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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, 2001
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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
(203) 596-2236
Registrant's Telephone Number, Including Area Code:
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.
[X] Yes [ ] 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 March 12, 2002 was $1,699,591 based upon the closing market
price on such date as reported on the American Stock Exchange. All (i) executive
officers and directors of the registrant and (ii) all persons filing a Schedule
13D with the Securities and Exchange Commission in respect to registrant's
common stock who hold 10% or more of the registrant's outstanding common stock,
have been deemed, solely for the purpose of the foregoing calculation, to be
"affiliates" of the registrant.
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of March 1, 2002, was 12,815,092 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated herein
by reference to the Proxy Statement for the 2002 Annual Meeting of the Company's
Stockholders.
OPTICARE HEALTH SYSTEMS, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS......................................................... 3
ITEM 2. PROPERTIES....................................................... 18
ITEM 3. LEGAL PROCEEDINGS................................................ 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 22
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 25
ITEM 6. SELECTED FINANCIAL DATA.......................................... 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK............................................................ 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................... 47
ITEM 11. EXECUTIVE COMPENSATION............................................ 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................... 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K ............................ 48
SIGNATURES.................................................................. 56
2
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
operate in three distinct segments of the eye care market which, together, cover
virtually every major sector of that market:
o Our Managed Care Division contracts with insurers, managed care
plans and other third party payers to manage claims payment
administration of eye health benefits for those contracting
parties in eight states.
o Our Professional Services Division provides laser and ambulatory
surgery facilities; develops and sells integrated practice
management systems, including Internet-based software solutions;
and provides support services to eye care professionals throughout
the country.
o Our Other Integrated Services Division owns, operates and/or
contracts with integrated eye health centers and professional
optometric practices in Connecticut and North Carolina, and
provides wholesale buying services to eye care professionals
nationwide.
RECENT DEVELOPMENTS
New Capital Structure for OptiCare
On January 25, 2002, we completed a series of transactions which resulted in
a major restructuring of our debt, equity and voting capital stock. We refer to
these as the Capital Restructuring Transactions. Taken together, the
transactions lowered our long-term debt by approximately $10.3 million,
increased our equity by approximately $6.9 million (after tax effect) and
reduced our next-12-months' principal payments by approximately $3.8 million.
The Capital Restructuring Transactions included, among other things, the
following:
1. Palisade Concentrated Equity Partnership, L.P., a fund manager and
an owner prior to the restructuring of approximately 16% of the
voting stock of the company, purchased, for $3.6 million in cash,
2,571,429 shares of the company's Series B 12.5% Voting Cumulative
Convertible Participating Preferred Stock, par value $.001 per
share, convertible into 25,714,290 shares of common stock,
pursuant to a Restructure Agreement among the company, Palisade,
and Dean J. Yimoyines, M.D., Chairman of the Board, Chief
Executive Officer and President of the Company. Linda Yimoyines,
wife of Dr. Yimoyines, purchased for a cash payment of $400,000,
285,714 shares of Series B Preferred Stock. Each share of Series B
Preferred Stock is immediately convertible into ten shares of
common stock and has the voting power equivalent to ten shares of
common stock; accrues cumulative dividends at an annual rate of
12.5%; must be redeemed in full by the company on December 31,
2008; and with respect to dividends, redemption rights, and rights
on liquidation, winding up, corporate reorganization and
dissolution, ranks senior to our common stock. (See Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - The
Series B Preferred Stock.)
2. Bank Austria Creditanstalt Corporate Finance, Inc., which was,
until January 25, 2002, our senior secured lender, forgave
approximately $7.9 million of principal and approximately $2.1
million of interest of the company's debt due to it and sold the
loans and other obligations of the company which Bank Austria then
held, including security agreements, pledges of stock by certain
of our subsidiaries and guarantees of loans and other obligations,
to CapitalSource Finance LLC, an asset-
3
based lender specializing in the health care industry.
3. CapitalSource, as lender, and the company, as borrower, amended
and restated the terms of the indebtedness acquired by
CapitalSource from Bank Austria by entering into an Amended and
Restated Revolving Credit, Term Loan and Security Agreement,
referred to as the Loan and Security Agreement. (For further
information regarding the CapitalSource credit facility, see Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - The
CapitalSource Credit Facility.)
4. Palisade made a subordinated loan to us of $13.9 million, and Ms.
Yimoyines made a subordinated loan to us of $100,000, which loans
are evidenced by senior subordinated secured notes. The notes held
by Palisade and Ms. Yimoyines are subordinate to our indebtedness
to CapitalSource and are secured by second-priority security
interests in substantially all our assets (the first-priority
security interest is held by CapitalSource). (See Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - The
Palisade and Yimoyines Senior Subordinated Secured Loans.)
5. In connection with providing its $13.9 million subordinated loan
to the company, Palisade received warrants entitling Palisade to
purchase up to 17,375,000 shares of common stock at an exercise
price of $0.14 per share (subject to anti-dilution provisions). In
connection with providing her $100,000 subordinated loan to the
company, Ms. Yimoyines received warrants entitling her, at any
time, to purchase up to 125,000 additional shares of common stock
at an exercise price of $0.14 per share (subject to anti-dilution
provisions). The warrants issued to Palisade and to Ms. Yimoyines
are exercisable during a ten-year period expiring January 24,
2012.
6. The company applied a portion of the proceeds of the Palisade loan
to pay down the indebtedness under our credit facility now held by
CapitalSource. After giving effect to this paydown, the balances
outstanding under the credit facility as of March 1, 2002, are $3
million under the term loan and approximately $6.4 million under
the revolving credit facility. On March 1, 2002, we had
approximately $1.5 million of available borrowing capacity under
the revolving credit facility (in excess of the approximately $6.4
million outstanding on that date).
7. Our bridge loan from Alexander Enterprise Holdings Corp. was
satisfied in full, as follows:
a. $2.5 million in cash was paid to Alexander Enterprise in full
satisfaction of the principal and interest due to Alexander
Enterprise under the bridge loan. Alexander Enterprise
relinquished its security interest in the assets of the
company and has no further claims against us. The cash was
provided by the $3.6 million purchase by Palisade of Series B
Preferred Stock.
b. We satisfied our obligations to Palisade as a participant
under the bridge loan by issuing to Palisade 309,170.5 shares
of Series B Preferred Stock. The amount of such
participation, including accrued but unpaid interest, was
$432,839.
c. We satisfied our obligations to Ms. Yimoyines as a
participant under the bridge loan by issuing to Ms. Yimoyines
38,646 shares of Series B Preferred Stock. The amount of such
participation, including accrued but unpaid interest, was
$54,104.83.
(For further information regarding the Alexander Enterprise bridge
loan, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and
Capital Resources - Alexander Enterprise Bridge Loan.)
8. We reacquired from Bank Austria, for a cash payment of $1.35
million, certain notes and contractual rights originally issued or
made to the company in connection with the company's transfers of
certain medical practice assets to physicians engaged in such
practices.
4
9. In connection with the Capital Restructuring Transactions, our
stockholders approved various equity-related proposals by written
consent in a solicitation process which commenced on January 4,
2002, including a proposal to increase the number of shares of
authorized common stock from 50,000,000 to 75,000,000. The
additional authorized shares provide, among other things, for the
availability of common stock to be issued upon conversion of the
Series B Preferred Stock and exercise of the warrants which were
issued to Palisade and to Ms. Yimoyines.
10. As of the closing of the Capital Restructuring Transactions on
January 25, 2002, Palisade held (i) 2,000,000 shares of the common
stock which were previously acquired, (ii) 2,880,599.5 shares of
Series B Preferred Stock, immediately convertible into 28,805,995
shares of common stock, and (iii) immediately exercisable warrants
to purchase up to an additional 17,775,000 shares of common stock,
of which warrants to purchase 400,000 shares at $0.40 per share
were previously acquired. Thus, 44,864,690 shares of our common
stock (including 12,815,092 shares of common stock outstanding as
of January 25, 2002, and 32,049,598 shares of common stock
issuable upon conversion of the Series B Preferred Stock held by
Palisade and Ms. Yimoyines) would be outstanding in the event that
all of the shares of Series B Preferred Stock are converted.
Without giving effect to any warrants, Palisade may be deemed to
beneficially own 74.0% of our common stock. Giving effect to the
warrants held by Palisade, Palisade may be deemed to beneficially
own 81.8% of our common stock.
11. Pursuant to the terms of the Restructure Agreement, we agreed,
among other things, that, so long as Palisade owns more than 50%
of the voting power of the company, Palisade shall have the right
to designate a majority of our board of directors.
5
Capitalization Table
The following table sets forth our capitalization as of December 31, 2001,
actual and pro forma to reflect the closing of the Capital Restructuring
Transactions. This table should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this report.
CAPITALIZATION TABLE
(Unaudited)
AS OF DECEMBER 31, 2001
---------------------------------------
ACTUAL PRO FORMA
--------------- -----------------
(dollars in thousands)
Long-term debt (including current portion):
Senior debt $ 29,675 $ 9,474
Bridge loan, net of $453 discount (actual) 2,297 -
Subordinated debt, net of $39 (actual) and
$1,419 (pro forma) discount 2,394 14,547
--------------- -----------------
Total long-term debt (including current portion) 34,366 24,021
--------------- -----------------
Series B 12.5% voting, redeemable, cumulative convertible
participating preferred stock; $.001 par value; 3,500,000
authorized; no shares issued or outstanding (actual);
3,204,960 shares issued and outstanding (pro forma) - 4,487
--------------- -----------------
Stockholders' equity:
Series A convertible preferred stock; $.001 par value;
550,000 shares authorized; 418,803 shares
issued and outstanding (actual); none (pro forma) 1 -
Common stock, $.001 par value; 50,000,000 shares
authorized 12,815,092 shares issued and outstanding
(actual); 75,000,000 shares authorized, 12,815,092 shares
issued, 12,758,192 shares outstanding and 56,900 shares
held in treasury (pro forma). 13 13
Additional paid-in-capital 60,679 62,059
Accumulated deficit (53,711) (48,230)
--------------- -----------------
Total stockholders' equity 6,982 13,842
--------------- -----------------
Total capitalization $ 41,348 $ 42,350
=============== =================
Possible Settlement in Dispute with North Carolina Retail Optometry Affiliate
On or about March 20, 2002, the company believes that it reached an
agreement in principle that would resolve its dispute with Optometric Eye Care
Center, P. A. regarding a Services Agreement between the company and Optometric
Eye Care. (See Item 3. Legal Proceedings, Optometric Eye Care Center, P.A.
Claim.) The agreement in principle contemplates a proposed transaction for the
sale of certain assets and the assumption of certain liabilities of our North
Carolina professional optometric practices and retail optometry sales business.
The proposed sale will not include the company's other North Carolina operations
(i.e., our Managed Care and Buying Group Divisions). However, the parties have
not entered into a written agreement regarding the proposed transaction and
there can be no assurance that a settlement will occur or that the parties will
consummate the proposed transaction.
6
American Stock Exchange Suspension and Proposed Delisting
On April 20, 2001, the American Stock Exchange suspended trading of our
common stock, and the exchange did not permit trading in the stock from that
date until December 12, 2001, principally because we had not filed our Annual
Report on Form 10-K for the year ended December 31, 2000, or our Quarterly
Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30,
2001. We filed all those reports by December 3, 2001, and the exchange
thereafter permitted trading to be conducted.
By letter dated November 19, 2001, the staff of the American Stock
Exchange advised us that it would recommend to the exchange's Committee on
Securities the delisting of our common stock. We appealed such recommendation
and a hearing on the appeal was held before the Committee on Securities on
January 29, 2002. The Committee decided at that time to postpone a determination
of whether or not to delist our common stock pending timely receipt of our
Annual Report on Form 10-K for the year ended December 31, 2001, and review of
that report by the Committee and the staff of the exchange.
(For further information concerning our listing with the American Stock
Exchange, see Part II Item 5. Market for the Company's Common Equity and Related
Stockholder Matters.)
Changes in the Board of Directors and Management
During 2001, there were a number of changes in the composition of our
board of directors. On January 25, 2002, Raymond W. Brennan and Alan J. Glazer
resigned from the board of directors and Melvin Meskin, Mark S. Hoffman and Eric
J. Bertrand were elected by the board of directors to fill vacancies on the
board. These new board members are designees of Palisade pursuant to Palisade's
right, obtained in the Capital Restructuring Transactions, to designate a
majority of the board of directors. Palisade may designate additional directors
if it so desires. The board of directors is now comprised of: Dean J. Yimoyines,
M.D., Chairman; Norman S. Drubner, Esq.; Melvin Meskin; Mark S. Hoffman; Eric J.
Bertrand; and Frederick A. Rice.
On September 1, 2001, William A. Blaskiewicz, formerly our Chief
Accounting Officer, was named Chief Financial Officer of the company, replacing
Steven L. Ditman. On February 18, 2002, Christopher J. Walls, Esq., joined us as
Vice President and General Counsel.
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, including
disease and/or lack of functionality of the eyes. The most common conditions
addressed by eye care professionals are nearsightedness, farsightedness and
astigmatism. These eye and vision conditions are treated with surgical
intervention (notably, laser surgery), prescription glasses, contact lenses or
some combination of these treatments. The optical products portion of the eye
care market consists of the manufacture, distribution and sale of 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
20,000 practicing ophthalmologists and 31,000 practicing optometrists in the
U.S.
The U.S. market for eye care services and products is very large and
growing. Approximately 61% of the U.S. population--169 million people--require
some form of vision correction; and over 100 million--or some 60% of
7
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 is expected to grow. Further, the rise of
third-party plan providers continues to fuel growth in the industry. Since 1989,
the portion of the eye care population covered by third-party plan providers has
grown from 40% to 54%.
Spending in 2001 for health care services related to eye care was
approximately $29 billion, and spending on retail optical products totaled $15.8
billion. We do business in both sectors of this $45 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 expect 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. In our
view, 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 for 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 that we are positioning ourselves to capitalize on that growth,
although favorable results cannot be assured.
Eye Care Products and Services
We 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 patients over the age of 65 are most affected by
these eye disorders, the Medicare program is the primary payer for treatment of
these disorders, including surgery.
Although vision correction techniques and technologies are growing
dramatically, the demand for basic optical goods, including corrective lenses,
eyeglass frames and other optical products remains substantial. Of the $45
billion eye care market, consumers spend approximately $15.8 billion on retail
optical products. Approximately 84%, or $13.8 billion, is spent on lenses and
frames, while approximately 12.3%, or $1.9 billion, is spent on contact lenses.
DESCRIPTION OF BUSINESS DIVISIONS
Our business operations are managed through three divisions which,
together, cover virtually every major sector of the eye care market:
o Managed Care Services. We contract with insurers, managed care
plans and other third party payers to manage claims payment
administration of eye health benefits for those contracting
parties in eight states.
8
o Professional Services. We provide laser and ambulatory surgery
facilities; develop and sell integrated practice management
systems, including Internet-based software solutions; and provide
support services to eye care professionals throughout the country.
o Other Integrated Services. We own, operate and/or contract with
integrated eye health centers and professional optometric
practices in Connecticut and North Carolina; and provide wholesale
buying services to eye care professionals nationwide.
For certain financial information about the company's three business
divisions, see Note 6 to our consolidated financial statements, which are
included in this report beginning at page F-1.
Managed Care Services Division
We have significant expertise in providing managed care services for
insurance companies, HMOs and other third-party payers. We 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 March 1, 2002, we administered eye care benefit programs,
delivered through networks of eye care professionals nationwide, for 2.5 million
lives managed under capitation (i.e., payment by an insurer to a managed care
entity or network of a fixed amount per member or per enrollee each month,
quarter or year) and fee-for-service arrangements; and for approximately 3.0
million lives under discount or network leasing arrangements. Types of benefits
administered include routine wellness eye examinations, optical goods (e.g.,
eyeglasses and contact lenses) and medical/surgical eye care.
Under each managed care contract, we "credential" (i.e., establish to
our and the third-party payer's satisfaction the credentials of) 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
standards.
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
payers. Some of the services provided are described below.
Plan Member Relations. We provide service representatives 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 plan
members prior to performing certain eye care procedures. 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
a total of eight procedures associated with two diseases. This change reduces
administrative burdens but may increase our risk of adverse claims experience,
and there can be no assurance that adverse claims experience will not develop.
There has not been
9
a statistically significant change in utilization patterns to date as a result
of this reduction in the number of procedures that require pre-authorization.
To enhance our claim payment administration, we utilize proprietary
systems which allow us to strictly follow Center for Medicare and Medicaid
Services (formerly HCFA) rules for payment of eye care claims. In addition, we
have posted on-line our clinical criteria for treatment of every eye care
condition for which we provide covered services. Our providers can use our
secure web server to check these criteria and to inform themselves of new or
modified criteria as changes occur. We also have Internet capabilities for
direct claim submission, claim tracking, provider locator, and eligibility and
benefit verification services. Additionally, we accept claims via electronic
data interchange allowing providers to send claims through their own practice
management software. We believe these enhancements 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 or written 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 they are 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
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 reduce unnecessary procedures,
hence costs, there can be no assurance that costs may not become excessive.
Credentialing. We provide credentialing services according to national
standards set by the National Committee for Quality Assurance by which health
plans are measured for compliance with quality assurance initiatives. In those
instances, we undertake a thorough review process on each prospective eye care
professional, which includes, for each provider, obtaining a copy of the state
license and Drug Enforcement Agency number, verifying hospital privileges,
liability insurance and board certification, and reviewing work history. Eye
care professionals who are credentialed for our panels are currently
re-credentialed every two years. All credentialed eye care professionals must
meet the guidelines of the National Committee for Quality Assurance, a leading
quality assurance authority. OptiCare has received accreditation and was
re-awarded accreditation as a Credentialing Verification Organization by the
National Committee for Quality Assurance for 10 out of 10 elements.
Periodic Cost Reports. Periodic analytical reports on costs are
prepared for our 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, Inc., is licensed as a single-service
HMO in Texas. (See Regulation of Our HMO Subsidiary, below.) We hold licenses as
a third-party administrator in Florida and are a licensed utilization review
agent in Texas, Tennessee, New York, and Connecticut.
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,
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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, a portion of which is
reported as 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., an affiliated Connecticut professional corporation, to provide
surgical and other services to patients at the ambulatory and laser surgical
centers.
Management Services. We sell a broad range of management services and
eye care systems to eye care professionals, principally ophthalmologists and
optometrists.
Through our software operation, Cohen Systems, we develop and provide
practice management/point-of-sale software systems for optometry practices and
retail optical locations and fabricating systems for optical manufacturing
laboratories. These products support eye health practice management, billing,
collections, record-keeping, production control and inventory control
applications.
As of December 31, 2001, we had approximately 150 retailers and 100
lens manufacturers 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 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 interface between the patient examination phase and the
computer-driven eyeglass manufacturing phase, reducing expense and minimizing
the possibility of error.
We believe that there will be increasing demand for management and
information systems solutions for independent practitioners (which make up the
majority of practicing ophthalmologists) as well as for group practices. We
believe these doctors and opticians have the potential to benefit from our
services in this area.
Health Services Organization. Our Health Services Organization,
referred to as HSO, provides marketing, managed care and other administrative
services to individual ophthalmology and optometry practices. As of March 1,
2002, 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 these agreements, we receive a percentage (generally
3%) of the revenues earned by these practices in exchange, among other things,
for the core services we provide. In addition, the practices may obtain various
supplemental services, which they may purchase at agreed-upon rates on a menu
basis. HSO participants also have access to our buying group program.
The company is having disputes with a number of its Health Services
Organization practices, some of which are not paying their services fees and we
are in litigation with certain of these practices. The company intends to
vigorously defend or prosecute these matters. Though the company strongly
believes in the merits of its position, there can be no assurance of a favorable
outcome, and failure to collect or recover services fees due to the company
could have material adverse consequences for the company's cash flow and
financial condition. (See Item 3. Legal Proceedings.)
Other Integrated Services Division
The Other Integrated Services Division provides eye care services and
products to consumers through 46 integrated eye health centers and professional
optometric practices we own, operate and/or contract with 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
measuring and non-surgical correction services by optometrists. We operate 19
centers in Connecticut and conduct all management, billing, systems and related
procedures for the operation of these centers.
Professional Optometric Practices. The professional optometric practice
locations, which we own, operate and/or
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contract with, 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
professional optometric practices provide all customary optical goods and are
supported by our billing, collection, and information systems. We operate or
contract with 45 retail optical locations in Connecticut and North Carolina (19
of those, in Connecticut, also offering medical services and, hence, being the
integrated eye health centers discussed above). 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 professional optometric
practices, we contract with professional corporations--OptiCare, P.C., and
Optometric Eye Care Center, P.A.--which employ ophthalmologists and optometrists
to provide surgical, medical, optometric and other professional services to
patients. We provide management services to OptiCare P.C. and to Optometric Eye
Care Center, P.A. under renewable professional services and support agreements.
However, we are currently in dispute with Optometric Eye Care Center, P.A. and
its owners, Drs. Allan L.M. Barker and D. Blair Harrold, concerning the services
we provide under the services agreement and failure to resolve that dispute
could have a material adverse effect on our business, operations and financial
position. (See Item 3. Legal Proceedings - Regulatory Proceedings; - Potential
Litigation.)
In addition to our owned and/or operated locations, an affiliate of
ours has franchise arrangements with 30 professional optometric practices in
North Carolina and South Carolina. Under license agreements, those practices are
permitted to utilize proprietary trademarks and trade names, including the
affiliate's tradename, "Optometric Eye Care Center," and offer specific
marketing programs and group purchasing services. Though these agreements are
generally for five year terms, the licensee is usually granted the right to
terminate the agreement upon not less than 30 days' notice. The licensees pay
our affiliate a fee based on a percentage of their gross revenue and have the
option of requesting additional services 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 professional optometric practices, as well as
independent ophthalmology and optometric practices and opticians with optical
and ophthalmic goods and medical supplies (i.e., eyeglass frames and lenses,
contact lenses, clinical equipment and other supplies). Over 3,500 eye care
professionals nationwide participate in our buying group. This program leverages
the purchasing strength of a large number of participants and buys from a
national panel of approximately 280 vendors.
We enter into a non-exclusive account relationship with the buying
ophthalmologists, optometrists and opticians 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; EYE
CARE FOR A LIFETIME(R); EYEWEAR AND EYE CARE FOR A LIFETIME(R); CONNECTICUT
VISION CORRECTION(R); LOSE THE GLASSES, KEEP THE VISION(R); THE DIFFERENCE IS
CLEAR(R); KEEPING YOU AHEAD OF THE CURVE(R); and TLC(R). Another trademark for
which an application for U.S. registration is pending are the Vision of Health
(TM) and DOCTOR'S EXPRESS(TM). We also maintain a common law trademark in CLAIM
IT (TM). We own the following domain names: opticare.com; opticareeye.com;
opticare.net; opticare-ehn.com; opticarenas.net; opticareonline.com; and
optical-online.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.
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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 Division competes with several regional and national
eye health companies which 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 than ours.
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 Other Integrated Services Division, the most direct form of
competition is with independent ophthalmologists and optometrists, as well as
with regional operators of retail optical locations. On a national basis,
companies that compete in this sector include retail optical chains, such as
LensCrafters, Cole Vision, Wal-Mart, Eye Care Centers of America, Vista Eyecare,
Consolidated Vision Group, Costco Wholesale, U.S. Vision, Sterling Optical and
D.O.C. Optics. 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 than
we have or may charge less for certain services than we do. However, we believe
the integrated nature of our business model provides significant competitive
advantages in the marketplace.
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:
Preferred Provider Networks. In Connecticut, the sponsors of preferred
provider networks are required to register and file annual updates with the
Office of Health Care Access. Disclosure of a number of enumerated items is
required. Newspaper publication is required for the expansion of such a network
into a new county. Among other things, a network is to submit to the Office of
Health Care Access and make available upon request to providers its general
criteria for the selection or termination of health care providers. A provider
cannot be rejected or terminated until the provider has been advised of the
criteria his practice fails to meet.
Surgical Facility Regulations. We operate a licensed ophthalmic
outpatient surgical facility in Connecticut. This facility is subject to the
terms of Certificate of Need approvals from the Office of Health Care Access and
licensure under the provisions of the Connecticut Public Health Code. The
facility also is a participating provider under the federal Medicare and
Connecticut Medicaid programs and has provider agreements with various
commercial and governmental third-party payers. Violation of any of the terms
and conditions of the Certificate of Need approvals and the Connecticut Public
Health Code license governing the facility's operation could result in fines or
other sanctions against the facility and its operators, including the company
being enjoined or precluded from further operation of the facility. Failure to
adhere to the terms of participation for the Medicare or Medicaid programs or a
violation of billing or other requirements for the public and private
third-party payment programs governing the facility could result in civil or
criminal sanctions against the facility and its operators, refund obligations or
claims denials and/or termination or exclusion from participation in the
Medicare, Medicaid or other payer programs. The
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structure of relationships involving the facility and clinicians providing
services in conjunction with the facility also is subject to the federal fraud
and abuse statute (the anti-kickback statute) and related state and federal
authorities.
Utilization Review Regulations. We also hold a license to operate as a
utilization review company in Connecticut. This requires us to register with the
Connecticut Insurance Department and to periodically renew our license and
update information with the Department as to the company's utilization review
staffing, policies and procedures. In conducting utilization review activities,
we are subject to various provisions of Connecticut law addressing the manner in
which such activities are to be conducted. Violation of these provisions could
subject us to penalties and could result in a revocation of our license as a
utilization review company.
Excimer Laser Regulation. Medical devices, including the excimer lasers
used in our eye surgery and laser center, are subject to regulation by the U.S.
Food and Drug Administration, referred to as the FDA. Failure to comply with
applicable FDA requirements could subject us, 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 use of excimer lasers by physicians
outside 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, our 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. It has been
monitoring marketing activities in this area through a non-public inquiry to
identify activities 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 non-approved uses of excimer lasers, the FDA
reserves the right to regulate advertising and promotion of non-FDA-approved
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 to payment on a capitated
basis (i.e., payment by an insurer to a managed care entity or network of a
fixed amount per member or per enrollee each month, quarter or year).
There are exceptions to these rules in some states. For example,
certain states such as Texas, where we work strictly on a capitated basis,
require that the risk-bearing entity (e.g., the managed care company) be
licensed for capitated arrangements unless that entity qualifies under certain
exceptions (such as that it be a professional corporation which is owned by eye
care providers). We do not qualify for such an exception. We are currently
licensed only in Texas and operate our capitated arrangements through a
wholly-owned HMO subsidiary. If we are required to become licensed under the
laws of other states, 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, which,
if waivers or other exemptions are not available, might cause us to withdraw
from those states or otherwise cause a material adverse change to our business,
operations, or financial position. Once licensed, we would be subject to
regulatory compliance and reporting to the licensing authority. These same
requirements can also serve as a barrier to entry to competition in states where
such licensure is required.
Regulation of Our HMO Subsidiary. We hold one single-service HMO
license in Texas. The Texas managed care business is highly regulated. Texas
requires the filing of quarterly and annual reports, submission to periodic
on-site examinations, filing of audited financial reports on an annual basis,
the booking of reserve liabilities and the maintenance of statutory deposits and
minimum net worth. Other regulations include, but are not limited to,
restrictions on rate increases for the small group market; mandated benefits;
and rules governing relationships with, and payments to, network providers. In
Texas, a single service HMO must maintain a minimum net worth of
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$500,000 and may be required to have additional capitalization based on a
risk-based capital requirement. These regulations also require approval by the
Department of Insurance for changes of ownership control of Texas managed care
entities. In connection with the Capital Restructuring Transactions, we have
submitted a Form A Application to the Texas Department of Insurance seeking
permission for a change of control and are awaiting a decision of the
Department. Although we believe that permission for a change of control will be
granted, as we believe such change to be in the best interests of the public we
serve, in the event our application is declined and if an appeal therefrom is
disallowed or declined, we may be forced to withdraw from doing business in
Texas, which could have a material adverse effect on our business, operations
and financial position.
Texas Commissioner of Insurance Order. Our wholly owned Texas HMO, AECC
Total Vision Health Plan of Texas, Inc., is required by the terms of an 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,
provided that such payments comply with 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 sharing
of administrative costs. The cost allocation agreement may be amended only with
approval of the Texas Department of Insurance.
Third Party Administration Licensing. Some states require licensing for
companies providing administrative services in connection with managed care
business. We currently hold a third-party administrator license only in Florida.
We may seek licenses in the states where they are required for eye care
networks, if needed. In the event such licensure is required and we are unable
to obtain a license, we may be forced to withdraw from that state, which could
have a material adverse effect on our business.
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. We believe 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, although Texas does impose certain
anti-discrimination requirements for optometrists and ophthalmologists.
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 and professional
corporations (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;
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o Perform only non-professional services;
o Do not represent to the public or customers that we provide
professional eye care services (which is done by the professional
corporations with which we have management contracts); 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.
Prohibitions of Certain Referrals. The Omnibus Budget Reconciliation
Act of 1993 includes a provision that significantly expands the scope of the
Ethics in Patient Referral Act, also known as "Stark." The provisions of Stark
originally prohibited a physician from referring a Medicare or Medicaid patient
to any entity for the provision of clinical laboratory services if the physician
or a family member of the physician had an ownership interest in or compensation
relationship with the entity. The revisions to the Stark Bill prohibit a
referral to an entity in which the physician or a family member has a prohibited
ownership interest or compensation relationship if the referral is for any of a
list of "designated health services." This list of designated health services
includes "prosthetic devices", which the Stark regulations define to include
certain types of eyeglasses and contact lenses for patients that have undergone
certain ophthalmic procedures. The Stark regulations provide that sales of these
types of eyewear are permissible if the arrangement between the physician and
the eyewear seller conforms to the Anti-Kickback Amendments and other regulatory
requirements. There can be no assurance that future interpretations of such laws
and future regulations promulgated thereunder will not affect our existing
relationships with affiliated practices.
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 it endorses the
AMA Code of Medical Ethics Opinions 6.02, 6.03, and 6.04 condemning
fee-splitting. According to the Position Statement, fee-splitting may be the
receipt of money or something else of value in return for referrals or
remuneration from a drug or device manufacturer/distributor, a sales
representative, or another professional as an incentive for the use of that
interested party's product. Except in instances permitted by North Carolina law,
it is the Medical Board's position that sharing profits between a non-physician
and physician partner on a percentage basis is fee-splitting and is grounds for
disciplinary action. The Medical Board has never applied its Position Statement
in the context of a physician practice management company, but this issue has
been raised in several lawsuits in the 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
our 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.
(See Item 3. Legal Proceedings - Regulatory Proceedings.)
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.
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In addition, North Carolina law prohibits self-referrals through a
statutory scheme that is broader in scope than the Stark law discussed below.
The law provides that a health care provider--which includes ophthalmologists
and optometrists--may not make any referral of any patient to any entity in
which the health care provider is an investor. The law further provides that a
health care provider may not enter into an arrangement or scheme, such as a
cross-referral arrangement, that the health care provider knows or should know
is intended to induce referrals of patients for designated health care services
to a particular entity. "Designated health care services" includes any health
care procedure or service provided by a health care provider that is covered by
or insured under any health benefit plan regulated by state or federal law.
Making referrals to an entity as described above constitutes a "prohibited
referral" under the law and could subject the health care provider to
disciplinary action with respect to such health care provider's license and/or
civil money penalties as prescribed by law. However, a "prohibited referral"
under the North Carolina self-referral law does not include any referral to an
entity for a designated health care service which is provided by or under the
personal supervision of a member of a group practice to the patients of that
group practice, and the law does not apply in certain under-served areas.
Federal Anti-Kickback Law. Federal law prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of "federal health care program" patients, or in return for the purchase, lease
or order of any item or service that is covered by a "federal health care
program". A "federal health care program" includes Medicare, Medicaid,
TriCare/CHAMPUS, and certain other state programs funded by the federal
government, among others. Pursuant to this law, the federal government has
pursued a policy of increased scrutiny of transactions among health care
providers in an effort to reduce potential fraud and abuse relating to
government health care costs. The Medicare and Medicaid anti-kickback statute,
referred to as the Anti-Kickback Statute, provides criminal penalties for
individuals or entities participating in federal health care programs who
knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce referrals for items or services reimbursed under such programs. In
addition to federal criminal penalties, the Social Security Act provides for
civil monetary penalties and exclusion of violators from participation in
federal health care programs. A violation of the Anti-Kickback Statute requires
the existence of all of these elements: (i) the offer, payment, solicitation or
receipt of remuneration; (ii) the intent to induce referrals; (iii) the ability
of the parties to make or influence referrals of patients; (iv) the provision of
services that are reimbursable under any federal health care programs; and (v)
patient coverage under any federal health care program.
To our knowledge, there have been no case law decisions regarding
service agreements similar to ours that would indicate that such agreements
violate the Anti-Kickback Statute. On April 15, 1998 the Office of Inspector
General of the U.S. Department of Health and Human Services, referred to as 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. Further, we
believe that the remuneration we receive for providing services does not violate
the Anti-Kickback Statute. Because of the breadth of the Anti-Kickback Statute
and the government's active enforcement thereof, there can be no assurance,
however, that future interpretations of such laws will not require modification
of our existing relationships with practices. If our services agreements are
ever determined to be in violation of the Anti-Kickback Statute, it is
17
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 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.
EMPLOYEES
We and our affiliates have approximately 700 employees, including, 231
licensed ophthalmologists, optometrists and opticians and 92 ophthalmic
assistants. These numbers include an aggregate of approximately 100 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. 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 three separate leases with
remaining terms ranging from 1 month to 11 years. Each of these leases also has
renewal options ranging from 5 to 20 years in total. The combined annual base
rent is $847,000 for a total of 44,400 square feet.
The facilities in Rocky Mount, NC, which contain executive offices, HMO
offices and an operations center, are leased under four separate leases with
remaining terms of from 1 month to three 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.
We and our affiliate, Optometric Eye Care Center, P.A., 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 up to 10 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
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The company and/or its subsidiaries are involved in five Health
Services Organization, referred to as HSO, lawsuits, described below. Each suit
involves a medical practice which was unwound from the former network of our
subsidiary, PrimeVision Health, Inc., and which remained associated with the
company through an HSO agreement. Generally, the HSO agreements require the
practice to pay monthly fees to PrimeVision and obligates PrimeVision to provide
only certain "Core Services." Other "Supplemental Services" are optional. The
company maintains that it has fully complied with the HSO agreements by
providing these Core Services. The HSO agreements generally are for a fifteen
year term, subject to early termination. A practice is allowed to terminate only
on very limited conditions. However, even on early termination, the practice is
contractually obligated to pay a "Buy-Out Price." The Buy-Out Price is a stated
fixed sum, reduced by certain percentages on the fifth and tenth anniversaries
of the HSO Agreement. The suits are in the early 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 PrimeVision, a
subsidiary of the company, allegedly exceeds the value of the "core services"
received from PrimeVision by the practice, the HSO agreement is unlawful, as it
violates the California Business and Professions Code. At PrimeVision's request,
the case has been removed from California state court to the U.S. District Court
in California. OptiCare and PrimeVision have denied the plaintiffs' allegations
and have filed counterclaims for payment of past due services fees. A scheduling
conference was held in March 2002 wherein the parties agreed to a discovery
schedule and a tentative trial date in September 2003. The parties continue to
discuss possible settlement of this matter although there can be no assurance a
settlement will occur. Though we strongly believe in the merits of our position
and intend to vigorously prosecute our counterclaims and defend our position,
the case is in its early stage 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. Further, in PrimeVision Health, Inc. v. Charles Retina,
P.C., et al, filed on November 1, 2001, in the U.S. District Court for the
Eastern District of North Carolina, Western Division, the company has filed suit
against Charles Retina Institute et al. seeking to enforce the HSO agreement.
The parties have filed various motions seeking to dismiss the actions or, in the
alternative, to transfer venue to either Tennessee or North Carolina.
Coordinated scheduling orders have recently been filed in each of the two cases
but no substantive discovery has been undertaken. Though we strongly believe in
the merits of our position and intend to vigorously prosecute our claims and
defend our position, the case is in its early stage and no assurance can be
given of a favorable outcome.
Huntington & Distler, et al. v. PrimeVision Health Inc., filed on
November 20, 2001, in the U. S. District Court for the Western District of
Kentucky. Plaintiffs, a Kentucky medical practice and its owners, claim that the
HSO contracts were procured by fraud or mistake and are otherwise void because
the services enumerated are inadequate consideration. Alternatively, plaintiffs
claim that the company has failed to provide the core services required by the
contracts. Plaintiffs seek to avoid an obligation to pay the contractually
mandated buy out price. The company has answered, denying all material
allegations, and seeks the recovery of past due monthly services fees and the
buy out price. Though we strongly believe in the merits of its position and
intend to vigorously defend our position, the case is in its early stage and no
assurance can be given of a favorable outcome.
Eye Associates of Southern Indiana & Bradley C. Black v. PrimeVision
Health Inc., filed on November 20, 2001, in the U. S. District Court for the
Southern District of Indiana. Plaintiffs, an Indiana medical practice and its
owner, claim that the HSO contracts were procured by fraud or mistake and are
otherwise void because the services enumerated are inadequate consideration.
Alternatively, plaintiffs claim that the company has failed to provide the core
services required by the contracts. Plaintiffs seek to avoid an obligation to
pay the contractually mandated buy
19
out price. The company has answered, denying all material allegations, and seeks
the recovery of past due monthly services fees and the buy out price. Though we
strongly believe in the merits of our position and intend to vigorously defend
our position, the case is in its early stage and no assurance can be given of a
favorable outcome.
On March 18, 2002, the company filed with the Judicial Panel on
Multidistrict Litigation, referred to as the Panel, a motion to transfer to the
United States District Court for the Eastern District of North Carolina, for
consolidated and coordinated pretrial proceedings, each of the four HSO lawsuits
not already pending in that court. The grounds for the motion are that the cases
involve numerous common questions of law and fact and that consolidated and
coordinated treatment will avoid inconsistent rulings, eliminate duplicatative
discovery, conserve resources and promote efficiency and convenience for the
parties, witnesses and the court. The rules of the Panel allow the parties until
April 8, 2002 and April 15, 2002 to file opposition and reply papers,
respectively. The Panel will thereafter schedule oral argument on the motion.
The pendency of the motion does not automatically stay the pending actions.
OTHER LITIGATION
OptiVest, LLC v. OptiCare Health Systems, Inc., OptiCare Eye Health
Centers, Inc. and Dean Yimoyines, filed in the Superior Court, Judicial District
of Waterbury, Connecticut on January 14, 2002. Plaintiff is a Connecticut
limited liability corporation that entered into an Asset Purchase Agreement for
certain assets of the company. The company believes it properly cancelled the
Asset Purchase Agreement pursuant to its terms. Plaintiff maintains that it
incurred expenses in investigating a potential purchase of certain assets, that
the company misled it with respect to its financial condition, and, as a result,
plaintiff has suffered damages. Plaintiff seeks specific performance of the
Asset Purchase Agreement and an injunction prohibiting the company from
interfering with concluding the transactions contemplated by the Asset Purchase
Agreement. Further, plaintiff alleges a breach of contract with regard to the
Asset Purchase Agreement. Plaintiff further alleges the company engaged in
innocent misrepresentation, negligent misrepresentation, intentional and
fraudulent misrepresentation, and unfair trade practices with respect to the
Asset Purchase Agreement. The company denies plaintiff's allegations and
believes they are baseless and without merit; however, the company has not yet
filed an answer to the complaint. We intend to vigorously defend our position,
but the case is in its earliest stages and, therefore, no assurance can be given
of a favorable outcome.
REGULATORY PROCEEDINGS
On or about August 8, 2001, our affiliate, Optometric Eye Care Center,
P.A., and Allan Barker, O.D. and D. Blair Harrold, O.D., who are officers of the
company, received a request for information from the North Carolina State Board
of Examiners in Optometry in exercise of its continuing authority to oversee the
implementation of a consent order entered in December 1999. Optometric Eye Care
Center, P.A. is a North Carolina professional association licensed to practice
optometry, which is wholly owned by Drs. Barker and Harrold. The employment of
Drs. Barker and Harrold by the company is governed by separate employment
agreements which are independent of their ownership of Optometric Eye Care. The
company, through its wholly-owned subsidiary, PrimeVision Health, Inc., has a
Professional Services and Support Agreement with Optometric Eye Care pursuant to
which the company provides management services to Optometric Eye Care, and
Optometric Eye Care provides optometry services to managed care plans and other
arrangements involving the company. This agreement was approved by and attached
to the Board's Consent Order. Optometric Eye Care and Drs. Barker and Harrold
provided the Board with information pursuant to the request.
Thereafter, on November 15, 2001, the Board's counsel convened an informal
meeting of counsel to discuss the information provided by the parties and
invited PrimeVision to participate. At the informal meeting, Optometric Eye Care
and Drs. Barker and Harrold contended that the Board should review a broad array
of issues between Optometric Eye Care and the company. The company contended
that these issues extend well beyond the Board's inquiry into the implementation
of the consent order. Optometric Eye Care and Drs. Barker and Harrold further
claimed that the company has violated the doctrine prohibiting the corporate
practice of medicine by excessively controlling Optometric Eye Care and refusing
to honor all provisions of the Services Agreement which was entered into in
1999, and treating it as a controlled subsidiary. Optometric Eye Care and Drs.
Barker and Harrold further
20
contend that the Services Agreement may have become unlawful because of changes
in the corporate practice doctrine. Further, Optometric Eye Care and Drs. Barker
and Harrold maintain that they are not bound by the April 1999 Settlement
Agreement requiring them to enter into a succession agreement (under which they
would have allowed their ownership of Optometric Eye Care to be transferred to
another doctor of optometry licensed in North Carolina subject to Board
approval), as this provision was either waived by the company or on grounds that
such a provision violates the corporate practice doctrine.
We deny that we have waived the requirement that Drs. Barker and
Harrold enter into a succession agreement and further contend that enforcement
of such a provision does not violate the corporate practice of medicine
doctrine. Additionally we maintain that we have substantially complied with the
Services Agreement, have not exercised excessive control over Optometric Eye
Care and do not treat Optometric Eye Care as a controlled subsidiary for
purposes of the corporate practice of medicine doctrine.
The parties have submitted memoranda outlining their respective
positions to the Board. The parties also are engaged in settlement discussions
and, as a result, a previously scheduled pre-hearing conference and hearing date
have been postponed and have not yet been rescheduled. While the Board has
indicated that Drs. Barker and Harrold and Optometric Eye Care, as its
licensees, are the nominal parties with respect to whom the regulatory
proceeding was initiated, the Board has given the company the opportunity to be
present at the pre-hearing conference where the issues that will proceed to
hearing will be determined. Further, it has afforded each party the opportunity
to file submissions addressing the issue as to whether the company may
participate in the hearing and, if so, its status at the hearing. Though we
strongly believe in the merits of our position and intend to vigorously defend
that position, no assurance can be given that we will be able to directly
participate in the hearing or that there will be a favorable outcome.
OPTOMETRIC EYE CARE CENTER, P.A. CLAIM
On February 22, 2001, Optometric Eye Care gave the company notice of
its intent to terminate the Services Agreement between itself and the company's
subsidiary, PrimeVision. The notice cited numerous alleged breaches of
contractual obligations due to Optometric Eye Care from PrimeVision and gave us
the contractually provided 60 days to cure such breaches. The company adamantly
denies that such alleged material breaches have occurred.
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 Services Agreement. Although that tolling
agreement was renewed on several occasions through 2001, it has currently
expired.
The company believes, however, that it has reached an agreement in
principle with Optometric Eye Care, and Drs. Barker and Harrold that would
resolve the dispute. The proposed agreement contemplates that the parties enter
into a transaction wherein Optometric Eye Care or another entity that is
controlled by Drs. Barker and Harrold will purchase the assets and assume
certain liabilities of our North Carolina professional optometric practices and
retail optometry sales business. The proposed sale will not include the
company's other North Carolina operations (i.e., our Managed Care Division and
Buying Group). The parties have not entered into a written agreement regarding
the proposed transaction and there can be no assurance that a settlement will
occur or that the parties will consummate the proposed transaction.
If Optometric Eye Care moves to enforce termination of the Services
Agreement, the company will vigorously challenge its right to terminate the
agreement and will take all appropriate steps to protect its 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 optometry practice. The company believes
that it is in substantial compliance with the Services Agreement and has made
clear that it will take any appropriate step to cure any noncompliance should it
be determined that such is necessary. Additionally, neither termination of the
Services Agreement nor transfer of the ownership of Optometric Eye Care would
have a direct impact on the employment status of Drs. Barker and Harrold as
officers of the company.
Termination of the Services Agreement could have material adverse
consequences for the company's ability to
21
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 Professional Association which employs the doctors who practice in those
centers.
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 company did not submit any matters to a vote of security holders in
2001. Certain aspects of the Capital Restructuring Transactions described above
were presented to our security holders in January 2002.
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 March 1, 2002. 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. 54 Chairman of the Board of Directors, Chief Executive Officer and
President
William A. Blaskiewicz 39 Vice President and Chief Financial Officer
Allan L.M. Barker, O.D. 54 President of the Professional Services Division
Eric J. Bertrand 29 Director
Gordon A. Bishop 52 President of Connecticut Operations and the Buying Group
Stephen Cohen 54 President of Cohen Systems
Norman S. Drubner, Esq. (1) 61 Director
D. Blair Harrold, O.D. 55 President of Retail Optometry, North Carolina Operations
Jason M. Harrold 32 President of the Managed Care Division
Mark S. Hoffman 40 Director
Melvin Meskin 57 Director
Frederick A. Rice 56 Director
Christopher J. Walls 38 Vice President and General Counsel
- -------------------
(1) Mr. Drubner resigned from the board of directors on February 23, 2001,
and was appointed again on November 1, 2001.
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, Inc. and served as the Chairman, President and
Chief Executive Officer of OptiCare Eye Health Centers, Inc. since 1985. Dr.
Yimoyines has been instrumental in
22
the development and implementation of OptiCare Eye Health Centers, Inc.'
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. Prior to that he was 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). He holds a Master of Business
Administration from the University of Hartford and a Bachelor of Science in
Accounting from Central Connecticut State University, and 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 of OptiCare Health Systems, Inc. since August 13, 1999 and was a
director of the company from August 1999 to January 2001. Dr. Barker was a
senior executive officer and director of PrimeVision 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. Bertrand, who was elected to the board on January 25, 2002, is a
Vice President of Palisade Capital Management, LLC, an affiliate of Palisade
Concentrated Equity Partnership, L.P. From 1996-1997, Mr. Bertrand held a
position with Townsend Frew & Company, a healthcare-focused investment banking
boutique. From 1994 to 1996, he held positions with Aetna, Inc.'s private equity
group, focusing on middle market leveraged buy-outs and larger private equity
investments. Mr. Bertrand is a director of Versura, Inc. and Control F-1. He
holds a Bachelor of Science in Business Administration from Bryant College and a
Masters of Business Administration in Finance and Entrepreneurship with a
certificate in the Digital Economy from New York University.
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. Cohen has been President of Cohen Systems, the software division 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
23
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. Mr. Drubner holds
a Bachelor of Arts degree from Boston University and received his Juris Doctor
degree from Columbia University in 1963.
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 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. 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. Hoffman, who was elected to the board on January 25, 2002, is a
Managing Director of Palisade Capital Management, LLC, an affiliate of Palisade
Concentrated Equity Partnership, L.P., which he joined upon its formation in
1995. He is a director of several privately held companies, including YHD
Realty, Berdy Medical Systems, C3I, Marco Group and Neurologix. Mr. Hoffman is a
graduate of the Wharton School at the University of Pennsylvania.
Mr. Meskin, who was elected to the board on January 25, 2002, was,
until his retirement on December 31, 2001, Vice President - Finance - National
Operations for Verizon, the combined Bell Atlantic/GTE telecommunications
company. Mr. Meskin joined New York Telephone in 1970 and held a variety of line
and staff assignments with the company over a 31-year career. In 1994, he was
named Vice President - Finance and Treasurer for NYNEX Telecommunications. When
Bell Atlantic and NYNEX merged, he was appointed Vice President - Finance and
Comptroller of Bell Atlantic. Mr. Meskin is a member of the Board of Trustees of
Nyack Hospital and the Board of Trustees of the Post Graduate Center for Mental
Health.
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,
24
banking and financial institutions, at Ramapo College in New Jersey and St.
Thomas Aquinas College in New York.
Mr. Walls has served as Vice President and General Counsel of OptiCare
Health Systems, Inc. since February 18, 2002, subject to Board approval, which
was obtained on March 19, 2002. Prior to joining OptiCare, from December 2000 to
February 2002, Mr. Walls was Vice President, Corporate Counsel and Corporate
Secretary for Outpost.com, a technology company in Connecticut. Prior to that,
from October 1999 to December 2000, he was Corporate Counsel, Vice President of
Business Affairs and Assistant Corporate Secretary with Real Media Inc., an
international technology start-up. Mr. Walls has also served as an in-house
litigator with St. Paul Fire and Marine Insurance Company from December 1995 to
October 1999 and was in private practice concentrating on litigation that
included medical malpractice defense and complex insurance administrative
proceedings. Mr. Walls received his Bachelor of Arts degree from the University
of Dayton and his Juris Doctor degree from Widener University School of Law.
25
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
American Stock Exchange Suspension and Proposed Delisting
On April 20, 2001, the American Stock Exchange suspended trading of the
company's common stock, and the exchange did not permit trading in the stock
from that date until December 12, 2001, principally because the company had not
filed its Annual Report on Form 10-K for the year ended December 31, 2000, or
its Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and
September 30, 2001. The company filed all those reports by December 3, 2001, and
the exchange thereafter permitted trading to resume on December 12, 2001.
By letter dated November 19, 2001, the staff of the American Stock
Exchange advised the company that it would recommend to the exchange's Committee
on Securities the delisting of the company's common stock. The company appealed
such recommendation and a hearing on the appeal was held before the Committee on
Securities on January 29, 2002. The Committee decided at that time to postpone a
determination of whether or not to delist the company's common stock pending
timely receipt of the company's Annual Report on Form 10-K for the year ended
December 31, 2001, and review of that report by the Committee and the staff of
the exchange.
The company cannot assure that its common stock will continue to be listed
without further suspensions, or that the exchange will not de-list the company's
common stock in the future. 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 our common stock does not increase.
If the company's common stock is de-listed, 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 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;
26
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; and
o 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 broker-dealer does not recommend the transaction.
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.
Trading in OptiCare Common Stock
The high and low prices for the periods presented are based on trades
effected on the American Stock Exchange.
2001 HIGH LOW
---- ---- ---
4th Quarter * $0.160 $0.100
3rd Quarter * - -
2nd Quarter * 0.290 0.200
1st Quarter 0.625 0.320
2000 HIGH LOW
---- ---- ---
4th Quarter $0.875 $ 0.250
3rd Quarter 2.125 0.688
2nd Quarter 3.500 2.000
1st Quarter 4.500 3.000
* Trading in our common stock was suspended by the American Stock Exchange on
April 20, 2001, and was permitted to resume on December 12, 2001.
On March 1, 2002, the last reported sale price of our common stock on
the American Stock Exchange was $0.17 per share. As of March 1, 2002, there were
approximately 200 stockholders of record of our common stock. The number of
record holders was determined from the records of the company's transfer agent,
Mellon Investor Services, LLC, 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. Based on the numbers of requests for
solicitation materials by such persons in response to the company's solicitation
of stockholders' written consents to certain matters relating to the company's
Capital Restructuring Transactions, we believe the number of
27
beneficial holders of the company's common stock is 1,500.
We have never paid any cash dividends on our common stock and do not
intend to pay any cash dividends on our common stock 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 on our common stock, or making a distribution to our stockholders
under the covenants of our Loan and Security Agreement with Capital Source,
until the termination of such agreement and the repayment of all amounts due to
such lender. Additionally, we are precluded from declaring or paying any cash
dividends on our common stock, or making a distribution to our stockholders
under the terms of the senior subordinated secured note issued to Palisade until
the termination of such note and the repayment of all amounts due to such
Lender. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations -- The Palisade and Yimoyines Senior Subordinated Secured
Loans.)
Recent Sales of Unregistered Securities
Described below is information regarding equity securities we issued in
2001, 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.)
In March 2001, pursuant to a settlement and mutual general release, we
issued 34,310 shares of our common stock to a physician formerly affiliated with
the company and recognized his right to 15,690 shares of common stock of the
company, which were converted from shares of PrimeVision in connection with the
mergers in 1999. (See Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview.) As a result of this
settlement, the physician would own 50,000 shares of our common stock.
On January 5, 2001, the bridge loan from Alexander Enterprise was
amended and increased by $0.5 million. Funds for the $500,000 increase in the
bridge loan were provided by Palisade Concentrated Equity Partnership, L.P.
($400,000); Dean J. Yimoyines, M.D., Chairman of the Board, Chief Executive
Officer and President of the company ($50,000); and Alexander Enterprise
($50,000). Dr. Yimoyines' participation was subsequently assigned to his wife,
Linda Yimoyines. In connection with the bridge loan and amendment thereto,
warrants with an aggregate purchase price of $2.3 million were issued to:
o A designee of Alexander Enterprise to purchase 2.0 million shares
of our common stock at an exercise price of $1.00 and 300,000
shares at an exercise price of $0.40;
o Palisade to purchase 400,000 shares of our common stock at an
exercise price of $0.40; and
o Dr. Yimoyines to purchase 50,000 shares of our common stock at an
exercise price of $0.40.
(See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.)
The above 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 were deemed to be restricted securities for purposes
of the Securities Act and the certificates representing such securities bear, or
will bear, legends to that effect.
28
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 Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. The company in its present form is the
result of mergers completed on August 13, 1999 among Saratoga Resources, Inc.,
PrimeVision Health, Inc. and OptiCare Eye Health Centers, Inc. For accounting
purposes, PrimeVision was treated as the accounting acquirer and, therefore, the
predecessor business for historical financial statement reporting purposes.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
(in thousands) 2001 2000 1999 (1) 1998 1997
---- ---- ----- ---- ----
STATEMENT OF OPERATIONS DATA:
Total net revenues $ 112,483 $127,883 $ 94,633 $64,612 $ 58,346
Income (loss) from continuing operations 2,980 (14,171) 351 (3,239) (2,034)
Weighted average shares outstanding (2):
Basic 12,795 12,354 4,776 2,256 1,856
Diluted 13,214 12,354 4,776 2,256 1,856
Income (loss) from continuing operations
per share (3):
Basic $ 0.23 $(1.15) $(0.05) $(2.54) $(1.10)
Diluted $ 0.23 $(1.15) $(0.05) $(2.54) $(1.10)
- -------------------
(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, Inc. 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.
AS OF DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
(in thousands) ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Net assets of discontinued operations - - - $ 5,582 $ 69,473
Total current assets $ 20,141 $ 14,913 $ 21,345 20,237 18,274
Total assets 59,300 55,513 66,740 26,556 86,397
Total current liabilities 16,686 49,454 20,654 51,198 8,289
Total debt (including current portion) 34,366 34,214 43,148 39,976 46,536
Mandatorily redeemable preferred stock - - - 9,200 -
Total stockholders' equity (deficit) $ 6,982 $ 3,877 $ 5,274 $ (34,690) $ 4,546
29
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., 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 merged with Saratoga through a reverse acquisition
by PrimeVision of Saratoga at book value with no adjustments reflected to
historical values. Immediately following the PrimeVision merger, OptiCare Eye
Health Centers was acquired by PrimeVision, 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 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 PrimeVision 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 was recorded as goodwill and is being amortized on a
straight-line basis over 25 years and $2.2 million was used to eliminate the
valuation allowance related to PrimeVision's deferred tax assets. In addition,
the company recorded an intangible asset of $7.1 million in connection with a
new Professional Services and Support Agreement that is being amortized over 25
years.
On October 1, 1999, we purchased Cohen Systems, Inc., a software
systems provider specializing in point of sale and Internet-based solutions for
professional optometric practices, retail optical 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 divisions: (1)
Managed Care (2) Professional Services and (3) Other Integrated Services. The
Managed Care Division contracts with insurers, managed care plans and other
third party payers to manage claims payment administration of eye health
benefits for those contracting parties in eight states. The Professional
Services Division provides laser and ambulatory surgery facilities; develops and
sells integrated practice management systems, including Internet-based software
solutions; and provides support services to eye care professionals throughout
the country. The Other Integrated Services Division owns, operates and/or
contracts with integrated eye health centers and professional optometric
practices in Connecticut and North Carolina, and provides wholesale buying
services to eye care professionals nationwide.
30
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
For a detailed discussion on the application of these and other
accounting policies, see Note 2 in the notes to the consolidated financial
statements. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Services Revenue
The company (through its affiliated professional corporation and
professional association) provides comprehensive eye care services to consumers,
including medical and surgical treatment of eye diseases and disorders by
ophthalmologists, and vision measuring and non-surgical correction services by
optometrists. The company also charges a fee for providing the use of its
ambulatory surgery center to professionals for surgical procedures. The
company's ophthalmic, optometric and ambulatory surgery center services are
recorded at established rates reduced by an estimate for contractual allowances
and doubtful accounts. Contractual allowances arise due to the terms of certain
reimbursement contracts with third-party payers that provide for payments to the
company at amounts different from its established rates. The contractual
allowance represents the difference between the charges at established rates and
estimated recoverable amounts and is recognized in the period the services are
rendered. The contractual allowance recorded is estimated based on an analysis
of collection experience in relation to amounts billed and other relevant
information. Any differences between estimated contractual adjustments and
actual final settlements under reimbursement contracts are recognized as
contractual adjustments in the period of final settlements.
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 in the period of
the adjustment.
RESULTS OF OPERATIONS
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
Managed care revenue. Managed care revenue decreased to $28.2 million
for the year ended December 31, 2001, from $35.7 million for the year ended
December 31, 2000, a decrease of $7.5 million or 21.1%. This decrease is
primarily due to two managed care contracts that were not renewed in December
2000 by Anthem Blue Cross and Blue Shield of Connecticut ("Anthem"). In
addition, the contract with ConnectiCare was amended in April 2001, allowing
ConnectiCare to resume administration of the contract, further reducing managed
care revenue. These decreases are partially offset by negotiated increases in
capitation revenue on existing contracts.
Product sales revenue. Product sales revenue decreased to $55.2 million
for the year ended December 31, 2001, from $60.7 million for the year ended
December 31, 2000, a decrease of $5.5 million or 9.0%. Of this decrease $4.1
31
million represents a decrease in buying group revenue resulting from decreases
in purchasing volume. This decrease in volume is primarily due to consolidation
in the eyecare industry whereby the smaller independent eyecare businesses are
being replaced by larger eyecare chains that purchase directly from vendors. The
company expects this shift to continue and potentially further reduce the buying
group's market share and revenue, however the company does not expect it to have
a material impact on its overall profitablity. The remaining $1.4 million
decrease represents a decrease in retail optometry sales primarily due to the
closure of certain optometry facilities in connection with the restructuring of
operations in Connecticut during 2000.
Services revenue. Services revenue decreased to $29.0 million for the
year ended December 31, 2001, from $31.4 million for the year ended December 31,
2000, a decrease of $2.4 million or 7.6%. This decrease is primarily due to the
closure of certain ophthalomogy and ambulatory surgery centers in Connecticut as
a result of the company's restructuring of operations.
Medical claims expense. Medical claims expense decreased to $22.2
million for the year ended December 31, 2001, from $29.7 million for the year
ended December 31, 2000, a decrease of $7.5 million. The medical loss ratio
(MLR) representing medical claims expense as a percentage of managed care
revenue improved to 78.7% in 2001, from 83.0% in 2000. This improvement in MLR
is primarily due to the two Anthem contracts and the ConnectiCare contract that
are no longer managed by the company, which had higher MLRs than the average of
the company's remaining contracts, and to negotiated increases in capitation
rates on existing managed care contracts.
Cost of product sales. Cost of product sales decreased to $35.0 million
for the year ended December 31, 2001, from $38.7 million for the year ended
December 31, 2000, a decrease of $3.7 million or 9.5%. This decrease in cost of
sales is due to decreases in sales volume in the company's buying group and
retail optometry operations.
Cost of services. Cost of services decreased to $15.1 million for the
year ended December 31, 2001, compared to $15.8 million for the year ended
December 31, 2000, a decrease of $0.7 million or 4.4%. This decrease primarily
relates to a decrease in services compensation due to the workforce reductions
in the company's ophthalmology and optometry centers as a result of the
company's restructuring of its operations in Connecticut.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $37.1 million for the year ended December
31, 2001, from $41.4 million for the year ended December 31, 2000, a decrease of
$4.3 million or 10.4%. Of this decrease, approximately $3.8 million represents
decreases in compensation, marketing, rent and utilities primarily as a result
of the company's restructuring of its operations in 2000, which involved closing
facilities and reducing overhead. The remaining decrease of approximately $0.5
million represents a decrease in corporate overhead and primarily relates to
compensation of executive and managerial personnel in connection with the
company's restructuring plan to reduce overhead and streamline operations.
Restructuring and other one-time charges. In 2001, the company recorded
$1.0 million for professional fees, primarily non-deferrable legal and workout
costs, associated with company's capital restructuring. In 2000, the company
recorded a $4.3 million charge comprised of $2.3 million for operations
restructuring, $1.8 million for terminated merger costs and $0.2 million of
other non-recurring charges. The $2.3 million charge was recorded to cover
restructuring costs associated with the company's restructuring of its
operations in Connecticut, which included closing and consolidating certain
facilities, reducing overhead and streamlining operations. The restructuring of
operations 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 decreased to $2.5 million for the
year ended December 31, 2001, from $2.8 million for the year ended December 31,
2000, a decrease of $0.3 million. This decrease is primarily related to fixed
assets that were disposed of in 2000, principally related to the corporate
restructuring activities in 2000.
Amortization and write-off of goodwill. Amortization expense decreased
to $1.4 million for the year ended December 31, 2001, from $2.9 million for the
year ended December 31, 2000, a decrease of $1.5 million. This
32
decrease is primarily due to the $1.3 million write-off of goodwill in 2000.
Interest expense. Interest expense decreased to $3.0 million for the
year ended December 31, 2001, from $3.5 million for the year ended December 31,
2000, a decrease of $0.5 million. The decrease in interest expense is primarily
due to a decrease in the average interest rate associated with the company's
bank indebtedness.
Loss from continuing operations before income taxes. The company
reported a loss from continuing operations before income taxes of $4.9 million
for the year ended December 31, 2001, compared to a loss of $11.2 million for
the year ended December 31, 2000. This improvement is primarily due to the $3.3
million reduction in restructuring and other one-time charges as well as reduced
costs and overhead realized in connection with the company's restructuring of
its Connecticut operations, as described above.
Income tax expense. The company recorded an income tax benefit of $7.8
million for the year ended December 31, 2001. The tax benefit is primarily due
to the reversal of the valuation allowance against the deferred tax assets of
the company and was based on the company's expected ability, more likely than
not, to utilize its net operating loss carryforwards in the future.
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 represented approximately $6.4 million in total annual revenue
to the company.
Product sales revenue. Product sales revenue increased to $60.7 million
for the year ended December 31, 2000, from $56.1 million for the year ended
December 31, 1999, an increase of $4.6 million or 8.3%. Of this increase $8.6
million is primarily due to the merger with OptiCare Eye Health Centers in
August 1999 and $1.4 million represents increases in other optometry areas.
These increases are partially offset by a $5.4 million decrease in buying group
revenue due to a decrease in purchasing volume.
Services revenue. Services revenue increased to $31.4 million for the
year ended December 31, 2000, from $14.2 million for the year ended December 31,
1999, an increase of $17.3 million. Of this increase approximately $15.3 million
is a result of the merger with OptiCare Eye Health Centers in August 1999 and
primarily represents revenue from ophthalmology, optometry, and surgery
services. In addition, $0.6 million represents revenue associated with sales of
software systems by Cohen Systems, Inc., which was acquired by the company in
October 1999, and $1.0 million of this increase represents Health Services
Organization ("HSO") revenue from agreements with various ophthalmology
practices. The remaining increase represents an increase in other optometry
areas.
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 $10.1 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.
Cost of product sales. Cost of product sales decreased to $38.7 million for
the year ended December 31, 2000, from $40.4 million for the year ended December
31, 1999, a decrease of $1.7 million or 4.3%. This decrease represents a $5.5
million decrease in cost of sales associated with the buying group program as a
result of the
33
decrease in volume, and is partially offset by a $3.8 million increase in retail
cost of sales, primarily due to the merger with OptiCare Eye Health Centers.
Cost of services. Cost of services increased to $15.8 million for the
year ended December 31, 2000, compared to $6.0 million for the year ended
December 31, 1999, an increase of $9.8 million. This increase relates to the
company's optometry, ophthalmology and ambulatory surgery center services, which
increased as a result of the merger with OptiCare Eye Health Centers in August
1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $41.4 million for the year ended December
31, 2000, from $22.8 million for the year ended December 31, 1999, an increase
of $18.6 million. Of this increase $10.9 million represents increased personnel
and employee costs as a result of the mergers in 1999. The remaining increase of
approximately $7.7 million represents an increase in general and administrative
costs, of which approximately $5.3 million represents general and administrative
expenses of OptiCare Eye Health Centers and $0.3 million represents general and
administrative expense of Cohen Systems, which increased as a result of the
merger with OptiCare Eye Health Centers and the acquisition of Cohen Systems 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, and $1.4 million represents an increase in
corporate and other costs associated with the company's overall growth.
Restructuring and other one-time charges. Restructuring and other
one-time charges include a restructuring charge of $2.3 million, terminated
merger costs of $1.8 million and other non-recurring charges of $0.2 million in
2000. The restructuring charge was recorded to cover restructuring costs
associated with the company's restructuring of its Connecticut operations, 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 those 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 from Alexander Enterprise in October 2000.
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,
34
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 PrimeVision'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.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary sources of liquidity are cash flows generated
from operations and borrowings under its credit facility. The company's
principal uses of liquidity are to provide working capital, meet debt service
requirements and finance capital expenditures.
On January 25, 2002, as more fully described below, the company
completed a series of transactions which resulted in a major restructuring of
its debt, equity and voting capital stock. Taking into account the impact of
that restructuring, among other factors, we believe that our cash flow from
operations, borrowings under our credit facility, and operating and capital
lease financing will provide us with sufficient funds to finance our operations
for the next 12 months.
Summary
As of December 31, 2001, we had cash and cash equivalents of
approximately $2.6 million, $17.4 million of borrowings outstanding under a term
loan, and $12.3 million of advances outstanding under a revolving credit
facility (which term loan and revolving credit facility were then with Bank
Austria Creditanstalt Corporate Finance, Inc. and which are described in more
detail below). We also had contingent exposure to Bank Austria, arising from
certain rights to receive payment which we had assigned to Bank Austria totaling
approximately $2.7 million; no additional borrowing capacity under our revolving
credit facility; and we were in default, both as to payments and certain
covenants, under our credit facility.
In January 2002, we entered into a series of Capital Restructuring
Transactions which, among other things, lowered our long-term debt by
approximately $10.3 million; replaced Bank Austria as our senior secured lender
with CapitalSource Finance, LLC, an asset-based lender specializing in the
health care industry; enabled us to be in full compliance with the terms of the
credit facility; provided us with up to $10 million of availability under our
revolving credit facility; and reduced our next-12-months' debt principal
payments by approximately $3.8 million. (See The Capital Restructuring
Transactions, below.)
As of March 1, 2002, we had $6.4 million outstanding under our
revolving credit facility, with $1.5 million of additional availability.
(Although we may borrow up to $10 million under the revolving credit facility,
availability is based on the value of the collateral underlying the facility at
any given time and on the amount outstanding under the facility at such time.)
Bank Austria Credit Facility
Much of the company's debt to Bank Austria was accumulated by one of
our two principal subsidiaries, PrimeVision Health, Inc., in the course of
purchasing physician practices in the mid-1990s, when PrimeVision was an
independent company. In August 1999, when the company was formed in a series of
mergers involving PrimeVision and OptiCare Eye Health Centers, Inc., the company
retained nearly all of PrimeVision's debt to Bank Austria.
Although it was expected that a significant portion of the debt would
be converted into equity through a public offering of our stock, we were only
successful in completing an offering of approximately 3.6 million
35
shares of common stock early in 2000, with proceeds of approximately $12.5
million. The proceeds of this offering were applied, in part, to reduce our
debt, but a substantial portion of the debt remained. (Among the investors in
this transaction was Palisade Concentrated Equity Partnership, L.P., which
invested $7.0 million to acquire 2.0 million shares of our common stock.) (See
Stock Offering, below.)
The Bank Austria credit facility was comprised of a term loan of $17.4
million and up to a $12.7 million revolving credit facility, and was secured by
a security interest in substantially all of the assets of the company. We were
required to maintain certain financial ratios, which were 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 was to terminate on June 1, 2003.
The company's subsidiaries guaranteed payments and other obligations
under the credit facility, and the company (including certain subsidiaries)
granted a security interest in substantially all its assets in favor of Bank
Austria. The company also pledged the capital stock of certain of its
subsidiaries to Bank Austria.
The interest rate applicable to the Bank Austria credit facility
equaled the Base Rate or the Eurodollar Rate (each, as defined in the credit
facility agreement with Bank Austria), as we may from time to time have elected.
The Base Rate, after giving effect to the amendment discussed below, was
generally the higher of: (a) the prime rate of Bank Austria for domestic
commercial loans in effect on the applicable day, or (b) the federal funds rate
in effect on the 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 Bank Austria credit facility contained 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 our assets. We were 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. We also
were restricted from incurring capital expenditures in excess of a specified
amount and were required to achieve minimum cash flows.
The occurrence of certain events or conditions described in the credit
facility constituted 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; and
o The occurrence of a vacancy in the offices of the chief executive
or chief financial officer which was 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 an unconsummated transaction with Vision Twenty-One 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) we were 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. Fifty percent (50%) of any
capital raised through the issuance of equity or subordinated indebtedness was
to be used to reduce indebtedness under the credit facility. The remainder was
to be used for capital expenditures and to meet working capital requirements. In
the event other means were used to raise such capital, we could be required to
use all of such funds to reduce indebtedness under the Credit Facility.
36
Alexander Enterprise Bridge Loan
On October 10, 2000, we 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 evidenced by a secured promissory note issued to
Alexander Enterprise which accrued interest at the Eurodollar Rate plus two and
one-quarter percent (2-1/4%). It was to mature on June 1, 2003, the same date as
the maturity of the Bank Austria credit facility. Alexander Enterprise was
granted a security interest in substantially all of the assets of the company,
which was junior to the security interest of Bank Austria. 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 were
to receive at least $5.0 million, then, to the extent that the proceeds from
such Qualified Sale exceeded $5.0 million, such excess proceeds would be payable
to Alexander Enterprise.
On January 5, 2001, the bridge loan from Alexander Enterprise was
amended and increased by $0.5 million. Funds for this addition to the bridge
loan were provided by Palisade Private Concentrated Equity Partnership, LLP, a
fund manager which, due to its participation in our private placement, described
above, held approximately 16% of the voting stock of the company ($400,000);
Dean J. Yimoyines, M.D., Chairman of the Board, Chief Executive Officer and
President of the company ($50,000); and Alexander Enterprise ($50,000). Dr.
Yimoyines' participation was subsequently assigned to his wife, Linda Yimoyines.
The additional funding under the bridge loan was used to support our operations.
In connection with the bridge loan, and amendment thereto, warrants were issued
to:
o A designee of Alexander Enterprise to purchase 2.0 million shares
of our common stock at an exercise price of $1.00 and 300,000
shares at an exercise price of $0.40;
o Palisade to purchase 400,000 shares of our common stock at an
exercise price of $0.40; and
o Dr. Yimoyines to purchase 50,000 shares of our common stock at an
exercise price of $0.40.
The total estimated fair value of the warrants of $0.7 million was determined at
the dates of issuance using the Black-Scholes pricing model. That value was
recorded as a discount to the bridge loan and amortized to interest expense over
the life of the loan.
Key Developments in 2001 Leading Toward the Capital Restructuring Transactions
On January 2, 2001, we were unable to make the interest and principal
payment then due to Bank Austria under the credit facility.
On February 26, 2001, we entered into a Pre-Workout Agreement with Bank
Austria, which established certain understandings between us, including the fact
that we were in default in several respects under the terms of the credit
facility. Such defaults included our failure to pay principal and interest when
due and our failure to observe or perform certain affirmative and other
covenants.
On March 23, 2001, Bank Austria notified us of the occurrence of events
of default under the credit facility. The bank forbid us from making any
payments on account of debt junior to that of the bank, including payments due
under certain seller notes representing long-term obligations of the company to
certain medical practices.
Pursuant to an understanding reached with Bank Austria shortly after
receiving such notice, we engaged Morris-Anderson & Associates, Ltd., a
management consulting firm, to assist us in restructuring our long-term debt.
Morris-Anderson assisted us in negotiating with Bank Austria and other parties
in an effort to put in place an alternative financing arrangement which would
provide adequate capital support, at a manageable cost, to the company.
37
On September 25, 2001, Bank Austria gave us formal notice of: (i) the
occurrence of certain additional defaults under the credit facility; (ii) the
immediate termination of its commitments under the loan documents; and (iii) the
requirement that all amounts outstanding under the credit facility were
immediately due and payable. On October 5, 2001, Alexander Enterprise declared
an event of default under its bridge loan, as a result of our default under the
Bank Austria credit facility.
As of November 1, 2001, we had not made our scheduled principal
payments due in 2001 under our credit facility and our arrearage with respect to
such delinquent principal and interest totaled approximately $6.2 million. We
owed Bank Austria a total of approximately $31.6 million, consisting of $29.7
million of principal and $1.9 million of interest. In addition, we 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. We were in default with respect
to these obligations and Bank Austria had accelerated all amounts owed under the
credit facility and Alexander Enterprise had accelerated all amounts due under
its bridge loan. Without new financing, the company could not pay these
obligations, and Bank Austria and Alexander Enterprise had the right to commence
foreclosure upon the assets of the company.
We continued to negotiate 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.
In November 2001, certain letters of intent were entered into
concerning a major capital restructuring of the company. Palisade reached
preliminary agreement with Bank Austria concerning new terms for refinancing all
of our borrowings and other direct and indirect obligations to Bank Austria. As
a requirement for its participation, Palisade insisted that Dean J. Yimoyines,
M.D., Chairman of the Board, Chief Executive Officer and President of the
company, also make an additional substantial investment in the company.
After carefully considering options available to the company, both
management and the special committee of our board of directors concluded that,
without the cash investment and other support being offered by Palisade, we
would not be able to obtain substantial reduction of our debt to Bank Austria,
nor would we be able to obtain the other financing needed to meet our
obligations and resume our growth. Accordingly, on December 17, 2001, the
company entered into a Restructure Agreement with Palisade and Dr. Yimoyines,
which was amended on January 5, 2002, and on January 22, 2002.
The Capital Restructuring Transactions
On January 25, 2002, the company (including certain of its
subsidiaries) completed a series of transactions, involving terms similar to
those set out in the letters of intent signed in November 2001. These
transactions resulted in a major reduction in, and restructuring of, the debt
described above as well as our issuance of equity and voting capital stock. The
transactions included, among other things, the following:
1. Palisade purchased, for $3.6 million in cash, 2,571,429 shares of
the company's Series B 12.5% Voting Cumulative Convertible
Participating Preferred Stock, par value $.001 per share, referred
to as the Series B Preferred Stock, convertible into 25,714,290
shares of common stock, pursuant to the Restructure Agreement.
Linda Yimoyines, wife of Dr. Yimoyines, purchased for a cash
payment of $0.4 million, 285,714 shares of Series B Preferred
Stock. The Series B Preferred Stock is described in more detail
below.
2. Bank Austria forgave the portion of our indebtedness to it in
excess of $21.8 million and sold the loans and other obligations
of the company which Bank Austria then held, including security
agreements, pledges of stock by certain of our subsidiaries and
guarantees of loans and other obligations, to CapitalSource
Finance LLC, a Delaware limited liability company.
3. CapitalSource, as lender, and the company, as borrower, amended
and restated the terms of the
38
indebtedness acquired by CapitalSource from Bank Austria by
entering into an Amended and Restated Revolving Credit, Term Loan
and Security Agreement, referred to as the Loan and Security
Agreement.
4. Palisade made a subordinated loan to us of $13.9 million, and
Linda Yimoyines, wife of Dean J. Yimoyines, made a subordinated
loan to us of $100,000, which loans are evidenced by senior
subordinated secured notes, the terms of which are described in
more detail below.
5. In connection with providing its $13.9 million subordinated loan
to the company, Palisade received warrants entitling Palisade to
purchase up to 17,375,000 shares of common stock at an exercise
price of $0.14 per share (subject to anti-dilution provisions). In
connection with providing her $100,000 subordinated loan to the
company, Ms. Yimoyines received warrants entitling her to purchase
up to 125,000 shares of common stock at an exercise price of $0.14
per share (subject to anti-dilution provisions). The warrants
issued to Palisade and to Ms. Yimoyines are exercisable during a
ten-year period expiring January 24, 2012.
6. In conjunction with the amendment and restatement of the credit
facility, we issued 10-year warrants to CapitalSource to purchase
250,000 shares of our common stock at an exercise price of $0.14
per share, subject to adjustment for stock splits, stock dividends
and similar actions, and certain anti-dilution protections.
7. The company applied a portion of the proceeds of the Palisade loan
to pay down the indebtedness under our credit facility now held by
CapitalSource. After giving effect to this paydown, the balances
outstanding under the credit facility as of March 1, 2002, are $3
million under the term loan and approximately $6.4 million under
the revolving credit facility.
8. Our bridge loan from Alexander Enterprise was satisfied in full,
as follows:
a. $2.5 million in cash was paid to Alexander Enterprise in full
satisfaction of the principal and interest due to Alexander
Enterprise under the bridge loan. Alexander Enterprise
relinquished its security interest in the assets of the
company and has no further claims against us. The cash was
provided by the $3.6 million purchase by Palisade of Series B
Preferred Stock.
b. We satisfied our obligations to Palisade as a participant
under the bridge loan by issuing to Palisade 309,170.5 shares
of Series B Preferred Stock. The amount of such
participation, including accrued but unpaid interest, was
$432,839.
c. We satisfied our obligations to Ms. Yimoyines as a
participant under the bridge loan by issuing to Ms. Yimoyines
38,646.3 shares of Series B Preferred Stock. The amount of
such participation, including accrued but unpaid interest,
was $54,104.
9. We reacquired from Bank Austria, for a cash payment of $1.35
million, certain notes and contractual rights originally issued or
made to the company in connection with the company's transfers of
certain medical practice assets to physicians engaged in such
practices.
10. Without further consideration, Bank Austria returned warrants
previously issued to it to purchase 100,000 shares of the
company's common stock; returned to the company (for retirement)
418,803 shares of Series A convertible preferred stock of the
company; and returned to the company (for the company to hold as
treasury stock) 56,900 shares of common stock.
11. As of the closing of the Capital Restructuring Transactions on
January 25, 2002, Palisade held (i) 2,000,000 shares of our common
stock which were previously acquired, (ii) 2,880,599.5 shares of
Series B Preferred Stock, immediately convertible into 28,805,995
shares of common stock, and (iii) immediately exercisable warrants
to purchase up to an additional 17,775,000 shares of common
39
stock, of which warrants to purchase 400,000 shares at $0.40 per
share were previously acquired. Thus, 44,864,690 shares of our
common stock (including 12,815,092 shares of common stock
outstanding as of January 25, 2002 (i.e., prior to the Capital
Restructuring Transactions), and 32,049,598 shares of common stock
issuable upon conversion of the Series B Preferred Stock held by
Palisade and Ms. Yimoyines) would be outstanding in the event that
all of the shares of Series B Preferred Stock are converted.
Without giving effect to any warrants, Palisade may be deemed to
beneficially own 74.0% of our common stock. Giving effect to the
warrants held by Palisade, Palisade may be deemed to beneficially
own 81.8% of our common stock.
Pursuant to the terms of the Restructure Agreement, we agreed that, so
long as Palisade owns more than 50% of the voting power of the company, Palisade
shall have the right to designate a majority of our board of directors.
In connection with the Capital Restructuring Transactions, our stockholders
approved various equity-related proposals by written consent in a solicitation
process which commenced on January 4, 2002. Among those was a proposal to
increase the number of shares of authorized common stock from 50,000,000 to
75,000,000. The additional authorized shares provide the availability of common
stock to be issued upon conversion of the Series B Preferred Stock and exercise
of the warrants which were issued to Palisade, Ms. Yimoyines and to
CapitalSource.
Subject to the reservation shares of common stock for such conversion and
exercise of warrants, the additional shares will be available for issuance from
time to time by the company at the discretion of the board of directors,
normally without further stockholder action or notification (except as may be
required for a particular transaction by applicable law, requirements of
regulatory agencies or by stock exchange rules) to provide for future equity and
convertible debt financings, acquisitions of property or securities of other
corporations, debt conversions and exchanges, exercise of current and future
options and warrants, and for issuance under our current or future employee
benefit plans, stock dividends and stock splits.
The CapitalSource Credit Facility
The amended and restated credit facility with CapitalSource is comprised of
a $3 million term loan and up to a $10 million revolving credit facility. As of
March 1, 2002, the balance outstanding under the term loan was $3 million and
the balance outstanding under the revolving credit facility was approximately
$6.4 million. On March 1, 2002, we had approximately $1.5 million of available
borrowing capacity under the revolving credit facility (in excess of the
approximately $6.4 million outstanding on that date).
The principal terms of the term loan with CapitalSource are:
o The maximum amount of the term loan is 40% of the value of our
capital equipment, as determined by CapitalSource in its absolute
discretion; the current balance drawn down on the term loan is $3
million.
o The interest rate is 3.5 percentage points over the announced
prime rate of Citibank, N.A., but not less than 9%.
o Principal and interest are payable monthly, on the basis of a
15-year amortization, with payment in full of the balance due on
January 25, 2004, two years from the closing of the Loan and
Security Agreement.
The principal terms of the revolving credit facility with
CapitalSource are:
o The maximum amount which may be advanced under the revolving
credit facility is the lesser of (i) $10 million or (ii) 80% of
eligible accounts receivable and inventory of the company, plus up
to an additional $750,000. In addition, prior to April 1, 2002,
the amount available will be up to 85% of eligible accounts
receivable and inventory, plus an additional $750,000. If the
outstanding balance as of April 1, 2002 is in excess of 80% of
eligible accounts receivable and inventory, the excess
40
must be paid down in monthly installments over the four months
ending July 31, 2002.
-- Eligible accounts receivable are accounts receivable not more
than 120 days old, subject to certain cross-aging
requirements, and subject to determination by CapitalSource.
-- Eligible inventory is inventory meeting a number of detailed
requirements of CapitalSource and valued at the company's
cost less all discounts.
o The interest rate on the revolving credit facility is 1.5
percentage points above the announced prime rate of Citibank,
N.A., but not less than 7% per year. Interest is payable monthly
in arrears.
o All accounts receivable of the company shall be paid into lockbox
accounts and immediately transferred from such lockbox accounts
into a depository account maintained by CapitalSource on a daily
basis.
o The revolving credit facility expires and the outstanding balance
of the revolving credit facility, together with accrued but unpaid
interest, comes due in full on January 25, 2005, three years from
the closing of the Loan and Security Agreement.
With respect to both the term loan and the revolving credit facility,
we must also pay a monthly "unused line fee" that equals the excess, if any, of
$3,000 over all interest accrued for such month.
The Loan and Security Agreement contains certain restrictions on the
conduct of our business, including, among other things, restrictions on
incurring debt, purchasing or investing in the securities of, or acquiring any
other interest in, all or substantially all of the assets of any person or joint
venture, declaring or paying any cash dividends or making any other payment or
distribution on our capital stock, and creating or suffering liens on our
assets. We are required to maintain certain financial covenants, including a
minimum fixed charge ratio and to maintain a minimum net worth.
Just as was the case with the credit facility when Bank Austria was the
lender, the company's subsidiaries guarantee payments and other obligations
under the credit facility and the company (including certain subsidiaries) has
granted a security interest in substantially all its assets in favor of
CapitalSource. The company also pledged the capital stock of certain of its
subsidiaries to CapitalSource.
The occurrence of certain events or conditions described in the Loan
and Security Agreement (subject to grace periods in certain cases) constitutes
an "event of default." If an event of default occurs, the entire outstanding
balance of principal and interest would become immediately due and payable.
Events of default include:
o Our failure to pay any principal or interest when due;
o Our failure to pay any indebtedness to persons other than
CapitalSource in excess of $250,000 (including amounts payable to
Palisade under the note issued to Palisade);
o Our failure to observe any covenant under the credit facility
(including, e.g., the financial covenants);
o Bankruptcy, insolvency or receivership proceedings with respect to
the company;
o Certain changes of control of the company (as defined in the Loan
and Security Agreement);
o Our inability to pay our debts generally as they come due; and
o The occurrence or expectation of any material adverse change with
respect to the company.
41
The Palisade and Yimoyines Senior Subordinated Secured Loans
Palisade made a subordinated loan to us of $13.9 million, and Ms.
Yimoyines made a subordinated loan to us of $100,000, which loans are evidenced
by senior subordinated secured notes. The senior subordinated secured notes
issued to Palisade and to Ms. Yimoyines rank pari passu with each other. The
principal terms of the notes are as follows:
o Principal is due to be paid in 10 years (i.e., on January 25,
2012).
o Interest is payable quarterly at the rate of 11.5%. In the first
and second years, the company has the right to defer 100% and 50%,
respectively, of interest to maturity by increasing the principal
amount of the note by the amount of interest so deferred. In the
third through tenth years, the holder of the note has the right to
require the company to defer interest to maturity by increasing
the principal amount of the note by the amount of interest so
deferred.
o The notes are subordinate to our indebtedness to CapitalSource and
are secured by second-priority security interests in substantially
all the company's assets (the first-priority security interest is
held by CapitalSource).
o Payment of principal and interest is subordinated to payment of
the company's indebtedness to CapitalSource, as provided in a
Subordination Agreement among Palisade, Ms. Yimoyines,
CapitalSource and the company.
o The notes may be prepaid at any time without penalty.
o The notes contain certain restrictions on the conduct of our
business, including, among other things, restrictions on incurring
debt, becoming a party to a merger, selling or transferring
substantially all of the assets of the company, declaring or
paying any cash dividends or making any other payment or
distribution on the company's capital stock or purchasing or
redeeming such stock, entering into any agreements inconsistent
with the company's obligations under the notes, making any
redemption or prepayment of any subordinated debt, creating or
suffering liens on the company's assets, or materially changing
the nature of the company's business.
o The occurrence of certain events or conditions described in the
Notes (subject to grace periods in certain cases) constitutes a
"default." If a default occurs, the entire outstanding balance of
principal and interest would become immediately due and payable.
Such defaults include, but are not limited to:
-- Our failure to pay any principal or interest under the notes
when due;
-- Our failure to pay any principal or interest when due with
respect to the CapitalSource credit facility;
-- Our failure to perform or comply with any obligation under
the notes;
-- Entry of a final judgment against the company, which,
together with all other final judgments, exceeds in the
aggregate $250,000, and which judgment is not stayed, paid or
discharged; and
-- Bankruptcy, insolvency or receivership proceedings with
respect to the company.
The Series B Preferred Stock
As more fully described in the Certificate of Designations, Rights and
Preferences of the Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock of the company, each share of Series B Preferred Stock:
o Is immediately convertible into ten shares of common stock and has
the voting power equivalent to ten shares of common stock, subject
to certain anti-dilution adjustments.
o Accrues cumulative dividends at an annual rate of 12.5%.
42
o Is redeemable at any time by the company on 30 days' notice.
o Must be redeemed in full by the company on December 31, 2008, at a
price equal to the greater of:
-- The aggregate adjusted redemption value of the Series B
Preferred Stock plus accrued but unpaid dividends; or
-- The amount the preferred stockholders would be entitled to
receive if the Series B Preferred Stock plus accrued
dividends were converted at that time into common stock and
the company were to liquidate and distribute all of its
assets to its common stockholders.
o With respect to dividends, redemption rights, and rights on
liquidation, winding up, corporate reorganization and dissolution,
ranks senior to:
-- The common stock;
-- All other presently issued and outstanding classes and series
of stock of the company; and
-- All other classes and series of equity securities that may be
authorized in the future and, by their terms, rank junior to
the Series B Preferred Stock.
o Entitles its holder to receive dividends in an amount equal to the
amount of dividends that holder would receive if the share of
Series B Preferred Stock had been converted into common stock.
o Entitles its holder, in the event of any liquidation, dissolution
or winding up, or merger or other business combination or
acquisition transaction of the company, to be paid, out of the
assets of the company available for distribution to its
stockholders, before any payment is made to the holders of common
stock or any other stock junior to the Series B Preferred Stock,
the greater of:
-- $1.40 per share in cash, increased from the date of original
issuance of the Series B Preferred Stock to the date of
payment at the rate of 12.5% per annum compounded annually,
plus an amount in cash equal to all accrued but unpaid
dividends at the date of such payment; or
-- The cash or other property the holder of the Series B
Preferred Stock (including all accrued but unpaid dividends)
would have received had such holder converted such holder's
shares of Series B Preferred Stock into common stock of the
company immediately prior to such payment.
If the company's assets are insufficient to pay the full amount
payable to the holders of the Series B Preferred Stock, then such
holders will share ratably in the distribution of assets.
In conjunction with the Capital Restructuring Transactions:
o The company adopted a by-law amendment which provides that, for so
long as Palisade holds more than 50% of our voting power, the
approval of the majority of the company's independent directors
(as that term is defined by the American Stock Exchange) is
required to, among other things:
-- Redeem the Series B Preferred Stock;
-- Issue any new class or series of preferred stock to Palisade;
-- Issue a security convertible into preferred stock to
Palisade;
-- Declare or pay any dividend in cash, property or securities
of the company; or
-- Amend the special voting provision of the company's by-laws.
o The company signed a registration rights agreement as of January
25, 2002 with Palisade, Linda Yimoyines and CapitalSource, giving
(i) Palisade certain demand and piggy-back registration rights and
(ii) Linda Yimoyines and Capital Source piggy-back registration
rights. The company is liable for all expenses in connection with
the required registrations but other participants to the
registration would pay underwriting commissions and transfer taxes
attributable to the securities to be sold by them.
43
Capitalization
The following table sets forth the capitalization of the company as of
December 31, 2001, and the pro forma capitalization as of such date, reflecting
the restructuring of the company's debt and equity that closed on January 25,
2002. This table should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this report.
CAPITALIZATION TABLE
(Unaudited)
AS OF DECEMBER 31, 2001
---------------------------------------
ACTUAL PRO FORMA
--------------- -----------------
(dollars in thousands)
Long-term debt (including current portion):
Senior debt $ 29,675 $ 9,474
Bridge loan, net of $453 discount (actual) 2,297 -
Subordinated debt, net of $39 (actual) and
$1,419 (pro forma) discount 2,394 14,547
--------------- -----------------
Total long-term debt (including current portion) 34,366 24,021
--------------- -----------------
Series B 12.5% voting, redeemable, cumulative convertible
participating preferred stock; $.001 par value; 3,500,000
authorized; no shares issued or outstanding (actual);
3,204,960 shares issued and outstanding (pro forma) - 4,487
--------------- -----------------
Stockholders' equity:
Series A convertible preferred stock; $.001 par value;
550,000 shares authorized; 418,803 shares
issued and outstanding (actual); none (pro forma) 1 -
Common stock, $.001 par value; 50,000,000 shares
authorized 12,815,092 shares issued and outstanding
(actual); 75,000,000 shares authorized, 12,815,092 shares
issued, 12,758,192 shares outstanding and 56,900 shares
held in treasury (pro forma). 13 13
Additional paid-in-capital 60,679 62,059
Accumulated deficit (53,711) (48,230)
--------------- -----------------
Total stockholders' equity 6,982 13,842
--------------- -----------------
Total capitalization $ 41,348 $ 42,350
=============== =================
Cash Flows from Operations
For the year ended December 31, 2001, net cash provided by operating
activities was $1.9 million while net cash used in investing activities and
financing activities was $0.6 million and $0.1 million, respectively. Cash
provided by operating activities primarily included $3.0 million of net income,
$1.5 million of net cash provided by changes in working capital and other assets
and liabilities and $5.2 million of depreciation, amortization and other
non-cash charges. These changes were partially offset by a $7.8 million non-cash
benefit from deferred taxes related to the reversal of the company's valuation
allowance on deferred tax assets in 2001.
44
Cash used in investing activities included $0.6 million of capital
expenditures, primarily for use in our optometry areas. Net cash used in
financing activities included $0.6 million of principal payments on debt and
capital lease obligations which was partially offset by $0.5 million of
additional proceeds from the company's bridge loan that was amended in January
2001.
For the year ended December 31, 2000, the company used $3.2 million in
operating activities and $1.8 million in investing activities while net cash
provided by financing activities was $3.6 million. Cash used in operating
activities included a $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. We 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 our revolving credit facility. Cash provided by financing
activities was partially offset by approximately $9.5 million of principal
payments on long-term debt.
As of December 31, 2001, under agreement with the Texas Department of
Insurance, we were required to maintain restricted investments of $250,000,
thereby resulting in a restriction upon working capital. In addition, our cash
flows could be negatively affected if the parties who dispute their Health
Services Organization contracts continue their cessation of payments or other
parties cease making payments required under the contracts. Further, in the
event the company is required to utilize funds to provide cash collateral in
connection with certain contractual arrangements, our cash flows could be
negatively affected.
Stock Offering
In January 2000, we 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 previously issued by the company. The shares were
issued under a registration statement filed with the Securities and Exchange
Commission on January 18, 2000. We 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, thereby
resulting in a restriction upon our working capital.
Contractual Obligations
The following table summarizes the company's significant contractual
obligations at December 31, 2001 that impact its liquidity.
Less than After 5
(in thousands) Total 1 Year 1 - 3 Years 3 - 5 Years Years
------------- ------------ ------------- ------------ ------------
Long-term debt (a) $24,021 $ 1,758 $9,609 $ 34 $ 12,620
Operating leases 16,656 3,482 5,161 3,345 4,668
Capital Leases 313 146 163 4 -
------------- ------------ ------------- ------------ ------------
Total $ 40,990 $5,386 $ 14,933 $3,383 $ 17,288
============= ============ ============= ============ ============
(a) Contractual obligations of long-term debt include the effects of the
company's Capital Restructuring Transactions that closed on January 25,
2002. Those transactions resulted in a reduction of the company's long-term
debt and changed the scheduled maturities of the debt. (See also Liquidity
- The Capital Restructuring Transactions.)
The company's long-term debt and capital restructuring is explained in
detail in Notes 10 and 19 to the
45
consolidated financial statements. Operating leases and capital leases are
explained in detail in Note 11 to the consolidated financial statements.
SIGNIFICANT RELATED PARTY TRANSACTIONS
The company maintains a substantial number of real estate leases with
various terms with related parties for properties located in Connecticut, North
Carolina and Florida. Generally, the leases are for property that is used for
the practice of ophthalmology, optometry, sale of eyeglasses, or other operating
and administrative functions. The company believes that these leases reflect the
fair market value and contain customary terms for leased commercial real estate
in the geographic area where they are located.
The company entered into a bridge loan agreement with Alexander
Enterprise, Palisade Concentrated Equity Partnership, L.P., (a significant
shareholder) and Dean J. Yimoyines, Chairman of the Board, Chief Executive
Officer and President of the Company. The terms of the loans given by each of
Palisade and Dr. Yimoyines were essentially the same as those terms offered and
accepted by Alexander Enterprise, an independent third party, which were
completed as an arms-length transaction. The company believes that these
transactions were fair to the company as of the time they were authorized and
entered into by the company.
The company entered into a loan agreement and with Palisade and Linda
Yimoyines, wife of Dr. Yimoyines, as part of an overall capital restructuring of
the company. In connection with this capital restructuring, the company received
an opinion given by Legg Mason Wood Walker Incorporated that the consideration
received by the company in the capital restructuring was fair, from a financial
point of view, to the company and its stockholders. A special committee of the
board of directors, comprised of independent directors, approved the Capital
Restructuring Transactions and the stockholders of the company also approved the
various equity-related components of the Capital Restructuring Transactions by
written consent. The company believes that the Capital Restructuring
Transactions were fair to the company as of the time they were authorized and
entered into by the company.
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. Decreases in Medicare reimbursement rates could have
an adverse effect on our results of operations if we 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 our 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 AND RISK FACTORS
The 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)
that relate to matters that are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Exchange Act of
1934. When used in this document and elsewhere, words such as "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may," "predict" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements include those
relating to:
o The new financial structure for the company;
o The continued listing of our common stock on the American Stock
Exchange;
o Future opportunities;
o The outlook of customers;
o The reception of new services, technologies and pricing methods;
46
o Existing and potential strategic alliances;
o The likelihood of incremental revenues offsetting expense related
to new initiatives; and
o Expected improvements in the company's financial condition as a
result of the 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. Also,
our business could be materially adversely affected and the trading price of our
common stock could decline if any of the following risks and uncertainties
develop into actual events. Such risk factors, uncertainties and the other
factors include:
o Changes in the regulatory environment applicable to the company's
business, including health-care cost containment efforts by
Medicare, Medicaid and other third-party payers;
o Demand and competition for the company's products and services;
o General economic conditions;
o Risks related to the eye care industry, including the cost and
availability of medical malpractice insurance, and adverse
long-term experience with laser and other surgical vision
correction;
o Risks related to the managed care and insurance industries,
including risks relating to class action litigation seeking to
broaden the scope of covered services;
o Our ability to successfully integrate and profitably manage our
operations;
o Loss of the services of key management personnel;
o Our ability to execute our growth strategy, without which we may
not become profitable or sustain our profitability;
o Our ability to obtain additional capital, without which our growth
could be limited;
o The fact that we have a history of losses and may incur further
losses in the future;
o The fact that if we default on our debt, our creditors could
foreclose on our assets;
o The possibility that we may not compete effectively with other eye
care services companies which have more resources and experience
than us;
o Failure to negotiate profitable capitated fee arrangements;
o The possibility that we may have potential conflicts of interests
with respect to related party transactions which could result in
certain of our officers, directors and key employees having
interests that differ from us and our stockholders;
o Health care regulations or health care reform initiatives, which
could materially adversely affect our business, financial
condition and results of operations;
o The fact that the nature of our business could subject us to
potential malpractice, product liability and other claims;
o The fact that managed care companies face increasing threats of
private-party litigation, including class actions, over the scope
of care that the managed care companies must pay for;
o The fact that the company is dependent upon letters of credit or
other forms of third party security in connection with certain of
its contractual arrangements and, thus, would be adversely
affected in the event it was unable to obtain such credit as
needed;
o The fact that certain parties are challenging the validity of
and/or the company's compliance with Health Services Organization
contracts and have ceased or may cease making payments under such
contracts, jeopardizing the company's cash flow; and
47
o Other risks and uncertainties discussed in this form 10-K and
detailed from time to time in the company's periodic earnings
releases and reports filed with the Securities and Exchange
Commission.
We undertake 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 our
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.
We do not expect changes in interest rates to have a material effect on
income or cash flows in the year 2002, 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. We did not
use derivative instruments to adjust the company's interest rate risk profile
during the year ended December 31, 2001.
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
The company had no material changes in, or disagreements with,
accountants on accounting and financial disclosure in 2001 and 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information regarding directors and executive officers required by
Item 10, appearing under the caption "Election of Directors," "Executive
Officers of the Company" and "Section 16(A) Beneficial Ownership Reporting
Compliance" of the company's Proxy Statement for the 2002 Annual Meeting of
Stockholders, is incorporated herein by reference.
Information regarding our directors and executive officers is included
in Part I of this Form 10-K as permitted by General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 appearing under the caption
"Executive Compensation" of the company's proxy statement for the 2002 Annual
Meeting of Stockholders is incorporated herein by reference.
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 appearing under the caption
"Security Ownership of Certain Beneficial Owners and Management" of the
company's proxy statement for the 2002 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 appearing under the caption "Certain
Relationships and Related Transactions" of the company's proxy statement for the
2002 Annual Meeting of the Stockholders is incorporated herein by reference.
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:
See the Index to Financial Statements beginning on page F-1.
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
------- -----------
3.1 Certificate of Incorporation of Registrant, incorporated
herein 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 herein by
reference to Exhibit 3.1 to Registrant's Current Report on
Form 8-K filed on August 30, 1999.
3.3 Amended and Restated By-laws of Registrant adopted March 27,
2000, incorporated herein by reference to Exhibit 3.3 to
Registrant's Annual 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
herein by reference to Exhibit 3.2 to Registrant's Current
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 herein by reference to Exhibit 3.3 to the
Registrant's Current 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
49
EXHIBIT DESCRIPTION
------- -----------
3.7 Certificate of Amendment of the Certificate of Incorporation,
dated as of January 21, 2002, increasing the authorized
common stock of the Company from 50,000,000 to 75,000,000
shares, incorporated herein by reference to the Registrant's
Current Report on Form 8-K dated January 25, 2002, Exhibit
3.1.
3.8 Certificate of Designation, Rights and Preferences of the
Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock of the Company, as filed with the Delaware
Secretary of State on January 23, 2002, incorporated herein
by reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.2.
3.9 Amendment No. 1 to the Amended and Restated Bylaws of
OptiCare Health Systems, Inc., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.3.
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 herein by reference to Exhibit 4.2 to
Registrant's Annual Report on Form 10-K filed on March 30,
2000. +
4.3 2000 Professional Employee Stock Purchase Plan incorporated
herein by reference to Exhibit 4.3 to Registrant's Annual
Report on Form 10-K filed on March 30, 2000. +
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 herein by reference to Exhibit 10.8 to the
Registration Statement 333-78501.
10.8 Vision care capitation agreement between OptiCare Eye Health
Centers, Inc. and Blue Cross & Blue Shield of Connecticut,
Inc. (and its affiliates) dated October 23, 1999,
incorporated herein by reference to Exhibit 10.9 to the
Registration Statement 333-78501.
10.9 Eye care services agreement between OptiCare Eye Health
Centers, Inc. and Anthem Health Plans, Inc. (d/b/a Anthem
Blue Cross and Blue Shield of Connecticut), effective
November 1, 1998, incorporated herein 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, Inc., 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.+
50
EXHIBIT DESCRIPTION
------- -----------
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
Statement 333-78501.+
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, Inc. 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 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
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, Inc., 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 D. Blair Harrold &
Allan L.M. Barker d/b/a Harrold Barker Investment Co.
("HBIC"), as landlord, and Consolidated Eye Care, Inc.
("CEC"), as tenant, for premises located at 112-B Zebulon
Court, Rocky Mount, North Carolina, incorporated herein by
reference to Exhibit 10.12 to the Registrant's Quarterly
Report on Form 10-Q filed on November 15, 1999.
10.22 Lease dated March 1, 1997 by and betweenHBIC, as landlord,
andCEC, a wholly-owned subsidiary of PrimeVision Health,
Inc., as tenant, for premises located at 110 Zebulon Court,
Rocky Mount, North Carolina, incorporated herein by reference
to Exhibit 10.13 to the Registrant's Quarterly 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 herein by
reference to Exhibit 10.14 to the Registrant's Quarterly
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.
51
EXHIBIT DESCRIPTION
------- -----------
10.25 Professional Services and Support Agreement dated December 1,
1995 between OptiCare Eye Health Centers, Inc. 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 Health
Centers, Inc., 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 herein by reference to Exhibit 10.1 to
the Registrant's Current 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, Inc., 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 herein by reference to Exhibit 10.2 to
the Registrant's Current 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 herein by reference to
Exhibit 10.3 to the Registrant's Current 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 herein by reference to Exhibit 10.4 to the
Registrant's Current 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,
Inc., 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 Agent for the
benefit of the Lenders and the LC Issuer, incorporated herein
by reference to Exhibit 10.5 to the Registrant's Current
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 herein by reference to Exhibit 10.6 to
the Registrant's Current 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.
10.36 Stock Purchase Agreement dated October 1, 1999, among the
Registrant, Stephen Cohen, Robert Airola, Gerald Mandel and
Reginald Westbrook (excluding schedules
52
EXHIBIT DESCRIPTION
------- -----------
and other attachments thereto), incorporated herein by
reference to Exhibit 10.10 to the Registrant's Quarterly
Report on Form 10-Q filed on November 15, 1999.
10.38 Lease dated March 1, 1997, between the Registrant as tenant
and Drs. D. Blair Harrold and Allan L.M. Barker as landlord,
covering premises known as 579 Cross Creek Mall,
Fayetteville, N.C., incorporated herein by reference to
Exhibit 10.39 to the Registrant's Registration Statement on
Form S-1, registration no. 333-93043, first filed on December
17, 1999, as 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 herein 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 herein
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 herein 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
herein by reference to Exhibit 10.43 to the Registration
Statement 333-93043.
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 herein 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 September
30, 2000, Exhibit 10.11.
10.47 Secured promissory note dated as of October 10, 2000, made by
the Registrant to Alexander Enterprise Holdings Corp.,
incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 2000, Exhibit 10.12
10.48 Security Agreement dated as of October 10, 2000, among the
Registrant, OptiCare Eye Health Centers, Inc., 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 September 30, 2000, 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 Consolidated Eye Care, Inc. to
Alexander Enterprise Holdings Corp. ("Bridge Loan") ,
incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000,
Exhibit 10.49.
53
EXHIBIT DESCRIPTION
------- -----------
10.50 Employment Agreement between the Registrant and Jason M.
Harrold, effective July 1, 2000, incorporated herein by
reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000, 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, incorporated
herein by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000, Exhibit 10.51.
10.52 OptiCare Directors' and Officers' Trust Agreement dated
November 7, 2001, between the Registrant and Norman S.
Drubner, Esq., as Trustee, incorporated herein by reference
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, Exhibit 10.52. +
10.53 Agreement for Consulting Services between Morris Anderson and
Associates, Ltd. and OptiCare Health Systems, Inc. dated
April 16, 2001, incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000, Exhibit 10.53.
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., incorporated herein by
reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000, Exhibit 10.54.
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., incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000, Exhibit 10.55.
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.,
incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000,
Exhibit 10.56.
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, L.P., incorporated herein by reference to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, Exhibit 10.57.
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, incorporated
herein by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000, Exhibit 10.58.
10.59 Amendment to Security Agreement dated as of January 5, 2001,
among the Registrant, OptiCare Eye Health Centers, Inc.,
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
54
EXHIBIT DESCRIPTION
------- -----------
herein by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000, Exhibit 10.59.
10.60 Restructure Agreement dated December 17, 2001, among Palisade
Concentrated Equity Partnership, L.P., Dean J. Yimoyines,
M.D. and the Company, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.1.
10.61 Amendment No. 1, dated January 5, 2002, to the Restructure
Agreement dated December 17, 2001, among Palisade
Concentrated Equity Partnership. L.P., Dean J. Yimoyines,
M.D. and the Company, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.2.
10.62 Amendment No. 2, dated January 22, 2002, to the Restructure
Agreement dated December 17, 2001, among Palisade
Concentrated Equity Partnership, L.P. Dean J. Yimoyines, M.D.
and the Company, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.3.
10.63 Senior Secured Subordinated Note dated January 25, 2002, in
the principal sum of $13,900,000, issued by the Company to
Palisade Concentrated Equity Partnership, L.P., incorporated
herein by reference to the Registrant's Current Report on
Form 8-K dated January 25, 2002, Exhibit 10.4.
10.64 Senior Secured Subordinated Note dated January 25, 2002, in
the principal sum of $100,000, issued by the Company to Linda
Yimoyines, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.5.
10.65 Subordinated Pledge and Security Agreement dated as of
January 25, 2002, by the Company (including certain of its
subsidiaries) as grantor, and Palisade Concentrated Equity
Partnership, L.P., as secured party and agent for the other
secured party (Linda Yimoyines), securing the senior secured
subordinated notes made by the Company to the secured parties
dated January 25, 2002, incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.6.
10.66 Form of Warrant dated January 25, 2002, issued to Palisade
Concentrated Equity Partnership, L.P., for the purchase of up
to 17,375,000 shares of common stock., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.4.
10.67 Form of Warrant dated January 25, 2002, issued to Linda
Yimoyines, for the purchase of up to 125,000 shares of common
stock, incorporated herein by reference to the Registrant's
Current Report on Form 8-K dated January 25, 2002, Exhibit
3.5.
10.68 Form of Warrant dated January 25, 2002, issued to
CapitalSource Finance, LLC, for the purchase of up to 250,000
shares of common stock, incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 3.6.
10.69 Registration Rights Agreement dated January 25, 2002,
covering common stock held by Palisade, common stock issuable
on conversion of the Series B Preferred Stock and exercise of
the warrants issued to Palisade, Linda Yimoyines and
CapitalSource Finance, L.L.C., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.7.
10.70 Subordination Agreement dated January 25, 2002, among
Palisade Concentrated
55
EXHIBIT DESCRIPTION
------- -----------
Equity Partnership, L.P., Linda Yimoyines, CapitalSource
Finance, L.L.C. and the Company, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.8.
10.71 Amended and Restated Revolving Credit, Term Loan and Security
Agreement dated as of January 25, 2002, between CapitalSource
Finance, L.L.C. and the Company, including Annex I, Financial
Covenants, and Appendix I, Definitions, incorporated herein
by reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.9.
10.72 Reassignment of Rights to Payments under Services Agreements,
Physician Notes and Physician Security Agreements, between
Bank Austria Creditanstalt Corporate Finance, Inc., and the
Company, dated January 25, 2002, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.10.
10.73 Assignment and Assumption Agreement dated January 25, 2002,
between Bank Austria Creditanstalt Corporate Finance, Inc.,
and CapitalSource Finance, L.L.C., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.11.
10.74 OptiCare Directors' & Officers' Tail Policy Trust dated
January 10, 2002, between the Registrant and Norman S.
Drubner, Esq.,as trustee. * +
10.75 Employment Agreement dated as of September 1, 2001, between
the Registrant and William Blaskiewicz, incorporated herein
by reference to Exhibit 10.21 of the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 2001.+
16.1 Letter of Hein & Associates LLP regarding Change in
Certifying Accountants, incorporated herein 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 herein 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 herein
by reference to Exhibit 21 to the Registration Statement
333-93043.
23 Consent of Deloitte & Touche regarding its report on the
company's financial statements as of December 31, 2001 and
2000, and for each of the three years in the period ended
December 31, 2001. *
* Filed herewith.
+ Management or compensatory plan.
(b) REPORTS ON FORM 8-K
The registrant did not file any reports on Form 8-K during the calendar
quarter ended December 31, 2001.
56
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: March 27, 2002 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, March 27, 2002
- -------------------------- Chief Executive Officer and
Dean J. Yimoyines, M.D. President (Principal Executive
Officer)
/s/ William A. Blaskiewicz Vice President and Chief Financial March 27, 2002
- -------------------------- Officer (Principal Financial and
William A. Blaskiewicz Accounting Officer)
/s/ Eric J. Bertrand Director March 27, 2002
- --------------------------
Eric J. Bertrand
/s/ Norman S. Drubner Director March 27, 2002
- --------------------------
Norman S. Drubner, Esq.
/s/ Mark S. Hoffman Director March 27, 2002
- --------------------------
Mark Hoffman
/s/ Melvin Meskin Director March 27, 2002
- --------------------------
Melvin Meskin
/s/ Frederick A. Rice Director March 27, 2002
- --------------------------
Frederick A. Rice
57
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000
and 1999 F-6
Notes to Consolidated Financial Statements F-7
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 (the "Company") as of December 31, 2001 and 2000,
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, 2001 and 2000, 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.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
March 22, 2002
F-2
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
-------------------------------
2001 2000
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,568 $ 1,445
Accounts receivable, net 7,823 9,548
Inventories 3,046 3,113
Deferred income taxes, current 6,000 -
Other current assets 704 807
------------- --------------
TOTAL CURRENT ASSETS 20,141 14,913
Property and equipment, net 6,292 8,222
Deferred debt issuance costs, net 706 971
Intangible assets, net 28,655 30,082
Deferred income taxes, non-current 1,800 -
Other assets 1,706 1,325
------------- --------------
TOTAL ASSETS $ 59,300 $ 55,513
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,588 $ 5,798
Claims payable and IBNR 3,398 3,703
Accrued salaries and related expenses 2,475 2,062
Accrued expenses 3,047 3,758
Current portion of long-term debt 1,758 32,992
Current portion of capital lease obligations 146 120
Other current liabilities 1,274 1,021
------------- --------------
TOTAL CURRENT LIABILITIES 16,686 49,454
Long-term debt, less current portion 32,608 1,222
Capital lease obligations, less current portion 167 268
Other liabilities 2,857 692
------------- --------------
TOTAL LIABILITIES 52,318 51,636
COMMITMENTS AND CONTINGENCIES (Notes 10, 11, and 17)
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; 12,815,092
and 12,747,324 shares outstanding at December 31, 2001 and 2000,
respectively 13 13
Additional paid-in-capital 60,679 60,554
Accumulated deficit (53,711) (56,691)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 6,982 3,877
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $59,300 $ 55,513
============= ==============
See notes to consolidated financial statements
F-3
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
------------ ------------- ------------
NET REVENUES:
Managed care $ 28,214 $ 35,745 $ 24,425
Product sales 55,232 60,701 56,053
Other services 29,037 31,437 14,155
------------ ------------- ------------
Total net revenues 112,483 127,883 94,633
------------ ------------- ------------
OPERATING EXPENSES:
Medical claims expense 22,191 29,663 19,545
Cost of product sales 35,029 38,685 40,420
Cost of services 15,067 15,757 6,003
Selling, general and administrative 37,089 41,392 22,764
Restructuring and one-time charges 1,017 4,346 -
Depreciation 2,491 2,842 1,408
Amortization and write-off of goodwill 1,427 2,888 605
Interest 3,022 3,500 3,248
------------ ------------- ------------
Total operating expenses 117,333 139,073 93,993
------------ ------------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (4,850) (11,190) 640
Income tax expense (benefit) (7,830) 2,981 289
------------ ------------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,980 (14,171) 351
(Loss) from disposal of discontinued operations, net of tax - - (2,317)
------------ -------------
------------
NET INCOME (LOSS) $ 2,980 $(14,171) $ (1,966)
============ ============= ============
INCOME (LOSS) PER SHARE:
Income (loss) per share from continuing operations - basic
and diluted $ 0.23 $ (1.15) $ (0.05)
============ ============= ============
Net income (loss) per share - basic and diluted $ 0.23 $ ( 1.15) $ (0.54)
============ ============= ============
Shares used in computing income (loss) per share:
Basic 12,795,433 12,354,494 4,776,501
============ ============= ============
Diluted 13,214,236 12,354,494 4,776,501
============ ============= ============
See notes to consolidated financial statements.
F-4
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 2,980 $(14,171) $ (1,966)
Less: net (loss) from discontinued operations - - (2,317)
----------- ----------- -----------
Net income (loss) from continuing operations 2,980 (14,171) 351
Adjustments to reconcile net income (loss) from continuing operations
to net cash (used in) provided by operating activities:
Depreciation 2,491 2,842 1,408
Amortization and write-off of goodwill 1,427 2,888 605
Deferred income taxes (7,800) 3,015 (102)
Bad debt expense 498 446 216
Loss on disposals of fixed assets 73 - -
Non-cash restructuring charges - 782 -
Non-cash interest expense 556 351 -
Other non-cash charges 112 108 -
Changes in operating assets and liabilities (excluding the effects of
acquired businesses):
Accounts receivable 1,227 563 (133)
Inventories 67 (84) 222
Other assets (382) 730 625
Accounts payable and accrued expenses (1,813) (681) (962)
Other liabilities 2,446 (27) (834)
Cash provided by (used in) discontinued operations - - (1,749)
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,882 (3,238) (353)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (623) (1,806) (1,871)
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 (623) (1,806) (1,183)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt 500 3,050 32,998
Proceeds from issuance of common stock 9 10,135 -
Payments on long-term debt (515) (9,481) (34,173)
Payment of financing costs - - (185)
Payments on capital lease obligations (130) (136) (139)
----------- ----------- -----------
Net cash provided by (used in) financing activities (136) 3,568 (1,499)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 1,123 (1,476) (3,035)
Cash and cash equivalents at beginning of year 1,445 2,921 5,956
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,568 $ 1,445 $ 2,921
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 432 $ 3,029 $ 4,332
Cash paid (received) for income taxes $ (109) $ (861) $ 1,496
Assets of discontinued operations assumed by bank as a reduction of debt - - $ 7,818
See notes to consolidated financial statements.
F-5
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, 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
Issuance 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
Issuance of common stock
under employee stock
purchase plan 33,458 9 9
Issuance of common stock 34,310 8 8
Issuance of warrants 108 108
Net income for 2001 2,980 2,980
------------ --------- ----------- ----------- ----------- --------------- ----------
Balance at December 31, 2001 418,803 $ 1 12,815,092 $ 13 $ 60,679 $(53,711) $ 6,982
============ ========= =========== =========== =========== =============== ==========
See notes to consolidated financial statements.
F-6
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER 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 providing managed care and
professional eye care services. The Company operates in three distinct segments
of the eye care market:
o The Managed Care Division contracts with insurers, managed care
plans and other third party payors to manage claims payment
administration of eye health benefits for those contracting
parties.
o The Professional Services Division provides laser and ambulatory
surgery facilities; develops and sells integrated practice
management systems, including internet-based software solutions;
and provides support services to eye care professionals.
o The Integrated Services Division owns, operates and/or contracts
with integrated eye health centers and professional optometric
practices in Connecticut and North Carolina, and provides
wholesale buying services to eye care professionals nationwide.
For both the integrated eye health centers and professional optometric
practices, the Company contracts with professional corporations--OptiCare, P.C.,
and Optometric Eye Care Center, P.A.--which employ ophthalmologists and
optometrists to provide surgical, medical, optometric and other professional
services to patients.
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 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.
NEW CAPITAL STRUCTURE
On January 25, 2002, the Company closed a series of transactions which
resulted in a major restructuring of its debt, equity and voting capital stock.
These transactions resulted in a significant reduction of the Company's
long-term debt (See Note 19 - "Subsequent Events").
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.
F-7
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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.
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-service
agreements, preferred provider arrangements and other exclusive arrangements.
Capitation payments are accrued when they are due under the related contracts at
the agreed-upon per-member, per-month rates. Revenue from non-capitated services
is recognized when the services are provided and the Company's customers are
obligated to pay for such services.
F-8
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRODUCT SALES REVENUE
The Company recognizes revenue on product sales at the time of delivery to
the customer. Product sales revenue includes sales of optical products to
customers through the retail optometry centers that the Company manages and to
affiliated and non-affiliated ophthalmologists and optometrists through the
Company's buying group. The buying group negotiates volume buying discounts with
optical product suppliers. Products sold through the buying group are shipped
directly to the buying group's customers from the supplier. The Company bills
the customer and bears the credit risk. All sales to affiliated ophthalmologists
and optometrists are eliminated in consolidation.
SERVICES REVENUE
The Company (through its affiliated professional corporation and
professional association) provides comprehensive eye care services to consumers,
including medical and surgical treatment of eye diseases and disorders by
ophthalmologists, and vision measuring and non-surgical correction services by
optometrists. The Company also charges a fee for providing the use of its
ambulatory surgery center to professionals for surgical procedures. The
Company's ophthalmic, optometric and ambulatory surgery center services are
recorded at established rates reduced by an estimate for contractual allowances
and doubtful accounts. Contractual allowances arise due to the terms of certain
reimbursement contracts with third-party payors that provide for payments to the
Company at amounts different from its established rates. The contractual
allowance represents the difference between the charges at established rates and
estimated recoverable amounts and is recognized in the period the services are
rendered. The contractual allowance recorded is estimated based on an analysis
of collection experience in relation to amounts billed and other relevant
information. Any differences between estimated contractual adjustments and
actual final settlements under reimbursement contracts are recognized as
contractual adjustments in the period of final settlements.
The Company's Health Services Organization ("HSO") provides marketing,
managed care and other administrative services to individual ophthalmology and
optometry practices. HSO revenue is recognized monthly at a contractually agreed
upon fee, based on a percentage of cash collections by the HSO practices.
The Company sells and installs software systems that support eye health
practice management to optometry practices, retail optical locations and
manufacturing laboratories. Revenue associated with sales of software systems is
recognized upon delivery and acceptance by the customer.
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 in the period of the adjustment.
COST OF PRODUCT SALES
Cost of product sales is comprised of optical products including
eyeglasses, contact lenses and other optical goods.
F-9
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COST OF SERVICES
Cost of services represents the direct costs associated with services
revenue. These costs are primarily comprised of medical and other service
provider wages, as well as medical and other supplies and costs incidental to
other services revenue.
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.
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 payable by the Texas HMO to the Company are generally
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 $250 and $500 at December 31,
2001 and 2000, respectively.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, as amended, "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
F-10
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
adopted effective January 1, 2001. SFAS No. 133 requires that the Company 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 of
the Company.
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 adoption of SFAS No. 141 did not have a material effect on consolidated
results of operations or financial position of the Company.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective January 1, 2002. SFAS No. 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. Application of the non-amortization
provisions of SFAS No. 142 for goodwill is expected to result in an increase in
operating income of approximately $1.0 million in 2002. The Company is currently
assessing, but has not yet determined, the impact of SFAS No. 142 on its
consolidated financial position and results of operations.
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 consolidated financial position and results of
operations.
F-11
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. MERGERS AND ACQUISITIONS
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.
Assuming the Mergers and Cohen Acquisition had closed effective January 1,
1999, the Company's pro forma net revenue, loss from continuing operations and
net loss for the year ended December 31, 1999 would have been $129,624, $1,359,
and $3,676, respectively. The pro forma basic and diluted loss per common share
from continuing operations would have been $0.15 and the pro forma basic and
diluted net loss per share would have been $0.41. 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 is it
intended to be a projection of future results.
4. RESTRUCTURING AND OTHER ONE-TIME CHARGES
DEBT AND EQUITY RESTRUCTURING
In the fourth quarter of 2001, the Company recorded approximately
$1,017 of professional fees, primarily legal and work-out related non-deferrable
costs, associated with the restructure of the Company's long-term debt.
OPERATIONS RESTRUCTING
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 were completed in
2001. The restructuring charge in 2000 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.
F-12
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. During the year ended
December 31, 2001, $436 was charged against the restructuring accrual,
representing primarily severance and lease related charges on vacant facilities
that were closed as part of the Company's restructuring activities. The
remaining restructuring liability at December 31, 2001 of $796 principally
relates to lease obligations on excess office space that is not expected to be
utilized over the terms of the remaining leases.
TERMINATED MERGER
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 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. 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. Net loss per share from discontinued operations was $0.49 for the year
ended December 31, 1999.
F-13
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER 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, 2001, 2000 and 1999 is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
------------- -------------- ------------
Revenues:
Managed care services $ 28,988 $ 38,260 $ 25,150
Professional services 6,934 8,256 4,061
Other integrated services 90,548 95,265 78,227
------------- -------------- ------------
Segment totals 126,470 141,781 107,438
Elimination of inter-segment revenues (13,987) (13,898) (12,805)
------------- -------------- ------------
Total net revenue $ 112,483 $ 127,883 $ 94,633
============= ============== ============
Income (loss) from continuing operations
before tax:
Managed care services $ 2,018 $ 1,644 $ 1,723
Professional services 1,663 1,936 2,080
Other integrated services 2,184 2,031 2,985
------------- -------------- ------------
Segment totals 5,865 5,611 6,788
Depreciation (2,491) (2,842) (1,408)
Amortization and write-off of goodwill (1,427) (2,888) (605)
Interest expense (3,022) (3,500) (3,248)
Restructuring and other one-time charges (1,017) (4,346) -
Corporate (2,758) (3,225) (887)
------------- -------------- ------------
Income (loss) from continuing operations before tax $(4,850) $ (11,190) $ 640
============= ============== ============
Assets:
Managed care services $ 2,906 $ 3,849 $ 7,564
Professional services 2,902 2,945 919
Other integrated services 12,221 14,803 14,409
------------- -------------- ------------
Segment totals 18,029 21,597 22,892
Intangibles 28,655 30,082 32,443
Corporate, cash and other 12,616 3,834 11,405
------------- -------------- ------------
Total $59,300 $55,513 $66,740
============= ============== ============
Capital expenditures:
Managed care services $ 25 $ 198 $ 294
Professional services 57 246 -
Other integrated services 428 574 1,504
------------- -------------- ------------
Segment totals 510 1,018 1,798
Corporate 113 788 73
------------- -------------- ------------
Total $ 623 $ 1,806 $ 1,871
============= ============== ============
F-14
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. RECEIVABLES
Activity in the allowance for doubtful accounts consisted of the following for
the years ended December 31:
2001 2000 1999
----------- ----------- ------------
Balance at beginning of period $ 681 $ 626 $ 218
Allowances of acquired companies - - 298
Additions charged to expense 498 446 216
Deductions (558) (391) (106)
----------- ----------- ------------
Balance at end of period $ 621 $ 681 $ 626
=========== =========== ============
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
--------------------------------
2001 2000
------------- -------------
Leasehold improvements $ 4,082 $ 3,962
Furniture and equipment 7,726 7,893
Computer hardware and software 4,066 3,969
------------- -------------
Total 15,874 15,824
Accumulated depreciation and amortization (9,582) (7,602)
------------- -------------
Property and equipment, net $ 6,292 $ 8,222
============= =============
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
--------------------------------
2001 2000
------------- -------------
Goodwill $ 23,340 $ 23,340
Administrative services agreement 7,123 7,123
Other 2,411 2,411
------------- -------------
Total 32,874 32,874
Accumulated amortization (4,219) (2,792)
------------- -------------
Intangible assets, net $ 28,655 $ 30,082
============= =============
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 AND PER SHARE DATA)
10. LONG-TERM DEBT (See also Note 19 - "Subsequent Events")
The details of the Company's long-term debt at December 31, 2001 and 2000 are as
follows:
2001 2000
------------- -----------
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 4.25% at December 31, 2001. The term note is
collateralized by substantially all assets of the Company. (Restructured
in January 2002) $17,375 $ 17, 375
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. (Restructured in January 2002) 12,300 12,300
Promissory note payable due June 1, 2003. The interest rate is equal to the
eurodollar rate , which was equivalent to 4.25% at December 31, 2001. The
note is collateralized by substantially all assets of the Company.
(Restructured in January 2002) 2,750 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 9.0% 1,953 2,158
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. 480 720
Other notes payable due through September 2001 - 69
Unamortized discounts (492) (658)
------------- -----------
Total 34,366 34,214
Less current portion 1,758 32,992
------------- -----------
$32,608 $1,222
============= ===========
The following represents maturities of long-term debt by year and in the
aggregate:
2002 $ 1,758
2003 3,101
2004 6,508
2005 34
2006 -
Thereafter 12,620
Reduction of debt in 2002 from
debt restructuring (see Note 19) 10,345
----------------
$ 34,366
================
In August 1999, in connection with the Merger, the Company entered into a
new loan agreement (the "Credit Facility") with Bank Austria. 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 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 2001, the Company's
average borrowing rate was approximately 7.0%.
F-16
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Effective June 30, 2000, the Company's Credit Facility with Bank Austria 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"). The Second Amendment provided, 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. The
remaining proceeds of $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. In
connection with the Bridge Loan, the Company also issued a warrant, with an
estimated fair value at the date of issuance of $553.
On January 5, 2001, the Bridge Loan was amended and the Company received an
additional $500 of cash. Of this additional cash, $50 was provided by Alexander
Enterprises, $400 was provided by Palisade Concentrated Equity Partnership, L.P.
("Palisade"), a significant shareholder, and $50 was provided by a family member
of the Chief Executive Officer and President of the Company. In connection with
the additional funds provided to the Company under the amendment to the Bridge
Loan, the Company issued additional warrants with an estimated fair value at the
date of issuance of $108. The estimated fair value of the warrants issued were
determined using the Black-Scholes pricing model. The value of the warrants was
recorded as a discount to the Bridge Loan and is being amortized to interest
expense over the life of the loan. In connection with Bridge Loan and amendment
thereto, the Company had outstanding warrants to purchase 2,000,000 common
shares of the Company at an exercise price of $1.00 per common share and 750,000
common shares at $0.40 per share.
At December 31, 2001 and 2000, the Company was a guarantor of debt of
related parties in the amount of $103 and $144, respectively.
At December 31, 2001 the Company had standby letters of credit outstanding
in the amount of $400.
F-17
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of December 31, 2001, the Company had not made its scheduled
principal and interest payments due in 2001 under its Credit Facility and was in
default under its Credit Facility and Bridge Loan. However, the Company
restructured this debt in January 2002, which included a significant reduction
in its indebtedness as well as a change to the repayment terms and maturity
date. Accordingly, the Company has classified this debt as long-term liability
as of December 31, 2001, based on the new repayment terms under the refinanced
debt and the Company's proven ability to refinance this debt. (See also Note 19
- - "Subsequent Events").
11. 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 2012, including leases with related parties (see Note 13).
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, 2001, 2000 and 1999 was $5,087, $5,271 and $3,341 of which
$92, $73 and $83, respectively, represent contingent rent expense.
Property and equipment includes the following amounts for capital leases at
December 31:
2001 2000
----------- -----------
Furniture, machinery and equipment $ 660 $ 651
Less accumulated amortization (342) (206)
----------- -----------
$ 318 $ 445
=========== ===========
Capital lease obligations of $55 and $221 were incurred for acquisition of
new equipment in 2001 and 2000, 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, 2001:
CAPITAL OPERATING
LEASES LEASES
--------------- ---------------
2002 $ 146 $ 3,482
2003 131 2,869
2004 32 2,292
2005 4 1,819
2006 - 1,526
Thereafter - 4,668
--------------- ---------------
Total minimum lease payments $ 313 $ 16,656
=============== ===============
12. 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, 2001, 2000, and 1999 were $231,
$417 and $337, respectively.
F-18
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. RELATED PARTY TRANSACTIONS
The Company incurred rent expense and other fees of $146, $131, and $123 in
2001, 2000, and 1999, respectively, which was paid to certain doctors for the
use of equipment.
The Company incurred rent expense of $2,098, $2,123 and $752 in 2001, 2000
and 1999, respectively, which was paid to entities in which certain officers
have an interest, for the lease of facilities.
The Company has notes receivable from an affiliated optometrist at an
interest rate of 7.75%, maturing in 2003. The balance due under these notes
receivable was $78 and $92 at December 31, 2001 and 2000, respectively, of which
$20 and $14 have been reflected as current assets at December 31, 2001 and 2000,
respectively.
The Company has notes payable to two opticians employed by the Company
which bear interest at a rate of 8.25% and mature in 2005. The balances due
under these notes was $129 and $182 at December 31, 2001 and 2000, respectively,
of which $29 and $27 have been reflected as current liabilities at December 31,
2001 and 2000, respectively.
As of December 31, 2001, the Company had promissory notes payable under
its Amended Bridge Loan to a significant shareholder for $400 and to a family
member of the Company's Chief Executive Officer and President for $50. The
secured promissory notes accrue interest at the Eurodollar rate, generally equal
to LIBOR plus two and one-quarter percent (2 1/4%) and mature on June 1, 2003.
14. STOCKHOLDERS' EQUITY
SALE OF REGISTERED COMMON STOCK
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.
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, 2001, warrants were outstanding and exercisable to
purchase 3,501,198 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, (v) 2,000,000 common shares at an exercise price of $1.00 per
common share, expiring in 2005 and (vi) 750,000 common shares at $0.40 per
share, expiring in 2006. No warrants were exercised in 2001, 2000 or 1999.
F-19
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 2001, 33,458 shares were
purchased by employees under the ESPP at a weighted average price of $0.24.
Effective July 2001 the Company suspended the purchase of shares by employees
under the ESPP.
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, 2001, 2000
and 1999.
OPTIONS EXERCISE PRICE
OUTSTANDING RANGE
----------------- -------------------
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
Canceled (321,688) $ 2.00 - $ 47.80
----------------- -------------------
December 31, 2001 920,458 $ 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 Mergers. Stock options generally are granted with an
exercise price equal to 100% of the market value of a share of common stock on
the date of grant, have a 10-year term and vest within three to four years from
the date of grant. During the year ended December 31, 2001, options to purchase
321,688 shares were canceled at an average exercise price of $4.51. The weighted
average fair value of stock options, calculated using the Black-Scholes option
pricing model, granted during 2000 and 1999 was $0.89 and $3.15 per share. There
were no stock options granted during the year ended December 31, 2001. As of
December 31, 2001, 2,226,278 shares were reserved for issuance under the stock
option plan, including 1,305,820 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 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
--------------- -------------
Risk free interest rate 5.50% 6.00%
Dividends -- --
Volatility factor .5500 .5500
Expected Life 5 years 5 years
F-20
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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,
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
Net income (loss):
As reported $ 2,980 $(14,171) $(1,966)
Pro forma $ 2,659 $(14,535) $(2,091)
Earnings per share - As reported:
Basic $ 0.23 $ (1.15) $ (0.54)
Diluted $ 0.23 $ (1.15) $ (0.54)
Earnings per share - Pro forma:
Basic $0.21 $ (1.18) $ (0.56)
Diluted $0.20 $ (1.18) $ (0.56)
The following table summarizes in more detail information regarding the
Company's stock options outstanding at December 31, 2001.
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 45,000 8.6 $ 1.78 11,250 $ 1.78
$ 2.56 345,131 6.0 2.56 345,131 2.56
$ 4.78 15,690 0.4 4.78 15,690 4.78
$ 5.85 471,250 7.7 5.85 235,620 5.85
$ 6.37 - $19.12 27,460 5.8 13.47 27,460 13.47
$47.80 - $63.73 15,927 5.9 63.26 15,927 63.26
--------------- ------------- -------------- -----------
Total 920,458 $ 5.62 651,078 $5.74
=============== ============= ============== ============
F-21
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999
------------- ------------- --------------
Income (loss) from continuing operations applicable to common
stockholders:
Income (loss) from continuing operations $ 2,980 $ (14,171) $ 351
Accretion of redemption value of preferred stock and
preferred stock dividends - - (600)
------------- ------------- --------------
Income (loss) from continuing operations applicable to
common stockholders $ 2,980 $ (14,171) $ (249)
============= ============= ==============
Net income (loss) applicable to common stockholders:
Net income (loss) $ 2,980 $ (14,171) $ (1,966)
Accretion of redemption value of preferred stock and
preferred stock dividends - - (600)
------------- ------------- --------------
Net income (loss) applicable to common shareholders $ 2,980 $ (14,171) $ (2,566)
============= ============= ==============
Weighted average common shares - basic * 12,795,433 12,354,494 4,776,501
Effect of dilutive securities -
Convertible preferred stock 418,803 ** **
------------- ------------- --------------
Weighted average common shares - dilutive 13,214,236 12,354,494 4,776,501
============= ============= ==============
Income (loss) per common share from continuing operations:
Basic $ 0.23 $ (1.15) $ (0.05)
============= ============= ==============
Diluted $ 0.23 $ (1.15) $ (0.05)
============= ============= ==============
Net income (loss) per common share:
Basic $ 0.23 $ (1.15) $ (0.54)
============= ============= ==============
Diluted $ 0.23 $ (1.15) $ (0.54)
============= ============= ==============
* The weighted average common shares outstanding for 1999 have been
adjusted to reflect the conversion associated with the Merger.
** Anti-dilutive
The following table reflects the potential common shares of the Company at
December 31, 2001, 2000 and 1999 that have been excluded from the calculation of
diluted earnings per share due to their anti-dilutive effect.
2001 2000 1999
-------------- ------------- -------------
Options 920,458 1,242,146 1,314,738
Warrants 3,501,198 3,001,198 671,198
Common stock to be issued for convertible preferred stock - 418,803 418,803
Common stock to be issued for convertible debt - - 581,818
-------------- ------------- -------------
Total 4,421,656 4,662,147 2,986,557
============== ============= =============
F-22
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. 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, 2001 and 2000:
2001 2000
------------ ------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 4,372 $ 3,408
Accruals 2,218 2,149
Allowance for bad debts 354 394
Depreciation and amortization 1,476 1,544
Other (620) 165
------------ ------------
Total deferred tax assets 7,800 7,660
Valuation allowance -- (7,660)
------------ ------------
Net deferred tax assets $ 7,800 $ 0
============ ============
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 a result of the Company's debt refinancing (see Note 19) and expected
ability to utilize its net operating loss (NOL) carryforwards, the Company has
reversed all of the valuation allowance against its deferred tax assets in
2001.
As of December 31, 2001, the Company has net operating loss
carryforwards available of approximately $11.5 million for federal tax purposes.
These NOL carryforwards expire in the years 2019 through 2021.
The components of income tax expense (benefit) for the years ended December
31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
------------ ------------ -------------
Current:
Federal $ - $ - $ 325
State (30) (34) 66
------------ ------------ -------------
Total current (30) (34) 391
------------ ------------ -------------
Deferred:
Federal (6,468) 2,480 (85)
State (1,332) 535 (17)
------------ ------------ -------------
Total deferred (7,800) 3,015 (102)
------------ ------------ ------------
Total income tax expense (benefit) (7,830) $2,981 $ 289
============ ============ =============
A reconciliation of the tax provision (benefit) at the U.S. Statutory Rate
to the effective income tax rate as reported is as follows:
2001 2000 1999
------------ ------------ -------------
Tax provision (benefit) at U.S. Statutory Rate (34) % (34) % 34 %
State income taxes, net of federal benefit (5) % (5) % 5 %
Non-deductible expenses and other 36 % 7 % 6 %
Change in valuation allowance (158) % 59 % -
------------ ------------ -------------
Effective income tax rate (161) % 27 % 45 %
============ ============ =============
F-23
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company and its Chairman of the Board, Chief Executive Officer and
President, Dean J. Yimoyines, have been named as defendants in a lawsuit by
OptiVest, LLC ("OptiVest"). OptiVest and the Company entered into an Asset
Purchase Agreement for OptiVest's purchase of certain assets of the Company, for
which the sale was subsequently cancelled. OptiVest maintains that it incurred
expenses in investigating a potential purchase of certain assets and suffered
damages. OptiVest alleges a breach of contract with regard to the Asset Purchase
Agreement and further alleges that the company engaged in misrepresentation and
unfair trade practices. The Company denies OptiVest's allegations and believes
they are baseless and without merit. The Company intends to vigorously defend
itself, but the case is in its earliest stages and, therefore, no assurance can
be given of a favorable outcome. However, the Company does not expect the
outcome to have a material adverse impact on its consolidated financial
condition or results of operation.
The Company is involved in five lawsuits, each initiated by a medical
practice which was unwound from the former PrimeVision Health network, but which
remained under a contract with the company through Health Service Organization
("HSO") agreements. These lawsuits involve disputes related to the fees and
services under the HSO agreements. Though the Company strongly believes in the
merits of its position and intends to vigorously defend itself, these cases are
in the early stages of litigation and, therefore, no assurance can be given of a
favorable outcome. Any possible loss or range of possible loss that may be
incurred cannot be reasonably estimated at this time.
OPTOMETRIC EYE CARE CENTER, P.A. CLAIM
In 1999 PrimeVision Health, Inc., ("PrimeVision"), formerly known as
Consolidated Eye Care, a North Carolina corporation and subsidiary of the
Company, entered into a Professional Service and Support Agreement ("PSSA") with
Optometric Eye Care Center, P.A. ("OECC"), a North Carolina professional
association licensed to practice optometry, which is wholly owned by Allan
Barker, O.D. and Blair Harrold, O.D. On February 22, 2001, Drs. Barker and
Harrold gave the Company notice of OECC's intent to terminate the PSSA between
OECC and our subsidiary, PrimeVision. Termination of the PSSA 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 PSSA, the Company will
vigorously challenge OECC's grounds for terminating 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. It is not possible at this time to make a reasonable
assessment of the outcome of this matter. Any possible loss or range of possible
loss that may be incurred cannot be reasonably estimated at this time.
The company believes, however, that it has reached an agreement in principle
with OECC and Drs. Barker and Harrold that would resolve the dispute. The
proposed agreement contemplates that the parties enter into a transaction
wherein OECC or another entity that is controlled by Drs. Barker and Harrold
will purchase the assets and assume certain liabilities of the company's North
Carolina professional optometric practices and retail optometry sales business.
The proposed sale will not include the company's other North Carolina operations
(i.e. Managed Care Division and Buying Group). The parties have not entered into
a written agreement regarding the proposed transaction and there can be no
assurance that a settlement will occur or that the parties will consummate the
proposed transaction.
REGULATORY PROCEEDINGS
On or about August 8, 2001, OECC (our affiliate), and Drs. Barker and
Harrold, (officers of the Company), received a request for information from the
North Carolina State Board of Examiners in Optometry in exercise of its
authority under a consent order entered into in December 1999. OECC and Drs.
Barker and Harrold provided the Board with the requested information.
Thereafter, the Board's counsel convened an informal meeting of counsel to
discuss the information provided by the parties and invited OptiCare Eye Health
Network, Inc., now known as PrimeVision Health, Inc., a wholly owned subsidiary
of the company, to participate. At the informal hearing, OECC, and Drs. Barker
and Harrold contended that the Board should review the broad array of issues
between OECC and the Company. They further claimed that the Company has violated
the doctrine prohibiting the corporate practice of medicine by excessively
controlling OECC, treating it as a controlled subsidiary, and refusing to honor
all provisions of the PSSA which was entered into in 1999. OECC and Drs. Barker
and Harrold further contend that the PSSA may have become unlawful because of
changes in the corporate practice doctrine. Further, OECC and Drs. Barker and
Harrold maintain that they are not bound by an April 1999 Settlement Agreement
with the
F-24
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company requiring them to enter into a succession agreement as this provision
was either waived by the company or that such a provision violates the corporate
practice doctrine.
The Company denies that it has waived the requirement that OECC and Drs.
Barker and Harrold enter into a succession agreement and further contends that
enforcement of such a provision does not violate the corporate practice of
medicine doctrine. Additionally the Company maintains that it has substantially
complied with the PSSA and has not exercised excessive control over OECC.
The parties have submitted memoranda outlining their respective
positions to the Board. The parties also are engaged in settlement discussions
and, as a result, a previously scheduled pre-hearing conference and hearing date
have been postponed and not yet rescheduled. While the Board has indicated that
OECC is the nominal party at the hearing, it has given the company the
opportunity to be present at the pre-hearing conference. Further, it has
afforded each party the opportunity to file submissions addressing the issue as
to whether the Company may participate in the hearing and, if so, its status at
the hearing. Though the Company strongly believes in the merits of its position
and intends to vigorously defend itself, the case is in its early stages and no
assurance can be given that the Company will be able to directly participate in
the hearing or of a favorable outcome. It is not possible at this time to make a
reasonable assessment as to the outcome of this matter.
BILLING COMUNICATION ERROR
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 consolidated financial position or results of
operation.
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, 2001 cannot be
ascertained. Management is of the opinion that, after taking into account the
merits of defenses 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-25
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- ------------ ------------ -------------
2001
----
Net revenue $29,582 $29,058 $27,536 $26,307
Net income (loss) (1) (809) (347) (795) 4,931
Basic income (loss) per share (0.06) (0.03) (0.06) 0.38
Diluted income (loss) per share (0.06) (0.03) (0.06) 0.37
2000
----
Net revenue $ 34,592 $ 34,217 $ 32,397 $ 26,677
Net income (loss) (2) 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 (3) (0.22) 0.02 0.01 0.02
Diluted income (loss) per share from continuing
operations (3) (0.22) 0.02 0.01 0.01
Net income (loss) 80 (2,262) 77 139
Basic net income (loss) per share (3) (0.22) (.97) 0.01 0.02
Diluted net income (loss) per share (3) (0.22) (.97) 0.01 0.01
(1) In the fourth quarter of 2001, the Company recorded approximately $1,017
of professional fees associated with the restructuring of the Company's
debt and recorded a tax benefit of $7,830 primarily due to the reversal of
a valuation allowance against deferred tax assets.
(2) 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.
(3) Includes the effect of a preferred stock dividend of $600 in the first
quarter of 1999.
F-26
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
19. SUBSEQUENT EVENTS
NEW CAPITAL STRUCTURE FOR OPTICARE
On January 25, 2002, the Company (including certain of its subsidiaries)
closed a series of transactions which resulted in a major restructuring of its
debt, equity and voting capital stock (the "Capital Restructuring
Transactions"). Taken together, the transactions lowered the Company's long-term
debt by approximately $10.3 million, increased its equity by approximately $6.9
million (after tax effect) and reduced the Company's next-12-months' principal
payments on debt by approximately $3.8 million.
The Capital Restructuring Transactions included, among other things, the
following:
o Palisade Concentrated Equity Partnership, L.P., a fund manager and
stockholder of the Company, purchased, for $3.6 million in cash, 2,571,429
shares of the Company's Series B 12.5% Voting Cumulative Convertible
Participating Preferred Stock, par value $.001 per share, convertible into
25,714,290 shares of common stock. Each share of Series B Preferred Stock is
immediately convertible into ten shares of common stock and has the voting
power equivalent to ten shares of common stock; accrues cumulative dividends
at an annual rate of 12.5%; must be redeemed in full by the Company on
December 31, 2008; and with respect to dividends, redemption rights, and
rights on liquidation, winding up, corporate reorganization and dissolution,
ranks senior to the Company's common stock.
o Bank Austria Creditanstalt Corporate Finance, Inc., which was, until January
25, 2002, the Company's senior secured lender, forgave approximately $7.9
million of principal and approximately $2.1 million of interest of the
Company's debt due to it and sold the loans and other obligations of the
Company which Bank Austria then held, including security agreements, pledges
of stock by certain of the Company's subsidiaries and guarantees of loans
and other obligations, to CapitalSource Finance LLC, an asset-based lender
specializing in the health care industry. Without further consideration,
Bank Austria returned warrants previously issued to it to purchase 100,000
shares of the Company's common stock; returned to the Company (for
retirement) 418,803 shares of Series A convertible preferred stock of the
Company; and returned to the Company (for the Company to hold as treasury
stock) 56,900 shares of common stock.
o CapitalSource, as lender, and the Company, as borrower, amended and restated
the terms of the indebtedness acquired by CapitalSource from Bank Austria by
entering into an Amended and Restated Revolving Credit, Term Loan and
Security Agreement, referred to as the Loan and Security Agreement.
o Palisade made a subordinated loan to the Company of $13.9 million, and Linda
Yimoyines, wife of Dean J. Yimoyines, M.D. Chairman of the Board, Chief
Executive Officer and President of the Company, made a subordinated loan to
the Company of $0.1 million which loans are evidenced by senior subordinated
secured notes. These notes are subordinate to the Company's indebtedness to
CapitalSource and are secured by second-priority security interests in
substantially all of the Company's assets (the first-priority security
interest is held by CapitalSource).
o In connection with providing the $13.9 million subordinated loan to the
Company, Palisade received warrants to purchase up to 17,375,000 shares of
common stock. In connection with providing the $0.1 million subordinated
loan to the company, Ms. Yimoyines received warrants to purchase up to
125,000 shares of common stock. In conjunction with the amendment and
restatement of the credit facility, CapitalSource received warrants to
purchase 250,000 shares of common stock. The warrants were issued at an
exercise price of $0.14 per share and are exercisable during a ten-year
period expiring January 24, 2012. The estimated fair value of the warrants
was recorded as a debt discount.
F-27
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
o The proceeds of the Palisade loan and new funds loaned by CapitalSource were
used to pay Bank Austria the amount due to it. After giving effect to this
paydown, the balances outstanding under the credit facility as of March 1,
2002, were $3 million under the term loan and approximately $6.4 million
under the revolving credit facility. On March 1, 2002, the Company had
approximately $1.5 million of available borrowing capacity under the
revolving credit facility (in excess of the approximately $6.4 million
outstanding on that date).
o The bridge loan from Alexander Enterprise Holdings Corp. was satisfied in
full, as follows:
- $2.5 million in cash was paid to Alexander Enterprise in full
satisfaction of the $2.3 million of principal and $0.2 million
accrued interest due to Alexander Enterprise under the Bridge Loan.
Alexander Enterprise relinquished its security interest in the
assets of the company and has no further claims against us. The cash
was provided by the $3.6 million purchase by Palisade of Series B
Preferred Stock.
- The Company issued 309,170.5 shares of Series B Preferred Stock to
Palisade to satisfy the $400 of principal and $33 of accrued
interest due to Palisade as a participant under the Bridge Loan.
- The Company issued 38,646.3 shares of Series B Preferred Stock to
Ms. Yimoyines to satisfy the $50 of principal and $4 of accrued
interest due to Ms. Yimoyines as a participant under the bridge
loan.
o The Company issued and sold 285,714 shares of Series B Preferred Stock to
Ms. Yimoyines for a cash payment of $400.
o The Company reacquired from Bank Austria, for a cash payment of $1.35
million, certain notes and contractual rights originally issued or made to
the company in connection with the company's transfers of certain medical
practice assets to physicians engaged in such practices.
o In connection with the Capital Restructuring Transactions, the number of
shares of authorized common stock was increased from 50,000,000 to
75,000,000. The additional authorized shares provide, among other things,
for the availability of common stock to be issued upon conversion of the
Series B Preferred Stock and exercise of the warrants issued.
(See Capitalization Table on next page.)
F-28
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth the actual capitalization of the Company as
of December 31, 2001 and the pro forma capitalization to reflect the capital
restructuring transactions that closed on January 25, 2002, as if the
restructuring occurred on December 31, 2001.
CAPITALIZATION TABLE
(Unaudited)
AS OF DECEMBER 31, 2001
----------------------------------
ACTUAL PRO FORMA
------------- --------------
(DOLLARS IN THOUSANDS)
Long-term debt (including current portion):
Senior debt $ 29,675 $ 9,474
Bridge loan, net of discount of $453 2,297 -
Other subordinated debt, net of discount of $39 (actual),
$1,419 (pro forma) 2,394 14,547
------------- --------------
Total long-term debt (including current portion) 34,366 24,021
------------- --------------
Series B 12.5% voting, redeemable, cumulative convertible
Participating preferred stock; $.001 par value, 3,500,000
authorized; no shares issued or outstanding (actual);
3,204,960 shares issued and outstanding (pro forma) - 4,487
------------- --------------
Stockholders' equity:
Series A convertible preferred stock, $.001 par value, 550,000 shares
authorized; 418,803 shares issued
and outstanding (actual), none (pro forma) 1 -
Common stock, $.001 par value; 50,000,000 shares authorized,
12,815,092 shares issued and outstanding (actual); 75,000,000 shares
authorized, 12,815,092 shares issued, 12,758,192 shares outstanding
and 56,900 shares held in
treasury (pro forma). 13 13
Additional paid-in-capital 60,679 62,059
Accumulated deficit (53,711) (48,230)
------------- --------------
Total stockholders' equity 6,982 13,842
------------- --------------
Total capitalization $ 41,348 $42,350
============= ==============
F-29