, an aggregate of approximately 630,737 options were
granted to option holders of OptiCare Eye Health Centers and PrimeVision Health
in substitution for such options, which contained substantially identical terms
as the options substituted therefor, except for a change in the exercise price
and the number of shares for which options can be exercised to reflect the
mergers. In addition, after the consummation of the mergers, on August 13, 1999,
an aggregate of approximately 721,250 options were granted to employees.
Non-Qualified and Incentive Stock Options
The compensation committee may designate options as either non-qualified
stock options (i.e., options not entitled to special tax benefits under the
Internal Revenue Code) or incentive stock options pursuant to Section 422 of the
Code. Incentive stock options may only be issued to employees and must be issued
at an option price no less than the fair market value of our common stock on the
date of the grant (and 110% of fair market value in the case of 10%
stockholders). Subject to the foregoing, the price of the shares subject to each
option is set by the compensation committee.
The exercise of options granted under the Program is subject to terms and
conditions set by the compensation committee and set in the agreement evidencing
each option. The purchase price for the shares acquired upon exercise of the
option may be paid: (a) in cash or by certified check; or (b) at the discretion
of the committee, by delivery of one or more stock certificates evidencing other
shares of our common stock with a fair market value equal to the option price;
or (c) by a combination of cash and common stock as described in clauses (a) and
(b).
The compensation committee sets the expiration date of each option, but in
the case of incentive stock options, the expiration date may not be longer than
ten years from the date of the grant (or five years in the case of 10%
stockholders).
All incentive stock options will terminate on the earlier of the expiration
date or one year following termination of employment due to disability or death.
Upon termination of employment for any reason other than disability or death,
all options will expire on the earlier of their expiration date or ninety days
following termination of employment, unless otherwise provided in an applicable
agreement or instrument. Non-qualified stock options may be subject to the same
provisions with respect to termination, or may contain such other provisions as
the compensation committee determines.
Options are not transferable or assignable other than by will or the laws of
descent and distribution and are exercisable during the participant's lifetime
only by the participant, except that the compensation committee may, in its sole
discretion, allow for transfers of awards (other than incentive stock options)
to other persons or entities.
Restricted Stock
An award of a share of restricted stock is an award to a participant of a
share of common stock generally conditioned upon the attainment of performance
goals established by the compensation committee for the performance period to
which the award relates and the continued employment or retention as a service
provider of the participant with us or any of our majority-owned subsidiaries
through the end of the performance period. During the performance period, the
participant has all of the rights of a stockholder, including the right to
receive dividends, except that the participant shall not have custody of the
shares of common stock nor the right to transfer ownership of the shares during
the performance period.
Generally, a participant's termination of employment or provision of
services to us prior to the end of the relevant performance period results in
forfeiture of an award of restricted stock, although the compensation committee
is authorized to determine that all or any portion of the award shall not be
forfeited. If a portion of a restricted stock
40
award is forfeited, the non-forfeited portion is reduced by the amount of any
dividends previously paid to the participant with respect to the forfeited
portion.
Performance Shares or Cash Units
The compensation committee may establish performance programs and grant
awards of performance shares or cash units pursuant to such programs. The
compensation committee will establish performance goals and a schedule relating
to such goals to determine the performance awards to be granted to participants.
At the completion of a performance award period, the compensation committee
shall determine the award to be made to each participant by multiplying the
number of performance units granted to each participant by a performance factor
representing the degree of attainment of the performance goals. Performance
shares shall generally be paid in the form of common stock, and cash units shall
be paid in cash, provided that the compensation committee may pay performance
shares in the form of cash at the request of a participant.
The Effect of a Change in Control
In the event of a change in control of the company, as defined in the
Program, all awards will become fully vested and all options will become
immediately exercisable if the compensation committee so provides, if an award
so provides or if an employment agreement with a recipient of an award so
provides.
1999 EMPLOYEE STOCK PURCHASE PLAN
The company's 1999 Employee Stock Purchase Plan was adopted by our Board of
Directors on May 14, 1999 and approved by our stockholders on August 13, 1999.
The 1999 plan was amended and restated by our Board of Directors on March 27,
2000 in order to allow for the purchase of fractional shares of common stock and
to reduce the number of shares of common stock available for issuance to the
extent of our common stock issued under our 2000 Professional Employee Stock
Purchase Plan, which plan is described below. The Amended and Restated 1999
Employee Stock Purchase Plan provides for a maximum of 450,000 shares of our
common stock to be sold to employees, which number shall be reduced by the
number of shares of common stock issued under the 2000 Professional Employee
Stock Purchase Plan. No more than 450,000 shares of common stock may be issued
pursuant to these two plans in aggregate. Authorized but previously unissued
shares and treasury shares may be issued under the Employee Plan up to the
maximum aggregate limit.
This plan is administered by the compensation committee. The compensation
committee has the general authority to interpret the provisions of this plan and
adopt such rules as it deems necessary or desirable for the administration of
the plan.
The 1999 plan will terminate upon adoption by the board of a resolution
terminating the plan, or upon the sale of the maximum aggregate number of shares
of common stock available under the Employee Plan.
Eligibility
All of our employees and those of our subsidiaries, other than certain 5%
stockholders, are eligible to participate in the Employee Plan if they
customarily work at least 20 hours per week for at least five months in a year.
Election to Participate
Eligible employees elect to participate in the 1999 plan by contributing a
portion of their compensation (not to exceed the lesser of 20% of base pay or
$21,250) to purchase shares of common stock under the 1999 plan. Participating
employees may change their elections at any time, but not more than once in a
calendar quarter.
Purchase Price
Employee contributions will be used to purchase shares of common stock as of
the last business day of each calendar quarter at a price equal to 85% of the
then fair market value of such shares. Only whole numbers of shares will be
purchased for each employee, with any excess contributions being carried over to
the next quarter.
41
2000 PROFESSIONAL EMPLOYEE STOCK PURCHASE PLAN
On March 27, 2000, the 2000 Professional Employee Stock Purchase Plan was
adopted and approved by our Board of Directors and the 2000 plan became
effective. The 2000 plan allows for the participation of optometrists and
ophthalmologists employed by professional corporations affiliated with us
through professional service agreements. (See "Item 13. Certain Relationships
and Related Transactions.")
The terms of this second plan are identical to the Employee Plan except
that: (i) optometrists and ophthalmologists employed by professional
corporations affiliated with us may be eligible to participate in this plan and
(ii) this plan will not qualify as a plan adopted under Section 423 of the
Internal Revenue Code of 1986, as amended. (See "Federal Income Tax
Consequences.") In aggregate, 450,000 shares are available for issuance under
the Employee Stock Purchase Plan and the 2000 Professional Employee Stock
Purchase Plan.
EMPLOYMENT AGREEMENTS WITH CERTAIN OFFICERS
Key provisions of the employment agreements with Dr. Yimoyines, Mr. Ditman,
Dr. Barker, Dr. D. Blair Harrold, and Mr. Jason Harrold are summarized below.
Dean J. Yimoyines, Chairman, President and Chief Executive Officer. The term
of Dr. Yimoyines' employment agreement is three years, expiring August 13, 2002.
It is automatically renewable for additional one year terms unless either party
gives six months' notice. Dr. Yimoyines may terminate his employment agreement
without cause upon six months notice. Dr. Yimoyines' annual base salary and
guaranteed bonus is $410,000, and he may receive performance-based bonuses as
determined by the Board of Directors, up to 100% of base salary plus guaranteed
bonus, subject to the achievement of goals established for each calendar year by
the Board of Directors or the compensation committee. Dr. Yimoyines is entitled
to a disability benefit consisting of full base salary and guaranteed bonus for
the first six months of a disability, and thereafter 65% of base salary,
guaranteed bonus and performance-based bonus earned as of the date of disability
and to a life insurance policy on his life in the amount of $1,500,000 payable
to a beneficiary designated by Dr. Yimoyines. If his employment is terminated on
account of disability or without cause by the company, or if the agreement is
not renewed at the end of the initial three year term, Dr. Yimoyines shall
receive a lump sum payment in an amount equal to three times total compensation
for the year prior to termination, plus continuation of all benefits for a
period of three years after termination. If: (a) during the three year period
following a change in control, Dr. Yimoyines' duties are materially diminished,
his principal place of employment is moved more than 50 miles, or his employment
is terminated on account of disability or by the company without cause or by
now-renewal of the agreement, or (b) Dr. Yimoyines voluntarily terminates his
employment during the one year period following a change in control, then Dr.
Yimoyines shall receive severance pay equal to three times total compensation
for the year ended prior to the change in control. If Dr. Yimoyines' employment
is not terminated at our election, including a termination on account of
non-renewal after the initial 3-year term, then: (1) during the term of the
agreement and for a period of 18 months after the date of termination of
employment, Dr. Yimoyines shall not engage in the practice of any branch of
ophthalmology or ophthalmic surgery in any capacity in Connecticut or any
portion of any other state where the company actively conducts business; and (2)
for the 12-month period following termination, Dr. Yimoyines may not render
services to any organization which is engaged in: (a) researching, developing,
marketing or selling any eye wear or eye care product, process or service or (b)
management of an ophthalmic medical practice which competes with any of our
products, processes or services.
Steven L. Ditman, former Executive Vice President and Chief Financial
Officer. The term of Mr. Ditman's employment was three years expiring August 13,
2002, renewable for one year terms, subject to termination by Mr. Ditman without
cause upon six months' notice. His base annual salary, excluding the cost of
certain perquisites, was $175,000, and he was eligible to receive
performance-based bonuses as determined by the Board of Directors, subject to
the achievement of goals established for each calendar year by the board or the
compensation committee, up to 100% of base salary. If he became disabled, he was
entitled to full base salary for the first three months, and thereafter 65% of
base salary and performance-based bonus earned as of the date of disability. He
was also entitled to a death benefit of $150,000. If: (1) we did not renew Mr.
Ditman's agreement at the end of the initial 3-year term; (2) we were to have
terminated Mr. Ditman's employment agreement without cause; (3) Mr. Ditman were
to have voluntarily terminated his employment during the one year period
following a change of control; or (4) during the three year period following a
change in control, Mr. Ditman's duties were materially diminished, his principal
place of
42
employment moved more than 50 miles, or his employment terminated by us without
cause or by non-renewal of the agreement, then he was entitled to receive a lump
sum payment equal to two times his total compensation for the year prior to
termination. During the term of the agreement and for a period of 18 months
after termination, subject to certain exceptions, Mr. Ditman was not permitted
to render services directly or indirectly to any organization which is engaged
in: (1) researching, developing, marketing or selling any eye wear or eye care
product, process or service which competes with us, or (2) managing the business
practice of ophthalmologists, optometrists, or opticians. Mr. Ditman resigned as
a member of the Board of Directors on June 15, 2001 and resigned as an officer
of the company effective August 24, 2001 at which time his employment contract
was terminated.
Allan L.M. Barker, O.D., President, Professional Services Division. The term
of Dr. Barker's agreement is seven years, expiring August 13, 2006, and is
automatically renewable for subsequent one year terms unless either party gives
six months' prior notice. Dr. Barker may terminate the agreement without cause
upon six months' notice. Base annual salary is $150,000, subject to cost of
living adjustments on the third and sixth anniversary dates. Dr. Barker may
receive performance-based bonuses as determined by the Board of Directors,
subject to the achievement of goals established for each calendar year by the
board or the compensation committee, up to 100% of base salary. If Dr. Barker is
disabled, he receives full base salary for the first three months. Dr. Barker is
entitled to receive a death benefit of $150,000. If he is terminated by the
company without cause, he is entitled to a lump sum payment equal to the base
salary he would have received from the date of termination to the end of the
term, and continuation of benefits to the end of the term. If he terminates his
employment with us following a change in control, he is entitled to a lump sum
payment equal to one year of base salary. During the term of the agreement and
for a period of 18 months after termination, subject to certain exceptions, Dr.
Barker may not render services directly or indirectly to any organization which
is engaged in: (1) researching, developing, marketing or selling any eye wear or
eye care product, process or service which competes with us, or (2) managing the
business practice of ophthalmologists, optometrists, or opticians.
D. Blair Harrold, O.D., President, Retail Optometry, North Carolina
Operations. The term of Dr. Harrold's agreement is seven years, expiring August
13, 2006, and is automatically renewable for subsequent one year terms unless
either party gives six months' prior notice. Dr. Harrold may terminate the
agreement without cause upon six months' notice. Base annual salary is $150,000,
subject to cost of living adjustments on the third and sixth anniversary dates.
Dr. Harrold may receive performance-based bonuses as determined by the Board of
Directors, subject to the achievement of goals established for each calendar
year by the board or the compensation committee, up to 100% of base salary. If
Dr. Harrold is disabled, he receives full base salary for the first three
months. Dr. Harrold is entitled to receive a death benefit of $150,000. If Dr.
Harrold is terminated by the company without cause, he is entitled to a lump sum
payment equal to the base salary he would have received from the date of
termination to the end of the term, and continuation of benefits to the end of
the term. If he terminates his employment with us following a change in control,
he is entitled to a lump sum payment equal to one year of base salary. During
the term of the agreement and for a period of 18 months after termination,
subject to certain exceptions, Dr. Harrold may not render services directly or
indirectly to any organization which is engaged in: (1) researching, developing,
marketing or selling any eye wear or eye care product, process or service which
competes with us, or (2) managing the business practice of ophthalmologists,
optometrists, or opticians.
Jason Harrold, President, Managed Care Division. The term of the agreement
is two years expiring June 30, 2002 and is automatically renewable for
subsequent one year terms unless either party gives the other six months' notice
prior to the renewal date. Mr. Harrold's annual base salary during the term of
the agreement is $150,000 to September 2, 2001 and $175,000 to June 30, 2002. He
may receive performance-based bonuses as determined by the Board of Directors,
subject to the achievement of goals established for each calendar year by the
board or the compensation committee, of up to 100% of base salary. Mr. Harrold
may terminate the agreement without cause upon six months' notice and we may
terminate without cause at any time upon notice. If Mr. Harrold is terminated
without cause, he is entitled to a lump sum payment of 12 months' base salary
plus benefits for a 12-month period. If Mr. Harrold becomes disabled, he is
entitled to full base salary for the first three months, and, thereafter, as
allowed by a long-term disability policy provided by the company, 60% of base
salary plus performance-based bonus earned as of the date of disability. During
the term of the agreement and for a period of 18 months after termination,
subject to certain exceptions, Mr. Harrold may not render services directly or
indirectly to any organization which is engaged in: (1) the managed eye care
business, (2) the optical buying group business, or (3) the business of owning
or managing the practice of ophthalmologists, optometrists, opticians,
ambulatory or refractive surgery facilities or providing services to such
organizations. If, during the one year period following a change in control of
the company, Mr. Harrold's duties are materially diminished, his principal place
of employment is moved more than 50 miles, or his employment is terminated by
the company without cause or by non-renewal of the agreement, then he shall
receive a lump sum payment equal to his annual base salary.
43
COMPENSATION OF DIRECTORS
Directors who are also employees do not receive any additional compensation
for their service as directors. Prior to August 1, 2000, all other directors
received a fee of $1,000 per board meeting attended in person, and $500 per
committee meeting attended in person. The chairman of the audit committee, the
compensation committee, and the stock plan committee also received a payment of
$1,500 per year.
Effective August 1, 2000, cash compensation for service on the Board of
Directors was eliminated and replaced with periodic grants of restricted common
stock. All non-employee directors will receive a grant of 4,000 shares of
restricted common stock at the time of the annual meeting of stockholders for
their service on the Board of Directors for the ensuing year. In addition, each
non-employee director who serves on a committee of the board will receive a
grant of 1,000 shares of restricted common stock for each such committee on
which such director serves. The chairpersons of these committees will receive a
grant of 500 shares of restricted common stock. These grants will also be made
at the time of the annual meeting of stockholders. Restricted stock will be
forfeited if the non-employee director does not remain a director for 12 months
following its issuance, with certain specified exceptions.
Directors will continue to be reimbursed for their expenses incurred in
connection with attendance at board and committee meetings, including travel and
lodging, if necessary.
Each non-employee director receives options to purchase 20,000 shares of
common stock upon election to the board (the "election options"), and thereafter
options to purchase 5,000 shares at the time of each annual meeting of
stockholders at which such director is re-elected. All such options will vest in
tranches of one-third of the award each on the first, second and third
anniversaries of the awards.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee was formed on August 13, 1999. Mr. Croweak was a
member of the compensation committee until October 30, 2000, at which time he
was replaced by Mr. Drubner. Messrs. Croweak and Drubner have never been either
officers or employees of the company. Dr. Durfee, who was the other member of
the committee until his resignation on January 17, 2000, served as the acting
Chief Executive Officer and Senior Vice President of PrimeVision Health from
1996 until the closing of the mergers on August 13, 1999. Prior to the formation
of the compensation committee, all decisions regarding executive compensation,
salaries and incentive compensation for our employees and consultants were made
solely by the Board of Directors and executive officers of PrimeVision Health
and OptiCare Eye Health Centers, as the case may be. On January 18, 2000, Mr.
Schramm was appointed to the compensation committee to fill the vacancy left by
Dr. Durfee's resignation. Mr. Schramm has never been one of our officers or
employees.
44
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation, as amended, provides that no director will be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
o For any breach of the director's duty of loyalty to us or our stockholders;
o For acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o Under Section 174 of the Delaware General Corporation Law; and
o For any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation, as amended, and bylaws generally provide
that we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, including payment in advance of a final disposition
of a director's or officer's expenses and attorneys' fees incurred in defending
any action, suit or proceeding. We believe that these provisions will assist us
in attracting and retaining qualified individuals to serve as directors.
We have entered into indemnification agreements with each of our directors.
These indemnification agreements provide for the indemnification by us of our
directors for liability for acts and omissions as directors. We believe that
indemnification agreements are necessary to attract and retain qualified persons
as directors.
We currently maintain an executive liability insurance policy which provides
coverage for directors and officers. Under this policy, the insurer agreed to
pay, subject to certain exclusions, for any claim made against any of our
directors or officers for a wrongful act by any such director or officer. The
policy, however, only covers the portion of securities claims which exceeds a
"Retention" (or deductible) amount of $150,000.
We have created an OptiCare Directors & Officers Trust pursuant to which we
have placed $150,000 in a bank account under the control of a member of our
Board of Directors, as Trustee. Funds may be disbursed from the Trust to cover
the deductible amount in instances where a claim has been made as to which the
company has an indemnification obligation. The Trust terminates on the earlier
of November 6, 2004 (provided no claims are outstanding on that date) or the
date on which the company's net worth reaches $30,000,000.
There is no pending litigation or proceeding involving any of directors,
officers, employees or agents as to which indemnification is being sought.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of November 1, 2001 there were 12,815,092 shares of our common stock
outstanding. The following table sets forth as of that date certain information
regarding the beneficial ownership of the common stock outstanding by: (i) each
person who is known by us to own 5% or more of our common stock (the holdings of
certain unrelated entities listed below are based on shareholdings disclosed in
their public filings), (ii) each of the company's directors, (iii) the company's
chief executive officer and four other most highly compensated executive
officers whose total compensation exceeded $100,000 and (iv) all of the
company's executive officers and directors as a group. Unless otherwise
indicated, each of the stockholders shown in the table below has sole voting and
investment power with respect to the shares beneficially owned.
45
NAMES OF EXECUTIVE OFFICERS, DIRECTORS OR 5% STOCKHOLDERS SHARES(1) PERCENT
- --------------------------------------------------------- ------ -------
Nicolas Berggruen (2) 2,454,026 19.1%
Palisade Concentrated Equity Partnership, L.P. (3) 2,400,000 18.7%
Marlin Capital, L.P. 1,209,487 9.4%
Bank Austria Creditanstalt Corporate Finance, Inc. (4) 785,616 6.1%
Oxford Health Plans (5) 775,996 6.1%
Allan L.M. Barker, O.D. (6) 665,056 5.2%
D. Blair Harrold, O.D. 660,505 5.2%
Dean J. Yimoyines, M.D. (7) 524,224 4.1%
Norman S. Drubner, Esq. 294,489 2.3%
Steven L. Ditman (8) 111,488 *
Jason Harrold (9) 74,921 *
All executive officers and directors as a group (six persons) 2,330,683 18.2%
- ----------
*Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual to acquire them within 60 days upon the exercise of
an option are treated as outstanding for purposes of determining
beneficial ownership and the percent beneficially owned by such individual
and for the executive officers and directors as a group.
(2) Includes 2,300,000 shares of common stock issuable upon exercise of
warrants held by Medici I Investment Corp. and 154,026 shares of common
stock held by Alexander Enterprise Holdings Corp. Mr. Nicholas Berggruen
acts as an investment advisor to both Medici I Investment Corp. and
Alexander Enterprise Holdings Corp. Mr. Berggruen disclaims beneficial
ownership of such shares. The address of Alexander Enterprise Holdings
Corp. is: c/o Alpha Investment Management, Inc., 499 Park Ave., 24th
Floor, New York, NY 10022.
(3) Includes 2,000,000 shares of common stock and 400,000 shares of common
stock issuable upon exercise of warrants. The address of Palisade
Concentrated Equity Partnership, L.P. is One Bridge Plaza, Suite 695, Fort
Lee, NJ 07024.
(4) Includes 418,803 shares of non-voting convertible preferred stock held by
Bank Austria. Also includes warrants to purchase 100,000 shares of either
common stock or non-voting convertible preferred stock. Does not give
effect to provisions which may be included in the preferred stock and
warrants, which, for bank regulatory purposes, will restrict Bank Austria
from beneficially owning in excess of 4.99% of our outstanding common
stock. The address of Bank Austria is 150 East 42nd Street, New York, NY,
10017.
(5) Includes 337,514 shares subject to currently exercisable warrants. The
address of Oxford is 800 Connecticut Avenue, Norwalk, Connecticut 06854.
(6) Includes 552 shares of common stock held by Dr. Barker's son, as to which
Dr. Barker disclaims beneficial ownership.
(7) Includes 249,825 shares of common stock held by Linda Yimoyines, wife of
Dr. Dean J. Yimoyines, 224,399 shares of common stock issuable upon the
exercise of outstanding options and 50,000 shares issuable upon exercise
of warrants.
(8) Includes 111,488 shares of common stock issuable upon the exercise of
outstanding options held by Mr. Ditman.
(9) Includes 58,604 shares of common stock issuable upon the exercise of
outstanding options held by Mr. Jason Harrold.
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OPTICARE, P.C. PROFESSIONAL SERVICES AND SUPPORT AGREEMENT
OptiCare Eye Health Centers has entered into a Professional Services and
Support Agreement with OptiCare P.C., a Connecticut professional corporation,
effective December 1, 1995. Pursuant to that agreement, OptiCare P.C. employs
medical personnel and performs all ophthalmology and optometry services at the
company's facilities in Connecticut. We select and provide the facilities at
which the services are performed and we are the exclusive provider of all
administrative and support services for the facilities operated by OptiCare P.C.
pursuant to this agreement. We bill and receive payment for the services
rendered by OptiCare P.C. and in turn pay OptiCare P.C. a service fee pursuant
to a compensation plan mutually agreed to each year. The company owns all the
rights to the "OptiCare" name and, under the terms of the agreement, if the
agreement with OptiCare P.C. is terminated, OptiCare P.C. must change its name
and discontinue using the OptiCare name. The agreement expires on December 1,
2002 and automatically renews for successive two year terms unless either party
terminates the agreement at least 180 days before the next renewal date. Dean J.
Yimoyines, M.D., our Chairman, Chief Executive Officer, and President, is the
sole stockholder of OptiCare, P.C. He is the beneficial holder of 4% of the
company's common stock.
OPTOMETRIC EYE CARE CENTER, P.A. PROFESSIONAL SERVICES AND SUPPORT AGREEMENT
Through one of the company's subsidiaries, Consolidated Eye Care, Inc.,
renamed OptiCare Eye Health Network, OptiCare entered into a Professional
Services and Support Agreement with Optometric Eye Care Center, P.A., a North
Carolina professional association, effective August 10, 1999. Pursuant to that
agreement, Optometric Eye Care Center employs optometrists and performs all
optometry services at OptiCare's facilities in North Carolina. OptiCare selects
and provides the facilities at which the services are performed and provides all
administrative and support services for the facilities operated by Optometric
Eye Care Center pursuant to this agreement. The professionals employed by
Optometric Eye Care Center make all patient care decisions. OptiCare submits
claims and collects payment on behalf of Optometric Eye Care Center for the
services rendered at the facilities by Optometric Eye Care Center. Out of these
collections, OptiCare pays for all the expenses arising out of the operation of
Optometric Eye Care Center and provides compensation to Optometric Eye Care
Center's professional employees, pursuant to a professional compensation plan
mutually agreed to by the parties each year. OptiCare owns all the rights to the
trade names used at the practice locations under the terms of the agreement. If
the agreement with Optometric Eye Care Center is terminated, Optometric Eye Care
Center must change its name to a name substantially dissimilar from OptiCare's
trade names. The agreement expires in 15 years and automatically renews for
successive five-year terms unless either party terminates the agreement at least
180 days before the next renewal date. Drs. Allan L.M. Barker, President of the
Professional Services Division, and D. Blair Harrold, the President of Retail
Optometry, North Carolina Operations, own all the capital stock of Optometric
Eye Care Center, P.A.
Settlement with Optometric Eye Care Center, P.A.
In 1996, Drs. Allan L.M. Barker and D. Blair Harrold, majority shareholders
in both Optometric Eye Care Center, P.A. and Consolidated Eye Care, Inc. (now
renamed OptiCare Eye Health Network, Inc.), sold Consolidated to PrimeVision
Health. At the same time, Drs. Barker and Harrold became executive officers and
directors of PrimeVision Health. Consolidated and Optometric Eye Care had
previously entered an administrative services agreement which continued after
the sale of Consolidated to PrimeVision Health.
In early 1999 Drs. Barker and Harrold began proceedings to terminate the
administrative services agreement between Consolidated (a subsidiary of
PrimeVision Health at the time) and Optometric Eye Care and to submit their
resignations from PrimeVision Health forthwith. In conjunction with these
actions, Drs. Barker and Harrold submitted a Request for Declaratory Ruling from
the North Carolina Board of Examiners in Optometry and instituted a lawsuit in
North Carolina Superior Court, asking the court to grant a temporary restraining
order, which was issued, enjoining, among other things, the mergers.
47
On April 9, 1999, Drs. Barker and Harrold entered into a settlement
agreement among Optometric Eye Care, PrimeVision Health, Consolidated and the
other parties to the lawsuit. The transactions called for in the settlement
agreement closed on August 13, 1999, at the same time as the mergers of
PrimeVision Health and OptiCare Eye Health Centers with the company. Following
are the material terms of this settlement agreement:
(1) Drs. Barker and Harrold were required to sign a Succession Agreement
allowing their ownership of Optometric Eye Care to be transferred to
another doctor of optometry licensed in North Carolina who was acceptable
to the company.
(2) Consolidated, the name of which was changed to OptiCare Eye Health
Network, and Optometric Eye Care entered into a new 40-year professional
services and support agreement with an initial 15 year term and five
automatic renewals for five years each. The agreement was approved by a
consent order issued by the Board of Examiners in Optometry, which
retained a ten-year oversight role with respect to Optometric Eye Care
Center, P.A.
(3) $2.5 million in cash was paid to Drs. Barker and Harrold.
(4) PrimeVision Health issued additional shares of its common stock to Drs.
Barker and Harrold such that, together with shares previously issued to
them, they would own 32% of PrimeVision Health's total common stock
calculated on a primary basis immediately prior to the mergers. This share
grant satisfied a note receivable in the amount of $364,896 plus accrued
interest held by Consolidated Eye Care and all other alleged claims.
(5) Drs. Barker and Harrold entered into new employment agreements with the
company that became effective on August 13, 1999.
(6) Drs. Barker and Harrold were granted the right, in the event of a
bankruptcy, to purchase six retail business operations in North Carolina.
(7) Dr. Barker was named as one of our directors.
Recent Developments Concerning Optometric Eye Care Center, P.A.
Despite having agreed to sign and implement the Succession Agreement,
allowing ownership of Optometric Eye Care to be transferred to another doctor of
optometry, Drs. Barker and Harrold never did so. Thus, they maintain nominal
ownership of Optometric Eye Care. The latter is the contracting party with the
doctors of optometry who practice at the eye care centers in North Carolina
which are operated by our subsidiary, OptiCare Eye Health Network. The company,
on advice from its attorneys, entirely disagrees with this position.
On January 9, 2001, Dr. Barker submitted his resignation from our Board of
Directors.
On February 2, 2001, Optometric Eye Care offered to purchase all assets of
the "retail optometry operations"--essentially the North Carolina optometry
business of OptiCare Eye Health Network--for $2.5 million plus certain other
consideration. The company, which considered this offer wholly inadequate, did
not formally respond to the offer by the date of its expiry, February 21, 2001.
On February 22, 2001, the day after the purchase offer expired, Optometric
Eye Care gave the company notice of its intent to terminate the professional
services and support agreement between itself and our subsidiary, OptiCare Eye
Health Network. The notice cited numerous alleged breaches of contractual
obligations due to Optometric Eye Care from OptiCare Eye Health Network and gave
us the contractually-provided 60 days to cure such breaches.
The company adamantly denies that such alleged breaches have occurred.
Termination of the professional services and support agreement could have
adverse consequences for the company's ability to continue to operate its North
Carolina eye care and retail optometry centers. This is so because while the
company would still have access to the centers themselves, still own the
equipment therein and still employ the non-medical staff at those centers, it
would no longer have a contractual relationship with the association of doctors
who practice in those centers.
48
On April 5, 2001, an agreement was reached to toll the running of the 60-day
cure period, which began when Optometric Eye Care gave the company notice of its
intent to terminate the professional services and support agreement. That
tolling agreement has been renewed on several occasions through 2001.
On July 24, 2001, Optometric Eye Care offered again to purchase the North
Carolina optometry business of OptiCare Eye Health Network--for $4.0 million
plus certain other consideration. The company, which considered this offer
inadequate, had discussions concerning the offer with Drs. Barker and Harrold,
but did not formally respond to the offer which had an original expiration date
of August 10, 2001.
Negotiations between the parties included a series of simultaneous
extensions of Optometric Eye Care's offer to purchase the optometry business and
of the tolling agreement with respect to termination of the professional
services and support agreement. Although the offer to purchase remains under
consideration by the company and the company has made a proposal to further
extend the tolling agreement, both the offer and the tolling agreement have, for
the time being, expired.
If the tolling agreement is not renewed and Optometric Eye Care moves to
enforce termination of the professional services and support agreement, the
company will vigorously challenge its right to terminate the agreement and will
take all appropriate steps to protect OptiCare Eye Health Network's interests.
Such steps will include, as appropriate, litigation and/or administrative
proceedings to enforce the April 1999 Settlement Agreement and to provide for
the orderly continuation of Optometric Eye Care's practice. The company believes
that OptiCare Eye Health Network is in substantial compliance with the
professional services and support agreement and has made clear that it will take
any appropriate step to cure any default should it be determined that such is
necessary.
CERTAIN LEASES
OptiCare Eye Health Centers is the tenant under a Lease Agreement dated
September 1, 1995 with O.C. Realty Associates Limited Partnership, as landlord.
The leased premises are located in New Milford, Connecticut and are used for the
practice of ophthalmology and optometry and incidental activities such as the
sale of eyeglasses and corrective lenses. The term of the lease is 15 years.
During the first five years of the leasehold term, OptiCare Eye Health Centers
pays a minimum annual rental to O.C. Realty Associates Limited Partnership of
$50,400, subject to adjustment at the end of the first five years and every five
years thereafter plus all taxes, assessments, utilities and insurance related to
the property being leased. In addition, OptiCare Eye Health Centers has
guaranteed the mortgage of O.C. Realty Associates Limited Partnership, the
amount of which was approximately $144,000 as of December 31, 2000. Dean J.
Yimoyines, M.D., John Yimoyines, brother of Dean Yimoyines, and Steven Ditman,
former officer and director, each owns a 4.11% interest in O.C. Realty
Associates Limited Partnership.
OptiCare Eye Health Centers is the tenant under a Lease Agreement dated
September 1, 1995 with French's Mill Associates, as landlord. The leased
premises are located in Waterbury, CT and are used for the practice of
ophthalmology and optometry, an ambulatory surgery center, and incidental
activities such as the sale of eyeglasses and corrective lenses. The term of the
lease is fifteen years. Under the Lease Agreement, during the first five years
of the leasehold term, OptiCare Eye Health Centers pays annual rental to
French's Mill Associates of $604,000, subject to adjustment at the end of the
first five years and every five years thereafter. In addition, OptiCare Eye
Health Centers pays all taxes, assessments, utilities and insurance related to
the property being leased. Linda Yimoyines and John Yimoyines, the wife and
brother, respectively, of Dean Yimoyines, M.D., each owns a 14.28% interest in
French's Mill Associates.
OptiCare Eye Health Centers is the tenant under a Lease dated September 30,
1997 with French's Mill Associates II, LLP, as landlord. The leased premises are
located in Waterbury, CT and are the location of our main headquarters. The term
of the lease is fifteen years. Under the lease, during the first five years of
the leasehold term, OptiCare Eye Health Centers pays a minimum annual rental to
French's Mill Associates II, LLP of $76,800, subject to adjustment at the end of
the first five years and every five years thereafter. In addition, OptiCare Eye
Health Centers pays all taxes, assessments, utilities and insurance related to
the property being leased. Linda Yimoyines and John Yimoyines each owns a 12.5%
interest in French's Mill Associates II, LLP.
O.N.B. Associates owns approximately a 25% interest in Cross Street Medical
Building Partnership, the landlord under a lease dated September 22, 1987 and a
Lease Extension Agreement dated December 12, 1997 with Ophthalmic Physicians and
Surgeons, P.C., an entity that merged with and into OptiCare Eye Health Centers
in 1987. The leased premises are located in Norwalk, CT and are used for the
practice of ophthalmology and optometry and incidental
49
activities such as the sale of eyeglasses and corrective lenses. The term of the
lease is three years. Under the lease, OptiCare Eye Health Centers pays a
minimum annual rental to Cross Street Medical Building Partnership of $427,600.
In addition, OptiCare Eye Health Centers pays all taxes, assessments, utilities
and insurance related to the property being leased. Linda Yimoyines and John
Yimoyines each own an 11% interest in O.N.B. Associates and Steven Ditman,
former officer and director, owns a 1.5% interest in O.N.B. Associates.
OptiCare Eye Health Centers is also the tenant under a second Lease
Agreement dated September 1, 1995 with French's Mill Associates II, L.L.P. as
landlord. The leased premises are located in Waterbury, CT and are also part of
OptiCare's main headquarters. The term of the lease is fifteen years. Pursuant
to the Lease Agreement, during the first five years of the leasehold term,
OptiCare Eye Health Centers pays a minimum annual rental to French's Mill
Associates II of $54,210, subject to adjustment at the end of the first five
years and every five years thereafter. In addition, OptiCare Eye Health Centers
pays all taxes, assessments, utilities and insurance related to the property
being leased.
Consolidated Eye Care, Inc., renamed OptiCare Eye Health Network, is the
tenant under a Lease Agreement dated March 1, 1997 with Harrold Barker
Investment Company (a partnership owned directly or indirectly by Drs. Barker
and Harrold and certain family members). The leased premises are located in
Rocky Mount, North Carolina and are used for HMO offices. The term of the lease
is five years commencing on August 1, 1997. Under the lease, Consolidated Eye
Care, Inc. pays an annual rental of $13,500 and $14,850 during the first two
years and second two years, respectively. In addition, Consolidated Eye Care,
Inc. pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Consolidated Eye Care, Inc., renamed OptiCare Eye Health Network, is the
tenant under a Lease Agreement dated March 1, 1997 with Harrold Barker
Investment Company (a partnership owned directly or indirectly by Drs. Barker
and Harrold and certain family members). The leased premises are located in
Rocky Mount, North Carolina and are used for HMO executive offices. The term of
the lease is five years commencing on May 1, 1997. Under the lease, Consolidated
Eye Care, Inc. pays an annual rental of $42,409 and $46,448 during the first two
years and second two years respectively. In addition, Consolidated Eye Care,
Inc. pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Consolidated Eye Care, Inc., renamed OptiCare Eye Health Network, is the
tenant under a Lease Agreement dated March 1, 1997 with Harrold Barker
Investment Company (a partnership owned directly or indirectly by Drs. Barker
and Harrold and certain family members). The leased premises are located in
Rocky Mount, North Carolina and are used as an operations center. The term of
the lease is five years commencing on May 1, 1997. Under the lease, Consolidated
Eye Care, Inc. pays an annual rental of $122,467 and $137,552 during the first
two years and second two years respectively. In addition, Consolidated Eye Care,
Inc. pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Consolidated Eye Care, Inc., renamed OptiCare Eye Health Network, is the
tenant under a Lease Agreement dated September 1, 1999 with Harrold Barker
Investment Company (a partnership owned directly or indirectly by Drs. Barker
and Harrold and certain family members). The leased premises are located in
Rocky Mount, North Carolina and are used as executive offices. The term of the
lease is five years commencing September 1, 1999. Under the lease, Consolidated
Eye Care, Inc. pays an annual rental of $40,000 during the first year of the
lease. Thereafter, the rental amount is adjusted annually in accordance with the
consumer price index. In addition, Consolidated Eye Care, Inc. pays all taxes,
assessments, utilities, insurance and for certain repairs related to the
property being leased.
Optometric Eye Care Center, P.A., is the tenant under a Lease Agreement
dated March 1, 1997 with Optometric Properties, LLC (an entity wholly owned by
Drs. Barker and Harrold). The leased premises are located in Fayetteville, North
Carolina and are used for the practice of optometry and the sale of eyeglasses
and corrective lenses. The term of the lease is five years commencing May 1,
1997. Under the lease, Optometric Eye Care Center, P.A. pays an annual rental of
$96,000 during the first two years and the greater of $100,000 or 6% of revenues
during the remainder of the lease. In addition, Optometric Eye Care Center, P.A.
pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Optometric Eye Care Center, P.A., is the tenant under a Lease Agreement
dated March 1, 1997 with Optometric Properties, LLC (an entity wholly owned by
Drs. Barker and Harrold). The leased premises are located in Jacksonville, North
Carolina and are used for the practice of optometry and the sale of eyeglasses
and corrective lenses. The term of the lease is four years commencing May 1,
1997. Under the lease, Optometric Eye Care Center,
50
P.A. pays an annual rental of $59,752 during the first two years. During the
second two years, Optometric Eye Care Center, P.A. pays an annual rental of
$65,184 or 6% of net revenues, whichever is greater. This lease expired March 1,
2001 and the lessor and lessee are continuing the lease on a month-to-month
basis using the years 3 and 4 lease rate. In addition, Optometric Eye Care
Center, P.A. pays all taxes, assessment, utilities, insurance and for certain
repairs related to the property being leased.
Optometric Eye Care Center, P.A., is the tenant under a Lease Agreement
dated January 2, 1995 with John Hearn and others (assignor to Skyway Drive
Partnership, an entity partially owned by Drs. Barker and Harrold). The leased
premises are located in Monroe, North Carolina and are used for the practice of
optometry and the sale of eyeglasses and corrective lenses. The term of the
lease is seven years commencing January 2, 1995. Under the lease, Optometric Eye
Care Center, P.A. pays an annual rental of $45,600 each year of the lease. In
addition, Optometric Eye Care Center, P.A. pays all taxes, assessment,
utilities, insurance and for certain repairs related to the property being
leased.
Optometric Eye Care Center, P.A., is the tenant under a Lease Agreement
dated February 4, 1995 with L.F.M. Properties (assignor to Ehringhaus
Associates, LLC, an entity partially owned by Drs. Barker and Harrold). The
leased premises are located in Elizabeth City, North Carolina and are used for
the practice of optometry and the sale of eyeglasses and corrective lenses. The
term of the lease is ten years commencing September 5, 1995. Under the lease,
Optometric Eye Care Center, P.A. pays an annual rental of $60,922 in year 1,
$61,958 in year 2, $62,989 in year 3, $64,020 in year 4, and $65,051 in years 5
through 10. In addition, Optometric Eye Care Center, P.A. pays all taxes,
assessment, utilities, insurance and for certain repairs related to the property
being leased.
Optometric Eye Care Center, P.A., is the tenant under a Lease Agreement
dated June 1, 1996 with CS Investments, Inc. (an entity partially owned by Drs.
Barker and Harrold). The leased premises are located in Cary, North Carolina and
are used for the practice of optometry and the sale of eyeglasses and corrective
lenses. The term of the lease is twenty years commencing June 1, 1996. Under the
lease, Optometric Eye Care Center, P.A. pays an annual rental of $128,445 each
year of the lease. In addition, Optometric Eye Care Center, P.A. pays all taxes,
assessment, utilities, insurance and for certain repairs related to the property
being leased.
Optometric Eye Care Center, P.A. is the tenant under a Lease Agreement dated
August 31, 1994 with Charles S. Zwerling and Jean S. Zwerling (assignor of Prime
Johnson Real Estate, LLC, an entity partially owned by Drs. Barker and Harrold).
The leased premises are located in Smithfield, North Carolina and are used for
the practice of optometry and the sale of eyeglasses and corrective lenses. The
term of the lease commenced on September 1, 1994. Under the lease, Optometric
Eye Care Center, P.A. pays an annual rental of $57,800 each year of the lease.
The lease expired on August 31, 1999 and the lessor and lessee are continuing
the lease on a month-to-month tenancy at the lease rent rates. In addition,
Optometric Eye Care Center, P.A. pays all utilities and for certain repairs
related to the property being leased.
Optometric Eye Care Center, P.A. is the tenant under a Build-to-Lease
Agreement dated August 14, 2000 with Long Circle Associates, LLC (an entity
partially owned by Drs. Barker and Harrold). The leased premises are located in
Roanoke Rapids, North Carolina and are used for the practice of optometry and
the sale of eyeglasses and corrective lenses. The term of the lease is 12 months
commencing on August 31, 2001. Under the lease, Optometric Eye Care Center, P.A.
pays an annual rental equal to the greater of $102,000 (base rent) or 6% of
gross receipts each year of the lease. In addition, Optometric Eye Care Center,
P.A. pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Optometric Eye Care Center, P.A. is the tenant under a Build-to-Lease
Agreement dated July 19, 2000 with Tiffany Drive Associates, LLC (an entity
partially owned by Drs. Barker and Harrold). The leased premises are located in
Rocky Mount, North Carolina and are used for the practice of optometry and the
sale of eyeglasses and corrective lenses. The term of the lease is 12 months
commencing on July 31, 2001. Under the lease, Optometric Eye Care Center, P.A.
pays an annual rental equal to the greater of $102,000 (base rent) or 6% of
gross receipts each year of the lease. In addition, Optometric Eye Care Center,
P.A. pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Optometric Eye Care Center, P.A. is the tenant under a Lease Agreement dated
April 16, 2001 with Skyway Drive Partnership (an entity partially owned by Drs.
Barker and Harrold). The leased premises are located in Charlotte, North
Carolina and are used for the practice of optometry and the sale of eyeglasses
and corrective lenses. The term of the lease is 12 months commencing on June 1,
2001. Under the lease, Optometric Eye Care Center, P.A. pays an annual rental
equal to the greater of $67,500 (base rent) or 6% of gross receipts each year of
the lease. In addition,
51
Optometric Eye Care Center, P.A. pays all taxes, assessments, utilities,
insurance and for certain repairs related to the property being leased.
Optometric Eye Care Center, P.A. is the tenant under a Lease Agreement dated
April 17, 2001 with Country Club Drive Associates, LLC (an entity partially
owned by Drs. Barker and Harrold). The leased premises are located in Concord,
North Carolina and are used for the practice of optometry and the sale of
eyeglasses and corrective lenses. The term of the lease is 12 months commencing
on July 1, 2001. Under the lease, Optometric Eye Care Center, P.A. pays an
annual rental equal to the greater of $54,000 (base rent) or 6% of gross
receipts each year of the lease. In addition, Optometric Eye Care Center, P.A.
pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Optometric Eye Care Center, P.A. is the tenant under a Lease Agreement dated
June 30, 2001 with West Wilson Associates, LLC (an entity partially owned by
Drs. Barker and Harrold). The leased premises are located in Wilson, North
Carolina and are used for the practice of optometry and the sale of eyeglasses
and corrective lenses. The term of the lease is 12 months commencing on July 1,
2001. Under the lease, Optometric Eye Care Center, P.A. pays an annual rental
equal to the greater of $102,000 (base rent) or 6% of gross receipts each year
of the lease. In addition, Optometric Eye Care Center, P.A. pays all taxes,
assessments, utilities, insurance and for certain repairs related to the
property being leased.
Cohen Systems, Inc. is a tenant under a Lease Agreement with Stephen Cohen
and Benta Jensen. The leased premises are located in Largo, FL and are used as
the office for the software systems' provider operations. The lease term is five
years beginning October 1, 1999. Cohen Systems, Inc., pays $27,000 annually for
base rent plus an amount equal to the regular recurring condominium association
maintenance assessment charges. In addition, Cohen Systems, Inc. pays, utilities
and applicable sales tax on all rental payments. Benta Jensen is the wife of
Stephen Cohen, an officer of the company.
CONSULTING AGREEMENT
In April 2001 we entered into a consulting agreement with Morris-Anderson &
Associates, Ltd., a consulting firm at which Alan J. Glazer is a Principal. As
of November 1, 2001 we paid $525,600 to Morris-Anderson in consideration of
consulting services under that agreement. Effective November 1, 2001, Mr. Glazer
was appointed to the company's Board of Directors.
52
STOCK PURCHASE AGREEMENT AND CONSULTING AGREEMENT
Under the terms of a Stock Purchase Agreement dated as of October 15, 1997
among OptiCare Eye Health Centers and Oxford Health Plans, Inc. ("Oxford"),
Nazem OptiCare Partners, LP, Eugene W. Huang and Christopher Kaufman, as
purchasers, OptiCare Eye Health Centers sold, for an aggregate purchase price of
$6,000,017, either Class A preferred shares, or Class B preferred shares to
Oxford, Nazem, OptiCare Partners, Huang and Kaufman. In addition, Oxford
received warrants to purchase Class B shares. The foregoing shares were
exchanged in the mergers for common stock of the company and the warrants were
exchanged for warrants of the company.
On October 15, 1997, OptiCare Eye Health Centers also entered into a
three-year Consulting Agreement with Mr. Fred Nazem, who until January, 2000,
was a beneficial owner of in excess of 5% of our outstanding capital stock. We
paid to Mr. Nazem a sum of $180,000 in consideration for consulting services
under that agreement, and issued to Mr. Nazem and two of his associates warrants
to purchase an aggregate of 19,911 shares of Class B preferred stock of OptiCare
Eye Health Centers. These warrants were exchanged in the mergers for warrants in
the company, as described above.
Prior to the mergers of PrimeVision Health and OptiCare Eye Health Centers
on August 13, 1999, OptiCare Eye Health Centers, Oxford, Nazem OptiCare
Partners, Mr. Nazem, Mr. Huang and Mr. Kaufman were parties to a certain Amended
and Restated Stockholders Agreement (the "OptiCare Stockholders Agreement"),
dated as of October 15, 1997, that contained provisions such as restrictions on
transfers of shares, rights of first refusal, co-sale rights and provisions
relating to the election of directors. Pursuant to a Second Amended and Restated
Stockholders' Agreement entered into in connection with the mergers, the
OptiCare Stockholders Agreement was amended and restated so as to terminate most
of its provisions and to amend certain provisions relating to restrictions of
the employee/stockholders from competing with the company.
Prior to the mergers, OptiCare Eye Health Centers, Oxford, Nazem OptiCare
Partners, Mr. Huang and Mr. Kaufman were parties to a certain Registration
Rights Agreement (the "OptiCare Registration Rights Agreement"), dated as of
October 15, 1997, that provided for certain demand and piggyback registration
rights in favor of the stockholders parties thereto. The OptiCare Registration
Rights Agreement was terminated, effective as of the mergers. However, pursuant
to a Letter Agreement, dated August 9, 1999, between the company and Oxford, the
company agreed to continue the piggyback registration rights provided for in the
OptiCare Registration Rights Agreement with respect to the shares issuable upon
exercise of the warrants held by Oxford.
PARTICIPATING PROVIDER AGREEMENT
OptiCare Eye Health Centers is also a party to a participating provider
agreement with Oxford Health Plans, Inc., a holder of in excess of five percent
of our outstanding capital stock, under which OptiCare Eye Health Centers
provides medical services to the insured members of Oxford's insurance plans and
receives fees from Oxford for these services. This agreement may be terminated
by either party upon 90 days' written notice.
PARTICIPATIONS IN THE ALEXANDER BRIDGE LOANS
Dr. Yimoyines, Chairman of the board of Directors and President of the
company, participates as a lender in the amended Alexander Holding bridge loan,
in the amount of $50,000. He is entitled to interest at the London Interbank
Offered Rate plus 2-1/4% per year under the terms of the loan, and for
participating in the loan, he received warrants to purchase 50,000 shares of
common stock at a price of $0.40 per share. If the Alexander bridge loan is
satisfied in accordance with the proposed new capital structure, Dr. Yimoyines
would receive preferred stock having voting rights equal to approximately
400,000 shares of the company's common stock, as payment in full for the amounts
owed to him under the Alexander bridge loan.
Palisade, a holder of approximately 18.7% of the common stock of the
company, participates as a lender in the amended Alexander Holding bridge loan,
in the amount of $400,000. Palisade is entitled to interest at the London
Interbank Offered Rate plus 2-1/4% per year under the terms of the loan, and for
participating in the loan, Palisade (or its designees) received warrants to
purchase 400,000 shares of common stock at a price of $0.40 per share. If the
Alexander bridge loan is satisfied in accordance with the proposed new capital
structure, Palisade would receive preferred stock having voting rights equal to
approximately 3.2 million shares of the company's common stock as
53
payment in full for the amounts owed to Palisade under the Alexander bridge
loan.
ARRANGEMENTS WITH MARLIN CAPITAL, L.P.
Pursuant to the terms of a stock purchase agreement, dated as of June 4,
1998, between PrimeVision Health and Marlin Capital, L.P., PrimeVision Health
sold to Marlin Capital (i) 8,000 shares of PrimeVision Health's Class A
Preferred Stock and (ii) warrants to purchase 1,333,333 shares of PrimeVision
Health's common stock for an aggregate purchase price of $8,000,000. Mr. Martin
E. Franklin, who was then a director of the company, is the Chairman, Chief
Executive Officer and principal stockholder of Marlin Holdings, Inc., which is
the general partner of Marlin Capital, L.P., a private investment partnership
since October 1996. Mr. Ian G.H. Ashken, who was then a director of the company,
is the Vice Chairman of Marlin Holdings, Inc. Messrs. Franklin and Ashken
resigned from the board on January 3, 2000.
In connection with the mergers, the 8,000 shares of PrimeVision Health
Class A Preferred Stock and warrants owned by Marlin Capital were exchanged as
follows:
o 2,000 shares of PrimeVision Health preferred stock and all the warrants (as
adjusted) were exchanged for 2,033,333 shares of PrimeVision Health common
stock, which in turn were exchanged in the mergers for 638,059 shares of
our common stock.
o 2,000 shares of PrimeVision Health preferred stock were exchanged for a
promissory note issued by us in the principal amount of $2,000,000, having
a three year term and bearing interest at the annual rate of 8%. This
promissory note was cancelled in January, 2000 upon the exchange of the
note for 571,428 registered shares of our common stock in connection with
our offering of an aggregate of 3,571,428 shares of common stock at a price
of $3.50 per share. (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.")
o 4,000 shares of PrimeVision Health preferred stock were exchanged for a
convertible promissory note issued by us in the principal amount of
$4,000,000, having a three year term, and bearing interest at the annual
rate of 9% beginning on February 14, 2000. The note was convertible into
our common stock after August 13, 2000 at a conversion price which is the
greater of: (x) the closing market price on the first trading day after the
mergers, or (y) 90% of the average closing price of our common stock in the
20 trading days prior to conversion. This note was paid in full in February
2000 with a portion of the proceeds of a common stock offering. (See "Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.")
STOCK OPTIONS
In connection with the mergers, options to acquire shares of common stock
or capital stock of OptiCare Eye Health Centers and PrimeVision Health, as the
case may be, were exchanged by directors and officers for options under the
company's Performance Stock Program. (See "Item 11. Executive Compensation.")
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS:
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Required schedules have been omitted because they are either not applicable
or the required information has been disclosed in the consolidated financial
statements or notes thereto.
3. EXHIBITS:
EXHIBIT DESCRIPTION
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3.1 Certificate of Incorporation of Registrant, incorporated by reference to Exhibit
3.1 to the Registrant's Annual Report on Form 10-KSB filed February 3, 1995.
3.2 Certificate of Amendment of the Certificate of Incorporation, dated as of August
13, 1999, as filed with the Delaware Secretary of State on August 13, 1999,
incorporated by reference to Exhibit 3.1 to Registrant's report on Form 8-K
filed on August 30, 1999.
3.3 Amended and Restated By-laws of Registrant adopted March 27, 2000, incorporated
by reference to Exhibit 3.3 to Registrant's report on Form 10-K filed on March
30, 2000.
3.4 Certificate of Designation with respect to the Registrant's Series A Convertible
Preferred Stock, as filed with the Delaware Secretary of State on August 13,
1999, incorporated by reference to Exhibit 3.2 to Registrant's report on Form
8-K filed on August 30, 1999.
3.5 Warrant agreement dated as of August 13, 1999 between the Registrant and Bank
Austria Creditanstalt Corporate Finance, Inc., incorporated by reference to
Exhibit 3.3 to the Registrant's report on Form 8-K filed on August 30, 1999.
3.6 Warrant Agreement dated as of October 10, 2000 by and between OptiCare Health
Systems, Inc. and Medici Investment Corp., incorporated herein by reference to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended 9/30/00,
Exhibit 10.14
4.1 Performance Stock Program, incorporated herein by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-4, registration no. 333-78501,
first filed on May 14, 1999, as amended (the "Registration Statement 333-78501).+
4.2 Amended and Restated 1999 Employee Stock Purchase Plan, incorporated by
reference to Exhibit 4.2 to Registrant's report on Form 10-K filed on March 30,
2000.+
4.3 2000 Professional Employee Stock Purchase Plan incorporated by reference to
Exhibit 4.3 to Registrant's report on Form 10-K filed on March 30, 2000.+
55
EXHIBIT DESCRIPTION
------- -----------
10.1 Compromise and Settlement Agreement dated May 7, 1996, by and between Saratoga
Resources, Inc. a Delaware corporation, Saratoga Resources, Inc., a Texas
corporation, Lobo Operating, Inc., a Texas corporation, Lobo Energy, Inc., a
Texas corporation, Thomas F. Cooke, Joseph T. Kaminski, Randall F. Dryer, and
Internationale Nederlanden (U.S.) Capital Corporation, incorporated by reference
to Exhibit 1 to the Registrant's Report on Form 8-K dated May 7, 1996.
10.2 Purchase and Sale Agreement dated May 7, 1996, by and between Internationale
Nederlanden (U.S.) Capital Corporation and Prime Energy Corporation,
incorporated by reference to Exhibit 2 to our Report on Form 8-K dated May 7,
1996.
10.3 Assignment and Bill of Sale dated May 7, 1996, by and between Saratoga
Resources, Inc., a Delaware corporation and Prime Energy Corporation,
incorporated by reference to Exhibit 3 to our Report on Form 8-K dated May 7,
1996.
10.4 Settlement Agreement and Full and Final Release dated March 10, 1997, by and
between Saratoga Resources, Inc., a Delaware corporation, Thomas F. Cooke,
Randall F. Dryer, Dryer, Ltd., a Texas Family Partnership and Joseph T.
Kaminski, incorporated by reference to Exhibit 1 to our Report on Form 8-K dated
March 12, 1997.
10.5 Purchase and Sale agreement dated effective November 12, 1998, between Saratoga
Holdings I, Inc. and The Premium Group, incorporated by reference to Exhibit
10.1 to the Registration Statement on Form SB-2 of Saratoga Holdings I, Inc.
filed with the SEC on December 1, 1998.
10.6 Service Agreement dated as of November 12, 1998, between Saratoga Holdings and
Premium Recoveries, Inc., incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form SB-2 of Saratoga Holdings I, Inc. filed on
December 1, 1998.
10.7 Settlement agreement dated as of April 9, 1999, among PrimeVision Health, Inc.,
Dr. Allan L.M. Barker, Dr. D. Blair Harrold, Optometric Eye Care Center, P.A.,
Steven B. Waite, Bank Austria AG, and Bank Austria Corporate Finance, Inc.,
incorporated by reference to Exhibit 10.8 to the Registration Statement
333-78501.
10.8 Vision care capitation agreement between OptiCare Eye Health Centers and Blue
Cross & Blue Shield of Connecticut, Inc. (and its affiliates) dated October 23,
1999, incorporated by reference to Exhibit 10.9 to the Registration Statement
333-78501.
10.9 Eye care services agreement between OptiCare Eye Health Centers and Anthem
Health Plans, Inc. (d/b/a Anthem Blue Cross and Blue Shield of Connecticut),
effective November 1, 1998, incorporated by reference to Exhibit 10.10 to the
Registration Statement 333-78501.
10.10 Contracting provider services agreement dated April 26, 1996, and amendment
thereto dated as of January 1, 1999, between Blue Cross and Blue Shield of
Connecticut, Inc., and OptiCare Eye Health Centers, incorporated herein by
reference to Exhibit 10.11 to the Registration Statement 333-78501.
10.11 Form of employment agreement between the Registrant and Dean J. Yimoyines, M.D.,
effective August 13, 1999, incorporated herein by reference to Exhibit 10.12 to
the Registration Statement 333-78501.
10.12 Form of employment agreement between the Registrant and Steven L. Ditman,
effective August 13, 1999, incorporated herein by reference to Exhibit 10.13 to
the Registration Statement 333-78501.+
10.13 Form of employment agreement between the Registrant and Dr. Allan L.M. Barker,
effective August 13, 1999, incorporated herein by reference to Exhibit 10.14 to
the Registration Statement 333-78501.+
10.14 Form of employment agreement between the Registrant and Dr. D. Blair Harrold,
effective August 13, 1999, incorporated herein by reference to Exhibit 10.15 to
the Registration
56
EXHIBIT DESCRIPTION
------- -----------
Statement 333-78501.+
10.15 Employment Agreement between the Registrant and Samuel B. Petteway dated August
9, 1999 incorporated by reference to Exhibit 10.11 to the Registrant's report on
Form 10-Q filed on November 15, 1999.+
10.16 Lease dated September 22, 1987 and lease extension agreement dated December 12,
1997 by and between Cross Street Medical Building partnership, as landlord, and
Ophthalmic Physicians and Surgeons, P.C., as tenant, for premises located at 40
Cross Street, Norwalk, Connecticut incorporated herein by reference to Exhibit
10.16 to the Registration Statement 333-78501.
10.17 Lease agreement dated September 1, 1995 by and between French's Mill Associates,
as landlord, and OptiCare Eye Health Centers as tenant, for premises located at
87 Grandview Avenue, Waterbury, Connecticut incorporated herein by reference to
Exhibit 10.17 to the Registration Statement 333-78501.
10.18 Lease agreement dated September 30, 1997 by and between French's Mill Associates
II, LLP, as landlord, and OptiCare Eye Health Centers Eye Health Center P.C., as
tenant, for premises located at 160 Robbins Street, Waterbury, Connecticut
(upper level), incorporated herein by reference to Exhibit 10.18 to the
Registration Statement 333-78501.
10.19 Lease agreement dated September 1, 1995 and amendment to lease dated September
30, 1997 by and between French's Mill Associates II, LLP, as landlord, and
OptiCare Eye Health Centers Eye Health center P.C., as tenant, for premises
located at 160 Robbins Street, Waterbury, Connecticut (lower level),
incorporated herein by reference to Exhibit 10.19 to the Registration Statement
333-78501.
10.20 Lease agreement dated September 1, 1995 between O.C. Realty Associates Limited
Partnership, as landlord, and OptiCare Eye Health Centers, as tenant, for
premises located at 54 Park Lane, New Milford, Connecticut, incorporated herein
by reference to Exhibit 10.20 to the Registration Statement 333-78501.
10.21 Lease dated March 1, 1997 by and between HBIC, as landlord, and CEC, as tenant,
for premises located at 112-B Zebulon Court, Rocky Mount, North Carolina,
incorporated by reference to Exhibit 10.12 to the Registrant's report on Form
10-Q filed on November 15, 1999.
10.22 Lease dated March 1, 1997 by and between D. Blair Harrold & Allan L.M. Barker
d/b/a Harrold Barker Investment Co. ("HBIC"), as landlord, and Consolidated Eye
Care, Inc. ("CEC"), a wholly-owned subsidiary of PrimeVision Health, Inc., as
tenant, for premises located at 110 Zebulon Court, Rocky Mount, North Carolina,
incorporated by reference to Exhibit 10.13 to the Registrant's report on Form
10-Q filed on November 15, 1999.
10.23 Lease dated March 1, 1997 by and between HBIC, as landlord, and CEC, as tenant,
for premises located at 112-A Zebulon Court, Rocky Mount, North Carolina,
incorporated by reference to Exhibit 10.14 to the Registrant's report on Form
10-Q filed on November 15, 1999.
10.24 Form of health services organization agreement between PrimeVision Health, Inc.
and eye care providers, incorporated herein by reference to Exhibit 10.21 to the
Registration Statement 333-78501.
10.25 Professional services and support agreement dated December 1, 1995 between
OptiCare Eye Health Centers and OptiCare P.C., a Connecticut professional
corporation, incorporated herein by reference to Exhibit 10.22 to the
Registration Statement 333-78501.
10.26 Voting Agreement, dated as of July 14, 1999, between Thomas Cooke and
PrimeVision Health, Inc., incorporated herein by reference to Exhibit 10.23 to
the Registration Statement 333-78501.
10.27 Amended and Restated Loan and Security Agreement, dated as of August 13, 1999,
among Consolidated Eye Care, Inc., renamed OptiCare Eye Health Network, Inc,
OptiCare Eye
57
EXHIBIT DESCRIPTION
------- -----------
Health Centers, and PrimeVision Health, Inc. as borrowers, the Registrant as
the Parent, the lenders named therein (the "Lenders"), Bank Austria, AG (the
"LC Issuer"), and Bank Austria Creditanstalt Corporate Finance, Inc., as the
agent (the "Agent") (excluding schedules and other attachments thereto),
incorporated by reference to Exhibit 10.1 to the Registrant's report on Form
8-K filed on August 30, 1999.
10.28 Guaranty dated as of August 13, 1999, among the Registrant, OptiCare Eye Health
Centers, PrimeVision Health, Inc., Consolidated Eye Care, Inc., renamed OptiCare
Eye Health Network, Inc., and each of the other subsidiaries and affiliates of
the Registrant listed on the signature pages thereto, in favor of the Lenders,
the LC Issuer and the Agent, incorporated by reference to Exhibit 10.2 to the
Registrant's report on Form 8-K filed on August 30, 1999.
10.29 Security Agreement dated as of August 13, 1999, among the Registrant and the
other parties listed on the signature page thereto in favor of the Agent for the
benefit of the Lenders and the LC Issuer, incorporated by reference to Exhibit
10.3 to the Registrant's report on Form 8-K filed on August 30, 1999.
10.30 Conditional Assignment and Trademark Security Agreement dated as of August 13,
1999, between the Registrant and the Agent for the benefit of the Lenders and
the LC Issuer, incorporated by reference to Exhibit 10.4 to the Registrant's
report on Form 8-K filed on August 30, 1999.
10.31 Pledge and Security Agreement, dated as of August 13, 1999, among each of the
Registrant, OptiCare Eye Health Centers, PrimeVision Health, Inc., Consolidated
Eye Care, Inc., renamed OptiCare Eye Health Network, Inc., and each of the other
subsidiaries and affiliates of the company listed on the signature pages
thereto, in favor of the Agent for the benefit of the Lenders and the LC Issuer,
incorporated by reference to Exhibit 10.5 to the Registrant's report on Form 8-K
filed on August 30, 1999.
10.32 Assignment of Notes and Security Agreement, dated as of August 13, 1999, between
PrimeVision Health, Inc. and the Agent, incorporated by reference to Exhibit
10.6 to the Registrant's report on Form 8-K filed on August 30, 1999.
10.33 Agreement and Plan of Merger, dated as of April 12, 1999, among the Registrant
(then known as "Saratoga Resources, Inc."), OptiCare Shellco Merger Corporation,
Prime Shellco Merger Corporation, OptiCare Eye Health Centers, Inc., a
Connecticut corporation, and PrimeVision Health, Inc., incorporated herein by
reference to Exhibit 2 to the Registration Statement 333-78501.
10.34 Subordinated Promissory Note of the company dated August 13, 1999 in the
aggregate principal amount of $2,000,000, payable to Marlin Capital, L.P.,
incorporated by reference to Exhibit 10.8 to the Registrant's report on Form
10-Q filed on November 15, 1999.
10.35 Subordinated Convertible Promissory Note of the company dated August 13, 1999 in
the aggregate principal amount of $4,000,000, payable to Marlin Capital, L.P.,
incorporated by reference to Exhibit 10.9 to the Registrant's report on Form
10-Q filed on November 15, 1999.
10.36 Stock Purchase Agreement dated October 1, 1999, among the company, Stephen
Cohen, Robert Airola, Gerald Mandel and Reginald Westbrook (excluding schedules
and other attachments thereto), incorporated by reference to Exhibit 10.10 to
the Registrant's report on Form 10-Q filed on November 15, 1999.
10.37 Registration Rights Agreement dated as of August 13, 1999 between Registrant and
Bank Austria Creditanstalt Corporate Finance, Inc. (Filed herewith.)
10.38 Lease dated March 1, 1997, between the Registrant as tenant and Drs. Blair
Harrold and Allan L.M. Barker as landlord, covering premises known as 579 Cross
Creek Mall, Fayetteville, N.C., incorporated by reference to Exhibit 10.39 to
the company's Registration Statement on Form S-1, registration no. 333-93043,
first filed on December 17, 1999, as
58
EXHIBIT DESCRIPTION
------- -----------
amended ("Registration Statement 333-93043").
10.39 Lease dated March 1, 1997, between the Registrant as tenant and Optometric Eye
Care Center, P.A., as landlord, covering premises at 315-A Western Boulevard,
Jacksonville, N.C., incorporated by reference to Exhibit 10.40 to the
Registration Statement 333-93043.
10.40 Employment agreement between the Registrant as employer and Gordon A. Bishop,
dated August, 13, 1999, incorporated by reference to Exhibit 10.41 to the
Registration Statement 333-93043.+
10.41 Lease dated September 1, 1999, between the Registrant as tenant and
Harrold-Barker Realty, as landlord, covering premises located in Rocky Mount,
N.C., incorporated by reference to Exhibit 10.42 to the Registration Statement
333-93043.
10.42 Professional Services and Support Agreement between the Registrant and Optometric
Eye Care Center, P.A., incorporated by reference to Exhibit 10.43 to the
Registration Statement 333-93043.
10.43 Agreement and Plan of Merger and Reorganization among Vision Twenty-One, Inc., OC
Acquisition Corp. and OptiCare Health Systems, Inc. dated as February 10, 2000,
incoprorated herein by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended 12/31/99, Exhibit 10.43.
10.44 First Amendment to Amended and Restated Loan and Security Agreement, dated as of
June 30, 2000 by and among Bank Austria Creditanstalt Corporate Finance, Inc.,
and the Registrant, incorporated by reference to Exhibit 10.9 to the Registrant's
Form 10-Q filed on August 14, 2000.
10.45 Second Amendment to Amended and Restated Loan and Security Agreement, dated as of
October 10, 2000 by and among the Registrant and Bank Austria Creditanstalt
Corporate Finance, Inc., incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended 9/30/00, Exhibit 10.11.
10.46 Engagement letter dated as of September 18, 2000 between Marlin Management, LLC
and OptiCare Health Systems, Inc., incorporated herein by reference to
incorporated herein by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended 9/30/00, Exhibit 10.10
10.47 Secured promissory note dated as of October 10, 2000, made by the company to
Alexander Enterprise Holdings Corp., incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended 9/30/00, Exhibit
10.12
10.48 Security Agreement dated as of October 10, 2000 among the Registrant, OptiCare
Eye Health Centers, PrimeVision Health, Inc., Consolidated Eye Care, Inc. and
each of the other subsidiaries and affiliates of the Registrant listed on the
signature pages thereto, in favor of Alexander Enterprise Holdings Corp.,
incorporated herein by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended 9/30/00, Exhibit 10.13
10.49 Amended and Restated Secured Promissory Note issued as of October 10, 2000 by
OptiCare Eye Health Centers, Inc., PrimeVision Health, Inc. and OptiCare Eye
Health Network, Inc. to Alexander Enterprise Holdings Corp. ("Bridge Loan").
(Filed herewith.)
10.50 Employment Agreement between the Registrant and Jason M. Harrold, effective July
1, 2000.+, incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended 6/30/00, Exhibit 10.10.
10.51 Pre-Workout Agreement dated February 26, 2001 among Bank Austria Creditanstalt
Corporate Finance, Inc. and OptiCare Eye Health Network, Inc., OptiCare Eye
Health Centers, Inc., PrimeVision Health Inc., and the Registrant. (Filed
herewith.)
10.52 OptiCare Directors' and Officers' Trust Agreement dated November 7, 2001 between
the Registrant and Norman S. Drubner, Esq., as Trustee. (Filed herewith.)+
59
EXHIBIT DESCRIPTION
------- -----------
10.53 Agreement for Consulting Services dated April 16, 2001 between the Registrant
and Morris Anderson and Associates, Ltd. (Filed herewith.)
10.54 Form of Warrant to purchase 2,250,000 shares of common stock issued in
connection with the Secured Promissory Note issued as of October 10, 2000 by
OptiCare Eye Health Centers, Inc., PrimeVision Health, Inc. and OptiCare Eye
Health Network, Inc. to Medici Investment Corp. ("Bridge Loan"). (Filed
herewith.)
10.55 Form of Warrant to purchase 300,000 shares and 2,000,000 shares of common stock
issued in connection with the Amended and Restated Secured Promissory Note issued
as of October 10, 2000 by OptiCare Eye Health Centers, Inc., PrimeVision Health, Inc.
and OptiCare Eye Health Network, Inc. to Medici Investment Corp. ("Bridge Loan").
(Filed herewith.)
10.56 Form of Warrant to purchase 50,000 shares of common stock issued in connection
with the Amended and Restated Secured Promissory Note issued as of October 10,
2000 by OptiCare Eye Health Centers, Inc., PrimeVision Health, Inc. and OptiCare
Eye Health Network, Inc. to Dean J. Yimoyines, M.D. ("Bridge Loan"). (Filed
herewith.)
10.57 Form of Warrant to purchase 400,000 shares of common stock issued in connection
with the Amended and Restated Secured Promissory Note issued as of October 10,
2000 by OptiCare Eye Health Centers, Inc., PrimeVision Health, Inc. and OptiCare
Eye Health Network, Inc. to Palisade Concentrated Equity Partnership, LLP
("Bridge Loan"). (Filed herewith.)
10.58 Third Amendment to Amended and Restated Loan and Security Agreement, dated as of
January 5, 2001 by and among Bank Austria Creditanstalt Corporate Finance, Inc.
and OptiCare Eye Health Network, Inc., OptiCare Eye Health Centers, Inc.,
PrimeVision Health Inc., and the Registrant. (Filed herewith.)
10.59 Amendment to Security Agreement dated as of January 5, 2001 among the
Registrant, OptiCare Eye Health Centers, PrimeVision Health, Inc., Consolidated
Eye Care, Inc. and each of the other subsidiaries and affiliates of the
Registrant listed on the signature pages thereto, in favor of Alexander
Enterprise Holdings Corp. (Filed herewith.)
16.1 Letter of Hein + Associates LLP regarding Change in Certifying Accountants,
incorporated by reference to Exhibit 16 of the Amendment No. 1 filed April 6,
1999, of Registrant's Current Report on Form 8-K dated March 29, 1999.
16.2 Letter of Ernst & Young LLP regarding Change in Certifying Accountants,
incorporated by reference to Exhibit 16 of the Amendment No. 2 filed September
17, 1999 of Registrant's Current Report on Form 8-K dated August 13, 1999.
21 List of Subsidiaries of the Registrant, incorporated by reference to Exhibit 21
to the Registration Statement 333-93043.
23.1 Consent of Deloitte & Touche LLP (Filed herewith.)
23.2 Consent of Ernst & Young LLP (Filed herewith.)
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended
December 31, 2000.
+ Management or compensatory plan.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTICARE HEALTH SYSTEMS, INC.
Date: November 29, 2001
By: /s/ Dean J. Yimoyines
---------------------------
Dean J. Yimoyines, M.D.
Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Dean J. Yimoyines Director, Chairman of the Board, Chief Executive Officer November 29, 2001
- ------------------------------- and President (Principal Executive Officer)
Dean J. Yimoyines, M.D.
/s/ William A. Blaskiewicz Vice President and Chief Financial Officer November 29, 2001
- ------------------------------- (Principal Financial and Accounting Officer)
William A. Blaskiewicz
/s/ Raymond W. Brennan Director November 29, 2001
- -------------------------------
Raymond W. Brennan
/s/ Norman S. Drubner Director November 29, 2001
- -------------------------------
Norman S. Drubner, Esq.
/s/ Alan J. Glazer Director November 29, 2001
- -------------------------------
Alan J. Glazer
/s/ Frederick A. Rice Director November 29, 2001
- -------------------------------
Frederick A. Rice
61
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999
and 1998 F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
OptiCare Health Systems, Inc.
Waterbury, Connecticut
We have audited the accompanying consolidated balance sheets of OptiCare
Health Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. 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 in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of OptiCare Health Systems, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for the year ended December
31, 2000 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1, the Company is experiencing difficulty in
generating sufficient cash flow to meet its obligations and is in default
under loan agreements with its bank and secondary lender. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans concerning these matters are described in Note 20.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
November 21, 2001
F-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Prime Vision Health, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of income,
statement of shareholders' deficit and cash flows of Prime Vision Health, Inc.
and subsidiaries ("Company") for the year ended December 31, 1998. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of their
operations and their cash flows for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Prime Vision Health, Inc. and subsidiaries will continue as a going concern.
During 1998 and 1997 the Company incurred operating losses and had a working
capital deficiency at December 31, 1998. In addition, the Company was not in
compliance with certain covenants of its loan agreement with a bank at
December 31, 1998. These conditions raised substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that my result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
May 7, 1999
Raleigh, NC
F-3
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31,
-------------------------------
2000 1999
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,445 $ 2,921
Accounts receivable, net 9,548 10,557
Inventories 3,113 3,029
Income tax receivable - 755
Deferred income taxes, current - 2,579
Other current assets 807 1,504
------------- -------------
TOTAL CURRENT ASSETS 14,913 21,345
Property and equipment, net 8,222 9,679
Deferred debt issuance costs, net 971 1,236
Intangible assets, net 30,082 32,443
Deferred income taxes, non-current - 951
Notes receivable from related parties, less current portion 78 94
Other assets 1,247 992
------------- -------------
TOTAL ASSETS $55,513 $ 66,740
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,798 $ 7,619
Claims payable and IBNR 3,703 3,048
Accrued expenses 5,820 5,211
Current portion of long-term debt 32,992 3,459
Current portion of capital lease obligations 120 110
Deferred income tax liability - 397
Other current liabilities 1,021 810
------------- -------------
TOTAL CURRENT LIABILITIES 49,454 20,654
Long-term debt, less current portion 1,222 39,689
Capital lease obligations, less current portion 268 193
Other liabilities 692 930
------------- -------------
TOTAL LIABILITIES 51,636 61,466
COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 18)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.001 par value, 550,000 shares
authorized; 418,803 shares issued and outstanding 1 1
Common Stock, $0.001 par value; 50,000,000 shares authorized; 12,747,324
and 8,972,128 shares outstanding at December 31, 2000 and 1999, respectively 13 9
Additional paid-in-capital 60,554 47,784
Accumulated deficit (56,691) (42,520)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 3,877 5,274
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 55,513 $ 66,740
============= =============
See notes to consolidated financial statements
F-4
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
NET REVENUES:
Managed care services $35,745 $ 24,425 $ 14,902
Professional services 8,256 4,061 --
Other integrated services 83,882 66,147 49,710
------------ ------------ ------------
Total net revenues 127,883 94,633 64,612
------------ ------------ ------------
OPERATING EXPENSES:
Cost of product sales 40,171 41,182 35,237
Medical claims expense 29,663 19,545 10,994
Salaries, wages and benefits 40,032 20,073 9,275
Selling, general and administrative 15,631 7,932 5,996
Restructuring and other one-time charges 4,346 - -
Depreciation 2,842 1,408 1,133
Amortization and write-off of goodwill 2,888 605 284
Interest 3,500 3,248 4,498
------------ ------------ ------------
Total operating expenses 139,073 93,993 67,417
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (11,190) 640 (2,805)
Income tax expense 2,981 289 434
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (14,171) 351 (3,239)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations, net of tax - - (11,287)
(Loss) from disposal of discontinued operations, net of tax - (2,317) (23,564)
----------- ------------- -----------
NET (LOSS) (14,171) $ (1,966) $ (38,090)
=========== ============= ============
(LOSS) PER COMMON SHARE:
Income (loss) from continuing operations - basic and diluted $ (1.15) $ (0.05) $ (2.54)
=========== ============= ============
Net income (loss) - basic and diluted $ ( 1.15) $ ( 0.54) $ (17.99)
=========== ============= ============
Weighted average shares outstanding - basic and diluted 12,354,494 4,776,501 2,256,461
=========== ============= ============
See notes to consolidated financial statements
F-5
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Year ended December 31,
------------------------------------------
2000 1999 1998
------------- ------------ -----------
OPERATING ACTIVITIES:
Net loss $ (14,171) $ (1,966) $(38,090)
Less: net (loss) from discontinued operations - (2,317) (34,851)
------------- ------------ -----------
Net income (loss) from continuing operations (14,171) 351 (3,239)
Adjustments to reconcile net income (loss) from continuing operations
to net cash (used in) provided by operating activities:
Depreciation 2,842 1,408 1,133
Amortization and write-off of goodwill 2,888 605 284
Deferred income taxes 3,015 (102) 273
Bad debt expense 446 216 263
Non-cash restructuring charges 782 - -
Non-cash interest expense 351 - -
Other non-cash charges 108 - -
Changes in operating assets and liabilities (excluding the effects of
acquired businesses):
Accounts receivable 563 (133) (743)
Inventories (84) 222 913
Other assets 730 625 (1,578)
Accounts payable and accrued expenses (681) (962) 3,276
Other liabilities (27) (834) (273)
Cash provided by (used in) discontinued operations - (1,749) 1,899
------------- ------------ -----------
Net cash provided by (used in) operating activities (3,238) (353) 2,208
------------- ------------ -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,806) (1,871) (608)
Cash acquired in mergers - 640 -
Cash received from discontinued operations disposals - 5,685 -
Cash used for acquisitions and related expenses - (5,637) -
------------- ------------ -----------
Net cash (used in) investing activities (1,806) (1,183) (608)
------------- ------------ -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt 3,050 32,998 17
Proceeds from issuance of common stock 10,135 - -
Proceeds from issuance of mandatorily redeemable preferred stock - - 8,000
Payments on long-term debt (9,481) (34,173) (6,000)
Payment of financing costs - (185) -
Payments on capital lease obligations (136) (139) (139)
------------- ------------ -----------
Net cash provided by (used in) financing activities 3,568 (1,499) 1,878
------------- ------------ -----------
Increase (decrease) in cash and cash equivalents (1,476) (3,035) 3,478
Cash and cash equivalents at beginning of year 2,921 5,956 2,478
------------- ------------ -----------
Cash and cash equivalents at end of year $ 1,445 $2,921 $5,956
============= ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,029 $4,332 $3,987
Cash paid (received) for income taxes $ (861) $1,496 $2,155
Assets of discontinued operations assumed by bank as a reduction of debt - $7,818 -
See notes to consolidated financial statements
F-6
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Retained
Preferred Stock Common Stock Additional Earnings
----------------------- ---------------------- Paid-In (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
------------ ---------- ------------- ---------- ------------ ------------- ------------
Balance at December 31, 1997 -- $ -- 2,170,326 $ 2 $ 5,715 $ (1,171) $ 4,546
Issuance of stock warrant
in connection with the
issuance of redeemable
preferred stock 1,293 1,293
Accretion of preferred stock (1,293) (1,293)
Preferred stock dividends (1,200) (1,200)
Issuance of common stock 154,799 54 54
Net loss for 1998 (38,090) (38,090)
------------ ---------- ------------- ---------- ------------ ------------- ------------
Balance at December 31, 1998 -- -- 2,325,125 2 5,862 (40,554) (34,690)
Preferred stock dividend (600) (600)
Exercise of warrants 69,124
Issuance of common stock
to bank as financing fees 156,900 960 960
Issuance of warrants to bank
as financing fees 179 179
Issuance of preferred stock
to bank to reduce debt 418,803 1 2,449 2,450
Exchange of redeemable
preferred stock 638,060 1 3,799 3,800
New Administrative
Services Agreement 873,903 1 5,352 5,353
Issuance of common stock 324,838 1,998 1,998
Saratoga merger 225,000 130 130
OptiCare merger 4,249,675 5 26,866 26,871
Fractional shares (497) (11) (11)
Cohen Systems, Inc. purchase 110,000 800 800
Net loss for 1999 (1,966) (1,966)
------------ ---------- ------------- ---------- ------------ ------------- ------------
Balance at December 31, 1999 418,803 1 8,972,128 9 47,784 (42,520) 5,274
Sale of registered shares 3,571,429 4 11,963 11,967
Exercise of options 35,209 89 89
Issuance of common stock
under employee stock purchase
plan 105,808 79 79
Issuances of common stock 62,750 86 86
Issuance of warrants 553 553
Net loss for 2000 (14,171) (14,171)
------------ ---------- ------------- ---------- ------------ ------------- ------------
Balance at December 31, 2000 418,803 $1 12,747,324 $13 $60,554 $(56,691) $ 3,877
============ ========== ============= ========== ============ ============= ============
See notes to consolidated financial statements.
F-7
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
OptiCare Health Systems, Inc. and subsidiaries (the "Company") is an
integrated eye care services company focused on (i) providing managed eye care
services for health plans (ii) selling software systems, including
point-of-sale and internet-based solutions, and providing administrative
services to eye care professionals and (iii) operating integrated eye health
centers, retail optical stores and a buying group program.
The Company's current form is the result of two mergers (collectively the
"Merger") completed on August 13, 1999 by and among Saratoga Resources, Inc.
("Saratoga"), a Delaware corporation, PrimeVision Health, Inc. ("Prime") and
OptiCare Eye Health Centers, Inc. ("OptiCare"). In this transaction Prime
merged with Saratoga through a reverse acquisition by Prime of Saratoga (the
"Prime Merger") whereby Prime has acquired Saratoga at book value with no
purchase accounting adjustments. Upon consummation of the Prime Merger, each
share of Prime common stock was converted into the right to receive 0.3138
shares of Common Stock of the Company. Immediately following the Prime Merger,
OptiCare was acquired by Prime (the "OptiCare Merger"). Upon consummation of
the OptiCare Merger, each share of OptiCare capital stock was converted into
the right to receive 11.7364 shares of common stock of the Company or a total
of 4,249,675 shares.
In connection with the Merger, the Company's name changed to OptiCare
Health Systems, Inc., effective August 13, 1999.
For accounting purposes, Prime was the accounting acquirer and the
surviving accounting entity. Accordingly, the operating results of OptiCare
have been included in the accompanying consolidated financial statements since
September 1, 1999, the deemed effective date of the acquisition for accounting
purposes. The impact of results from August 13, 1999 through August 31, 1999
are not material to the consolidated financial statements. Financial results
for periods prior to September 1, 1999 are based solely upon the results
reported by Prime and its subsidiaries.
As of December 31, 2000, the Company was in violation of certain
covenants and is currently in default under loan agreements with its bank and
secondary lender. Also, as shown in the financial statements, the Company's
current liabilities exceeded its current assets by $34,541 at December 31,
2000, including $31,925 of long-term debt that has been classified as current
as a result of being in default. These factors, among others, indicate that
the Company may be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis and to obtain
additional financing or refinancing as may be required.
In November 2001, management of the Company signed letters of intent to
refinance and replace its long-term debt (See Note 20).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and OptiCare P.C. and Optometric Eye
Care Centers P.A. All intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers investments purchased with an original maturity of
three months or less when purchased to be cash equivalents.
RECEIVABLES
Receivables are stated net of allowances for doubtful accounts. Gross
receivables are stated net of contractual allowances and insurance
disallowances.
F-8
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
INVENTORIES
Inventories primarily consist of eyeglass frames, lenses, sunglasses,
contact lenses and surgical supplies. Inventories are valued at the lower of
cost or market, determined on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Leasehold improvements are
being amortized over the term of the lease or the life of the improvement,
whichever is shorter. Depreciation and amortization are provided primarily
using the straight-line method over the estimated useful lives of the
respective assets as follows:
CLASSIFICATION ESTIMATED USEFUL LIFE
-------------- ---------------------
Furniture, fixtures and equipment 5 - 7 years
Leasehold improvements 3 - 10 years
Computer hardware and software 3 - 5 years
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs are being amortized on the interest method
over the term of the related debt and such amortization is included in
interest expense.
INTANGIBLE ASSETS
The Company uses the straight-line method to amortize intangible assets
over their estimated useful lives which range from 15 to 25 years. The
Company's management periodically evaluates the carrying value of its
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Recoverability is based on estimated future undiscounted cash flows from the
use and ultimate disposition of the asset.
PROFESSIONAL SERVICES REVENUE
The Company owns and operates ambulatory surgery centers and sells a
broad range of other management services to eye care professionals. Revenue is
recorded when the service is rendered at contractually agreed upon rates.
MANAGED CARE REVENUE
The Company provides vision care services, through its managed vision
care business, as a preferred provider to HMOs, PPOs, third party
administrators and insurance indemnity programs. The contractual arrangements
with these entities operate under capitated programs, exclusive and
non-exclusive fee-for-services, preferred provider arrangements and other
exclusive arrangements. Capitation payments are accrued when they are due
under the related contracts. Revenue from non-capitated services is recognized
when the services are provided and the Company's customers are obligated to
pay for such services.
OTHER INTEGRATED SERVICES REVENUE
A portion of the Company's ophthalmic and optometric eye care revenues
are reimbursements received from Medicare and other governmental programs and
insurance companies. The Company has agreements with third-party payors that
provide for payments to the Company at amounts different from its established
rates. Revenue is reported at the estimated net realizable amounts from
patients, third-party payors, and others for services rendered. The Company
recognizes revenue on product sales at the time of delivery to the customer.
F-9
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
MALPRACTICE CLAIMS
The Company purchases insurance to cover medical malpractice claims.
There are known claims and incidents as well as potential claims from unknown
incidents that may be asserted from past services provided. Management
believes that these claims, if asserted, would be settled within the limits of
insurance coverage.
MEDICAL CLAIMS EXPENSE
Claims expense is recorded as provider services are rendered and includes
an estimate for claims incurred but not reported.
Reserves for estimated insurance losses are determined on a case by case
basis for reported claims, and on estimates based on company experience for
loss adjustment expenses and incurred but not reported claims. These
liabilities give effect to trends in claims severity and other factors which
may vary as the losses are ultimately settled. The Company's management
believes that the estimates of the reserves for losses and loss adjustment
expenses are reasonable; however, there is considerable variability inherent
in the reserve estimates. These estimates are continually reviewed and, as
adjustments to these liabilities become necessary, such adjustments are
reflected in current operations of the period of the adjustment.
INSURANCE OPERATIONS
The Company's managed vision care business includes a wholly-owned
subsidiary which is a licensed single service HMO in Texas (the "Texas HMO").
The Texas HMO is subject to regulation and supervision by the Texas Department
of Insurance, which has broad administrative powers relating to standards of
solvency, minimum capital and surplus requirements, maintenance of required
reserves, payments of dividends, statutory accounting and reporting practices,
and other financial and operational matters. The Texas Department of Insurance
requires that stipulated amounts of paid-in-capital and surplus be maintained
at all times. Dividends generally are limited to the lesser of 10% of
statutory-basis capital and surplus or net income of the preceding year
excluding realized capital gains.
Under the Company's agreement with the Texas Department of Insurance, the
Company was required to pledge investments of $500 at December 31, 2000 and
1999.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires an asset and liability method of accounting for deferred income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax basis using
enacted tax rates expected to apply to taxable income in the years the
temporary differences are expected to reverse.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations, and provide the pro forma disclosure. Accordingly,
compensation cost for the stock options is measured as the excess, if any, of
the fair value of the Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock.
F-10
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure of fair value information for certain assets and
liabilities, whether or not recorded in the balance sheet, for which it is
practicable to estimate that value. The Company has the following financial
instruments: cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities and long-term debt. The Company considers the carrying
amount of these items to approximate their fair values because of the short
period of time between the origination of such instruments and their expected
realization or their current market rate of interest.
CONCENTRATIONS OF CREDIT RISK
The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured. The
Company records receivables from patients and third party payors related to
eye health services rendered. The Company does not believe that there are any
substantial credit risks associated with receivables due from governmental
agencies and any concentration of credit risk from other third party payors is
limited by the number of patients and payors. The Company does not believe
that there are any substantial credit risks associated with other receivables
due from buying group members or other customers.
ESTIMATES
In preparing financial statements, management is required to make
estimates and assumptions, particularly in determining the adequacy of the
allowance for doubtful accounts, insurance disallowances and managed care
claims accrual, that affect the reported amounts of assets and liabilities as
of the balance sheet date and results of operations for the year. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to conform to
the current year presentation.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which the Company
is required to adopt effective January 1, 2001. SFAS No. 133 will require the
Company to record all derivatives on the balance sheet at fair value. The
adoption did not have a material effect on consolidated results of operations
or financial position.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests-method.
The Company does not believe that the adoption of SFAS No. 141 will have a
significant impact on its consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective January 1, 2002. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out
of previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company is currently assessing, but
has not yet determined the impact of SFAS No. 142 on its financial position
and results of operations.
F-11
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 addresses the conditions
under which an impairment charge should be recorded related to long-lived
assets to be held and used, except for goodwill, and those to be disposed of
by sale or otherwise. The Company is currently assessing, but has not yet
determined, the impact of SFAS No. 144 on its financial position and results
of operations.
3. MERGERS
OPTICARE
The OptiCare merger, completed on August 13, 1999, was accounted for
under the purchase method of accounting, whereby the purchase price has been
allocated to fair values of the assets acquired and liabilities assumed. Fair
values were based on valuations and other studies. The excess of the aggregate
purchase price (including expenses) of approximately $29,100 over the fair
value of the net assets acquired was approximately $20,700. Of this excess,
approximately, $18,500 has been recorded as goodwill and is being amortized on
a straight-line basis over 25 years and approximately $2,200 has been used to
eliminate the valuation allowance related to Prime's deferred tax assets. In
addition, the Company recorded an intangible asset of approximately $7,123 in
connection with the separate acquisition of a new administrative services
agreement that is being amortized over 25 years.
COHEN SYSTEMS
On October 1, 1999 the Company purchased Cohen Systems, Inc. (the "Cohen
Acquisition"), a software systems provider specializing in point of sale and
internet-based solutions for optical retail and optical manufacturing
laboratories. The total purchase price of $1,737 was comprised of $937 in cash
and notes payable and 110,000 shares of common stock valued at approximately
$800. The Cohen Acquisition was accounted for under the purchase method of
accounting, whereby the purchase cost has been allocated to the fair value of
the assets acquired and liabilities assumed with the excess identified as
goodwill. Fair values were based on valuations and other studies. The goodwill
resulting from this transaction was $1,387 and is being amortized on a
straight-line basis over 25 years. The results of operations of Cohen Systems,
Inc. are included in the consolidated financial statements from the purchase
date.
The following is a summary of the unaudited pro forma results of
operations of the Company as if the Mergers and Cohen Acquisition had closed
effective January 1, of the respective periods below.
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998
-------------- --------------
Net Revenues $ 129,624 $ 105,653
Income (loss) from continuing operations (1,359) (3,881)
Net income (loss) (3,676) (38,732)
Income (loss) per common share from continuing operations:
Basic and diluted $ (0.15) $ (0.43)
Net income (loss) per common share:
Basic and diluted $ (0.41) $ (4.32)
The unaudited pro forma information presented above is for informational
purposes only and is not necessarily indicative of the results that would have
been obtained had these events actually occurred at the beginning of the
periods presented, nor does it intend to be a projection of future results.
F-12
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
4. RESTRUCTURING AND OTHER ONE-TIME CHARGES
In the fourth quarter of 2000, the Company recorded $2,306 of
restructuring charges and $230 of charges related to the canceled sale of the
Connecticut operations. The Company's restructuring plans included closing and
consolidating facilities, reducing overhead and streamlining operations and
expects to substantially complete these restructuring activities by December
31, 2001. The restructuring charge of $2,306 was comprised of $242 of employee
termination costs for six employees, $1,160 of lease related charges, $782 of
fixed asset write-offs and $122 of other related expenses. During the year
ended December 31, 2000, the restructuring liability was reduced by $1,074, of
which $292 represented cash payments and $782 were non-cash related charges
from the write-off of assets related to facilities that were closed as part of
its restructuring activities. The majority of the restructuring liability at
December 31, 2000 is related to excess office space that is not expected to be
utilized over the remaining terms of the leases.
In June 2000, the Company terminated a merger agreement it had entered
into in February 2000 with Vision Twenty-One, Inc. The Company recorded a
charge of $1,810 of merger related costs, primarily professional fees,
associated with the terminated merger with Vision Twenty-One.
5. DISCONTINUED OPERATIONS
On December 15, 1998, in recognition of significant losses and the fact
that the physician's practice management business model as operated by the
Company had been largely unsuccessful, the Company's Board of Directors
decided to reorganize and dispose of its ophthalmology operations and recorded
an estimated loss on disposal of $23,564 in 1998. The disposal of these
operations continued in 1999 through the cancellation of the administrative
service agreements with affiliated ophthalmologists and the repurchase of
practice assets by the physicians. During the three months ended June 30,
1999, the Company revised its estimate of loss on the disposal of its
ophthalmology operations and accordingly recorded an additional loss of $2,317
net of tax of $212. As of December 31, 1999 the disposal of these operations
was substantially complete.
Summarized information on the discontinued ophthalmology segment follows:
1999 1998
------------ ---------------
Net revenues - $ 69,442
============ ===============
Income (loss) from discontinued operations before tax - (17,884)
Income tax expense (benefit) - ( 6,597)
------------ ---------------
Income (loss) from discontinued operations - (11,287)
Income (loss) on disposal of discontinued operations $ (2,317) (23,564)
------------ ---------------
Total income (loss) from discontinued operations $ (2,317) $ (34,851)
============ ===============
Income (loss) per share from discontinued operations $ (0.49) $ (15.45)
============ ===============
F-13
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
6. SEGMENT INFORMATION
The Company currently manages the operations of the business through
three operating segments: (1) Managed Care Services (2) Professional Services
and (3) Other Integrated Services.
Management assesses the performance of its segments based on income
before income taxes, interest expense, depreciation and amortization, and
other corporate overhead. Summarized financial information, by segment, for
the years ended December 31, 2000, 1999 and 1998 is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ----------- ------------
REVENUES:
Managed care services $ 38,260 $ 25,150 $ 14,902
Professional services 8,256 4,061 -
Other integrated services 95,265 78,227 68,949
------------ ----------- ------------
Segment totals 141,781 107,438 83,851
Elimination of inter-segment revenues (13,898) (12,805) (19,239)
------------ ----------- ------------
Total net revenue $127,883 $94,633 $64,612
============ =========== ============
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAX:
Managed care services $ 1,644 $ 1,723 $ 1,253
Professional services 1,936 2,080
Other integrated services 2,031 2,985 1,857
------------ ----------- ------------
Segment totals 5,611 6,788 3,110
Depreciation (2,842) (1,408) (1,133)
Amortization and write-off of goodwill (2,888) (605) (284)
Interest expense (3,500) (3,248) (4,498)
Restructuring and other one-time charges (4,346) - -
Corporate (3,225) (887) -
------------ ----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAX $ (11,190) $ 640 $ (2,805)
============ =========== ============
ASSETS:
Managed care services $ 3,849 $ 7,564 $ 4,548
Professional services 2,945 919 -
Other integrated services 14,803 14,409 6,403
------------ ----------- ------------
Segment totals 21,597 22,892 10,951
Intangibles 30,082 32,443 810
Discontinued operations - - 5,582
Corporate, cash and other 3,834 11,405 9,213
------------ ----------- ------------
Total $ 55,513 $ 66,740 $ 26,556
============ =========== ============
CAPITAL EXPENDITURES:
Managed care services $ 198 $ 294 $ 196
Professional services 246 - -
Other integrated services 574 1,504 412
------------ ----------- ------------
Segment totals 1,018 1,798 608
Corporate 788 73 -
------------ ----------- ------------
Total $ 1,806 $ 1,871 $ 608
============ =========== ============
F-14
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
7. RECEIVABLES
Activity in the allowance for doubtful accounts consisted of the following for
the years ended December 31:
2000 1999 1998
------------- ------------- -------------
Balance at beginning of period $626 $ 218 $ 227
Allowances of acquired companies - 298 -
Additions charged to expense 446 216 263
Deductions (391) (106) (272)
------------- ------------- -------------
Balance at end of period $681 $ 626 $ 218
============= ============= =============
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-----------------------------------
2000 1999
-------------- ----------------
Leasehold improvements $ 3,962 $ 4,447
Furniture and equipment 7,893 9,135
Computer hardware and software 3,969 3,728
-------------- ----------------
Total 15,824 17,310
Accumulated depreciation and amortization (7,602) (7,631)
-------------- ----------------
Property and equipment, net $ 8,222 $ 9,679
============== ================
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
-----------------------------------
2000 1999
-------------- ---------------
Goodwill $23,340 $24,256
Administrative services agreement 7,123 7,123
Other 2,411 2,395
-------------- ---------------
Total 32,874 33,774
Accumulated amortization (2,792) (1,331)
-------------- ---------------
Intangible assets, net $30,082 $32,443
============== ===============
In the fourth quarter of 2000, the Company recorded a $1,341 write-off of
goodwill that was charged to amortization expense. That write-off represents
the unamortized goodwill balance allocated to the managed care operations in
Connecticut, which were closed.
F-15
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
10. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2000 and 1999:
DECEMBER 31,
-----------------------------------
2000 1999
-------------- ---------------
Accrued salaries and related expenses 2,062 2,171
Interest payable 416 310
Restructuring liability (current portion) 540 -
Terminated merger fees 790 -
Other accrued expense 2,012 2,730
-------------- ---------------
Total accrued expenses $5,820 $5,211
============== ===============
11. LONG-TERM DEBT
The details of the Company's long-term debt at December 31, 2000 and 1999 are as
follows:
2000 1999
------------- -----------
Term note payable to bank in quarterly principal amounts. The final
principal payment is payable for the outstanding principal balance and is
due and payable on June 1, 2003. The interest rate equals the base rate or
the eurodollar rate, which was 9.0 % at December 31, 2000. The term
note is collateralized by substantially all assets of the Company. $17,375 $21,500
Revolving credit note to bank, due June 1, 2003, interest payable
at the base rate or the eurodollar rate and is collateralized by
substantially all assets of the Company. 12,300 11,500
Promissory note payable due June 1, 2003. The interest rate is equal to the
Eurodollar rate plus two and one-quarter percent, which was equivalent to
9.0 % at December 31, 2000. The note is collateralized by substantially
all assets of the Company. 2,250 -
Promissory notes payable due at various dates between 2001 and 2005.
Principal and interest payments are due monthly or annually. Interest
is payable at rates ranging from 5.5% to 9.5% 2,158 3,084
Note payable from practice acquisition due in annual installments of $240
plus interest at 7.0% per year, through October 2003, collateralized
by specific assets of the Company. 720 960
Other notes payable due through September 2001. 69 237
Subordinated note payable due August 13, 2002, interest compounds
Quarterly at a rate of 8.0%. - 2,000
Subordinated convertible promissory note payable due August 13, 2002.
Interest compounds quarterly at a rate of 9.0%. - 4,000
Unamortized discounts (658) (133)
------------- -----------
Total 34,214 43,148
Less current portion 32,992 3,459
------------- -----------
$1,222 $39,689
============= ===========
F-16
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
The following represents maturities of long-term debt by year and in the
aggregate:
2001 $32,992
2002 882
2003 272
2004 34
2005 34
-------------
$34,214
=============
In August 1999, in connection with the Merger, the Company entered into a
new loan agreement (the "Credit Facility"). The Credit Facility made available
to the Company a $21,500 term loan and up to a $12,700 revolving loan facility
secured by a security interest in substantially all of the assets of the
Company. The outstanding borrowings under the revolving loan facility and the
term loan are individually and collectively limited to specific available
borrowing base amounts, as defined in the agreement. The interest rate
applicable to the credit facility equals the base rate or the eurodollar rate
(each as defined in the Credit Facility), as the Company may from time to time
elect, in accordance with the provisions of the Credit Facility. The base rate
is generally the higher of the prime rate of the bank for domestic commercial
loans in effect on such applicable day, or the federal funds rate in effect on
such applicable day plus one-half of one percent (1/2 of 1%), which generally
equals LIBOR plus 2.25%. The Company is charged a commitment fee of one-half
of one percent (1/2 of 1%) per annum of the sum of the aggregate average daily
unused amount of the Company's revolving loan facility. During 2000, the
Company's average borrowing rate was approximately 8.70%.
Effective June 30, 2000, the Company's Credit Facility was amended (the
"First Amendment"). The First Amendment provided, among other things, that (i)
the terminated merger costs associated with the Vision Twenty-One merger were
excluded from the calculation of the financial covenants and the Company's
borrowing availability; (ii) the interest rate was increased by one-half of
one percent (1/2 of 1%) to the amount set forth above; (iii) the term was
reduced by one year with the termination date changing from June 1, 2004 to
June 1, 2003; and (iv) the Company agreed to raise, or enter into binding
commitments to raise, no less than $5,000 by January 1, 2001 through the
issuance of equity or subordinated indebtedness or other means reasonably
approved by Bank Austria. In accordance with the terms of the Credit Facility,
50% of any capital raised through the issuance of equity or subordinated
indebtedness would be used to reduce indebtedness under the Credit Facility.
The remainder would be used for capital expenditures and to meet working
capital requirements. In the event other means were used to raise such
capital, the Company could be required to use up to all of such funds to
reduce indebtedness under the Credit Facility.
The Credit Facility contains certain restrictions on the conduct of the
Company's business, including restrictions on: incurring debt, declaring or
paying any cash dividends or any other payment or distributions on capital
stock, and creating liens on the Company's assets. The Company is required to
maintain certain financial ratios, including, a minimum fixed charge coverage
ratio, a leverage ratio, a senior leverage ratio and an interest coverage
ratio. The Company is also restricted from incurring capital expenditures in
excess of a specified amount and is required to achieve minimum cash flows.
On October 10, 2000 the Company obtained $2,250 through a bridge
financing arrangement (the "Bridge Loan") with Alexander Enterprise Holdings
Corp. ("Alexander Enterprises") and entered into a second amendment to the
Credit Facility (the "Second Amendment"). Of the $2,250 of proceeds from the
Bridge Loan, approximately $1,200 was paid to Bank Austria pursuant to the
Second Amendment and the remaining $1,050 was used for general working capital
purposes.
The Bridge Loan is evidenced by a secured promissory note (the "Secured
Promissory Note") issued to Alexander Enterprises and is secured through a
security agreement (the "Security Agreement"). Pursuant to the terms of the
Security Agreement, the Company granted Alexander Enterprises a security
interest in substantially all of the assets of the Company. The Secured
Promissory Note accrues interest at the Eurodollar rate, generally equal to
LIBOR, plus two and one-quarter percent (2 1/4%) and matures on June 1, 2003.
F-17
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
The Second Amendment provides, among other things, that in connection
with the Bridge Loan from Alexander Enterprises, the Company pay $1,200 to
Bank Austria as repayment of principal and interest. Of the $1,200 paid to
Bank Austria, $300 was applied to past due interest, $400 was used to repay
principal and $500 was applied as a prepayment of interest.
In connection with the Bridge Loan, the Company issued a warrant to a
designee of Alexander Enterprises to purchase 2,250,000 shares of common
stock at $1.00 per share. The estimated fair value of the warrant at the date
of issuance was $553. This value was determined using the Black-Scholes
pricing model. The value of the warrant was recorded as a discount to the
Bridge Loan and is being amortized to interest expense over the life of the
loan.
At December 31, 2000 and 1999, the Company was a guarantor of debt of
related parties in the amount of $144 and $208, respectively.
At December 31, 2000 the Company had standby letters of credit
outstanding in the amount of $400.
As of December 31, 2000, the Company was in violation of certain
covenants under its Credit Facility. In addition, the Company did not make its
scheduled principal and interest payments due in 2001 under its Credit
Facility and is in default under its Credit Facility and Bridge Loan.
Accordingly, the Company's indebtedness under the Credit Facility and Bridge
Loan has been reclassified as a current liability as of December 31, 2000.
12. LEASES
The Company leases certain furniture, machinery and equipment under
capital lease agreements that expire through 2005. The Company primarily
leases its facilities under cancelable and noncancelable operating leases
expiring in various years through 2011. Several facility leases have annual
rental terms comprised of base rent at the inception of the lease adjusted
annually by a contingent amount based, in part, upon the increase in the
consumer price index. Also, certain facility leases contain provisions which
provide for additional contingent rents based on a stated percentage of sales.
Rent expense charged to operations during the years ended December 31, 2000,
1999 and 1998 was $ 4,686, $3,010 and $2,302 of which $73, $83 and $132,
respectively, represent contingent rent expense.
Property and equipment includes the following amounts for capital leases
at December 31:
2000 1999
-------------- ----------------
Furniture, machinery and equipment $ 651 $ 1,393
Less accumulated amortization ( 206) (1,037)
-------------- ----------------
$445 $ 356
============== ================
Capital lease obligations of $221 and $147 were incurred for acquisition
of new equipment in 2000 and 1999, respectively. Amortization of capital
leases is included in depreciation expense.
Future minimum lease payments, by year and in the aggregate, under
capital leases and operating leases with remaining terms of one year or more
consisted of the following at December 31, 2000:
CAPITAL OPERATING
LEASES LEASES
--------------- ---------------
2001 $ 164 $3,378
2002 160 2,708
2003 120 2,378
2004 22 1,941
2005 4 1,560
Thereafter - 2,649
---------------
---------------
Total minimum lease payments 470 14,614
===============
Amounts representing interest (82)
---------------
$ 388
===============
F-18
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
13. 401(K) SAVINGS PLAN
The Company provides a defined contribution 401(k) savings plan to
substantially all employees who meet certain age and employment criteria.
Eligible employees are allowed to contribute a portion of their income in
accordance with specified guidelines. The Company matches a percentage of
employee contributions up to certain limits. Employer contributions are made
on a discretionary basis as authorized by the Board of Directors. Employer
contributions for the years ended December 31, 2000, 1999 and 1998 were $ 417,
$337 and $577, respectively.
14. RELATED PARTY TRANSACTIONS
The Company incurred rent expense and other fees of $131, $123 and $123
in 2000, 1999 and 1998, respectively, which was paid to certain doctors for
the use of equipment.
The Company incurred rent expense of $2,123, $752 and $450 in 2000, 1999
and 1998, respectively, which was paid to officers and entities under common
ownership for the lease of facilities.
The Company has various notes receivable from related parties with
interest rates ranging from prime plus 1% to 9%, maturing from 1999 through
2006. The total balance due under these notes receivable was $92 and $108 at
December 31, 2000 and 1999, respectively, of which $14 has been reflected as a
current asset at December 31, 2000 and 1999.
15. STOCKHOLDERS' EQUITY
In January 2000, the Company completed the sale of 3,571,429 registered
shares of common stock. Gross proceeds from the offering, based on the
offering price of $3.50 per share, totaled $12,500, including the cancellation
of a $2,000 subordinated note payable previously issued by the Company. The
shares were issued under a registration statement filed with the Securities
and Exchange Commission on January 18, 2000. The Company used $7,000 of the
net proceeds to pay down long-term debt and used the remaining proceeds for,
among other things, business expansion, working capital and general corporate
purposes.
MANDATORILY REDEEMABLE PREFERRED STOCK
In June of 1998, the Company issued 8,000 shares of redeemable, 8%
cumulative preferred stock, together with a stock purchase warrant enabling
the holder to purchase 1,333,333 shares of the Company's common stock, for
$8,000. Under the terms of the agreement, the preferred stockholders were
entitled to receive a guaranteed annual rate of return of 30% over the first
four years of the agreement. Accordingly, the Company recorded accrued
dividends of $1,200 as of December 31, 1998 and $600 in 1999.
The estimated fair value of the stock purchase warrant was $1,293 at the
date of issuance in June 1998. This value was determined using the
Black-Scholes pricing model with the following assumptions: risk free interest
rate of 4.67%, no dividend yield, volatility factor of .7604 and an expected
life of five years. Initially, this value was recorded as a discount to the
redeemable preferred stock balance with a corresponding credit to additional
paid-in capital. This discount was to be amortized through charges to retained
earnings over the initial redemption period of the preferred stock, seven
years. However, in light of Prime's violation of financial covenants in the
preferred stock agreement in 1998 and the corresponding acceleration of the
redemption period, the remaining unamortized balance of the warrant discount
was fully amortized at December 31, 1998.
In August 1999, immediately prior to the Merger, the redeemable preferred
stock and warrant were exchanged for $2,000 of subordinated long term debt,
$4,000 of convertible subordinated long term debt and 2,033,333 shares of
Prime Vision common stock, which in turn were exchanged in the merger for
638,060 shares of common stock.
F-19
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
SERIES A PREFERRED STOCK
In connection with the Company's entering into the Credit Facility,
effective August 13, 1999, the Company issued 418,803 shares of Series A
Convertible Preferred Stock (the "Preferred Stock"). Each share of Preferred
Stock is convertible at any time at the option of the holder into one share of
common stock with certain limitations. In addition, the Company may cause the
conversion of all, but not less than all, of the outstanding shares of
Preferred Stock into shares of common stock, subject to certain limitations.
WARRANTS
As of December 31, 2000, warrants were outstanding and exercisable to
purchase 3,001,198 common shares of the Company as follow: (i) 571,198 common
shares at an exercise price of $7.98 per share, expiring in 2002, (ii)100,000
common shares at an exercise price of $5.85 per share, expiring in 2004, (iii)
50,000 common shares at an exercise price of $3.50 per share, expiring in
2005, (iv) 30,000 common shares at an exercise price of $4.50 per common
share, expiring in 2005, and (v) 2,250,000 common shares at an exercise price
of $1.00 per common share, expiring in 2005. No warrants were exercised in
2000 or 1999.
EMPLOYEE STOCK PURCHASE PLAN
The Company provides an Employee Stock Purchase Plan (the "ESPP") to
substantially all eligible employees who meet certain employment criteria.
Under the terms of the ESPP, eligible employees may have up to 20% of eligible
compensation deducted from their pay to purchase common stock. The per share
purchase price is 85% of the average high and low per share trading price of
common stock on the American Stock Exchange on the last trading date prior to
the investment date, as defined. The amount that may be offered pursuant to
this plan is 450,000 shares. For the year ended December 31, 2000, 105,808
shares were purchased by employees under the ESPP at a weighted average price
of $0.74.
STOCK OPTION PLAN
Presented below is a summary of the status of the Company's stock options
and the related transactions for the years ended December 31, 2000, 1999 and
1998.
OPTIONS EXERCISE PRICE
OUTSTANDING RANGE
----------------- -------------------
December 31, 1997 240,841 $ 4.78 - $ 63.74
Granted 2,981 $ 6.37 - $ 63.74
Canceled (38,957)
-----------------
-------------------
December 31, 1998 204,865 $ 4.78 - $ 63.74
Canceled (145,346) $ 2.56 - $ 63.74
OptiCare converted 533,969 $ 2.56
Granted 721,250 $ 5.85
----------------- -------------------
December 31, 1999 1,314,738 $ 2.56 - $ 63.74
Canceled (162,383) $2.56 - $63.74
Exercised (35,209) $2.56
Granted 125,000 $ 1.78 - $3.44
----------------- -------------------
December 31, 2000 1,242,146 $ 1.78 - $ 63.74
================= ===================
The Company's executive stock plan, approved by the Board of Directors in
1996, provided for the granting of nonqualified incentive stock options with a
ten-year term. On August 13, 1999 options were granted to option holders of
OptiCare and Prime in substitution for existing options, which contained
substantially identical terms, except for a change in the exercise price and
the number of shares, which were adjusted to reflect the exchange ratio in
connection with the Merger. During the year ended December 31, 2000, options
were issued at an average exercise price of $2.19
F-20
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
per share, and options were canceled at an average exercise price $6.12. As of
December 31, 2000, 2,214,319 shares were reserved for issuance under the stock
option plan, including 972,173 shares available for future grant
Pro forma information regarding net loss and loss per share is required
by SFAS 123, and has been determined as if the Company accounted for its
employee stock options granted subsequent to December 31, 1995, under the fair
value method of SFAS 123. The weighted average fair value of the Company's
stock options, calculated using the Black-Scholes option pricing model,
granted during 2000 was $0.89 per share. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
2000 1999 1998
----------------- ---------------- ----------------
Risk free interest rate 5.50% 6.00% 4.67%
Dividends -- -- --
Volatility factor .5000 .5500 .7604
Expected Life 5 years 5 years 8.27 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
Year Ended December 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net income (loss):
As reported $(14,171) $(1,966) $(38,090)
Pro forma $(14,535) $(2,091) $(38,110)
Earnings per share - basic and diluted:
As reported $ (1.15) $ (0.54) $ (17.99)
Pro forma $ (1.18) $ (0.56) $ (18.00)
The following table summarizes in more detail information regarding the
Company's stock options outstanding at December 31, 2000.
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Price Options Life (years) Price Options Price
------------------- --------------- --------------- ------------- -------------- ------------
$ 1.78 - $2.00 95,000 9.6 $ 1.90 - $ -
$ 2.56 429,844 7.0 2.56 214,920 2.56
$ 3.44 - $4.78 34,672 4.3 4.31 24,672 4.60
$ 5.85 637,500 8.7 5.85 164,060 5.85
$ 6.37 - $19.12 27,460 6.8 13.47 23,540 12.53
$47.80 - $63.73 17,670 6.9 61.73 17,670 61.73
--------------
--------------- ------------- ------------
Total 1,242,146 $ 5.33 444,862 $6.76
=============== ============= ============== ============
F-21
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
16. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
Year Ended December 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Income (loss) from continuing operations applicable to Common
stockholders:
Income (loss) from continuing operations $ (14,171) $ 351 $ (3,239)
Accretion of redemption value of preferred stock and
Preferred stock dividends - (600) (2,493)
------------- ------------- -------------
Income (loss) from continuing operations applicable to
Common stockholders $ (14,171) $ (249) $ (5,732)
============= ============= =============
Net income (loss) applicable to common stockholders:
Net income (loss) $ (14,171) $ (1,966) $ (38,090)
Accretion of redemption value of preferred stock and
Preferred stock dividends - (600) (2,493)
------------- ------------- -------------
Net income (loss) applicable to common shareholders $ (14,171) $ (2,566) $ (40,583)
============= ============= =============
Weighted average common shares outstanding 12,354,494 4,776,501 2,256,461
============= ============= =============
Income (loss) per common share from continuing operations $ (1.15) $ (0.05) $ (2.54)
============= ============= =============
Net income (loss) per common share $ (1.15) $ (0.54) $ (17.99)
============= ============= =============
The weighted average common shares outstanding for years 1999 and 1998
(presented above) have been adjusted to reflect the conversion associated with
the Merger.
The following table reflects the potential common shares of the Company
at December 31, 2000, 1999 and 1998. These shares have been excluded from the
calculation of diluted earnings per share due to their antidilutive effect.
2000 1999 1998
------------- ------------- --------------
Options 1,242,146 1,314,738 652,855
Warrants 3,001,198 671,198 1,553,614
Common stock to be issued for convertible preferred stock 418,803 418,803 -
Common stock to be issued for convertible debt - 581,818 -
------------- ------------- --------------
Total 4,662,147 2,986,557 2,206,469
============= ============= ==============
F-22
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
17. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consisted of the following at December 31, 2000 and 1999:
2000 1999
------------- --------------
Deferred tax assets:
Net operating loss carryforwards $ 3,408 $ 200
Accruals 2,149 2,047
Allowance for bad debts 394 263
Depreciation and amortization 1,544 951
Other 165 (328)
------------- --------------
Total current deferred tax assets 7,660 3,133
Valuation allowance (7,660) -
------------- --------------
Net deferred tax assets $ 0 $3,133
============= ==============
The liability method of accounting for deferred income taxes requires a
valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. In 2000, the company established a
full valuation allowance against the entire net deferred tax assets in the
amount of $7,660.
As of December 31, 2000, the Company has net operating loss (NOL)
carryforwards available of approximately $7.3 million for federal tax
purposes. These NOL carryforwards expire in the years 2009 through 2020.
The components of income tax expense (benefit) for the years ended
December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
------------ ------------ -------------
Current:
Federal $ - $325 $141
State (34) 66 20
------------ ------------ -------------
Total current (34) 391 161
------------ ------------ -------------
Deferred:
Federal 2,480 (85) 257
State 535 (17) 16
------------ ------------ -------------
Total deferred 3,015 (102) 273
------------ ------------ -------------
Total income tax expense $2,981 $289 $434
============ ============ =============
A reconciliation of the tax provision at the U.S. Statutory Rate to the
effective income tax rate as reported is as follows:
2000 1999 1998
------------ ------------- -------------
Tax provision (benefit) at U.S. Statutory Rate (34)% 34% (34%)
State income taxes, net of federal benefit (5)% 5% (3%)
Non-deductible expenses 7 % 6% 5%
Change in valuation allowance 59 % - 48%
------------ ------------- -------------
Effective income tax expense rate 27 % 45% 16%
============ ============= =============
F-23
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
18. COMMITMENTS AND CONTINGENCIES
OptiCare Eye Health Centers, Inc., a subsidiary of the Company, has been
involved in discussions with the Attorney General of Connecticut concerning a
potential consent decree relating to a confusing communication sent to some of
its customers in the 1995-99 period involving statements of balances due.
Though the statements were marked "This Is Not A Bill," some customers paid
balances, duplicating amounts later received by the Company from insurers.
When the misunderstanding was discovered, the Company reimbursed all customers
who mistakenly paid. The terms of the anticipated consensual administrative
order are still being discussed. The Company does not expect the outcome to
have a material adverse impact on its financial condition or results of
operation.
Opticare Eye Health Network (OEHN), formerly known as Consolidated Eye
Care, a North Carolina corporation and subsidiary of the Company, entered into
a professional service agreement ("PSA") with Optometric Eye Care Center, P.A.
("OECC"), a firm in which Dr. Allan Barker and Dr. Blair Harrold are
shareholders. Drs. Barker and Harrold, officers of the Company, gave the
Company notice of its intent to terminate the PSA between OECC and our
subsidiary, OEHN. Termination of the PSA could have adverse consequences on
the Company's ability to continue to operate its North Carolina eye care and
retail optometry centers, since the Company would no longer have a contractual
relationship with the association of doctors who practice in those centers.
The notice cited numerous alleged breaches of contractual obligations due to
OECC. The Company adamantly denies that such alleged breaches have occurred.
If OECC moves to enforce termination of the PSA, the Company will vigorously
challenge OECC's right to terminate the agreement and will take all
appropriate steps to protect the Company's interests, including litigation
and/or administrative proceedings. This matter has not yet reached the
litigation stage.
In the normal course of business, the Company is both a plaintiff and
defendant in lawsuits incidental to its current and former operations. Such
matters are subject to many uncertainties and outcomes are not predictable
with assurance. Consequently, the ultimate aggregate amount of monetary
liability or financial impact with respect to these matters at December 31,
2000 cannot be ascertained. Management is of the opinion that, after taking
into account the merits of defenses, insurance coverage and established
reserves, the ultimate resolution of these matters will not have a material
adverse effect in relation to the Company's consolidated financial position or
results of operations.
F-24
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Second Third Fourth
First Quarter Quarter Quarter Quarter
--------------- ------------ ------------ --------------
2000
Net revenue $ 34,592 $ 34,217 $ 32,397 $ 26,677
Net income (loss) (1) 294 (1,378) (61) (13,026)
Basic income (loss) per share 0.03 (0.11) 0.00 (1.05)
Diluted income (loss) per share 0.02 (0.11) 0.00 (1.05)
1999
Net revenue $ 18,096 $ 21,246 $ 23,553 $ 31,738
Income from continuing operations 80 55 77 139
Basic income (loss) per share from continuing
Operations (2) (0.22) 0.02 0.01 0.02
Diluted income (loss) per share from continuing
Operations (2) (0.22) 0.02 0.01 0.01
Net income (loss) 80 (2,262) 77 139
Basic net income (loss) per share (2) (0.22) (.97) 0.01 .02
Diluted net income (loss) per share (2) (0.22) (.97) 0.01 .01
1998
Net revenue $ 17,122 $16,485 $16,557 $14,448
Loss from continuing operations (46) (307) (932) (1,954)
Basic and diluted loss per share from
continuing operations (3) (.01) (0.14) (.67) (1.67)
Net income (loss) 279 (319) (394) (37,656)
Basic and diluted net income (loss) per share (3) .13 (0.41) (0.43) (17.15)
(1) In the second quarter of 2000, the Company recorded a $1,810 charge for
merger costs associated with the terminated merger with Vision
Twenty-One. In the fourth quarter of 2000, the Company recorded a
restructuring charge of $2,307, write-off of goodwill of $1,341 and a
valuation allowance against deferred tax assets of $2,989.
(2) Includes the effect of a preferred stock dividend of $600 in the first
quarter of 1999.
(3) The third quarter of 1998 includes the effect of a preferred stock
dividend of $600. The fourth quarter of 1998 includes the effect of a
preferred stock dividend of $600 and accretion of redemption value of
preferred stock of $1,293.
F-25
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
20. SUBSEQUENT EVENTS (UNAUDITED)
On January 5, 2001, the Bridge Loan to the Company was amended and
increased by $500,000. In connection with that increase, the warrants issued
in connection with the original loan in October 2000 to purchase 2,250,000
shares were cancelled and new warrants were issued to purchase 2,000,000
shares of common stock at an exercise price of $1.00 and 750,000 shares at an
exercise price of $0.40, for an aggregate purchase price of $2,300,000.
In November 2001, the Company and one of its major shareholders, Palisade
Concentrated Equity Partnership, LP ("Palisade") entered into preliminary,
non-binding agreements with each other and with certain third parties,
including the Company's senior lender, Bank Austria Creditanstalt Corporate
Finance, Inc. (the "Bank"), and Capital Source Finance, LLC ("CapitalSource"),
concerning a capital restructuring. Three preliminary, non-binding agreements
(which are subject to the completion of binding, formal agreements and
numerous substantial conditions, including a shareholder vote) have been
signed by the parties as follows: (i) a letter of intent between Palisade and
the Bank which establishes terms on which the Company's debt to the Bank would
be refinanced and repaid at a discount (ii) a commitment letter from
CapitalSource to the Company offering to loan the Company funds to repay the
Bank debt at the discount negotiated between Palisade and the Bank and (iii) a
letter of intent between Palisade and the Company setting terms on which
Palisade would provide funds to repay the Bridge Loan.
The terms of the these agreements provide for, among other things:
(a) Refinancing of all of the Company's debts and other obligations, direct
and contingent, to the Bank, totaling approximately $34.3 million, as of
November 1, 2001, and retirement of all of the Bank's stock, warrants
and other ownership interests in the Company for payments totaling
approximately $23.4 million. Of the payments of $23.4 million, $13.0
million would be paid in cash and $10.4 million would be paid in the
form of a two-year, interest-bearing promissory note issued by the
Company. The $13.0 million cash payment to the Bank would come from
proposed loans provided by CapitalSource in the form of a $6.5 million
three-year revolving credit facility, a $3.0 million term loan facility
and a $5.5 million 18-month bridge loan.
(b) Palisade's investment of $3.5 million of cash in the Company to satisfy
the outstanding Bridge Loan of $2.75 million plus interest and letter of
credit backing for obligations of the Company totaling $16.7 million.
(c) Issuance, to Palisades, of 2,500,000 newly authorized shares of the
Company's Series B, 12.5%, voting convertible redeemable preferred stock
(convertible into common stock on a one-for-ten basis) and warrants to
purchase approximately 16,730,000 additional shares of the Company's
common stock.
F-26