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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at May 2, 2003 was 29,958,277 shares.
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2003 (unaudited) and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
CERTIFICATIONS 24
2
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,937 $ 3,086
Accounts receivable, net 12,144 5,273
Inventories 9,231 2,000
Deferred income taxes, current 1,660 1,660
Other current assets 762 885
---------- ---------
TOTAL CURRENT ASSETS 27,734 12,904
Property and equipment, net 5,572 3,337
Intangible assets, net 1,309 1,353
Goodwill, net 20,516 20,516
Deferred income taxes, non-current 3,140 3,140
Other assets 4,599 3,855
---------- ---------
TOTAL ASSETS $ 62,870 $ 45,105
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,090 $ 2,902
Accrued expenses 5,940 5,255
Current portion of long-term debt 2,763 1,266
Other current liabilities 1,258 1,245
---------- ---------
TOTAL CURRENT LIABILITIES 22,051 10,668
---------- ---------
Long-term debt--related party 16,036 15,588
Other long-term debt, less current portion 7,799 2,564
Other liabilities 678 615
---------- ---------
TOTAL NON-CURRENT LIABILITIES 24,513 18,767
---------- ---------
Series B 12.5% voting, mandatorily redeemable, convertible preferred
stock--related party (liquidation preference of $1.61 per share) 5,158 5,018
---------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 75,000,000 shares authorized; 29,958,277
and 28,913,990 shares outstanding at March 31, 2003 and December 31,
2002, respectively. 30 29
Additional paid-in-capital 63,924 63,589
Accumulated deficit (52,806) (52,966)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 11,148 10,652
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,870 $ 45,105
========== =========
See notes to condensed consolidated financial statements.
3
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------------
2003 2002
-------------- --------------
NET REVENUES:
Managed vision $ 7,408 $ 7,512
Product sales 17,722 10,766
Other services 5,028 5,012
Other income 1,838 -
-------------- --------------
Total net revenues 31,996 23,290
-------------- --------------
OPERATING EXPENSES:
Medical claims expense 5,744 5,896
Cost of product sales 13,901 8,644
Cost of services 2,126 2,138
Selling, general and administrative 8,808 6,143
Depreciation 355 474
Amortization 44 44
Interest 751 697
-------------- --------------
Total operating expenses 31,729 24,036
-------------- --------------
Gain from early extinguishment of debt - 8,789
-------------- --------------
Income from continuing operations before income taxes 267 8,043
Income tax expense 107 3,175
-------------- --------------
Income from continuing operations 160 4,868
Income from discontinued operations, net of tax - 189
-------------- --------------
Net income $ 160 $ 5,057
Preferred stock dividends (140) (103)
-------------- --------------
Net income available to common stockholders $ 20 $ 4,954
============== ==============
EARNINGS PER SHARE--BASIC AND DILUTED:
Income per common share from continuing operations:
Basic $0.00 $0.37
Diluted $0.00 $0.08
Income per common share from discontinued operations:
Basic - $0.02
Diluted - $0.00
Net income per common share:
Basic $0.00 $0.39
Diluted $0.00 $0.08
See notes to condensed consolidated financial statements.
4
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income $ 160 $ 5,057
Less: Income from discontinued operations - 189
------------ ------------
Income from continuing operations 160 4,868
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 355 474
Amortization 44 44
Non-cash interest expense 558 82
Non-cash gain on early extinguishment of debt - (8,789)
Deferred taxes - 3,175
Changes in operating assets and liabilities:
Accounts receivable 55 (101)
Inventory (1,499) (114)
Other assets (13) (379)
Accounts payable and accrued expenses 905 547
Other liabilities 30 229
Cash provided by discontinued operations - 569
------------ ------------
Net cash provided by (used in) operating activities 595 605
------------ ------------
INVESTING ACTIVITIES:
Cash received on notes receivable 265 -
Purchase of assets from acquisition, excluding cash (5,863) -
Purchase of restricted certificates of deposit (600) -
Purchase of fixed assets (174) (107)
Purchase of notes receivable - (1,350)
------------ ------------
Net cash used in investing activities (6,372) (1,457)
------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit facility 7,377 (508)
Proceeds from issuance of common stock 30 -
Proceeds from long-term debt - 23,474
Proceeds from issuance of preferred stock - 4,000
Principal payments on long-term debt (684) (24,182)
Principal payments on capital lease obligations (14) (18)
Payment of financing costs (81) (1,445)
------------ ------------
Net cash provided by financing activities 6,628 1,321
------------ ------------
Increase in cash and cash equivalents 851 469
Cash and cash equivalents at beginning of period 3,086 2,536
------------ ------------
Cash and cash equivalents at end of period $ 3,937 $ 3,005
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 165 $ 125
Cash paid for income taxes 76 -
See notes to condensed consolidated financial statements.
5
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands except share data)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of OptiCare
Health Systems, Inc., a Delaware corporation, and subsidiaries (the "Company")
for the three months ended March 31, 2003 and 2002 have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934 and are
unaudited. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the consolidated financial statements have been included. The
results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year. The
condensed consolidated balance sheet as of December 31, 2002 was derived from
the Company's audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting For Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
Effective January 1, 2003 the Company adopted SFAS No. 145, "Rescission of
FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections". SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
No.13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No.145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002. As a
result of the Company's adoption of SFAS No. 145, the Company reclassified its
previously reported gain from extinguishment of debt of $8,789 and related
income tax expense of $3,475 in 2002 from an extraordinary item to continuing
operations.
Effective January 1, 2003 the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" and nullified EITF Issue No.
94-3. SFAS No.146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, whereas EITF
No 94-3 had recognized the liability at the commitment date of an exit plan.
There was no effect on the Company's financial statements as a result of such
adoption.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The Company
adopted the disclosure requirements of the interpretation as of December 31,
2002. Effective January 1, 2003, additional provisions of FIN No. 45 became
effective and were adopted by the Company. The accounting guidelines are
applicable to guarantees issued after December 31, 2002 and require that the
Company record a liability for the fair value of such guarantees in the balance
sheet. The adoption of FIN No. 45 did not have a material impact on its
financial position or results of operations.
6
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of Statement of Financial
Accounting Standard No. 123." This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the disclosure
requirements of SFAS No. 123 and Accounting Principles Board Opinion ("APB") No.
28, "Interim Financial Reporting," to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company elected to adopt the disclosure only provisions of SFAS No.
123, as amended by SFAS No. 148, and will continue to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for the stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than fair market value at the measurement
date.
Had compensation cost for the Company's stock option plans been determined
in accordance with SFAS No. 123, the Company's reported net income and earnings
per share would have been adjusted to the pro forma amounts indicated below:
THREE MONTHS
ENDED MARCH 31,
---------------------------
2003 2002
---------- ----------
Net income available to common stockholders, as reported $ 20 $ 4,954
Less: Total stock-based employee compensation
expense determined under Black-Scholes
option pricing model, net of related tax effects (108) (75)
---------- ----------
Pro forma net income (loss) $ (88) $ 4,879
========== ==========
Earnings per share - As reported:
Basic $ 0.00 $ 0.39
Diluted $ 0.00 $ 0.08
Earnings per share - Pro forma:
Basic $ 0.00 $ 0.38
Diluted $ 0.00 $ 0.07
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. The consolidation provisions of this interpretation are required
immediately for all variable interest entities created after January 31, 2003,
and the Company's adoption of these provisions did not have a material effect on
its financial position or results of operations. For variable interest entities
in existence prior to January 31, 2003, the consolidation provisions of FIN 46
are effective July 1, 2003 and are not expected to have a material effect on the
Company's financial position or results of operations.
3. ACQUISITION OF WISE OPTICAL VISION GROUP, INC.
On February 7, 2003, the Company acquired substantially all of the assets
and certain liabilities of the contact lens distribution business of Wise
Optical Vision Group, Inc. ("Wise Optical"), a New York corporation. The Company
acquired Wise Optical to become a leading optical product distributor. The
aggregate purchase price of $7,931 consisted of approximately $7,290 of
cash,750,000 shares of the Company's common stock with an estimated fair market
value of $330, and transaction costs of approximately $311. Funds for the
acquisition were obtained via the Company's revolving credit note with
CapitalSource, which was increased from $10 million to $15 million in connection
with the acquisition of Wise Optical.
The aggregate purchase price of $7,931 has been allocated to the estimated
fair value of the assets acquired and liabilities assumed with the excess
identified as goodwill. Fair values were based on valuations and other studies.
7
The goodwill resulting from this transaction, of $300, was assigned to the
Company's Distribution and Technology operating segment and is expected to be
deductible for tax purposes. The results of operations of Wise Optical are
included in the consolidated financial statements from February 1, 2003, the
deemed effective date of the acquisition for accounting purposes.
The following table sets forth the allocation of purchase price
consideration to the assets acquired and liabilities assumed at the date of
acquisition.
(Unaudited)
Assets:
Cash and cash equivalents $ 1,427
Accounts receivable 6,626
Inventory 5,732
Property and equipment, net 2,416
Other assets 148
Goodwill 300
--------------
Total assets $ 16,649
==============
Liabilities:
Accounts payable and accrued expenses $ 8,657
Other liabilities 61
--------------
Total liabilities $ 8,718
==============
The following is a summary of the unaudited pro forma results of operations
of the Company as if the Wise Acquisition had closed effective January 1, of the
respective periods below:
QUARTER ENDED MARCH 31,
-------------------------------
2003 2002
---------- ----------
(unaudited)
Net Revenues $ 38,615 $ 39,810
Income from continuing operations 248 4,666
Net income 248 4,855
Income per common share from continuing operations (1):
Basic $0.00 $0.36
Diluted $0.00 $0.07
Net income per common share (1):
Basic $0.00 $0.37
Diluted $0.00 $0.07
(1) Includes effect of preferred stock dividends of $140 and $103 for the
three months ended March 31, 2003 and 2002, respectively.
The unaudited pro forma information presented above is for informational
purposes only and is not necessarily indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
8
4. DISCONTINUED OPERATIONS
In May 2002, the Company's Board of Directors approved management's plan to
dispose of substantially all of the net assets relating to the retail optical
business and professional optometry practice locations it operated in North
Carolina and on August 12, 2002 the Company consummated the sale of those net
assets.
The sale was accounted for as a disposal group under SFAS No. 144.
Accordingly, amounts in the financial statements and related notes for all
periods presented have been reclassified to reflect SFAS No. 144 treatment.
Operating results of the discontinued operations for the three months ended
March 31, 2002 are as follows:
External revenue $ 7,409
=========
Intercompany revenue $ 2,197
=========
Income from discontinued operations before taxes $ 314
Income tax expense 125
---------
Income from discontinued operations $ 189
=========
Earnings per share from discontinued operations:
Basic $ 0.02
Diluted $ 0.00
5. SEGMENT INFORMATION
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing managed vision and professional eye care products and
services. During the third quarter of 2002, the Company sold its retail
optometry division in North Carolina, modified the Company's strategic vision
and realigned its business into the following three reportable operating
segments: (1) Managed Vision, (2) Consumer Vision, and (3) Distribution and
Technology. These operating segments are managed separately, offer separate and
distinct products and services, and serve different customers and markets.
Discrete financial information is available for each of these segments and the
Company's President assesses performance and allocates resources among these
three operating segments.
The Managed Vision segment contracts with insurers, insurance fronting
companies, employer groups, managed care plans and other third party payors to
manage claims payment administration of eye health benefits for those
contracting parties. The Consumer Vision segment sells retail optical products
to consumers and operates integrated eye health centers and surgical facilities
where comprehensive eye care services are provided to patients. The Distribution
and Technology segment provides products and services to eye care professionals
(ophthalmologists, optometrists and opticians) through (i) Wise Optical, a
distributor of contact and ophthalmic lenses and other eye care accessories and
supplies; (ii) a Buying Group program, which provides group purchasing
arrangements for optical and ophthalmic goods and supplies and (iii) CC Systems,
which provides systems and software solutions to eye care professionals. In
addition to its reportable operating segments, the Company's "All Other"
category includes other non-core operations and transactions, including its
health service organization operation, which do not meet the quantitative
thresholds for a reportable segment.
As a result of the changes discussed above, historical amounts previously
reported in 2002 have been restated to conform to the Company's current
operating segment presentation.
9
Summarized financial information, by segment, for the three months ended
March 31, 2003 and 2002 is as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
---------- ----------
REVENUES:
Managed vision $ 7,408 $ 7,512
Consumer vision 7,306 6,965
Distribution and technology 16,420 9,852
---------- ----------
Reportable segment totals 31,134 24,329
All other 1,861 302
Elimination of inter-segment revenues (999) (1,341)
---------- ----------
Total net revenue $ 31,996 $ 23,290
========== ==========
INCOME FROM CONTINUING OPERATIONS BEFORE TAX:
Managed vision $ 426 $ 553
Consumer vision 565 243
Distribution and technology (270) 158
---------- ----------
Reportable segment totals 721 954
All other 1,677 194
Gain from extinguishment of debt - 8,789
Depreciation (355) (474)
Amortization (44) (44)
Interest expense (751) (697)
Corporate (981) (679)
---------- ----------
Income from continuing operations before tax $ 267 $ 8,043
========== ==========
Total assets by reportable operating segment at March 31, 2003 were as
follows: Managed Vision: $13,144, Consumer Vision $9,855 and Distribution and
Technology $10,191.
6. INTANGIBLE ASSETS
Intangible assets subject to amortization are comprised of the following:
MARCH 31, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------ ------------ ------------ ------------
Service Agreement $ 1,658 $ (396) $ 1,658 (368)
Non-compete agreements 265 (218) 265 (202)
------------ ------------ ------------ ------------
Total $ 1,923 $ (614) $ 1,923 $ (570)
============ ============= ============ ============
Amortization expense for each of the quarters ended March 31, 2003 and 2002
was $44. Estimated annual amortization expense is expected to be $174 in 2003
and $111 for each of the years 2004 through 2007.
10
7. LONG-TERM DEBT
The details of the Company's long-term debt at March 31, 2003 are as
follows:
Term note payable to CapitalSource in principal amounts of $24 per month.
The final principal payment is due and payable on January 25, 2004. $ 1,976
Revolving credit note to CapitalSource, due January 25, 2005. 8,934
Senior subordinated secured notes payable due January 24, 2012. 16,036
Subordinated notes payable due at various dates through 2004. Principal and
interest payments are due monthly or annually. Interest is payable at
rates ranging from 7% to 7.5%. 867
Unamortized discounts (1,215)
----------
Total 26,598
Less current portion (2,763)
----------
$ 23,835
==========
On May 12, 2003, the senior subordinated secured notes payable due January
24, 2012 were exchanged for shares of Series C preferred stock. See Note 11 to
these condensed consolidated financial statements.
8. GAIN ON EXTINGUISHMENT OF DEBT
On January 25, 2002, the Company recorded a gain on the extinguishment of
debt of $8,789 before income taxes as a result of the Company's restructuring of
its debt. The $8,789 gain was comprised principally of approximately $10,000 of
debt and interest forgiveness by Bank Austria, the Company's former senior
secured lender, which was partially offset by $1,200 of unamortized deferred
financing fees and debt discount.
9. EARNINGS PER COMMON SHARE
The following tables sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
---------- ----------
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 160 $ 4,868
Preferred stock dividend (140) (103)
---------- ----------
Income from continuing operations available to
common stockholders 20 4,765
Discontinued operations - 189
---------- ----------
Net income available to common stockholders $ 20 $ 4,954
========== ==========
Average common shares outstanding (basic) 29,543,093 12,733,365
Basic earnings per share:
Income from continuing operations available
to common stockholders $ 0.00 $ 0.37
Discontinued operations - 0.02
---------- ----------
Net income per common share $ 0.00 $ 0.39
========== ==========
11
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------ -------------
DILUTED EARNINGS PER SHARE:
Income from continuing operations available to common $ 20 $4,765
Assumed conversions of preferred stock dividends 140 103
------------ -------------
Income from continuing operations available to common
stockholders plus assumed conversions 160 4,868
Discontinued operations - 189
------------ -------------
Net income available to common stockholders $ 160 $5,057
============ =============
Average common shares outstanding (basic) 29,543,093 12,733,365
Effect of dilutive securities:
Options 4,152,500 1,430,000
Warrants 1,045,000 17,795,000
Preferred Stock 36,845,912 32,784,577
------------ -------------
Diluted shares 71,586,505 66,742,942
============ =============
Diluted earnings per share:
Income from continuing operations available to
common stockholders $0.00 $ 0.08
Discontinued operations - 0.00
------------ -------------
Net income per common share $0.00 $ 0.08
============ =============
The following table reflects the potential common shares of the Company at
March 31, 2003 and 2002 that have been excluded from the calculation of diluted
earnings per share because their effect would be anti-dilutive.
2003 2002
------------- -------------
Options 2,054,566 1,040,458
Warrants 2,080,000 3,401,198
------------- -------------
4,134,566 4,441,656
============= =============
10. CONTINGENCIES
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 March 31, 2003 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 impact
on the Company's consolidated financial position or results of operations.
12
11. SUBSEQUENT EVENT
On May 12, 2003, Palisade Concentrated Equity Partnership, L.P. the
Company's majority shareholder, and Linda Yimoyines, wife of Dean J. Yimoyines,
M.D., Chairman of the Board and Chief Executive Officer of the Company, each
exchanged the entire amount of principal and interest due to them under the
Company's senior subordinated secured notes payable, totaling an aggregate of
$16.2 million, for 406,158 shares of Series C Preferred Stock, par value $0.001
per share (the "Series C Preferred Stock"). Such $16.2 million in aggregate
principle and interest was exchanged at a rate equal to $.80 per share, the
agreed upon value of our common stock on May 12, 2003, divided by 50 (or $40.00
per share). Each share of Series C Preferred Stock will be convertible into 50
shares of common stock, upon approval by the Company's stockholders at the
annual meeting to be held on May 19, 2003 of an amendment to the Company's
certificate of incorporation that provides the Company with a sufficient number
of shares to effect such conversion. The Series C Preferred Stock has the same
dividend rights, on an as converted basis, as the Company's common stock and an
aggregate liquidation preference of $16.2 million.
The following table sets forth the actual capitalization of the Company as
of March 31, 2003 and the pro forma capitalization to reflect the debt exchange
transaction that occurred on May 12, 2003, as if the debt exchange occurred on
March 31, 2003. Principal and interest accrued under the senior subordinated
secured notes was $16.0 million as of March 31, 2003 and, at the exchange ratio
describe above, would have resulted in 400,906 shares of Series C Preferred
Stock being issued.
CAPITALIZATION TABLE
(Unaudited)
AS OF MARCH 31, 2003
---------------------------------
ACTUAL PRO FORMA
------------ -------------
(DOLLARS IN THOUSANDS)
Long-term debt (including current portion):
Term note payable to Capital Source $ 1,976 $ 1,976
Revolving credit note to Capital Source 8,934 8,934
Senior subordinated secured notes payable 16,036 -
Subordinated notes payable 867 867
Unamortized discounts (1,215) -
------------- -------------
Total long-term debt (including current portion) 26,598 11,777
------------- -------------
Series B 12.5% voting, mandatorily redeemable convertible
preferred stock (at redemption value) 5,158 5,158
------------- -------------
Stockholders' equity:
Series C preferred stock, $.001 par value, 1,500,000
shares authorized; 0 (actual) and 400,906 (pro forma)
shares issued and outstanding - 1
Common Stock 30 30
Additional paid-in-capital 63,924 80,084
Accumulated deficit (52,806) (54,671)
------------- -------------
Total stockholders' equity 11,148 25,444
------------- -------------
Total capitalization $ 42,904 $ 42,379
============= =============
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may be understood more fully by reference to the
financial statements, notes to the financial statements, and management's
discussion and analysis contained in the company's Annual Report on Form 10-K
for the year ended December 31, 2002, as filed with the Securities and Exchange
Commission.
Overview. We are an integrated eye care services company focused on vision
benefits management (managed vision), the distribution of products and software
services to eye care professionals, and consumer vision services, which includes
retail optical sales and eye care services to patients.
On February 7, 2003, we acquired substantially all of the assets and certain
liabilities of the contact lens distribution business of Wise Optical Vision
Group, Inc. ("Wise Optical"), a New York corporation. The results of operations
of Wise Optical are included in the consolidated financial statements from
February 1, 2003, the deemed effective date of the acquisition for accounting
purposes.
In May 2002, our Board of Directors approved management's plan to dispose of
substantially all of the net assets relating to our retail optometry operations
in North Carolina. The sale was completed in August 2002 and was accounted for
as a discontinued operation under Statement of Financial Accounting
Standards ("SFAS") No. 144. Accordingly, amounts in the financial statements
(and described below) for all periods presented have been reclassified to
reflect SFAS No. 144 treatment.
During the third quarter of 2002, we modified our strategic vision and
realigned our business into the following three reportable operating segments:
(1) Managed Vision, (2) Consumer Vision, and (3) Distribution & Technology.
Our Managed Vision 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. Our Consumer Vision Division sells
retail optical products to consumers and operates integrated eye health centers
and surgical facilities in Connecticut where comprehensive eye care services are
provided to patients. The Distribution and Technology segment provides products
and services to eye care professionals (ophthalmologists, optometrists and
opticians) through (i) Wise Optical, a distributor of contact and ophthalmic
lenses and other eye care accessories and supplies; (ii) a Buying Group program,
which provides group purchasing arrangements for optical and ophthalmic goods
and supplies and (iii) CC Systems, which provides systems and software solutions
to eye care professionals.
In addition to these divisions, we receive income from other non-core
operations and transactions, including our health service organization ("HSO")
operation which receives fee income for providing certain support services to
individual ophthalmology and optometry practices. While we continue to provide
the services under existing contracts to these practices, we are in the process
of generally disengaging from a number of these operations.
As a result of the sale of our retail optometry division in North Carolina
and the realignment of our business into these three reportable operating
segments, historical amounts previously reported have been restated to reflect
discontinued operations treatment and to conform to our current operating
segment presentation.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts. Managed Vision revenue decreased to $7.4
million for the three months ended March 31, 2003, from $7.5 million for the
three months ended March 31, 2002, a decrease of $0.1 million or 1.4%. The net
decrease in managed vision revenue was primarily due to the non-renewal of a
contract, partially offset by growth in existing contracts.
Product sales revenue. Product sales include the retail sale of optical
products in our Consumer Vision segment, the sale of optical products through
our Buying Group and, effective February 2003, the sale of contact and
ophthalmic lenses through Wise Optical. Product sales revenue increased to $17.7
million for the three months ended March 31, 2003, from $10.8 million for the
three months ended March 31, 2002, an increase of $6.9 million or 64.6%. This
increase is primarily due to our acquisition of Wise Optical on February 7,
2003, which generated product sales revenue of $9.3 million. This increase in
revenue is partially offset by a $2.4 million decrease in Buying Group revenue,
due to a
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decrease in sales volume and consolidation in the eye care industry whereby
smaller independent eye care businesses are being replaced by larger eye care
chains that purchase directly from vendors. We expect this shift to continue and
potentially further reduce the Buying Group's market share and revenue, however,
we do not expect this trend to have a material impact on our overall
profitability.
Other services revenue. Other services revenue includes revenue earned from
providing eye care services in our Consumer Vision segment, software services in
our Distribution & Technology segment and HSO services. Other services revenue
was unchanged at $5.0 million for the three months ended March 31, 2003 and
2002. While total other services revenue remained unchanged, Consumer Vision
services revenue increased $0.2 million and software services revenue increased
$0.1 million for the three months ended March 31, 2003 as compared to the three
months ended March 31, 2002. Such increases were offset by a $0.3 million
decrease in HSO revenue for the three months ended March 31, 2003 as compared to
the three months ended March 31, 2002. The $0.2 million increase in Consumer
Vision services was due to increased services volume in the optometry and
surgical areas. The $0.1 million increase in software services revenue was
primarily due to an increase in sales volume. Our revenue stream from fees
collected under our HSO agreements has been decreasing due to disputes with
certain physician practices, which are parties to these agreements. We are in
litigation with several of these practices and intend to continue to pursue
settlement of these matters in the future.
Other income. Other income for the three months ended March 31, 2003 of $1.8
million represents non-recurring settlements on HSO contracts.
Medical claims expense. Medical claims expense decreased to $5.7 million
for the three months ended March 31, 2003, from $5.9 million for the three
months ended March 31, 2002, a decrease of $0.2 million. The medical claims
expense loss ratio (MLR) representing medical claims expense as a percentage of
Managed Vision revenue improved to 77.5% in 2003, from 78.5% in 2002.
Cost of product sales. Cost of product sales increased to $13.9 million for
the three months ended March 31, 2003, from $8.6 million for the three months
ended March 31, 2002, an increase of $5.3 million or 60.8%. Of this increase,
$7.7 million is due to an increase in sales volume due to the acquisition of
Wise Optical in February 2003. The remaining decrease of $2.4 million is
primarily due to a decrease in sales volume generated by our Buying Group.
Cost of services. Cost of services remained unchanged at approximately $2.1
million for the three months ended March 31, 2003 and 2002.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $8.8 million for the three months ended
March 31, 2003, from $6.1 million for the three months ended March 31, 2002, an
increase of $2.7 million or 43.4%. Of this increase, approximately $2.0 million
represents operating expenses of Wise Optical and the remaining $0.7 million
primarily represents increased compensation and professional fees.
Gain on extinguishment of debt. The $8.8 million gain on extinguishment of
debt for the three months ended March 31, 2002 was the result of our capital
restructuring in January 2002. The gain is comprised of approximately $10.0
million of forgiveness of principal and interest by Bank Austria, our former
senior secured lender, and was partially offset by the write-off of $1.2 million
of related unamortized deferred financing fees and debt discount.
Income tax expense. We recorded an income tax expense of $0.1 million for
the three months ended March 31, 2003, representing tax expense on income from
continuing operations at an effective rate of 40%. The tax expense for the three
months ended March 31, 2002 of $3.2 million was comprised of tax expense of $3.5
million related to the gain on extinguishment of debt, which was partially
offset by $0.3 million tax benefit on the loss from continuing operations during
that period.
Income from discontinued operations. Income from discontinued operations
represents the operating results of the retail optical and optometry practice
locations that we operated in North Carolina, which we sold in August 2002.
Income from the discontinued operation was $0.2 million, net of tax, for the
three months ended March 31, 2002.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows generated from operations
and borrowings under our credit facility. Our principal uses of liquidity are to
provide working capital, meet debt service requirements and finance capital
expenditures. 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. If,
however, additional funds are needed, we may attempt to raise such funds through
the issuance of equity or convertible debt securities. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced and our stockholders
may experience dilution of their interest in us. If additional funds are needed
and are not available or are not available on acceptable terms, our ability to
fund our operations, take advantage of unanticipated opportunities, develop or
enhance services or products or otherwise respond to competitive pressures may
be significantly limited.
On February 7, 2003, in connection with our acquisition of the assets of
Wise Optical Vision Group, Inc., our revolving credit note with CapitalSource
was increased from $10 million to $15 million.
In February 2003, we received approval from the South Carolina Department of
Insurance to operate a captive insurance company domiciled in South Carolina. We
obtained $0.6 million in letters of credit to capitalize a new wholly owned
subsidiary, OptiCare Vision Insurance Company, Inc., to operate as the captive
insurance company, as part of our Managed Vision Division's entrance into the
"direct-to-employer" market. These letters of credit are collateralized by $0.6
million of restricted certificates of deposits.
As of March 31, 2003, we had cash and cash equivalents of approximately $3.9
million, $2.0 million of borrowings outstanding under our term loan with
CapitalSource, and $8.9 million of advances outstanding under our revolving
credit facility with CapitalSource. As of March 31, 2003, we had approximately
$1.0 million of additional availability under our revolving credit facility.
(Although we may borrow up to $15 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.)
On May 12, 2003, Palisade Concentrated Equity Partnership, L.P. our majority
shareholder, and Linda Yimoyines, wife of Dean J. Yimoyines, M.D., our Chairman
of the Board and Chief Executive Officer, each exchanged the entire amount of
principal and interest due to them under our senior subordinated secured notes
payable, totaling an aggregate of $16.2 million, for 406,158 shares of Series C
Preferred Stock, par value $0.001 per share (the "Series C Preferred Stock").
Such $16.2 million in aggregate principal and interest was exchanged at a rate
equal to $0.80 per share, the agreed upon value of our common stock on May 12,
2003, divided by 50 (or $40.00 per share). Each share of Series C Preferred
Stock will be convertible into 50 shares of common stock, upon approval by our
stockholders at our annual meeting to be held on May 19, 2003 of an amendment to
our certificate of incorporation that provides us with a sufficient number of
shares to effect such conversion. The Series C Preferred Stock has the same
dividend rights, on an as converted basis, as our common stock and an aggregate
liquidation preference of $16.2 million.
Cash Flows
Net cash provided by operating activities was $0.6 million for the three
months ended March 31, 2003 and 2002. Net cash provided by operating activities
of $0.6 million in 2003 primarily consisted of $1.1 million of income, after
adding back non-cash charges of $0.9 million, and a $0.9 million increase in
accounts payable and accrued expenses, which was partially offset by a $1.5
million increase in inventory. Net cash provided by operating activities for the
three months ended March 31, 2002 of $0.6 million was primarily driven by cash
provided by discontinued operations.
Net cash used in investing activities was $6.4 million for the three months
ended March 31, 2003 and was primarily due to the acquisition of the net assets
of Wise Optical of $5.9 million (excluding cash) and the deposit of $0.6 million
into restricted certificates of deposit used to secure letters of credit in
connection with the approval to operate a captive insurance company domiciled in
South Carolina in February 2003. Net cash used in investing activities of $1.5
million for the three months ended March 31, 2002 was primarily due to a $1.4
million payment to reacquire certain notes receivable and contractual rights as
part of our capital restructuring in January 2002.
Net cash provided by financing activities was $6.6 million for the three
months ended March 31, 2003 compared to $1.3 million for the
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three months ended March 31, 2002. Net cash provided by financing activities of
$6.6 million for the three months ended March 31, 2003 included a $7.4 million
increase in our revolving credit facility, which was primarily used to finance
our purchase of the net assets of Wise Optical. This $7.4 million increase was
partially offset by $0.7 million in principal payments on debt and $0.1 million
in financing fees related to the increase in our credit facility. Net cash
provided by financing activities of $1.3 million for the three months ended
March 31, 2002 consisted of approximately $27.5 million from the issuance of
debt and preferred stock, which was partially offset by $24.2 million of
principal payments on long-term debt (primarily related to our capital
restructuring in January 2002), a $0.5 million net decrease in our revolving
credit facility and $1.5 million in financing costs.
The CapitalSource Loan and Security Agreement
The term loan and credit facility with CapitalSource are subject to a Loan
and Security Agreement. 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. As
of March 31, 2003, we believe we are in compliance with the covenants.
Our subsidiaries guarantee payments and other obligations under the credit
facility and we (including certain subsidiaries) have granted a first-priority
security interest in substantially all our assets to CapitalSource. We also
pledged the capital stock of certain of our subsidiaries to CapitalSource.
Upon the occurrence of certain events or conditions described in the Loan
and Security Agreement (subject to grace periods in certain cases), the entire
outstanding balance of principal and interest would become immediately due and
payable.
The Palisade and Yimoyines Senior Subordinated Secured Loans
In January 2002, Palisade Concentrated Equity Partnership, L.P. and Linda
Yimoyines, wife of Dean Yimoyines, our Chairman and Chief Executive Officer made
subordinated secured loans to us in the amount of $13.9 million and $0.1
million, respectively. As noted above and in Note 11 to the condensed
consolidated financial statements, on May 12, 2003, we issued 406,158 shares of
Series C Preferred Stock in exchange for these senior subordinated secured
notes.
Prior to their cancellation, the subordinated secured loans from Palisade
and Ms. Yimoyines were evidenced by senior subordinated secured notes that
ranked pari passu with each other. The notes were subordinate to our
indebtedness to CapitalSource and were secured by second-priority security
interests in substantially all of our assets.
Principal was due to be paid on January 25, 2012 and interest was payable
quarterly at the rate of 11.5%. In the first and second years, we had 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 holders of the notes had the right to require us to
defer interest to maturity by increasing the principal amount of the note by the
amount of interest so deferred. As of March 31, 2003 the aggregate balance due
under the subordinated loans was $16.0 million, which includes deferred interest
of $2.0 million.
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 our assets, declaring
or paying any cash dividends or making any other payment or distribution on our
capital stock or purchasing or redeeming such stock, entering into any
agreements inconsistent with our obligations under the notes, making any
redemption or prepayment of any subordinated debt, creating or suffering liens
on our assets, or materially changing the nature of our business.
Upon the occurrence of certain events or conditions described in the notes
(subject to grace periods in certain cases), the entire outstanding balance of
principal and interest would have become immediately due and payable.
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The Series B Preferred Stock
As of March 31, 2003, we had 3,204,959 shares of Series B Preferred Stock
issued and outstanding. Subject to the senior liquidation preference of the
Series C Preferred Stock described below, the Series B Preferred Stock ranks
senior to all other currently issued and outstanding classes or series of our
stock with respect to dividends, redemption rights and rights on liquidation,
winding up, corporate reorganization and dissolution. Each share of Series B
Preferred Stock is convertible into a number of shares of common stock equal to
such share's current liquidation value, divided by a conversion price of $0.14,
subject to adjustment for dilutive issuances. The number of shares of common
stock into which each share of Series B Preferred Stock is convertible will
increase over time because the liquidation value of the Series B Preferred
Stock, which was $1.61 per share as of March 31, 2003, increases at a rate of
12.5% per year, compounded annually.
After payment of the liquidation preference on the Series C Preferred Stock,
if our assets are insufficient to pay the full amount payable to the holders of
the Series B Preferred Stock with respect to dividends, redemption rights or
liquidation preferences, then such holders will share ratably in the
distribution of assets.
The Series C Preferred Stock
As noted above and in Note 11 to the condensed consolidated financial
statements, on May 12, 2003, we issued 406,158 shares of Series C Preferred
Stock in exchange for $16.2 million of senior subordinated secured notes
payable. Such $16.2 million in aggregate principle and interest was exchanged at
a rate equal to $.80 per share, the agreed upon value of our common stock on May
12, 2003, divided by 50 (or $40.00 per share). The Series C Preferred Stock has
an aggregate liquidation preference of $16.2 million and ranks senior to all
other currently issued and outstanding classes or series of our stock with
respect to liquidation rights. Each share of Series C Preferred Stock will be
convertible into 50 shares of common stock, upon approval by our stockholders at
our annual meeting to be held on May 19, 2003 of an amendment to our certificate
of incorporation that provides us with a sufficient number of shares to effect
such conversion. The Series C Preferred Stock has the same dividend rights, on
an as converted basis, as our common stock.
RECENT ACCOUNTING CHANGES
Effective January 1, 2003 we adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting For Asset Retirement Obligations". This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement did not have a material
impact on our financial position or results of operations.
Effective January 1, 2003 we adopted SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections". SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
No.13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No.145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002. As a
result of our adoption of SFAS No. 145, we reclassified our previously reported
gain from extinguishment of debt of $8.8 million and related income tax expense
of $3.5 million in 2002 from an extraordinary item to continuing operations.
Effective January 1, 2003 we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" and nullified EITF Issue No. 94-3.
SFAS No.146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF No
94-3 had recognized the liability at the commitment date of an exit plan. There
was no effect on our financial statements as a result of such adoption.
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In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. We adopted
the disclosure requirements of the interpretation as of December 31, 2002.
Effective January 1, 2003, additional provisions of FIN No. 45 became effective
and were adopted by us. The accounting guidelines are applicable to guarantees
issued after December 31, 2002 and require that we record a liability for the
fair value of such guarantees in the balance sheet. The adoption of FIN No. 45
did not have a material impact on its financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of Statement of Financial
Accounting Standard No. 123." This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the disclosure
requirements of SFAS No. 123 and Accounting Principles Board Opinion ("APB") No.
28, "Interim Financial Reporting," to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We elected to adopt the disclosure only provisions of SFAS No. 148 and
will continue to follow APB Opinion No. 25 and related interpretations in
accounting for the stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than fair market value at the measurement
date. For disclosure regarding stock options had compensation cost been
determined in accordance with SFAS No. 123, see Note 2 to the condensed
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. The consolidation provisions of this interpretation are required
immediately for all variable interest entities created after January 31, 2003,
and our adoption of these provisions did not have a material effect on our
financial position or results of operations. For variable interest entities in
existence prior to January 31, 2003, the consolidation provisions of FIN 46 are
effective July 1, 2003 and are not expected to have a material effect on our
financial position or results of operations.
IMPACT OF REIMBURSEMENT RATES
Our revenue is subject to pre-determined Medicare reimbursement rates which,
for certain products and services, have decreased over the past three years. A
decrease in Medicare reimbursement rates could have an adverse effect on our
results of operations if we cannot manage these reductions through increases in
revenues or decreases in operating costs. To some degree, prices for health care
are driven by Medicare reimbursement rates, so that our non-Medicare business is
also affected by changes in Medicare reimbursement rates.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
The statements in this Form 10-Q 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 expectation that the consolidation in the eye care industry will
continue and could further reduce our Buying Group's market share
and revenue, and that we do not expect this trend to have a material
impact on our overall profitability;
o Our belief that cash from operations, borrowings under our credit
facility, and operating and capital lease financings will provide
sufficient funds to finance operations for at least the next 12
months.
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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 our business,
including health-care cost containment efforts by Medicare, Medicaid
and other third-party payers;
o Reduction in demand and increased competition for our 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
our compliance with HSO contracts and have ceased or may cease
making payments under such contracts;
o Failure to timely and effectively integrate our acquisition of Wise
Optical;
o Failure to effectively compete in the marketplace with other
distributors, including an entity created by the former owner of
Wise Optical; and
o Other risks and uncertainties discussed elsewhere in this Form 10-Q
and detailed from time to time in our 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-Q
or to reflect the occurrence of unanticipated events.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk from exposure to changes in interest rates
based on our financing activities under our credit facility with CapitalSource,
due to its variable interest rate. The nature and amount of our indebtedness may
vary as a result of future business requirements, market conditions and other
factors. The extent of our 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 2003, although there can be no assurances that
interest rates will not significantly change. A 10% change in the interest rate
payable by us on our variable rate debt would have increased or decreased the
three-month interest expense by approximately $20,000, assuming that our
borrowing level is unchanged. We did not use derivative instruments to adjust
our interest rate risk profile during the three months ended March 31, 2003.
ITEM 4: CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including the company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon, and as of the date of,
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures were adequate and
effective, in all material respects, to ensure that information required to be
disclosed in our reports filed and submitted under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date we carried out our evaluation. There were no significant deficiencies or
material weaknesses identified in the evaluation and, therefore, no corrective
actions were taken.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
HEALTH SERVICE ORGANIZATION LAWSUITS
In re PrimeVision Health, Inc. Contract Litigation, MDL 1466 ("MDL 1466").
On April 11, 2003, the Judicial Panel on Multidistrict Litigation denied the
below listed defendants' motions to vacate the Judicial Panel's order to
conditionally transfer the actions to the Western District of Kentucky and
ordered the three actions listed below transferred to the Western District of
Kentucky for inclusion in the coordinated or consolidated pretrial proceedings
occurring there.
1. PrimeVision Health, Inc. v. The Brinkenhoff Medical Center, Inc., Michael
Brinkenhoff, filed in the United States District Court for the Central District
of California;
2. PrimeVision Health, Inc. v. Robert M. Thomas, Jr., M.D., a medical
corporation, Robert M. Thomas, Jr., M.D., filed in the United States District
Court for the Southern District of California;
3. PrimeVision Health, Inc. v. The Milne Eye Medical Center, P.C. and Milton
J. Milne, M.D., filed in the United States District Court for the District of
Maryland;
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. The parties agreed to non-binding
mediation, which began in April 2003 and will continue at a later date to be
agreed by the parties. At the mediation, OptiVest, LLC agreed to withdraw its
lawsuit and continue to attempt to resolve this matter through non-binding
mediation. Further, if non-binding mediation does not result in a resolution of
this matter, the parties have agreed to submit it to binding arbitration.
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THREATENED LITIGATION
As previously reported, in the fourth quarter of 2002, we received notice
from an attorney representing a physician employed by our professional affiliate
regarding a possible employment claim and expressing disagreement with the
computation of physicians' salaries in the professional affiliate, alleged
mismanagement of our company and/or the professional affiliate, possible
conflicts of interests and unlawful practice and/or compensation issues. In
April 2003 the parties proceeded with non-binding mediation and resolved this
matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 27, 2003, options to purchase 150,000 shares of common stock of
the Company were exercised by a director of the company at an aggregate price of
$30,000.
On February 7, 2003, we issued 750,000 shares of common stock, with an
estimated fair value of approximately $330,000, as part of the purchase price
consideration for our acquisition of Wise Optical.
On February 28, 2003, under our Amended and Restated 2002 Stock Incentive
Plan, we granted an aggregate of 225,000 shares of restricted stock, with an
estimated fair value of $146,250, and options to purchase an aggregate of
773,000 shares of common stock at an exercise price of $0.65 per share.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. No underwriter was engaged in connection with
the foregoing sales of securities. The company has reason to believe that (i)
all of the foregoing purchasers were familiar with or had access to information
concerning the operations and financial conditions of the company, (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 bore or will bear legends to that effect.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
The following Exhibits are filed as part of this Quarterly Report on
Form 10-Q:
EXHIBIT DESCRIPTION
------- -----------
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b. Reports on Form 8-K filed in the period covered by this report:
The Company filed a Current Report on Form 8-K, on February 10, 2003,
which was amended by the filing of a Form 8-K/A on April 23, 2003, relating
to the Company's purchase on February 7, 2003 of substantially all of the
assets and certain liabilities of Wise Optical Vision Group, Inc.
The Company filed a Current Report on Form 8-K on March 18, 2003 to
furnish the written statement of the Company's principal executive officer
and principal financial officer required by Section 906 of the
Sarbanes-Oxley Act of 2002 in connection with the filing of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned, hereunto duly authorized.
Date: May 14, 2003 OPTICARE HEALTH SYSTEMS, INC.
By: /s/ William A. Blaskiewicz
------------------------------------------
William A. Blaskiewicz
Vice President and Chief Financial Officer
(Principal Financial and Accounting
Officer and duly authorized officer)
23
CERTIFICATION
I, Dean J. Yimoyines, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OptiCare Health
Systems, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ Dean J. Yimoyines
------------------------------------
Dean J. Yimoyines, M.D.
Chairman and Chief Executive Officer
Date: May 14, 2003
24
CERTIFICATION
I, William A. Blaskiewicz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OptiCare Health
Systems, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /s/ William A. Blaskiewicz
------------------------------------------
William A. Blaskiewicz
Vice President and Chief Financial Officer
Date: May 14, 2003
25