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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 001-15223
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 Identification No.)
Incorporation or Organization)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 ). [ ]Yes [X]No
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) computed by reference to
the closing market price as reported on the American Stock Exchange on June 30,
2003, the last business day of the registrant's most recently completed second
fiscal quarter, was $4,920,389.
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of March 1, 2004, was 30,386,061 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III of this Annual Report on Form 10-K is
incorporated herein by reference to the registrant's Proxy Statement for the
2004 Annual Meeting of 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 ...............21
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ..............................................24
ITEM 6. SELECTED FINANCIAL DATA ............................................25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..............................26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .............................................42
ITEM 9A. CONTROLS AND PROCEDURES ............................................43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ....................43
ITEM 11. EXECUTIVE COMPENSATION .............................................43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS .......................43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES .............................44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K ...............................44
SIGNATURES ..........................................,........................51
2
PART I
ITEM 1. BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH
INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS. (SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--RISK FACTORS").
GENERAL
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing managed vision and professional eye care products and
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 Vision Division contracts with insurers, employer groups,
managed care plans, HMOs and other third-party payers to manage claims
payment administration of eye health benefits for contracting parties
in eight states and to provide insurance coverage relating to certain
eye care products and services.
o Our Consumer Vision Division sells retail optical products to
consumers and owns and/or operates integrated eye health centers,
professional optometric practices and surgical facilities in
Connecticut where comprehensive eye care services are provided to
patients. We also own a manufacturing laboratory in Connecticut, in
which prescription eyeglasses are fabricated and supplied to all of
our Connecticut locations.
o Our Distribution & Technology Division serves the professional eye
care market 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 to ophthalmologists,
optometrists and opticians, and (iii) CC Systems, which provides
systems and software solutions, including production, management and
inventory systems, for eye care professionals and for eyeglass
manufacturing laboratories.
Our principal executive offices are located at 87 Grandview Avenue,
Waterbury, Connecticut, 06708. Our telephone number is (203) 596-2236 and our
web site address is www.opticare.com. We include our web site address in this
Annual Report on Form 10-K only as an inactive textual reference and do not
intend it to be an active link to our web site.
We make available free of charge through the Investor Relations section of
our web site our Corporate Code of Conduct and Ethics and our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission (the SEC). The public may read and copy any materials we
file with the SEC at the SEC's Public Reference Room, 450 Fifth Street, NW,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. Because we file
reports and other information with the SEC electronically, the public may obtain
access to those documents at the SEC's Internet web site: http://www.sec.gov.
THE EYE CARE INDUSTRY
Overview
The eye care market includes both eye care services (including the systems
and equipment for delivering such services) and optical products.
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In the eye care services sector, 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 sector 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., ophthalmologists and optometrists have traditionally delivered
eye care services. Optical products are typically dispensed by opticians.
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
examinations and prescribe corrective optical devices (principally eyeglasses
and contact lenses). Optometrists do not perform surgery, but often provide pre-
and post-operative care. Opticians measure, fabricate, fit and adjust glasses as
requested by patients and as prescribed by doctors. They also perform routine
repairs and dispense eyeglasses and contact lenses. 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 optical products is 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 those
consumers--purchase eye wear each year. Annual market growth rates of 2% to 5%
are expected to continue for the next several years. The single most compelling
explanation for such growth is demographics, and, specifically the aging baby
boom segment of the population. The need for corrective lenses is highly
correlated with age. While 63% of 25-44 year-olds need such lenses, 95% of 45-64
year-olds require them. As the median age of the population increases (the
portion of the U.S. population age 45 and over is projected to grow 21% from
2001 to 2010), 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%.
Eye care in the U.S. is a $45 billion market. Of that, approximately $29
billion is spent annually on health care services related to eye care. In
addition, consumers spend approximately $16 billion annually on retail optical
products, of which approximately 84%--or $14 billion--is spent on lenses and
frames, while approximately 12%--or $2 billion--is spent on contact lenses (with
the balance, approximately 4% or $0.6 million, being spent on sunglasses).
We do business in both sectors of this market (i.e., by providing eye care
services and selling optical products). We also do business across both sectors
of this market (i.e., by providing managed vision services with respect to both
eye care services and optical products).
Eye Care Services and Products
We expect the demand for optical products and eye care services to show
steady growth. We believe that the aging of the population, including the "baby
boom" generation, will increase the demand for optical products and eye care
services such as the medical and surgical treatment of such common disorders as
glaucoma, macular degeneration, diabetic retinopathy and cataracts. For
instance, Glaucoma affects approximately 3 million people in the U.S. and is
projected by industry sources to double by 2030. 2.7 million cataract surgeries
were performed in 2002, and that number is expected to increase to approximately
3.2 million by 2007. Since patients over the age of 65 are most affected by
these eye disorders, the Medicare program is the primary payer for treatment,
including surgical treatment, of these disorders.
Managed Vision Services
According to InterStudy, a health care research firm, as of January 2002,
total U.S. enrollment in health maintenance organizations was 76.1 million.
Additionally, approximately 80 million Americans are enrolled in
4
preferred provider organizations. Almost all health care insurance plans cover
medical/surgical treatment of eye disorders and many also provide vision care
benefits, including routine eye exams and optical products.
We believe that enrollment in health care insurance 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.
Further, vision care coverage is the fastest growing employee benefit.
Vision is a low-cost, high perceived value benefit, rated by employees as one of
the three most important benefits. The percentage of employers offering vision
benefits rose from 34% in 1996 to 56% in 2000, the latest year for which such
statistics are available.
DESCRIPTION OF BUSINESS DIVISIONS
Our business operations are managed through three divisions which,
together, cover virtually every major sector of the eye care market: Managed
Vision; Consumer Vision; and Distribution & Technology.
Managed Vision Division
Description
Our Managed Vision Division contracts with insurers, insurance fronting
companies, employer groups, managed care plans, HMOs and other third-party
payers to manage claims payment and administration of eye health benefits for
those contracting parties in Connecticut, Colorado, Georgia, Missouri, New York,
North Carolina, Tennessee and Texas. The typical range of benefits administered
includes well eye exams, prescription optical products and medical and surgical
services related to eye care.
We have leveraged our leadership position in key markets to build a strong
provider base of eye care professionals: ophthalmologists, optometrists and
opticians. We verify and approve the credentials of these providers, ensuring
they meet plan and regulatory standards. We educate these providers concerning
the plan benefits which we administer and then streamline the authorization and
claims payment process.
We believe that our managed care services provide significant value to
third-party payers by delivering high quality managed eye care benefits to plan
members and comprehensive, cost-effective administrative services to the
third-party payers. 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, third party provider relationships and operating history.
Strategy
Recognizing the significant growth potential of this market segment, we are:
o Expanding our sales and marketing capabilities to organically grow in
certain South-East and North-East markets;
o Positioning ourselves to contract for business directly with employer
groups and other associations, thereby reaching another sector of the
third-party payer market and broadening the base of our revenue
stream;
o Increasing our market density, which will enable us to offer cost
advantages by directing volume to targeted manufacturers, thereby
increasing the value of our services to the practitioners who contract
with us; and
o Offering non-insurance related products, including Administrative
Services Only (ASO) and IRC Section 125 plans, with benefits that
include the administration of well eye examinations and/or
prescription optical products.
5
Market Position
As of December 31, 2003, we administered eye care benefit programs,
delivered through networks of eye care professionals nationwide, for
approximately 2 million benefit enrollees 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/or fee-for-service arrangements.
Customers
Our Managed Care Vision Benefits' customers include insurers, managed care
plans, HMOs and other third-party payers. With the advent of our
Direct-to-Employer suite of products, our customer base is being enlarged to
include, among others, employers, employer groups, unions, trade organizations
and municipalities. We have six managed vision contracts with two insurers,
CIGNA and United St. Louis, which account for 14 % of the our consolidated
revenue in 2003. CIGNA experienced a decline in membership in January 2004,
which translates into a $2.0 million decline in our annual revenue, however, a
new contract with a different payor became effective March 1, 2004, which will
offset this decrease in revenue.
Most of our contracts have terms of one to 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.
Products & Services
OptiCare is distinguished in the eye care insurance industry because it
offers a number of different risk-bearing contractual relationships for its
clients. In addition to traditional "Managed Care Vision Benefits," described in
the first point below, we began offering a new suite of products in February of
2003, which we refer to as our "Direct-to-Employer" products, described in the
second, third and fourth points below.
o Managed Care Vision Benefits - We administer vision benefits for
health plans to over 2 million benefit lives under capitation and
fee-for-service arrangements. Benefits administered under these
programs are for well vision, preventive exams and optical hardware in
addition to medical and surgical eye care benefits. We assume partial
or full financial risk with respect to nearly all of the lives for
which we administer vision benefits. We have been administering
benefits of this nature for more than ten years.
o Insured Vision Plan - We provide insurance coverage for well vision,
preventive examinations and optical hardware through Fidelity Security
Life Insurance Company and through our captive insurance company,
OptiCare Vision Insurance Company, Inc.
o Section 125 Vision Plan - This vision benefit allows qualified groups
and individuals to participate in vision programs for well vision,
preventive examinations and optical hardware on a pretax basis.
o ASO Vision Plan - We administer benefits on a fee basis for well
vision, preventive examinations and optical hardware for qualified
groups which are self-funded.
Operations
The following are the principal components of our Managed Vision
operations:
o Provider Contracting - Upon obtaining a managed care contract, we
typically define and/or develop a network of ophthalmologists,
optometrists and opticians to provide the eye care services required
under the contract. Generally, we attempt to contract first with eye
care professionals with whom we have an existing contractual
relationship. Additionally, we seek to enter into contracts with
independent eye care professionals as well as to work in conjunction
with our partners to build networks that meet set access standards.
6
o Provider Credentialing - Under most contracts, we "credential" eye
care professionals (i.e., establish to both our, and the third-party
payer's, satisfaction the credentials of such professionals) who
provide the eye care services specified under the contract to the
third-party payer's members. In addition to our network enrollment
process, we credential when requested by the health plan or as
required by state law consistent with the standards established by
those plans or applicable law. In those instances, we undertake a
review process on each prospective eye care professional, which
includes obtaining a copy of the state license and Drug Enforcement
Agency number, verifying hospital privileges, liability insurance and
board certification and reviewing work history.
In conducting our credentialing reviews, we apply the national
standards--set by the National Committee for Quality Assurance--by
which health plans are measured for compliance with quality assurance
initiatives. OptiCare was re-awarded accreditation in 2003 as a
Credentialing Verification Organization by the National Committee for
Quality Assurance for 11 out of 11 elements. Eye care professionals,
who are credentialed for our panels, are currently re-credentialed
every three years.
o Claims Payment - For most contracted payers, we pay claims to our
network providers for services rendered in the fulfillment of vision
benefits for members. We also have Internet capabilities for
authorizations (if needed), direct claim submission and claim
tracking. Additionally, we accept claims via electronic data
interchange, allowing providers to send claims through their own
practice management software. We believe these enhancements have
continued to help lower our cost of operations, improve service, and
speed the payment cycle to our providers.
To enhance our claims payment administration, we utilize proprietary
systems, which allow us to strictly follow Center for Medicare and
Medicaid Services' 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.
o Utilization Management - Our Utilization Management staff ensures that
established clinical criteria are followed in provision of services
and benefits to members. 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 guidelines, we work with eye care professionals to
determine appropriate eye care treatments. While these practices are
intended to reduce unnecessary procedures--and therefore costs--there
can be no assurance that costs may not become excessive.
o Plan Member Relations - Service representatives answer plan members'
questions relating to their benefits and the status of their claims
and help resolve complaints relating to their eye care treatment. We
believe that our issue-resolution structure is unique to the industry
and increases plan members' satisfaction with their eye care benefits.
o Provider Relations - We continuously educate providers concerning the
various plan benefits being administered. In addition, with the
assistance of our staff, providers may obtain required authorizations
prior to performing certain eye care procedures.
o Quality Management - Our Quality Management Department tracks
complaints and concerns and conducts surveys for members, providers
and payers to ensure that all parties are satisfied with the services
and the service levels provided. Department personnel also recommend,
or take, steps to address conditions from which valid complaints have
arisen. In addition, we perform prospective-outcome studies and other
quality assessment studies on the care rendered by our network of
providers.
o Claim Data Analysis - Our financial analysts review claim and other
data to provide feedback to management and to the insurance companies
and other payers with which we have claims payment contracts
concerning our performance, enabling management to maintain
profitability while providing excellent service.
7
Legal & Compliance
Our Managed Vision Division is subject to the following legal requirements
and regulations:
Licensing Requirements. Most states impose strict licensure requirements on
health insurance companies, HMOs and other companies that engage in the business
of insurance, pre-paid health care or defined managed care activities. In some
states, these laws do not apply to the discounted fee-for-service or capitation
programs between insurers and provider networks contracting with those insurers.
Certain states, however, 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. As a
risk-bearing entity, we are currently licensed only in Texas and operate our
capitated arrangements through a wholly-owned, single-service HMO subsidiary,
AECC Total Vision Health Plan of Texas, Inc. (See "--Regulation of Our HMO
Subsidiary")
If we are required to become licensed under the laws of states other than
Texas for our Managed Care Vision Benefits products, the licensure process can
be lengthy and time consuming. In states where we already are conducting such
business, 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, licensing requirements may mandate
strict financial and other requirements we may not immediately be able to meet
and 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. (The same risks may not apply to the
same degree for our Direct-to-Employer suite of products due to our relationship
with Fidelity Security Life Insurance Company, which is licensed to write life
and health insurance in all 50 states (New York, reinsurance only).) Once
licensed, we would be subject to regulatory compliance and required to report to
the licensing authority.
We also hold a license as a third-party administrator in North Carolina,
South Carolina and Texas and are a licensed utilization review agent in South
Carolina, Texas, Tennessee and New York. In addition, we have applied for a
preferred provider network license in Connecticut.
In New Jersey we have applications on file to become a Certified Organized
Delivery System and a third-party administrator.
These same requirements, it should be noted, can also serve as a barrier to
entry to competition in states where such licensure is required.
Regulation of Our Capitve Insurance Subsidiary. Our Captive Insurance
Company subsidiary, Opticare Vision Insurance Company (OVIC) is a licensed
Captive Insurance Company domiciled in South Carolina. It is subject to
regulation and supervision by the South Carolina Department of Insurance who
requires us to maintain $500,000 of unencumbered capital and surplus.
Regulation of Our HMO Subsidiary. Our Texas HMO subsidiary, AECC Total
Vision Health Plan of Texas, Inc. is a licensed single service HMO. It 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, payment 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. Our Texas HMO
subsidiary is required by terms of an Order of the Commissioner of Insurance,
dated August 12, 1999, as modified in November 2003, to maintain a minimum net
worth of $500,000. Dividends payable to us by our Texas HMO subsidiary 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.
Third Party Administration Licensing. Some states require licensing for
companies providing administrative
8
services in connection with managed care business. We currently hold third party
administrator licenses in North Carolina and Texas. 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.
Direct-to-Employer Insurance Products. Fidelity Security Life Insurance
Company, a carrier licensed to write life and health insurance in all 50 states
(New York, reinsurance only), underwrites our insured product. Fidelity has been
rated A- (Excellent), based on an analysis of financial position and operating
performance by A.M. Best Company, an independent analyst of the insurance
industry. Our insured product, offered through Fidelity, is reinsured through
OptiCare Vision Insurance Company, Inc., our wholly-owned subsidiary, which is
domiciled in South Carolina and has received approval to operate as a captive
insurance company from the South Carolina Department of Insurance.
Preferred Provider Networks. We previously registered as a preferred
provider network (PPN) with the Connecticut Office of Health Care Access. In
2003 this regulatory function was transferred to the Department of Insurance and
the definition of a PPN was revised to focus on entities assuming financial
risk. We have an application pending with the Department of Insurance for a PPN
in Connecticut. Many states have provider network licensure registration
requirements and many of these mandate that an organization have specified
financial reserves or insolvency protections and provide financial reporting and
disclosures to state officials. Our activities over time in Connecticut and/or
in various other states may subject us to regulation under such arrangements,
and our ability to comply with these requirements or to secure the necessary
regulatory approval, cannot be assured.
"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 ophthalmologists and optometrists .
Further, with the introduction of our Direct-to-Employer suite of products, we
have added business lines which would not be directly affected by adoption of
"any willing provider" requirements in the states in which we do such business.
Health Insurance Portability and Accountability Act - Administrative
Simplification. The Health Insurance Portability and Accountability Act
(referred to as HIPAA), passed in 1996 by Congress, requires the Department of
Health and Human Services (referred to as HHS) to enact standards for
information sharing, security and the use, disclosure and confidentiality of
patients' protected health information. The HHS, in its administrative
simplification provisions, has published three sets of final regulations
implementing healthcare transactions and privacy standards under HIPAA. These
regulations apply to what are termed "covered entities" (i.e., health plan,
health care clearinghouse, healthcare provider) and, under terms of the
regulations, in certain instances we may be a covered entity and in other
instances we may be classified as a business associate of an independent covered
entity. In addition, state laws may place additional limitations on the use or
disclosure of patients' information.
The first set of final regulations requires covered entities to use uniform
standards, including data reporting, formatting and coding, for common
healthcare transactions. The Standards for Electronic Transactions Final Rule
was published August 2000 and became effective October 2000 with a compliance
date of October 2002. The effective date was later delayed to October 2003. We
implemented the appropriate compliance initiatives, including systems
enhancements, to implement the electronic transaction and code set requirements
and we believe we are in compliance with this regulation.
The second set of final regulations imposes new standards relating to the
privacy of individually identifiable health information. The Standards for
Privacy and Individually Identifiable Health Information Final Rule was
published December 2000 and became effective April 2001 with a compliance date
of April 2003. These standards require covered entities to comply with rules
governing the use and disclosure of protected health information. The standards
also require covered entities to enter into certain contractual provisions with
any business associate to whom individually identifiable information is
disclosed. We implemented appropriate
9
compliance initiatives, including systems enhancements, training and
administrative efforts, required to be compliant with the HIPPA Privacy
Regulations and we believe we are in compliance with this regulation.
A third set of regulations under HIPAA, the Final Rule for Security
Standards, was published in February 2003 with a compliance date of April 2005.
The Final Rule establishes minimum security requirements for covered entities to
protect health information in electronic form. In some cases, we will also have
to comply with applicable state regulations regarding privacy and medical
information. We have has created a security plan that includes administrative,
technical and physical security safeguards to ensure appropriate compliance by
the effective date.
We are currently assessing the security standards to ensure that we have
the required systems and procedures in place to comply with the new HIPPA
regulations. While we will incur costs to become compliant with the HIPAA
regulations, we believe this will not have a significant overall impact on our
results of operations. We will continue to monitor new developments under HIPAA
and the regulations and pronouncements issued thereunder to ensure compliance.
In addition to its administrative simplification provisions, HIPAA also
imposes criminal penalties for fraud against any healthcare benefit program, for
theft or embezzlement involving healthcare and for false statements in
connection with the payment of any health benefits. These HIPAA fraud and abuse
provisions apply not only to federal programs, but also to private health
benefit programs. HIPAA also broadened the authority of the Department of Health
and Human Services Office of Inspector General, or OIG, to exclude participants
from federal healthcare programs. Although we do not know of any current
violations of the fraud and abuse provisions of HIPAA, if we were found to be in
violation of these provisions, the government could seek penalties against us
including exclusion from participation in government payer programs. Significant
fines could cause liquidity problems and adversely affect our results of
operations.
Interpretation and Implications. Many of the laws described may involve
civil and criminal penalties and have been subject to limited judicial and
regulatory interpretation. These laws often 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, some of 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.
Competition
Our Managed Vision Division competes with several regional and national eye
health companies, which provide services to health plans, associations, employer
groups and various other payers. Our largest competitor is 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 we do. 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.
Consumer Vision Division
Description
The Consumer Vision Division provides eye care services and products to
consumers through a total of 18
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integrated eye health centers and professional optometric practices, a surgery
center and a laser correction center we own and/or operate in Connecticut. (In
the integrated eye health centers, comprehensive eye care services are provided
by ophthalmologists and optometrists.) We also conduct all management, billing,
systems and related procedures for the operation of all locations.
Strategy
We are seeking to improve the profitability of our Consumer Vision Division
by generating higher volume through existing locations. To do so, we are trading
on our promise of "better doctors, better training, better care" and our wide
selection of quality brand name and private label products which span a wide
range of price points. Further, we are developing and executing test marketing
programs to increase optical sales and implementing profit improvement plans
throughout the Consumer Vision Division.
Market Position
We are the second largest optical retailer in Connecticut.
Customers
Our customers and patients are individuals who come to us for eye exams,
corrective lenses, surgery and non-prescription eyewear, such as sunglasses. We
are not dependent upon customers or patients of any particular age, gender,
ethnic origin or from any particular community or economic strata.
Products & Services
Integrated Eye Health Centers. Through our nine integrated eye health
centers, comprehensive eye care services are provided to individual patients.
Such services include medical and surgical treatment of eye diseases and
disorders by ophthalmologists, and vision measuring and non-surgical eye care
correction and treatment services by optometrists.
Professional Optometric Practices. Our professional optometric practice
locations provide vision correction services by optometrists, and/or sell
eyeglasses and other optical products. These facilities are either free-standing
or are located within our fully integrated eye health centers. Our professional
optometric practices provide all customary optical goods and are supported by
our billing, collection and information systems. We operate 18 retail optical
locations in Connecticut (nine of those facilities also offer medical services
and are referred to as the "integrated eye health centers" discussed above).
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, Connecticut, 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,
Connecticut, we use a VISX excimer laser for the correction of nearsightedness,
farsightedness and astigmatism. In these centers, we bill patients (or their
insurers, HMOs, Medicare, Medicaid or other responsible third-party payers) for
use of the surgery facility. Our surgeons bill the patients separately for their
services. 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.
Manufacturing Laboratory. We also have a complete manufacturing facility in
Connecticut, with state of the art equipment, in which lenses are farbricated,
surfaced and ground to specifications and supplied to all of our Connecticut
locations. Additionally, our lab manufacturing services are integrated into some
of our Managed Vision programs that are administered in Connecticut.
Operations
For our integrated eye health centers, professional optometric practices
and surgical centers, we contract with a
11
professional corporation, OptiCare P.C., which employs ophthalmologists and
optometrists, to provide surgical, medical, optometric and other professional
services to patients. We provide management services to OptiCare P.C. under a
renewable professional services and support agreement. We refer to OptiCare P.C.
as our "professional affiliate."
We purchase most of our eyeglass frames, ophthalmic lenses, contact lenses
and other optical goods and devices through our Buying Group and/or Wise
Optical, our optical product distribution company (See "--Distribution &
Technology Division").
Legal & Compliance
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:
Surgical Facility Regulations. Our licensed ophthalmic outpatient surgical
facility in Waterbury, Connecticut 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 OptiCare 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 Medicare, Medicaid or other payer
programs. The 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.
Excimer Laser Regulation. Medical devices, including the excimer laser used
in our Danbury, Connecticut laser surgery 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 U.S. is 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.
Corporate Practice of Ophthalmology and Optometry . The laws of a number of
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;
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o Controlling clinical decision-making; or
o Engaging in other activities that constitute the practice of
ophthalmology or optometry.
To comply with these requirements, we:
o Perform only non-professional services;
o Contract with our professional affiliate (which is owned by a licensed
ophthalmologist), which in turn employs or contracts with licensed
ophthalmologists or optometrists to provide professional services to
patients;
o Do not represent to the public or customers that we provide
professional eye care services (which is done by the professional
affiliate); and
o Do not exercise influence or control over the professional practices
or clinical judgements of eye care practitioners employed by the
professional affiliate.
o Only dispense prescription ophthalmic products under the sole
supervision of the employees of the professional affiliate.
Our agreement with our professional affiliate specifically provides 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 agreement 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 Stark 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", which includes "prosthetic devices." Under federal
authority and the standards imposed by various state Medicaid programs,
eyeglasses and contact lenses for patients who have undergone certain ophthalmic
procedures would be considered prosthetic devices covered by Stark. The Stark
regulations provide that the prohibition of referrals for these types of eyewear
does not apply if the arrangement between the physician and the eyewear seller
conforms to the Anti-Kickback Law 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 relationship with our
professional affiliate.
State Fee-Splitting and Anti-Kickback Law. Most states have laws which
prohibit the paying or receiving of any remuneration, direct or indirect, that
is intended to induce referrals for health care products or services and
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. In addition, to the extent we are
engaged in the direct delivery of vision care services in a jurisdiction we have
to comply with those statutes. There is no express statute on this specific
subject in Connecticut.
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
13
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
(42 USC Section 1320a-7b), 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 that which we have with our professional affiliate that
would indicate that such agreements 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
relationship with our professional affiliate. If our services agreement is ever
determined to be in violation of the Anti-Kickback Statute, it is likely that
there would be a material adverse impact on our business, financial condition
and results of operation.
Advertising Restrictions. Many states have laws which 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. Advertising is prohibited if it is undertaken in
a manner that is deemed inappropriate for a professional or likely to mislead
and there are regulatory requirements in Connecticut delineating certain
specific requirements in this regard to which we must comply. Our services
agreement with our professional affiliate provides 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.
Health Insurance Portability and Accountability Act - Administrative
Simplification. This federal statute and its regulations, discussed above in
"--Managed Vision Division" is applicable to the Consumer Vision Division as
well.
Interpretation and Implications. 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. 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.
In addition, these types of laws and their interpretation vary from state
to state. The regulatory framework of certain jurisdictions may limit our
expansion into such jurisdictions if we are unable to modify our operational
structure to conform to such regulatory framework.
Competition
The most direct competition for our Consumer Vision Division 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, Pearle Vision, Wal-Mart, Eye Care Centers of America, Eyecare,
Consolidated Vision Group, Costco Wholesale, U.S. Vision and D.O.C. Optics.
Retail optical operators compete on price, service, product availability and
location.
Several of our competitors have greater financial and other resources than
we have or may charge less for certain
14
services than we do. However, we believe the integrated nature of our business
model provides significant competitive advantages in the marketplace.
Distribution & Technology Division
Our Distribution & Technology Division serves the professional eye care
practitioner market in the U.S. and Canada with optical products, collective
buying arrangements and software systems and support. We continue to establish a
sales function, which will be equipped to communicate, and deliver, to the
professional eye care practitioner market the full range of our Distribution &
Technology Division's products and services.
Description
We sell optical and ophthalmic goods and related medical supplies to
professional eye care practitioners directly, through Wise Optical, one of the
largest contact lens distributors in the U.S. and, indirectly, through a "Buying
Group" program, which is a specialized group purchasing arrangement for
ophthalmologists, optometrists and opticians. Under the trade name CC Systems,
OptiCare also designs, develops and markets advanced practice management /
point-of-sale computer systems for optometry and ophthalmology practices and for
retail optical locations as well as management information systems for optical
manufacturing laboratories.
Strategy
As a provider to the professional eye care practitioner of substantially
all of the products, services and software needed to successfully operate an eye
care practice, we intend to capitalize on the uniquely integrated nature of our
business.
We intend to continue the expansion of our distribution of optical and
ophthalmic goods and medical supplies through leveraging Wise Optical's field
sales/customer service force of nearly 50 individuals nationwide.
We further intend to develop a unified selling strategy, which cross-sells
products and services to customers within the Distribution & Technology Division
and which makes such products and services available to our other divisions and
their customers, as well. A common theme of that selling strategy is "operating
efficiency." Through Wise Optical and our Buying Group, we can provide our
professional eye care practitioner customers with one-stop-shopping--enabling
them to compete more effectively. Through CC Systems, we can provide many of
those same customers with the operating efficiencies which arise from
utilization of a fully-integrated suite of practice management and eyeglass
manufacturing software products.
We intend to expand our Buying Group and Wise Optical volume by directing,
as appropriate, our Consumer Vision Division's purchasing requirements through
the Buying Group or Wise Optical and by cross-selling such products and services
to professional eye care practitioners who are members of our Managed Vision
Division provider panels.
Market Position
We are one of the leading integrated providers in the U.S. of optical and
ophthalmic goods and related medical supplies and of software systems designed
for eye care practitioners and eyeglass manufacturing laboratories. Within the
contact lens market, Wise Optical is one of the largest distributors (to eye
care professionals) in the U.S. Wise Optical is also a distributor of ophthalmic
lenses, and sales of such lenses are the fastest growing segment of Wise
Optical's distribution business. Our Buying Group is also one of the largest of
its kind in the U.S. wholesale optical goods market. CC Systems' market share
for its practice management / point-of-sale and fabricating management operating
and information systems places it among the top five vendors in North America of
comparable products to the optical industry.
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Customers
Our Wise Optical and Buying Group customers include independent ophthalmology
and optometric practices and opticians as well as the integrated eye health
centers and professional optometric practices of our Consumer Vision Division.
Wise Optical and our Buying Group each have approximately 2,700 and 1,800 active
customers, respectively, most of whom are independent eye care practitioners.
Similarly, our software systems' customers are ophthalmology and optometry
practices, optical product dispensaries and optical laboratories, based mainly
in North America. As of March 1, 2004, we had approximately 70 retail, 100 lens
manufacturing, and 20 combined customers using our eye care systems and software
services throughout the U.S. and Canada. In addition, ophthalmology and
optometry practices use our remote entry software to place orders with
laboratories, which also use our software, for custom manufactured lenses for
their patients. We are not dependent on any one, or on several, large customers.
We believe that there will be increasing demand for management and information
systems solutions for independent practitioners (who comprise the majority of
practicing ophthalmologists and optometrists) as well as for group practices. We
believe these doctors and opticians have the potential to benefit from our
services in this area.
Products & Services
We sell optical and ophthalmic goods (e.g., contact lenses, ophthalmic
lenses, eyeglass frames and accessories) and related medical supplies to
professional eye care practitioners directly, through Wise Optical, and,
indirectly, through a "Buying Group" program, which is a specialized group
purchasing arrangement for ophthalmologists, optometrists and opticians. Wise
Optical is an authorized distributor of contact and ophthalmic lenses
manufactured by such major vendors as: Johnson & Johnson, Ciba Vision, Bausch &
Lomb, CooperVision, Ocular Sciences and Essilor. Wise Optical also sells Gelflex
contact lenses, manufactured by Gelflex Laboratories, and Extreme H(2)O, a
contact lens designed to withstand dehydration. Wise Optical is also an
authorized Hilco distributor, carrying its optical supplies, eyewear
accessories, tools and consumer products.
We also sell practice management and point-of-sale software, including
Internet-based remote order entry software, which captures and links patient
data, provides such data to a remote manufacturing location for immediate custom
processing of optical goods, such as eyeglasses and contact lenses, and
generates invoices and other record-keeping data. This software supports such
aspects of eye health practice management as: billing, collections,
record-keeping, production control and inventory control. Our systems work on a
stand-alone basis or can be integrated as "partners" with the proprietary
products of other manufacturers. One of the advantages of these systems is that
they involve a seamless interface from the point at which the patient orders
glasses, to the computer-driven eyeglass manufacturing phase and to the billing
phase--reducing expense and minimizing the possibility of error.
Operations
Wise Optical purchases and takes possession of inventory and offers it for
sale via catalog and on its web site. Orders are taken by customer service
representatives, who are our employees, or are submitted by customers on-line.
To accommodate time-zone differences and to stay closer to its customers, Wise
Optical has customer service offices through which orders may be placed in
California, Oregon, Texas, Kansas and North Carolina. Orders are immediately
processed, packed and shipped from the Wise Optical warehouse in Yonkers, New
York, on the same day they are received. Most orders are delivered to customers
the day after the orders were placed. Among our vendors, two, Vistakon and Ciba
Vision, receive approximately 72% of the business of Wise Optical. Three others,
Bausch & Lomb, Coopervision and Ocular Sciences, account for another 22% of such
business. If one or more of these vendors should cease to sell products to Wise
Optical, it could have a material adverse effect on our business.
Our Buying Group leverages the purchasing strength of its approximately
2,500 members, of which 1,800 are active, making it possible for them to
purchase goods on a discounted basis from one or more suppliers chosen from our
national panel of approximately 230 different vendors. We enter into a
non-exclusive account relationship
16
with each of the ophthalmologists, optometrists and opticians who are members of
the Buying Group. These members may then 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 Buying Group
members. Among our vendors, two, Marchon Eyewear, Inc., and Safilo USA, Inc.,
receive approximately 25% of the business of our Buying Group members. Five
others, Silhouette Optical Ltd., Essilor of America, Inc., Ciba Vision,
Coopervision, Inc. and Viva International Group, account for another 25% of such
business. If one or more of these vendors should cease to allow our members to
purchase products from them through our Buying Group, it could have a material
adverse effect on our business.
CC Systems' sales are made on a direct basis and leads are developed
through various sources. These include: customer word-of-mouth and software
partner leads (Misys, IDX, Gerber Coburn, etc.) as well as trade show
attendance. Products are delivered, installed and supported by our installation
and support group and by our subcontractors. We also re-market computer and
network hardware, adding value through our software installation and
configuration.
Competition
There are 17 primary contact lens distributors in the U.S., with Wise
Optical being, we believe, one of the largest distributors of soft contact
lenses. These distributors compete on price and variety of products, which are
based, in part, on allowances and authorizations from the contact lens
manufacturers. Buying group organizations compete on the basis of price, size
and purchasing power of their members, the strength of their credit, and the
strength of their supplier agreements and relationships. We also compete with a
range of systems and software vendors which cater to eye health professionals.
We believe we are distinguished from our competition by our software products'
sophisticated interfaces, scalability and ease of modification.
While some of our competitors have greater financial and other resources
than we do, we believe that the comprehensive range of products, services and
software, which we offer to the professional eye care practitioner,
distinguishes us from many of those competitors.
TRADEMARKS, DOMAIN NAMES AND ASSUMED NAMES
We own the following U.S. trademark registrations: OPTICARE and the
miscellaneous curve design, which is the OptiCare Health Systems, Inc. logo; EYE
CARE FOR A LIFETIME; EYEWEAR AND EYE CARE FOR A LIFETIME; CONNECTICUT VISION
CORRECTION; LOSE THE GLASSES, KEEP THE VISION; THE DIFFERENCE IS CLEAR; and
KEEPING YOU AHEAD OF THE CURVE. Other trademarks for which applications for U.S.
registration are pending are: THE VISION OF HEALTH and DOCTOR'S EXPRESS. We also
maintain a common law trademark in CLAIM IT.
We own the following domain names: opticare.com; opticareeye.com;
opticare.net; opticare-ehn.com; opticarenas.net; opticareonline.com;
optical-online.com, wiseoptical.com, wisecontactus.com, yourlens.com,
wisevisiongroup.com, and wiseopticalonline.com.
We operate under the following assumed names: Wise Optical; Wise Optical
Vision Group; Wise/Corniche (California); Wise/Gulf Coast (Florida); Wise/North
Central (Minnesota); Wise/Contact US (New York); Wise/North West (Oregon);
Wise/South West (Texas); Wise/South East (North Carolina); Wise/Mid West
(Kansas).
We consider these trademarks, domain names and assumed names important to
our business. However, our business is not dependent on any individual trademark
or trade name.
17
EMPLOYEES
We and our professional affiliate have approximately 482 employees,
including 78 ophthalmologists, optometrists and opticians and 39 ophthalmic
assistants. These numbers include an aggregate of approximately 58 part-time
personnel who work 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, Yonkers, New York, 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 of
six, eight, and eight years, respectively. These leases have renewal options of
20, 20, and 10 years, respectively. The combined base rent is $807,364 per year
for a total of 43,592 square feet.
The facilities in Rocky Mount which contain offices for our Managed Vision
Division and Buying Group, are leased under one lease which began on August 1,
2002 and which has a remaining term of four years. The base rent for this
facility is $184,000 per year for 19,355 square feet.
The Yonkers facility, which contains offices for our Distribution &
Technology Division and a sales, service and fulfillment center for our Wise
Optical business, is leased under one lease which began in August 2000 and which
has a remaining term of seven years. The base rent for this facility is $415,875
per year for 27,575 square feet.
Our Distribution & Technology Division's CC Systems business is primarily
conducted from offices in Largo, Florida, which are leased under one lease which
began on October 1, 1999 expires in September 2004. The base rent for this
facility is $27,000 per year for 2,520 square feet.
The facilities in Waterbury, Connecticut and Largo, Florida, described
above, are each leased from parties that are affiliated or associated with one
of our executive officers.
We lease 22 additional offices in the states of Connecticut, California,
New York, North Carolina, Kansas and Texas, principally for our Consumer Vision
and Distribution & Technology Division operations. These leases have remaining
terms of up to ten 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 SERVICE ORGANIZATION LAWSUITS
In September and October 2001, the following actions were commenced:
Charles Retina Institute, P.C. and Steven T. Charles, M.D. v. OptiCare Health
Systems, Inc., filed in Chancery Court of Tennessee for the Thirtieth Judicial
District at Memphis; Eye Associates of Southern Indiana, P.C. and Bradley C.
Black, M.D. v. PrimeVision Health, Inc., filed in United States District Court,
Southern District of Indiana; and Huntington & Distler, P.S.C., John A. Distler,
M.D. and Anne C. Huntington, M.D. v. PrimeVision Health, Inc., filed in United
States District Court, Western District of Kentucky. Plaintiffs (ophthalmology
or optometry practices) in each of these actions alleged that our subsidiary,
PrimeVision Health, Inc. (referred to as PrimeVision) defaulted under agreements
effective as of April 1, 1999 entitled Services Agreement (HSO Model) (referred
to as Services Agreements) by failing to provide the services allegedly required
under those agreements in exchange for annual fees (referred to as HSO Fees) to
be paid to PrimeVision. Plaintiffs also alleged that PrimeVision repudiated any
duty to perform meaningful services under the Services Agreements and never
intended to provide meaningful
18
services. Plaintiffs seek declaratory relief that they are not required to make
any payments of HSO Fees to PrimeVision under the Services Agreements for a
variety of reasons, including that plaintiffs are discharged of any duty to make
payments, there was no termination of the Services Agreements that would trigger
an obligation by plaintiffs to pay PrimeVision the amounts designated in the
agreements as being owed upon early termination (referred to as the Buy-out
Price), the agreements contained an unenforceable penalty, there was lack of
consideration, and there was a mutual and material misunderstanding. Plaintiffs
also seek damages for non-performance and breach of duty of good faith and fair
dealing, and seek to rescind the Services Agreements for fraud in the
inducement, material misrepresentation, and mistake. Finally, plaintiffs seek
punitive damages and attorneys' fees, interest and costs. PrimeVision also filed
denials of all of the material allegations of the complaints in the Huntington &
Distler and Eye Associates of Southern Indiana cases, and asserted counterclaims
to recover HSO Fees and the Buy-out Price.
In November 2001, PrimeVision commenced the following action: PrimeVision
Health, Inc. v. Charles Retina Institute and Steven T. Charles, M.D. filed in
United States District Court for the Eastern District of North Carolina, Western
District. In this action, PrimeVision sued in North Carolina, which is its
principal place of business, one of the practices which had, in an action cited
above, sued it in Tennessee. PrimeVision alleged that the Services Agreement and
a Transition Agreement, also entered into by Defendant and PrimeVision in April
1999, were part of an integrated transaction in which many practices (referred
to as the Practices) that had previously entered into a physician practice
management (referred to as PPM) arrangement with PrimeVision converted to a
health service organization (referred to as HSO) model. As part of that
integrated transaction, the Practices (including Defendant) repurchased assets
that they had sold to PrimeVision in or about 1996 and were able to terminate
agreements entered into with PrimeVision in 1996 and the obligations thereunder.
PrimeVision sought a declaratory judgment that the Services Agreement is
enforceable and that Defendant must pay to PrimeVision the annual HSO Fees
required under the Services Agreement or, alternatively, the Buy-out Price.
The Multidistrict Litigation. On March 18, 2002, PrimeVision filed a motion
with the Judicial Panel on Multidistrict Litigation in Washington, D.C.
(referred to as the Judicial Panel) to transfer the foregoing litigation to a
single federal district court for consolidated or coordinated pretrial
proceedings. Over the opposition of the plaintiffs, the Judicial Panel granted
the motion and ordered that all of the cases be consolidated in the U.S.
District Court for the Western District of Kentucky under the caption In re
PrimeVision Health, Inc. Contract Litigation, MDL 1466 (MDL 1466).
In October and November 2002, PrimeVision commenced the following actions:
1. PrimeVision Health, Inc. v. The Brinkenhoff Medical Center, Inc.,
Michael Brinkenhoff, M.D., Tri-County Eye Institute, and Mark E. Schneider,
M.D., 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., Jeffrey P. Wasserstrom, M.D., a
medical corporation, Jeffrey P. Wasserstrom, M.D., Lawrence S. Rice, a medical
corporation and Lawrence S. Rice, 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;
4. PrimeVision Health, Inc. v. Eye Surgeons of Indiana, P.C., Michael G.
Orr, M.D., Kevin L. Waltz, M.D. and Surgical Care, Inc., in the United States
District Court for the Southern District of Indiana, Indianapolis Division;
5. PrimeVision Health, Inc. v. Downing-McPeak Vision Centers, P.S.C. and
John E. Downing, M.D., in the United States District Court for the Western
District of Kentucky, Bowling Green Division;
6. Prime Vision Health, Inc. v. HCS Eye Institute, P.C., Midwest Eye
Institute of Kansas City, John C. Hagan, III, M.D. and Michael Somers, M.D.,
filed in the United States District Court for the Western District of Missouri;
and
19
7. PrimeVision Health, Inc. v. Delaware Eye Care Center, P.A., a
professional corporation; and Gary Markowitz, M.D., filed in the Superior Court
of the State of Delaware, New Castle County.
PrimeVision requested the Judicial Panel to transfer all of the actions
except No. 7 to Kentucky and consolidate them as part of MDL 1466. (Action 7
could not be transferred because it was filed in state court.) The Judicial
Panel entered a conditional transfer order for such actions, and because there
was no opposition to transfer and consolidation in Actions 4, 5 and 6, they are
now part of MDL 1466. One practice defendant in Action 1, and the defendants in
Actions 2 and 3 opposed transfer to MDL 1466. On April 11, 2003, the Judicial
Panel denied those defendants' motions to vacate the Judicial Panel's order to
conditionally transfer the actions to the Western District of Kentucky and
ordered the remaining three actions transferred to the Western District of
Kentucky for inclusion in the coordinated or consolidated pretrial proceedings
occurring there.
The actions filed by PrimeVision contain similar allegations as the action
PrimeVision filed against Charles Retina Institute in North Carolina District
Court as described above. Instead of declaratory relief, however, PrimeVision
seeks money damages for payment of the contractual Buy-Out Price.
All of the defendants have denied the material allegations of the
complaints, and the defendants in Actions 3, 4, 5, 6 and 7, above, have asserted
counterclaims and seek relief similar to the claims asserted and relief sought
by the practices in the Charles Retina, Eye Associates of Southern Indiana and
Huntington & Distler cases. PrimeVision has denied all of the material
allegations of the counterclaims.
The parties have exchanged written discovery and have begun taking
depositions. PrimeVision also is willing to discuss a potential settlement with
any or all of the Practices, although there is no indication that the Practices
are prepared to discuss settlement on the same general basis or terms as
PrimeVision. At this stage of the actions, we are unable to form an opinion as
to the likely outcome or the amount or range of potential loss, if any.
During 2002 and 2003, we reached settlement with two HSO Practices with
which we were in litigation and with 11 other practices with which we were not
in litigation but where there was a mutual desire to disengage from the Services
Agreements. While we continue to meet our contractual obligations by providing
the requisite services under our Services Agreements, we are in the process of
disengaging from a number of these arrangements.
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 of our assets. We believe we 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 we misled it with
respect to our financial condition, and, as a result, Plaintiff has suffered
damages. Plaintiff seeks specific performance of the Asset Purchase Agreement
and an injunction prohibiting us 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 we engaged in innocent misrepresentation, negligent
misrepresentation, intentional and fraudulent misrepresentation, and unfair
trade practices with respect to the Asset Purchase Agreement.
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. Optivest LLC has withdrawn its
lawsuit however non-binding mediation has not been successful and the parties
will submit this matter to binding arbitration to be scheduled in the future.
20
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 believed the
matter had been resolved, however, since that time the parties have been in
discussion regarding the resolution reached at the mediation and no formal
settlement agreement has been entered into at this time.
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, 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 effect in relation to the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders in the fourth
quarter of 2003.
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 2004. 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. 56 Chairman of the Board of Directors and Chief Executive Officer
Eric J. Bertrand 31 Director
Gordon A. Bishop 55 President of Consumer Vision Division and Distribution Sector of
Distribution and Technology Division
William A. Blaskiewicz 41 Vice President and Chief Financial Officer
Norman S. Drubner, Esq. 64 Director
Jason M. Harrold 35 President of Managed Vision Division
Mark S. Hoffman 42 Director
Richard L. Huber 67 Director
Clark A. Johnson 72 Director
Melvin Meskin 59 Director
Mark S. Newman 54 Director
Christopher J. Walls, Esq. 40 Vice President and General Counsel
Lance A. Wilkes 37 President and Chief Operating Officer
Dr. Yimoyines has served as Chairman of the Board and Chief Executive
Officer since August 13, 1999. Dr. Yimoyines also served as our President from
August 13, 1999 to June 10, 2002. Dr. Yimoyines is a founder of OptiCare Eye
Health Centers, Inc. and has served as the Chairman, President and Chief
Executive Officer of OptiCare Eye Health Centers, Inc. since 1985. Dr. Yimoyines
has been instrumental in the development and
21
implementation of OptiCare Eye Health Centers, Inc.'s business for nearly 20
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. Bertrand has been a member of the Board of Directors since January 2002
and is a Director of Palisade Capital Management, LLC, an affiliate of Palisade
Concentrated Equity Partnership, L.P., where he has held a series of positions
of increasing responsibility since 1997. From 1996 to 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 U.S. Vision, Control F-1 and Versura,
Inc. He holds a Bachelor of Science in Business Administration from Bryant
College and a Master 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 Consumer Vision Division since
May 2001 and in September 2003 he replaced Gregory Eastburn as President of the
Distribution sector of the Distribution and Technology Division. From August
1999 to November 2002, he also was President of our Buying Group. 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 capacities with companies in the U.S.
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. Blaskiewicz has served as Chief Financial Officer of OptiCare since
September 2001. Prior to that, he was Director of Finance, Corporate Controller,
Vice President of Finance and, most recently, Chief Accounting Officer for
OptiCare from February 1998 to August 2001. Prior to joining OptiCare, 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 Financial Management (CFM) designations from the
IMA.
Mr. Drubner has been a member of the Board of Directors since November
2001; is senior partner in the law firm of Drubner, Hartley & O'Connor, 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, Connecticut Bar Association.
Mr. Drubner has been admitted to practice before the U.S. District Court,
District of Connecticut. He is a former trustee of Teikyo Post University and
was a Director of American Bank of Connecticut from 1985 - 2001. Mr. Drubner
holds a Bachelor of Arts degree from Boston University and received his Juris
Doctor degree from Columbia University in 1963.
Mr. Harrold has served as President of the Managed Vision Division since
August 2000. Mr. Harrold served as Chief Operating Officer of the Managed Vision
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, 1999, and Vice President of Quality Management from July 1996 to June
1999 for the Managed Vision 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
22
Security. He earned a Masters degree in Business Administration from Appalachian
State University in 1993.
Mr. Hoffman has been a member of the Board of Directors since January 2002
and 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 Refac and Neurologix, publicly-traded
companies, as well as several privately held companies, including Berdy Medical
Systems, C3I, Telelogue and Marco Group. Mr. Hoffman is a graduate of the
Wharton School at the University of Pennsylvania.
Mr. Huber has been a member of the Board of Directors since July 2002 and
is Chief Executive Officer of Norte Sur, a private equity firm targeting Latin
America. Mr. Huber is former Chairman, President and Chief Executive Officer of
Aetna, Inc., the Hartford, Connecticut-based insurance company, which he joined
in 1995. At Aetna, Mr. Huber was responsible for a number of strategic
acquisitions, such as NYLCare, PruCare and USHealthcare, making Aetna the
largest healthcare insurer in the world. Prior to Aetna, Mr. Huber had a 35-year
career in banking, including four years as Vice Chairman and Director of
Continental Bank and senior management positions at Chase Manhattan and
Citibank. Mr. Huber serves as Director of Danielson Holding Company and was a
member of the Congressional International Financial Institutions Advisory
Commission. He is a former Coast Guard officer and holds a Bachelor of Arts
degree from Harvard College.
Mr. Johnson has been a member of the Board of Directors since May 2002 and
is Chairman of PSS World Medical, Inc., a national distributor of medical
equipment and supplies to physicians, hospitals, nursing homes, and diagnostic
imaging facilities. He is a Director of MetroMedia International Group,
Neurologix, Inc., World Factory, Inc. and Refac; is retired Chairman and Chief
Executive Officer of Pier 1 Imports; and is former Executive Vice President and
Director of the Wickes Companies, Inc. Mr. Johnson, who attended the University
of Iowa, completed the Advanced Management Program at the Harvard Business
School. He is former Chairman of the American Business Conference, former
trustee of Texas Christian University and is a former Chief Executive Officer
Participant in the National Conference on Ethics in America.
Mr. Meskin has been a member of the Board of Directors since January 2002
and is Chairman of Refac, a publicly held company on the American Stock
Exchange. Mr Meskin retired as Vice President-Finance-National Operations of
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 the Post
Graduate Center for Mental Health.
Mr. Newman has been a member of the Board of Directors since May 2002 and
is Chairman of the Board, President and Chief Executive Officer of DRS
Technologies, Inc., a leading supplier of defense electronics systems to
government and commercial customers worldwide. Mr. Newman joined DRS
Technologies in 1973, served many years as its Chief Financial Officer, was
named a Director in 1988, became President and Chief Executive Officer in 1994,
and was elected Chairman of the Board. Mr. Newman serves as Chairman of the
American Electronics Association, and as a Director of the New Jersey Technology
Council, SSG Precision Optronics and the Congoleum Corporation where he chairs
the Audit Committee. He is a member of the Board of Governors of the Aerospace
Industries Association of America, and also serves as a member of the Navy
League of the United States, the National Defense Industrial Association, the
Association of the U.S. Army, and the American Institute of Certified Public
Accountants, among other professional affiliations. Mr. Newman holds a Bachelor
of Arts degree in Economics from the State University of New York at Binghamton
and a Master of Business Administration from Pace University. He is also a
C.P.A.
Mr. Walls has served as Vice President, General Counsel and Corporate
Secretary of OptiCare since February 2002. Prior to joining OptiCare, from
December 2000 to February 2002, Mr. Walls was Vice President, Corporate Counsel
and Corporate Secretary for Cyberian Outpost, Inc. 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. From December 1995
to October 1999, Mr. Walls served as an in-house litigator with St. Paul Fire
and Marine Insurance Company. His professional career also included private
practice concentrating on litigation that included medical malpractice defense
and
23
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.
Mr. Wilkes has served as President and Chief Operating Officer of OptiCare
since June 10, 2002. From 2001 to June 2002, Mr. Wilkes served as Senior Vice
President of Business Development for CIGNA Health Services, a unit of CIGNA
Corp. During his tenure with CIGNA, Mr. Wilkes was responsible for the
development of new specialty healthcare businesses, including the founding of
CIGNA Vision Care. From 1999 to 2001, Mr. Wilkes was head of strategy and
mergers & acquisitions for Aetna USHealthcare, a unit of Aetna Inc. From 1989 to
1999, Mr. Wilkes held a variety of other executive positions at Aetna in
finance, marketing and business development. A graduate of Brown University, Mr.
Wilkes holds a Masters degree in Economics and Corporate Finance from Trinity
College.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in OptiCare Common Stock
Our common stock is traded on the American Stock Exchange under the symbol
"OPT". The high and low closing prices for the periods presented are based on
trades effected on the American Stock Exchange.
2003 HIGH LOW
---- ---- ---
4th Quarter $0.99 $ 0.55
3rd Quarter 0.74 0.53
2nd Quarter 0.90 0.52
1st Quarter 0.90 0.29
2002 HIGH LOW
---- ---- ---
4th Quarter $0.44 $ 0.23
3rd Quarter 0.31 0.20
2nd Quarter 0.45 0.15
1st Quarter 0.45 0.13
On March 1, 2004, the last reported sale price of our common stock on the
American Stock Exchange was $0.71 per share. As of March 1, 2004, there were
approximately 200 stockholders of record of our common stock. The number of
record holders was determined from the records of our 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. We believe the number of beneficial holders of
our common stock is approximately 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 agreement with our senior lender, until the
termination of such agreement and the repayment of all amounts due to such
lender.
RECENT SALES OF UNREGISTERED SECURITIES.
None.
24
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 our consolidated financial statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
OptiCare 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. During 2002, we sold the net assets of
our retail optometry operations in North Carolina and accounted for the sale as
a discontinued operation. Accordingly, historical amounts presented below have
been restated to reflect discontinued operations treatment.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
(in thousands, except per share data) 2003 (1) 2002 2001 2000 1999 (2)
STATEMENT OF OPERATIONS DATA:
Total net revenues $125,702 $91,531 $94,082 $109,346 $66,944
Income (loss) from continuing operations
available to common stockholders (3)(5) (12,971) $4,335 $2,687 $(14,686) $(578)
Weighted average shares outstanding (4):
Basic 30,067 12,552 12,795 12,354 4,776
Diluted 30,067 51,172 13,214 12,354 4,776
Income (loss) from continuing operations
per share available to common
stockholders:
Basic $(0.43) $0.35 $0.21 $(1.19) $(0.12)
Diluted $(0.43) $0.10 $0.21 $(1.19) $(0.12)
BALANCE SHEET DATA:
Net assets of discontinued operations - $ - $9,494 $10,051 $10,647
Total current assets 17,654 12,904 20,583 14,913 21,345
Goodwill and other intangibles, net 20,374 21,869 22,050 23,161 25,207
Total assets 45,855 45,105 59,742 55,513 66,740
Total current liabilities 13,827 10,668 17,128 49,454 20,654
Total debt (including current portion) 12,603 19,486 34,393 34,058 42,956
Redeemable preferred stock 5,635 5,018 - - -
Total stockholders' equity 14,412 $10,652 $6,982 $3,877 5,274
(1) We acquired Wise Optical on February 7, 2003, which was accounted for as a
purchase. Accordingly, the results of operations of Wise Optical are
included in the historical results of operations since February 1, 2003,
the deemed effective date of the acquisition for accounting purposes.
(2) We acquired OptiCare Eye Health Centers, Inc. on August 13, 1999 and Cohen
Systems, Inc. (now doing business as "CC Systems") 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.
(3) Includes the effect of goodwill amortization of $943, $943 and $605 in
2001, 2000 and 1999, respectively. The amortization of goodwill was
discontinued in 2002 pursuant to Statement of Financial Accounting
Standards (SFAS) No. 142. Also includes preferred stock dividends of $618,
$531, and $600 in 2003, 2002 and 1999, respectively.
25
(4) The weighted averages of common shares outstanding in 1999 have been
adjusted to reflect the conversion associated with the reverse merger with
Saratoga in August 1999.
(5) As a result of the Company's adoption of SFAS No. 145, the Company
reclassified its previously reported gain from extinguishment of debt of
approximately $8.8 million and related income tax expense of approximately
$3.5 million in 2002 from an extraordinary item to continuing operations.
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
our consolidated financial statements and notes thereto which are included
elsewhere in this Annual Report on Form 10-K. (See "Index to Financial
Statements" beginning at page F-1.)
Overview. We are an integrated eye care services company focused on vision
benefits management (managed vision), retail optical sales and eye care services
to patients and the distribution of products and software services to eye care
professionals.
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. We have experienced substantial losses at Wise Optical in
2003. These losses were largely attributable to significant expenses incurred by
Wise Optical, including integration costs (primarily severance and stay bonuses,
legal and professional fees), weakness in gross margins and an operating
structure built to support a higher sales volume. In September 2003, we began
implementing strategies and operational changes designed to improve the
operations of Wise Optical. These efforts include developing our sales force,
improving customer service, enhancing productivity, eliminating positions and
streamlining our warehouse and distribution processes. In addition, effective
September 3, 2003, Gordon Bishop, President of our Consumer Vision division,
replaced the former President of the Distribution division. Mr. Bishop brings
industry expertise and a strong optical background to Wise, along with a focus
on operating expenses. We believe these changes will lead to increased sales,
improved gross margins and reduced operating costs in 2004, however if the
losses at Wise Optical continue it could have a material adverse effect on our
profitability and/or liquidity.
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 a total of
406,158 shares of Series C Preferred Stock.
In the third and fourth quarters of 2003 we failed to comply with the
minimum fixed charge ratio covenant under our revolving credit facility with
CapitalSource Finance, LLC, for which we received a waiver.
Due to our covenant failure in the third quarter of 2003 and anticipated
cash constraints in December 2003 through February 2004, both of which are
mainly due to operating losses at Wise Optical and seasonality in our business,
on November 14, 2003, we amended our term loan and revolving credit facility. As
part of the amendment, we received (i) an additional $0.3 million term loan,
(ii) an extension of the maturity dates of our term loan and revolving credit
facility to January 25, 2006, (iii) a waiver for non-compliance with the minimum
fixed charge ratio covenant through March 31, 2004 and (iv) a $0.7 million
temporary over-advance on our revolving credit facility, which was fully repaid
by March 1, 2004. Management believes it will comply with its future financial
covenants beyond the date of the current waiver, however, if operating losses
continue and we fail to comply with financial covenants in the future or
otherwise default on our debt, our creditors could foreclose on our assets.
26
Our business is comprised of 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 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. Our Distribution & Technology Division 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 segments, 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 required services to these practices, we are in the process of generally
disengaging from a number of these operations. (See "Legal Proceedings --Health
Services Organization Lawsuits")
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 U.S.
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. Estimates are adjusted as new information
becomes available. 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 to the consolidated financial statements." We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Services Revenue
Through our affiliated professional corporation, OptiCare P.C., our Consumer
Vision Division provides to consumers comprehensive eye care services, including
medical and surgical treatment of eye diseases and disorders by
ophthalmologists, and vision measuring and non-surgical treatments and
correction services by optometrists. We charge a fee for providing the use of
our ambulatory surgery center to professionals for surgical procedures. Our
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 us
at amounts different from our 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
historical 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
adjustments to revenue in the period of final settlements. Historically, we have
not had significant adjustments to this estimate.
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 our 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.
We believe that our 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
27
operations in the period of the adjustment. Historically, we have not had
significant adjustments to this estimate.
Goodwill
Goodwill, which arises from the purchase price exceeding the assigned value
of net assets of acquired businesses, represents the value attributable to
unidentifiable intangible elements being acquired. Of the total goodwill
included on our consolidated balance sheet, approximately 61% is recorded in our
Managed Vision segment, 25% in our Consumer Vision segment and 14% in our
Distribution & Technology segment.
On an annual basis, or as circumstances dictate, management reviews
goodwill and evaluates events or other developments that may indicate impairment
in the carrying value. The evaluation methodology for potential impairment is
inherently complex, and involves significant management judgment in the use of
estimates and assumptions. We use multiples of revenue and earnings before
interest, taxes, depreciation and amortization of comparable entities to value
the reporting unit being evaluated for goodwill impairment.
We evaluate impairment using a two-step process. First, we compare the
aggregate fair value of the reporting unit to its carrying amount, including
goodwill. If the fair value exceeds the carrying amount, no impairment exists.
If the carrying amount of the reporting unit exceeds the fair value, then we
compare the implied fair value of the reporting unit's goodwill with its
carrying amount. The implied fair value is determined by allocating the fair
value of the reporting unit to all the assets and liabilities of that unit, as
if the unit had been acquired in a business combination and the fair value of
the unit was the purchase price. If the carrying amount of the goodwill exceeds
the implied fair value, then goodwill impairment is recognized by writing the
goodwill down to the implied fair value. In the third and fourth quarters of
2003, we recorded an impairment charge to goodwill as a result of a loss of a
major customer in our Buying Group and poor operating performance in our Wise
Optical reporting unit. Adverse changes in our business climate, revenues or
profitability could require further reductions to the carrying value of our
goodwill in future periods.
Events that may indicate goodwill impairment include significant or adverse
changes in business or economic climate, an adverse action or assessment by a
regulator, unanticipated competition, loss of key personnel, and the sale or
expected sale/disposal of a reporting unit. Due to uncertain market conditions
it is possible that that the financial information used to support our goodwill
may change in the future, which could result in non-cash charges that would
adversely affect our results of operations and financial condition. See note 10
to consolidated financial statements.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) 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. Our determination of the likelihood that deferred tax assets can be
realized is based on our examination of available evidence, which involves
estimates and assumptions. We consider future market growth, forecasted
earnings, future taxable income and known future events in determining the need
for a valuation allowance. In the event we were to determine that we would not
be able to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to earnings in the period
such determination is made. In the third quarter of 2003, we recorded a
valuation reserve against our entire deferred tax assets due to historical
operating losses. As we experience future profitability, we expect to reduce or
eliminate the valuation reserve. See note 19 to consolidated financial
statements.
28
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts. Managed Vision revenue decreased to
approximately $28.1 million for the year ended December 31, 2003, from
approximately $29.4 million for the year ended December 31, 2002, a decrease of
approximately $1.3 million or 4.5%. During the second quarter of 2003 the Texas
state legislature made changes to its Medicaid program and as a result HMO Blue,
with whom we maintained a Medicaid contract, withdrew from Texas' Medicaid
program effective September 1, 2003. Therefore, our contract with HMO Blue
terminated on September 1, 2003. This contract generated revenue of
approximately $1.7 million in 2003 compared to approximately $2.5 million in
2002. In addition and also effective September 1, 2003, the Texas state
legislature decided to no longer fund a vision benefit in its Children's Health
Insurance Program or provide vision hardware benefits to those over the age of
21. We maintained a number of contracts through this program that reduced
benefits and/or terminated on September 1, 2003 and these contracts generated
revenues of approximately $2.0 million in 2003 and approximately $2.2 million in
2002. While this could become a trend in other states, we do not expect it to
have a material impact on future revenue since we do not have a significant
number of similar contracts in other states. Other decreased revenue of
approximately $2.0 million was primarily from contracts not renewed in 2003, and
was partially offset by increased revenue of approximately $1.5 million from new
contracts and growth in existing contracts. CIGNA experienced a decline in
membership in January 2004, which translates into an approximate $2.0 million
decline in our annual revenue, however, a new contract with a different payor
became effective March 1, 2004, which will offset this decrease in revenue. We
expect future revenue to increase due to new contracts related to our to
direct-to-employer initiative.
Product sales revenue. Product sales primarily include the sale of optical
products through Wise Optical, our Buying Group and our Consumer Vision segment.
Product sales revenue increased to approximately $72.8 million for the year
ended December 31, 2003, from approximately $39.4 million for the year ended
December 31, 2002, an increase of approximately $33.4 million or 84.8%. This
increase is primarily due to our acquisition of Wise Optical on February 7,
2003, which generated product sales revenue of approximately $41.9 million and
an approximate $0.5 million increase in consumer vision product sales, primarily
from an increase in purchasing volume as a result of sales incentives. This
increase in revenue is partially offset by an approximate $9.0 million decrease
in Buying Group revenue, due to a decrease in sales volume. The decrease in
Buying Group sales volume is primarily due to the loss of the business of
Optometric Eye Care Centers, P.A. and its franchise affiliates and, to a lesser
extent, 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 consolidation in this market to continue and
potentially further reduce the Buying Group's market share revenue, however, we
do not expect this trend to have a material impact on our overall profitability
due to the low margins inherent in this business. We expect Wise Optical revenue
to increase based on an increase in sales volume as a result of initiatives we
began in September 2003.
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. Services revenue
increased to approximately $22.0 million for the year ended December 31, 2003,
from approximately $20.4 million for the year ended December 31, 2002, an
increase of approximately $1.6 million or 8.3%. This increase includes an
approximate $1.5 million increase in Consumer Vision services revenue due to
increased services volume in the optometry and surgical areas due to increased
doctor coverage and an approximate $0.9 million increase in software services
revenue due to an increase in sales volume due to improved management focus.
These increases were offset by an approximate $0.8 million decrease in fees
collected under our HSO agreements primarily due to disputes with certain
physician practices, which are parties to these agreements, and due to HSO
settlements which cancelled these agreements for the future. We continue to be
in litigation with several of these practices and intend to continue to pursue
settlement of these matters in the future. While we expect future HSO revenue to
decline, we believe this will be more than off set by growth in Consumer Vision.
Other income. Other income represents non-recurring settlements on health
service organization contracts. Other income increased to approximately $2.7
million for the year ended December 31, 2003 from approximately $2.3 million for
the year ended December 31, 2002.
29
Medical claims expense. Medical claims expense decreased to $22.0 million
for the year ended December 31, 2003, from approximately $22.3 million for the
year ended December 31, 2002, a decrease of approximately $0.3 million. The
medical claims expense loss ratio (MLR) representing medical claims expense as a
percentage of Managed Vision revenue increased to 78.3% in 2003 from 75.9% in
2002. The MLR was lower in 2002 primarily due to a favorable adjustment to the
reserve of approximately $0.6 million in 2002 from a contract settlement.
Excluding this adjustment, MLR for 2002 would have been 77.9% compared to 78.3%
in 2003. In addition, the MLR in 2003 was negatively impacted by the recent
change in the Texas state legislature, which no longer funds a vision benefit in
its Children's Health Insurance Program and vision hardware to Medicaid
recipients over the age of 21. As a result, we experienced an increase in claims
as utilization increased prior to the elimination of the benefit.
Cost of product sales. Cost of product sales increased to approximately
$56.3 million for the year ended December 31, 2003, from approximately $31.1
million for the year ended December 31, 2003, an increase of approximately $25.2
million or 81.1%. This increase is primarily due to a $34.0 million increase in
product costs related to the increase in sales from the acquisition of Wise
Optical in February 2003. The increase in product costs is partially offset by
an approximate $8.5 million decrease in product costs associated with our Buying
Group due to a decrease in sales volume and an approximate $0.3 million decrease
in product costs in our Consumer Vision business primarily as a result of a
shift in product mix to higher margin products as a result of sales incentives,
a shift that we expect will continue into the future.
Cost of services. Cost of services increased to approximately $9.0 million
for the year ended December 31, 2002, compared to approximately $8.2 million for
the year ended December 31, 2002, an increase of approximately $0.8 million or
10.7%. Of this increase approximately $0.5 million is due to the increase in
software sales volume and $0.3 million is due to the increase in Consumer Vision
services.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $38.2 million for the year
ended December 31, 2003, from approximately $26.3 million for the year ended
December 31, 2002, an increase of approximately $11.9 million. Of this increase,
approximately $10.9 million represents operating expenses of Wise Optical and
includes approximately $1.0 million of Wise Optical integration related costs
consisting primarily of severance, stay bonuses, legal, consulting and other
professional fees. The remaining increase is primarily attributed to costs we
incurred as part of our direct-to-employer initiative in the Managed Vision
segment, including legal, consulting, compensation costs for a new sales force
and other professional fees. While we expect most of these cost to continue into
the future, they will be offset by direct-to-employer sales revenue.
Goodwill impairment charge. For the year ended December 31, 2003, we
recorded a non-cash goodwill impairment loss of approximately $1.6 million in
our Distribution and Technology segment, due to decreases in Buying Group sales
and significant operating losses at Wise Optical.
Interest expense. Interest expense decreased to approximately $2.1 million
for the year ended December 31, 2003 from approximately $3.0 million for the
year ended December 31, 2002, a decrease of $0.9 million. This decrease in
interest expense is primarily due to the decrease in the average outstanding
debt balance, primarily due to the conversion of debt to preferred stock in May
2003.
Gain (loss) from early extinguishment of debt. The approximate $1.9 million
loss from early extinguishment of debt for the year ended December 31, 2003,
primarily represents the write-off of deferred debt issuance costs and debt
discount associated with the exchange of approximately $16.2 million of debt for
Series C Preferred Stock, which occurred on May 12, 2003 and the amendment of
our term loan with CapitalSource on November 13, 2003. The approximate $8.8
million gain on extinguishment of debt for the year ended December 31, 2002 was
the result of our capital restructuring in January 2002. The 2002 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 (benefit). For the year ended December 31, 2003, we
recorded approximately $4.9 million of income tax expense, which includes
approximately $7.6 million of tax expense to establish a full valuation
allowance
30
against our deferred tax assets and is partially offset by an approximate $2.7
million income tax benefit on our loss from continuing operations. The valuation
allowance was established based on the weight of historic available evidence,
that it is more likely than not that the deferred tax assets will not be
realized. The tax expense for the year ended December 31, 2002 of approximately
$2.5 million was primarily due to approximately $3.5 million of tax expense
associated with the approximate $8.8 million gain on extinguishment of debt,
partially offset by an approximate $1.0 million of tax benefit on other
operating losses.
Discontinued operations. In May 2002, our Board of Directors approved our
plan to dispose of the net assets used in the retail optical and optometry
practice locations we operated in North Carolina. On August 12, 2002, we
consummated the sale of those assets, which resulted in a $4.4 million loss on
disposal in 2002, including income tax expense of $0.3 million. We reported $0.3
million of income from discontinued operations, net of tax, for the year ended
December 31, 2002, representing income from this operation prior to disposal.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts. Managed Vision revenue increased to
approximately $29.4 million for the year ended December 31, 2002, from
approximately $29.0 million for the year ended December 31, 2001, an increase of
approximately $0.4 million or 1.5%. Managed Vision revenue increased due to new
contracts and growth within existing contracts, partially offset by a decrease
in revenue largely due to the non-renewal of three contracts.
Product sales revenue. Product sales primarily include the retail sale of
optical products in our Consumer Vision segment and the sale of optical products
through our Buying Group. Product sales revenue decreased to approximately $39.4
million for the year ended December 31, 2002, from approximately $44.4 million
for the year ended December 31, 2001, a decrease of approximately $5.0 million
or 11.1%. Of this decrease, approximately $4.5 million represents a decrease in
Buying Group revenue and approximately $0.5 million represents a decrease in
retail optical revenue resulting from a decrease in purchasing volume. The
decrease in Buying Group volume is primarily due to 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.
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. Services revenue
decreased to approximately $20.4 million for the year ended December 31, 2002,
from approximately $20.7 million for the year ended December 31, 2001, a
decrease of approximately $0.3 million or 1.9%. This decrease includes an
approximate $1.6 million decrease in health service organization revenue, which
was offset by an approximate $0.8 million increase in Consumer Vision services
revenue and a $0.5 million increase in software services revenue. The
approximate $0.8 million increase in Consumer Vision services was due to
increased services volume in the optometry and ophthalmology areas. The $0.5
million increase in software services revenue was primarily due to an increase
in sales volume.
Other income. Other income for the year ended December 31, 2002 of
approximately $2.3 million represents non-recurring settlements on health
service organization contracts. We had no other income in 2001.
Medical claims expense. Medical claims expense decreased to approximately
$22.3 million for the year ended December 31, 2002, from approximately $23.0
million for the year ended December 31, 2001, a decrease of approximately $0.7
million. This decrease was primarily due to an approximate $0.6 million
favorable adjustment to the reserve in 2002. The medical claims expense loss
ratio (MLR) representing medical claims expense as a percentage of Managed
Vision revenue improved to 75.9% in 2002, from 79.2% in 2001, primarily due to
the favorable adjustment of approximately $0.6 million in 2002. Excluding this
adjustment, MLR for 2002 would have been 77.9% compared to 79.2% for 2001.
Cost of product sales. Cost of product sales decreased to approximately
$31.1 million for the year ended December 31, 2002, from approximately $35.5
million for the year ended December 31, 2001, a decrease of approximately $4.4
million or 12.6%. This decrease in cost of sales is due to decreases in sales
volume in our Buying Group and retail optometry operations.
31
Cost of services. Cost of services decreased to approximately $8.2 million
for the year ended December 31, 2002, compared to approximately $8.8 million for
the year ended December 31, 2001, a decrease of approximately $0.6 million or
7.7%. This decrease was comprised of an approximate $0.9 million decrease in
cost of services associated with Consumer Vision services as a result of cost
containment initiatives, partially offset by an approximate $0.3 million
increase in technology services expense associated with an increase in sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $26.3 million for the year
ended December 31, 2002, from approximately $26.2 million for the year ended
December 31, 2001, an increase of $0.1 million. This increase includes
approximately $1.0 million of increased professional fees, principally legal and
consulting, and $0.2 million of increased corporate overhead, which primarily
relates to increased compensation expense associated with the addition of
executive and managerial personnel. These increases were partially offset by a
$1.0 million of non-recurring costs, primarily legal and workout costs, in 2001
associated with our capital restructuring.
Depreciation. Depreciation expense was approximately $1.9 million for the
year ended December 31, 2002 compared to approximately $1.8 million for the year
ended December 31, 2001. The approximate $0.1 million increase represents
depreciation expense on new fixed assets purchased during the year.
Amortization. Amortization expense decreased to approximately $0.2 million
for the year ended December 31, 2002 from approximately $1.1 million for the
year ended December 31, 2001 due to the discontinuation of the amortization of
goodwill effective January 1, 2002 in accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets."
Interest expense. Interest expense remained unchanged at approximately $3.0
million for each of the years ended December 31, 2002 and 2001. Although we
reduced our outstanding indebtedness during 2002, interest expense associated
with the decrease in debt was offset by an increase in the interest rate charged
on our restructured debt.
Income tax benefit. We reported income tax expense of $2.6 million for the
year ended December 31, 2002 and approximately $8.0 million for the year ended
December 31, 2001. The 2002 tax expense was primarily due to approximately $3.5
million of tax expense associated with the approximately $8.8 million gain on
extinguishment of debt, partially offset by approximately $0.9 million of tax
benefit on other operating losses. The tax benefit in 2001 was primarily due to
the reversal of the valuation allowance against our deferred tax assets based on
our expected ability to utilize our net operating loss carryforwards in the
future.
Discontinued operations. In May 2002, our Board of Directors approved our
plan to dispose of the net assets used in the retail optical and optometry
practice locations we operated in North Carolina. On August 12, 2002, we
consummated the sale of those assets, which resulted in an approximate $4.4
million loss on disposal in 2002, including income tax expense of approximately
$0.3 million. We reported approximately $0.3 million of income from discontinued
operations, net of tax, for each of the years ended December 31, 2002 and 2001,
representing income from this operation prior to disposal.
LIQUIDITY AND CAPITAL RESOURCES
Uses of Liquidity.
The following table summarizes our significant contractual obligations (in
thousands) at December 31, 2003 that impact our liquidity.
32
CONTRACTUAL
OBLIGATIONS 2004 2005 2006 2007 2008 THEREAFTER TOTAL
-------------------- --------- ----------- ----------- ----------- ----------- ---------- ------------
Long-term debt $ 1,124 $ 300 $ 11,169 $ - $ - $ - $ 12,593
Operating leases 2,620 2,505 2,277 2,067 1,853 3,248 14,570
Capital leases 10 - - - - - 10
--------- ----------- ----------- ----------- ----------- ---------- ------------
Total $ 3,754 $ 2,805 $ 13,446 $2,067 $1,853 $3,248 $ 27,173
========= =========== =========== =========== =========== ========== ============
Our long-term debt is explained in detail in Note 11 to the consolidated
financial statements. Operating leases and capital leases are explained in
detail in Note 13 to the consolidated financial statements.
Throughout 2004, we plan to continue making substantial investments in our
business. In that regard, we foresee the following as significant uses of
liquidity in 2004: personnel costs, interest and principal expense of
approximately $1.6 million related to payments to be made our principal lender,
CapitalSource Finance, LLC, and capital expenditures of approximately $1.0
million. We also may make investments in future acquisitions of complementary
businesses or technologies.
The amounts and timing of our actual expenditures will depend upon numerous
factors, including our investments in technology, the amount of cash generated
by our operations and the amount and extent of our acquisitions. Actual
expenditures may vary substantially from our estimates.
Sources of Liquidity.
Our primary sources of liquidity have been cash flows generated from
operations in our Managed Vision and Consumer Vision segments and borrowings
under our credit facility.
The following table sets forth a year-over-year comparison of the
components of our liquidity and capital resources for the years ended December
31, 2003 and 2002:
(In millions)
2003 2002 $ CHANGE
---- ---- --------
Cash and cash equivalents $ 1.7 $ 3.1 $ 1.4
Cash (used in) provided by:
Operating activities (2.6) (0.2) (2.4)
Investing activities (6.7) 2.4 (9.1)
Financing activities 8.0 (1.7) 9.7
Net cash used in operating activities in 2003 included a net loss from
continuing operations of approximately $12.4 million, which was offset by
approximately $11.5 million of non-cash charges. The remaining $1.7 million of
cash used in operating activities was a net decrease in working capital,
primarily due to a reduction in accounts payable. Net cash used in operating
activities for the year ended December 31, 2002 primarily included income from
continuing operations and cash provided by discontinued operations, which were
offset by a reduction in accounts payable and accrued expenses as a result of
our improved liquidity after our debt restructuring in January 2002.
Net cash used in investing activities was approximately $6.9 million for
the year ended December 31, 2003 and included approximately $6.2 million of cash
used to purchase the assets of Wise Optical in February 2003 and approximately
$0.9 million of capital expenditures. Net cash provided by investing activities
in 2002 consisted principally of approximately $3.9 million in net cash received
from the sale of discontinued operations and approximately $0.7 million received
from notes receivable payments, which were partially offset by approximately
33
$1.4 million paid to reacquire certain notes receivable and contractual rights
as part of our debt restructuring in 2002 and approximately $0.8 million paid
for the purchase of fixed assets.
Net cash provided by financing activities was approximately $8.0 million
for the year ended December 31, 2003 and was primarily the result of an
approximate $8.8 million net increase in borrowings under our revolving credit
facility, which was primarily used to fund the purchase of Wise Optical and
offset Wise Optical's operating losses during the year. Net cash used in
financing activities in 2002 of approximately $1.7 million resulted primarily
from our debt and equity restructure in January 2002 and included principal
payments on long-term debt of approximately $25.1 million, a net decrease in our
revolving credit facility of approximately $4.9 million and financing costs of
approximately $1.5 million, which were partially offset by approximately $27.5
million from the issuance of debt and preferred stock and approximately $2.5
million in proceeds from the exercise of stock warrants.
The CapitalSource Loan and Security Agreement
As of December 31, 2003, we had borrowings of $2.1 million outstanding
under our term loan with CapitalSource Finance, LLC, $10.4 million of advances
outstanding under our revolving credit facility (including a $0.7 million
temporary over-advance) with CapitalSource and $0.5 million of additional
availability under our revolving credit facility. As of February 29, 2004, we
had repaid the $0.7 million over-advance and had $9.6 million of advances
outstanding under our revolving credit facility with CapitalSource and $1.3
million of additional availability.
In January 2002, as part of a debt and equity restructuring, we entered
into a credit facility with CapitalSource consisting of a $3.0 million term loan
and a $10.0 million revolving credit facility. In February 2003, in connection
with our acquisition of Wise Optical, the revolving credit facility was amended
to $15.0 million. Although we may borrow up to $15 million under the revolving
credit facility, the maximum amount that may be advanced is limited to the value
derived from applying advance rates to eligible accounts receivable and
inventory.
The term loan and revolving 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. Upon the occurrence of certain events or conditions described
in the Loan and Security Agreement (subject to grace periods in certain cases),
including our failure to meet the financial covenants, the entire outstanding
balance of principal and interest would become immediately due and payable.
We did not meet our minimum fixed charge ratio covenant in the third and
fourth quarter of 2003, primarily due to operating losses incurred at Wise
Optical. However, on November 14, 2003 we entered into an amendment of the terms
of our term loan and credit facility with CapitalSource which, among other
things,
(i) increased our term loan by $0.3 million and extend the maturity date of
the term loan from January 25, 2004 to January 25, 2006,
(ii) extended the maturity date of our revolving credit facility from
January 25, 2005 to January 25, 2006,
(iii) permanently increased the advance rate on eligible receivables of
Wise Optical from 80% to 85%,
(iv) temporarily increased the advance rate on eligible inventory of Wise
Optical from 50% to 55% through March 31, 2004,
(v) provided access to a $0.7 million temporary over-advance bearing
interest at prime plus 5 1/2%, which was repaid by March 1, 2004, and was
guaranteed by Palisade Concentrated Equity Partnership, L.P.,
(vi) through March 31, 2004, waived our non-compliance with the minimum
fixed charge ratio covenant, and
(vii) changed our net worth covenant from ($27) million to tangible net
worth of ($10) million.
In connection with the foregoing amendment, we agreed to pay CapitalSource
$80,000 in financing fees. The amendment also included an additional $150,000
termination fee if we terminate the revolving credit facility prior to
34
December 31, 2004. Additionally, if we terminate the revolving credit facility
pursuant to a refinancing with another commercial financial institution, we must
pay CapitalSource, in lieu of the termination fee, a yield maintenance amount
equal to the difference between (i) the all-in effective yield which could be
earned on the revolving balance through January 25, 2006, and (ii) the total
interest and fees actually paid to CapitalSource on the revolving credit
facility prior to the termination date or date of prepayment.
We did not meet our fixed charge ratio covenant in January and February
2004, however we expect to meet all covenants in March 2004. Accordingly, on
March 29, 2004 we entered into the Second Amended and Restated Credit Facility
which incorporates all of the changes embodied in the above amendments and: (i)
confirmed that the temporary over-advance was repaid as of February 29, 2004
(ii) changed the expiration date of the waiver of our fixed ratio covenant from
March 31, 2004 to February 29, 2004 and (iii) reduced the tangible net worth
covenant from $(10) million to $(2) million. In connection with the third
amendment, we agreed to pay $25,000 to CapitalSource in financing fees.
As of March 1, 2004, the advance rate under our revolving credit facility
was 85% of all eligible accounts receivable and 55% of all eligible inventory.
We are required to make monthly principal payments of $25,000 on the term loan
with the balance due at maturity. The interest rate applicable to the term loan
equals the prime rate plus 3.5% (but not less than 9%) and the interest rate
applicable to the revolving credit facility is prime rate plus 1.5% (but not
less than 5.75%).
Our subsidiaries guarantee payments and other obligations under the
revolving 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.
In September 2003, we began implementing strategies and operational changes
designed to improve the operations of Wise Optical. These efforts include
developing our sales force, improving customer service, enhancing productivity,
eliminating positions and streamlining our warehouse and distribution processes.
We expect these changes will lead to increased sales, improved gross margins and
reduced operating costs at Wise Optical. In addition, in 2003 in our Managed
Vision segment, we began shifting away from the lower margin and long sales
cycle of our third party administrator ("TPA") style business to the higher
margin and shortened sales cycle of a direct-to-employer business. This new
direct-to-employer business also removes some of the volatility that is often
experienced in our TPA type accounts. During 2003 we developed the sales force
and infrastructure necessary to build our direct-to-employer business and expect
increased and profitability as a result of this product shift. We experienced
significant improvements in revenue and profitability in our Consumer Vision
segment during 2003, largely from growth in existing store sales and enhanced
margins as a result of sales incentives, which we expect to continue in 2004. We
believe the combination of the above initiatives will lead to improved liquidity
in 2004. We believe that our cash flow from operations, borrowings under our
amended credit facility with CapitalSource and operating and capital lease
financing will provide us with sufficient funds to finance our operations for
the next 12 months.
Moreover, we believe that we will be able to comply with our financial
covenants under our amended credit facility with CapitalSource, including our
minimum fixed charge ratio covenant, the waiver with respect to which expired on
February 29, 2004. However, if operating losses continue and we fail to comply
with our financial covenants in the future or otherwise default on our debt, our
creditors could foreclose on our assets, in which case we would be obligated to
seek alternate sources of financing. There can be no assurance that alternate
sources of financing will be available to us on terms acceptable to us, if at
all. If 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 and may have a material adverse impact on the business
and operations of the Company.
35
Working Capital Constraint and Contingencies
Our Managed Vision segment maintains $1,150,000 of restricted investments
in the form of certificates of deposit, primarily related to the operation of
our South Carolina Captive Insurance Company and our Texas HMO, thereby
resulting in a restriction upon working capital. Of this amount, $900,000 is
held as collateral for letters of credit.
In November 2003, the Texas Commissioner of Insurance reduced the required
minimum net worth for our Texas HMO subsidiary from $1,000,000 to $500,000,
which has a positive impact on our liquidity.
Seasonality
Our revenues are generally affected by seasonal fluctuations in the
Consumer Vision and Distribution and Technology segments. During the winter and
summer months, we generally experience a decrease in patient visits and product
sales. As a result, our cash, accounts receivable and revenues decline during
these periods and, since we retain certain fixed costs related to staffing and
facilities during these periods, our cash flows can be negatively affected.
IMPACT OF INFLATION AND CHANGING PRICES
Our revenue is subject to pre-determined Medicare reimbursement rates that,
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 set based upon Medicare reimbursement rates, so that
our non-Medicare business is also affected by changes in Medicare reimbursement
rates.
We believe that inflation has not had a material effect on our revenues
during 2003, 2002 or 2001.
The Conversion of Our Senior Subordinated Secured Loans Into Series C Preferred
Stock
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. The subordinated secured loans were evidenced by senior
subordinated secured notes that ranked pari passu with each other. The notes
were subordinated to our indebtedness to CapitalSource and were secured by
second-priority security interests in substantially all of our assets. Principal
was due 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.
On May 12, 2003, Palisade and Ms. Yimoyines exchanged the entire amount of
principal and interest due to them under the senior secured loans, totaling an
aggregate of approximately $16.2 million, for a total of 406,158 shares of
Series C Preferred Stock, of which 403,256 shares were issued to Palisade and
2,902 shares were issued to Linda Yimoyines. The 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
approximately $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 is, at the holder's option, convertible
into 50 shares of common stock and has the same dividend rights, on an as
converted basis, as our common stock.
The Series B Preferred Stock
As of December 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, the Series B Preferred Stock ranks senior to all
other currently issued and outstanding classes or series of our stock with
respect to dividends,
36
redemption rights and rights on liquidation, winding up, corporate
reorganization and dissolution. Each share of Series B Preferred Stock is, at
the holder's option, immediately 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 increases at a rate of 12.5% per year compounded annually.
Each share of Series B Preferred Stock must be redeemed in full by the
Company on December 31, 2008, at a price equal to the greater of (i) the
aggregate adjusted redemption value of the Series B Preferred Stock ($1.40 per
share) plus accrued but unpaid dividends or (ii) 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.
The Series B Preferred Stock accrues dividends at an annual rate of 12.5%. As of
December 31, 2003, cumulative accrued and unpaid dividends on the Series B
Preferred Stock totaled $1.2 million.
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.
SIGNIFICANT RELATED PARTY TRANSACTIONS
We maintain a substantial number of real estate leases with various terms
with related parties for properties located in Connecticut and Florida.
Generally, the leases are for property that is used for executive offices and
for the practice of ophthalmology, optometry, sale of eyeglasses or other
operating and administrative functions. We believe 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.
In January 2002, we entered into a $14 million loan agreement with Palisade
and Linda Yimoyines and issued 3.2 million shares of Series B Preferred Stock
and warrants to purchase 17.5 million shares of our common stock to them as part
of our debt restructure. (See "--Liquidity and Capital Resources -- The
Conversion of our Senior Subordinated Secured Loans into Series C Preferred
Stock")
On May 12, 2003, Palisade and Ms. Yimoyines exchanged the entire amount of
principal and interest due to them under the aforementioned loan agreement,
totaling an aggregate of approximately $16.2 million, for a total of 406,158
shares of Series C Preferred Stock. (See "--Liquidity and Capital Resources --
The Conversion of our Senior Subordinated Secured Loans into Series C Preferred
Stock")
We have an unsecured promissory note payable to an officer of the Company
related to an amount owed in connection with our purchase of Cohen Systems (now
"CC Systems") in 1999. The note, which accrues interest at 7.50% and matures on
December 1, 2004 had an outstanding balance of approximately $106,000 and
$204,000 at December 31, 2003 and 2002, respectively.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
The statements in this Annual Report on 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:
37
o Our opinion that with respect to lawsuits incidental to our current
and former operations, 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 our financial
position or results of operations;
o Our belief that recent strategies implemented at Wise Optical will
lead to increased sales, improved gross margins and reduced operating
costs.
o Our belief that our new direct-to-employer product will lead to
increased revenue and gross margins in our Managed Vision segment.
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; and
o Our belief that cash from operations, borrowings under our amended
credit facility, and operating and capital lease financings will
provide sufficient funds to finance operations for the next 12 months.
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:
CHANGES IN THE REGULATORY ENVIRONMENT APPLICABLE TO OUR BUSINESS, INCLUDING
HEALTH-CARE COST CONTAINMENT EFFORTS BY MEDICARE, MEDICAID AND OTHER THIRD-PARTY
PAYERS MAY ADVERSELY AFFECT OUR PROFITS.
The health care industry has experienced a trend toward cost containment as
government and private third-party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with service
providers. Our revenue is subject to pre-determined Medicare reimbursement rates
for certain products and services, and 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. In addition, federal and state
governments are currently considering various types of health care initiatives
and comprehensive revisions to the health care and health insurance systems.
Some of the proposals under consideration, or others that may be introduced,
could, if adopted, have a material adverse effect on our business, financial
condition and results of operations.
RISKS RELATED TO THE EYE CARE INDUSTRY, INCLUDING THE COST AND AVAILABILITY OF
MEDICAL MALPRACTICE INSURANCE, AND POSSIBLE ADVERSE LONG-TERM EXPERIENCE WITH
LASER AND OTHER SURGICAL VISION CORRECTION COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The provision of eye care services entails the potentially significant risk
of physical injury to patients and an inherent risk of potential malpractice,
product liability and other similar claims. Our insurance may not be adequate to
satisfy claims or protect us and our affiliated eye care providers, and this
coverage may not continue to be available at acceptable costs. A partially or
completely uninsured claim against us could have a material adverse effect on
our business, financial condition and results of operations.
MANAGED CARE COMPANIES FACE INCREASING THREATS OF PRIVATE-PARTY LITIGATION,
INCLUDING CLASS ACTIONS, OVER THE SCOPE OF CARE FOR WHICH MANAGED CARE COMPANIES
MUST PAY.
Several large national managed care companies have been the target of class
action lawsuits alleging fraudulent practices in the determination of health
care coverage policies for their beneficiaries. Such lawsuits have, thus far,
been aimed solely at full service managed care plans and not companies that
specialize in specific segments, such as eye care. We cannot assure you that
private party litigation, including class action suits, will not target it in
the future, or that we will not otherwise be affected by such litigation.
38
LOSS OF THE SERVICES OF KEY MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS.
Our success, in part, depends upon the continued services of Dean J.
Yimoyines, M.D., who is our chairman and chief executive officer. We believe
that the loss of the services of Dr. Yimoyines could have a material adverse
effect on our business, financial condition and results of operations. In
addition, we have employment agreements with Dean J. Yimoyines and other
officers that require lump sum payments to be made upon the event of a change in
control. These change in control payments could deter takeover bids even if
those bids are in our stockholders' best interests.
IF WE FAIL TO EXECUTE OUR GROWTH STRATEGY, WE MAY NOT BECOME PROFITABLE
Our growth strategy depends in part on its ability to expand and
successfully implement our integrated business model. Our growth strategy also
requires successful sales results and operational execution in our managed care
business. Our growth strategy has resulted in, and will continue to result in,
new and increased responsibilities for management and additional demands on
management, operating and financial systems and resources. Our ability to
continue to expand will also depend upon our ability to hire and train new staff
and managerial personnel, and adapt our structure to comply with present or
future legal requirements affecting our arrangements with ophthalmologists and
optometrists. If we are unable to implement these and other requirements, our
business, financial condition, results of operations and ability to achieve and
sustain profitability could be materially adversely affected.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL, OUR GROWTH COULD BE LIMITED.
If we do not generate sufficient cash from its operations, we may need to
obtain additional capital in order to successfully implement our growth strategy
and to finance our continued operations. 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.
WE HAVE A HISTORY OF LOSSES AND MAY INCUR FURTHER LOSSES IN THE FUTURE.
We have historically incurred substantial operating losses due to our
sizeable outstanding indebtedness and costs relating to the integration of newly
acquired businesses. We cannot assure that it will not incur further losses in
the future.
WE MAY NOT BE ABLE TO MAINTAIN THE LISTING OF ITS COMMON STOCK ON THE AMERICAN
STOCK EXCHANGE, WHICH MAY MAKE IT MORE DIFFICULT FOR STOCKHOLDERS TO DISPOSE OF
OUR COMMON STOCK.
Our common stock is listed on the American Stock Exchange. The exchange's
rules for continued listing include stockholders' equity requirements, which we
may not meet if we experience further losses; and market value requirements,
which we may not meet if the price of our common stock does not increase. If our
common stock is delisted from the American Stock Exchange, trading in our 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 our common stock. This could
have an adverse effect on the price of the common stock.
IF WE DEFAULT ON OUR DEBT TO CAPITALSOURCE FINANCE, LLC, IT COULD FORECLOSE ON
OUR ASSETS.
Our outstanding indebtedness to CapitalSource under its term loan and
revolving credit facility as of March 1, 2004 was approximately $10.9 million.
Substantially all of OptiCare's assets are pledged to secure this
39
indebtedness. If OptiCare defaults on the financial covenants in its credit
facility, CapitalSource could foreclose on its security interest in our assets,
which would have a material adverse effect on our business, financial condition
and results of operations.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER EYE CARE SERVICES COMPANIES
WHICH HAVE MORE RESOURCES AND EXPERIENCE THAN US, AND WITH OTHER EYE CARE
DISTRIBUTORS.
Some of our competitors have substantially greater financial, technical,
managerial, marketing and other resources and experience than we do and, as a
result, may compete more effectively than we can. We compete with other
businesses, including other eye care services companies, hospitals, individual
ophthalmology and optometry practices, other ambulatory surgery and laser vision
correction centers, managed care companies, eye care clinics, providers of
retail optical products and distributors of wholesale and retail optical
products. Companies in other health care industry segments, including managers
of hospital-based medical specialties or large group medical practices, may
become competitors in providing surgery and laser centers as well as competitive
eye care-related services. Our failure to compete effectively with these and
other competitors, could have a material adverse effect on our business,
financial condition and results of operations.
IF WE FAIL TO NEGOTIATE PROFITABLE CAPITATED FEE ARRANGEMENTS, IT COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Under some managed care contracts, known as "capitation" contracts, health
care providers accept a fixed payment per member per month, whether or not a
person covered by a managed care plan receives any services, and the health care
provider is obligated to provide all necessary covered services to the patients
covered under the agreement. Many of these contracts pass part of the financial
risk of providing care from the payor, i.e., an HMO, health insurer, employee
welfare plan or self-insured employer, to the provider. The growth of capitation
contracts in markets which we serve could result in less certainty with respect
to profitability and require a higher level of actuarial acumen in evaluating
such contracts. We do not know whether we will be able to continue to negotiate
arrangements on a capitated or other risk-sharing basis that prove to be
profitable, or to pass the financial risks of providing care to other parties,
or to accurately predict utilization or the costs of rendering services. In
addition, changes in federal or state regulations of these contracts may limit
our ability to transfer financial risks away from us. Any such developments
could have a material adverse effect on our business, financial condition and
results of operations.
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 OUR STOCKHOLDERS AND US.
We have contractual agreements with entities owned or controlled by our
officers, directors and key employees, which agreements could create the
potential for possible conflicts of interests for such individuals. Through our
subsidiaries, we lease property owned by certain of our officers and their
family members.
Our subsidiary, OptiCare Eye Health Centers, Inc., is party to a
Professional Services and Support Agreement with OptiCare, P.C., a Connecticut
professional corporation. Dr. Yimoyines, our Chairman, Chief Executive Officer,
and beneficial holder of approximately 17% of our outstanding voting stock, is
the sole stockholder of OptiCare, P.C. Pursuant to our agreement, OptiCare, P.C.
employs medical personnel and performs all ophthalmology and optometry services
at our facilities in Connecticut. We select and provide the facilities at which
the services are performed and provide all administrative and support services
for the facilities for which OptiCare, P.C. provides medical personnel and
performs its ophthalmology and optometry services. We bill and receive payments
for services rendered by the medical personnel of OptiCare, P.C. and OptiCare
P.C. pays its physicians compensation for such medical services rendered.
40
HEALTH CARE REGULATIONS OR HEALTH CARE REFORM INITIATIVES COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are subject to extensive federal and state governmental regulation and
supervision, including, but not limited to:
o anti-kickback statutes;
o self-referral laws;
o insurance and licensor requirements associated with our managed care
business;
o civil false claims acts;
o corporate practice of medicine restrictions;
o fee-splitting laws;
o facility license requirements and certificates of need;
o regulation of medical devices, including laser vision correction and
other refractive surgery procedures;
o FDA and FTC guidelines for marketing laser vision correction; and
o regulation of personally identifiable health information.
We cannot assure you that these laws and regulations will not change or be
interpreted in the future either to restrict or adversely affect its business
activities or relationships with other eye care providers.
These laws and regulations 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. Neither federal nor
state authorities have examined our agreements and activities with respect to
these laws and regulations. We cannot assure you 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. 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. In addition, these laws and their interpretation vary
from state to state. The regulatory framework of certain jurisdictions may limit
our expansion into such jurisdictions if we are unable to modify our operational
structure to conform to such regulatory framework.
WE ARE DEPENDENT UPON LETTERS OF CREDIT OR OTHER FORMS OF THIRD PARTY SECURITY
IN CONNECTION WITH CERTAIN OF OUR CONTRACTUAL ARRANGEMENTS AND, THUS, WOULD BE
ADVERSELY AFFECTED IN THE EVENT WE ARE UNABLE TO OBTAIN SUCH CREDIT AS NEEDED.
We have obtained letters of credit to secure its contractual commitments to
certain managed care companies. If we are unable to maintain these letters of
credit or secure replacement letters of credit, we may not be able to retain our
existing contracts or obtain new contracts with certain managed care companies.
The inability to do business with these managed care companies could have an
adverse effect on our business, financial condition and results of operations.
WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM OUR ACQUISITION OF WISE OPTICAL.
We may not be able to decrease the operating losses or profitably manage
the operations of Wise Optical in the future without encountering difficulties
or experiencing the loss of key employees, potential customers or suppliers. If
we can not profitably manage Wise Optical's operations, or if the effort
requires greater time or resources than OptiCare has anticipated, we may not
realize the expected benefits from the acquisition, and this could have a
material adverse effect on our business, financial condition, and results of
operations.
OUR LARGEST STOCKHOLDER, PALISADE CONCENTRATED EQUITY PARTNERSHIP, L.P., OWNS
SUFFICIENT SHARES OF OUR COMMON STOCK AND VOTING EQUIVALENTS TO SIGNIFICANTLY
AFFECT THE RESULTS OF ANY STOCKHOLDER VOTE AND CONTROLS OUR BOARD OF DIRECTORS.
41
Palisade owns approximately 83% of our voting power and therefore will
determine the outcome of all corporate matters requiring stockholder approval,
including the election of all of our directors and transactions such as mergers.
In addition, in connection with the restructuring, we agreed that so long as
Palisade owns more than 50% of the voting power of our capital stock, Palisade
shall have the right to designate a majority of our board of directors.
CONFLICTS OF INTEREST MAY ARISE BETWEEN PALISADE AND OPTICARE.
Conflicts of interest may arise between us and Palisade and its affiliates
in areas relating to past, ongoing and future relationships and other matters.
These potential conflicts of interest include corporate opportunities, indemnity
arrangements, potential acquisitions or financing transactions; sales or other
dispositions by Palisade of our shares held by it; and the exercise by Palisade
of its ability to control our management and affairs. In addition, two of our
directors are officers of Palisade Capital Management, LLC, an affiliate of
Palisade. There can be no assurance that any conflicts that may arise between
Palisade and us will not have a material adverse effect on our business,
financial condition and results of operations or our other stockholders.
WE MAY FAIL FINANCIAL COVENANTS IN THE FUTURE
In the third and fourth quarters of 2003, we failed our fixed charges ratio
covenant under our revolving credit facility with CapitalSource, but received a
waiver through February 29, 2004. If we fail a financial covenant in the future
(beyond the date of our current waiver) or otherwise default on our debt, our
creditors could foreclose on our assets.
Except as required by law, 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
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 2004, 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
annual interest expense by $0.1 million, assuming our borrowing level is
unchanged. We did not use derivative instruments to adjust our interest rate
risk profile during the year ended December 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements 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
Not applicable.
42
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Annual Report on Form 10-K, have concluded that, based on such evaluation, our
disclosure controls and procedures were adequate and effective to ensure that
material information relating to us, including our consolidated subsidiaries,
was made known to them by others within those entities, particularly during the
period in which this Annual Report on Form 10-K was being prepared.
In designing and evaluating our disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
(b) Changes in Internal Controls. There were no changes in our internal
control over financial reporting, identified in connection with the evaluation
of such internal control that occurred during the fourth quarter of our last
fiscal year, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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 captions "Election of Directors," "Section 16(A)
Beneficial Ownership Reporting Compliance" and "Code of Conduct and Ethics" of
our Proxy Statement for the 2004 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 our Proxy Statement for the 2004 Annual Meeting of Stockholders
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 appearing under the caption "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" of our Proxy Statement for the 2004 Annual Meeting of
Stockholders is incorporated herein by reference.
43
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain aggregate information with respect to
all of our equity compensation plans in effect as of December 31, 2003:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER EQUITY
TO BE ISSUED UPON WEIGHTED AVERAGE COMPENSATION PLANS (EXCLUDING
EXERCISE OF EXERCISE PRICE OF SECURITIES REFLECTED IN FIRST
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN)
------------- ------------------- ------------------- -----------------------------
Equity Compensation
Plans Approved by
Stockholders (1) 5,523,462 $ 1.19 3,211,329
Equity Compensation
Plans Not Approved by
Stockholders (2) - - -
--------- ------ ---------
Total 5,523,462 $ 1.19 3,211,329
========= ====== =========
(1) These plans consist of the 1999 Performance Stock Program, the Amended and
Restated 1999 Employee Stock Purchase Plan, the 2000 Professional Employee
Stock Purchase Plan and the Amended and Restated 2002 Stock Incentive Plan.
(2) There are no equity compensation plans that have not been approved by
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 appearing under the captions "Employment
Contracts and Change of Control Agreements" and "Certain Relationships and
Related Transactions" of our Proxy Statement for the 2004 Annual Meeting of the
Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 appearing under the caption "Audit and
Non-Audit Fees" of our Proxy Statement for the 2004 Annual Meeting of
Stockholders is incorporated herein by reference.
PART IV
ITEM 15. 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.
44
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 the Registrant's
Annual Report on Form 10-KSB filed February 3, 1995,
Exhibit 3.1.
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
Registrant's Current Report on Form 8-K filed on
August 30, 1999, Exhibit 3.1.
3.3 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
Registrant's Current Report on Form 8-K filed on
August 30, 1999, Exhibit 3.2.
3.4 Certificate of Amendment of the Certificate of
Incorporation, as filed with the Delaware Secretary
on January 21, 2002, increasing the authorized common
stock of the Registrant from 50,000,000 to 75,000,000
shares, incorporated herein by reference to the
Registrant's Current Report on Form 8-K filed on
February 11, 2002, Exhibit 3.1.
3.5 Certificate of Designation, Rights and Preferences of
the Series B 12.5% Voting Cumulative Convertible
Participating Preferred Stock of the Registrant, 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 filed
on February 11, 2003, Exhibit 3.2.
3.6 Certificate of Designation, Rights and Preferences of
the Series C Preferred Stock of the Registrant, as
filed with the Delaware Secretary of State on May 12,
2003, incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q filed on
August 12, 2003, Exhibit 3.6.
3.7 Certificate of Amendment of the Certificate of
Incorporation, as filed with the Delaware Secretary
of State on May 29, 2003, increasing the authorized
common stock of the Registrant from 75,000,000 to
150,000,000 shares, incorporated herein by reference
to the Registrant's Quarterly Report on Form 10-Q
filed on August 12, 2003, Exhibit 3.7.
3.8 Amended and Restated By-laws of Registrant adopted
March 27, 2000, incorporated herein by reference to
Registrant's Annual Report on Form 10-K filed on
March 30, 2000, Exhibit 3.3.
3.9 Amendment No. 1 to the Amended and Restated Bylaws of
Registrant incorporated herein by reference to the
Registrant's Current Report on Form 8-K filed on
February 11, 2002, Exhibit 3.3.
4.1 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
45
EXHIBIT DESCRIPTION
------- -----------
Annual Report on Form 10-K filed on November 29,
2001, Exhibit 10.54.
4.2 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 filed on November 29, 2001
Exhibit 10.55.
4.3 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 filed on November 29,
2001, Exhibit 10.56.
4.4 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 field
on November 29, 2001, Exhibit 10.57.
4.5 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 filed on February 11, 2002, Exhibit 3.6.
10.1 1999 Performance Stock Program, incorporated herein
by reference 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"), Exhibit 4.1. +
10.2 Amended and Restated 1999 Employee Stock Purchase
Plan, incorporated herein by reference to
Registrant's Annual Report on Form 10-K filed on
March 30, 2000, Exhibit 4.2. +
10.3 2000 Professional Employee Stock Purchase Plan
incorporated herein by reference to Registrant's
Annual Report on Form 10-K filed on March 30, 2000,
Exhibit 4.3. +
10.4 Amended and Restated 2002 Stock Incentive Plan
incorporated herein by reference to Registrant's
Quarterly Report on Form 10-Q filed August 14, 2002,
Exhibit 4.4.+
10.5 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 the
Registration Statement 333-78501, Exhibit 10.9.
10.6 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 the Registration
Statement 333-78501, Exhibit 10.10.
10.7 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 the
Registration Statement 333-78501, Exhibit 10.11.
10.8 Form of Employment Agreement between the Registrant
and Dean J. Yimoyines, M.D., effective August 13,
1999, incorporated herein by reference to the
Registration
46
EXHIBIT DESCRIPTION
------- -----------
Statement 333-78501, Exhibit 10.11.+
10.9 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 the
Registration Statement 333-78501, Exhibit 10.17.
10.10 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 the Registration Statement
333-78501, Exhibit 10.18.
10.11 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 the Registration Statement 333-78501.,
Exhibit 10.19.
10.12 Second Amendment to Lease Agreement dated September
30, 1997 by and between French's Mill Associates II,
LLP, as landlord, and OptiCare Eye Health Center,
Inc., as tenant, for premises located at 160 Robbins
Street, Waterbury, Connecticut, incorporated herein
by reference to the Registrant's Quarterly Report on
Form 10-Q filed on August 12, 2003, Exhibit 10.4.
10.13 Lease Agreement dated August 1, 2002 by and between
Harrold-Barker Investment Company, as landlord, and
OptiCare Health Systems, Inc., as tenant, for
premises located at 110 and 112 Zebulon Court, Rocky
Mount, North Carolina incorporated herein by
reference to the Registrant's Annual Report on Form
10-K filed on March 18, 2003, Exhibit 10-12.
10.14 Form of Health Services Organization Agreement
between PrimeVision Health, Inc. and eye care
providers, incorporated herein by reference to the
Registration Statement 333-78501, Exhibit 10.21.
10.15 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 the
Registration Statement 333-78501, Exhibit 10.22.
10.16 Stock Purchase Agreement dated October 1, 1999, among
the Registrant, Stephen Cohen, Robert Airola, Gerald
Mandel and Reginald Westbrook (excluding schedules
and other attachments thereto), incorporated herein
by reference to the Registrant's Quarterly Report on
Form 10-Q filed on November 15, 1999, Exhibit 10.10.
10.17 Employment Agreement between the Registrant as
employer and Gordon A. Bishop, dated August, 13,
1999, incorporated herein by reference to the
Registration Statement 333-93043, Exhbit 10.41. +
10.18 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 filed on August 14, 2000, Exhibit
10.10. +
10.19 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 filed on November 29, 2001, Exhibit
10.52. +
10.20 Agreement for Consulting Services between Morris
Anderson and Associates, Ltd. and the
47
EXHIBIT DESCRIPTION
------- -----------
Registrant dated April 16, 2001, incorporated herein
by reference to the Registrant's Annual Report on
Form 10-K filed on November 19, 2001, Exhibit 10.53.
10.21 Restructure Agreement dated December 17, 2001, among
Palisade Concentrated Equity Partnership, L.P., Dean
J. Yimoyines, M.D. and the Registrant incorporated
herein by reference to the Registrant's Current
Report on Form 8-K filed on February 11, 2002,
Exhibit 10.1.
10.22 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 Registrant incorporated
herein by reference to the Registrant's Current
Report on Form 8-K filed on February 11, 2002,
Exhibit 10.2.
10.23 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 Registrant incorporated
herein by reference to the Registrant's Current
Report on Form 8-K filed on February 11, 2002,
Exhibit 10.3.
10.24 Amendment No. 3, dated May 12, 2003, to the
Restructure Agreement dated December 17, 2001, among
Palisade Concentrated Equity Partnership. L.P., Dean
J. Yimoyines, M.D. and the Registrant, incorporated
herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on August 12, 2003, Exhibit
10.3.
10.25 Subordinated Pledge and Security Agreement dated as
of January 25, 2002, by the Registrant (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 Registrant to the secured parties
dated January 25, 2002, incorporated herein by
reference to the Registrant's Current Report on Form
8-K filed on February 11, 2002, Exhibit 10.6.
10.26 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 filed on
February 11, 2002, Exhibit 10.7.
10.27 Amendment No. 1, dated May 12, 2003, to the
Registration Rights Agreement dated January 25, 2002,
incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q filed on August 12,
2003, Exhibit 10.2.
10.28 Subordination Agreement dated January 25, 2002, among
Palisade Concentrated Equity Partnership, L.P., Linda
Yimoyines, CapitalSource Finance, L.L.C. and the
Registrant, incorporated herein by reference to the
Registrant's Current Report on Form 8-K filed on
February 11, 2002, Exhibit 10.8.
10.29 Amended and Restated Revolving Credit, Term Loan and
Security Agreement dated as of January 25, 2002,
between CapitalSource Finance, L.L.C. and the
Registrant, including Annex I, Financial Covenants,
and Appendix I, Definitions, incorporated herein by
reference to the Registrant's Current Report on Form
8-K filed on February 11, 2002, Exhibit 10.9.
10.30 Waiver and Second Amendment, dated as of November 14,
2003, to the Amended and Restated Revolving Credit,
Term Loan and Security Agreement, originally dated as
of January 25, 2003, by and between the Registrant,
OptiCare Eye Health Centers, Inc., PrimeVision
Health, Inc. and CapitalSource Finance LLC,
incorporated herein by reference to the Registrant's
Current Report on Form 8-K filed on November 19,
2003, Exhibit 10.1.
48
EXHIBIT DESCRIPTION
------- -----------
10.31 Term Note B, dated November 14, 2003, by and between
the Registrant, OptiCare Eye Health Centers, Inc.,
PrimeVision Health, Inc. (individually and
collectively as borrower) and CapitalSource Finance
LLC (as lender), incorporated herein by reference to
the Registrant's Current Report on Form 8-K filed on
November 19, 2003, Exhibit 10.2.
10.32 Guaranty Agreement dated November 14, 2003 by and
between Palisade Concentrated Equity Partnership,
L.P., the Registrant, PrimeVision Health, Inc.,
OptiCare Eye Health Centers, Inc., OptiCare
Acquisition Corp., and CapitalSource Finance LLC,
incorporated herein by reference to the Registrant's
Current Report on Form 8-K filed on November 19,
2003, Exhibit 10.3.
10.33 Reassignment of Rights to Payments under Services
Agreements, Physician Notes and Physician Security
Agreements, between Bank Austria Creditanstalt
Corporate Finance, Inc., and the Registrant, dated
January 25, 2002, incorporated herein by reference to
the Registrant's Current Report on Form 8-K filed on
February 11, 2002, Exhibit 10.10.
10.34 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 filed on February 11,
2002, Exhibit 10.11.
10.35 OptiCare Directors' & Officers' Tail Policy Trust
dated January 10, 2002, between the Registrant and
Norman S. Drubner, Esq.as trustee incorporated herein
by reference to the Registrant's Annual Report on
Form 10-K filed on April 1, 2002, Exhibit 10.74. * +
10.36 Employment Agreement dated as of September 1, 2001,
between the Registrant and William Blaskiewicz,
incorporated herein by reference of the Registrant's
Quarterly Report on Form 10-Q filed on December 3,
2002, Exhibti 10.21.+
10.37 Employment Letter Agreement, dated as of February 18,
2002, between the Registrant and Christopher J.
Walls, incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q filed on
May 15, 2002, Exhibit 10.76.+
10.38 Employment Letter Agreement, dated as of May 21,
2002, between the Registrant and Lance A. Wilkes,
incorporated herein by reference of the Registrant's
Quarterly Report on Form 10-Q filed on August 14,
2002, Exhibit 10.77.+
10.39 Asset Purchase Agreement, dated as of August 1, 2002,
by and among the Registrant, PrimeVision Health, Inc.
and Optometric Eye Care Center, P.A., incorporated
herein by reference to the Registrant's Current
Report on Form 8-K filed on August 27, 2002, Exhibit
2.
10.40 Asset Purchase Agreement, dated as of February 7,
2003, by and among the Wise Optical Vision Group,
Inc. and OptiCare Acquisition Corp., incorporated
herein by reference to the Registrant's Current
Report on Form 8-K filed on February 10, 2003,
Exhibit 2.
10.41 Joinder Agreement and First Amendment, dated as of
February 7, 2003, to the Amended and Restated
Revolving Credit, Term Loan and Security Agreement,
originally dated as of January 25, 2003, by and
between the Registrant, OptiCare Eye Health Centers,
Inc., PrimeVision Health, Inc. and CapitalSource
Finance LLC, incorporated herein by reference to
Exhibit 99.2 of the Registrant's Current Report on
Form 8-K filed February 10, 2003, Exhibit 99.2.
49
EXHIBIT DESCRIPTION
------- -----------
10.42 Lease Agreement dated August 7, 2000 and Amendment to
Lease dated August 1, 2001, by and between Mack-Cali
So. West Realty Associates L.L.C., as landlord, and
Wise/Contact US Optical Corporation, as tenant, for
premises located at 4 Executive Plaza, Yonkers, New
York incorporated herein by reference to the
Registrant's Annual Report on Form 10-K filed on
March 18, 2003, Exhibit 10.39.
10.43 Letter Agreement dated May 12, 2003 by and among
Palisade Concentrated Equity Partnership, L.P., the
Registrant and Linda Yimoyines, incorporated herein
by reference to the Registrant's Quarterly Report on
Form 10-Q filed on August 12, 2003, Exhibit 10.1.
10.44 Second Amended and Restate Revolving Credit, Term
Loan and Security Agreement, dated as of March 29,
2004, by and between the Registrant, OptiCare Eye
Health Centers, Inc., PrimeVision Health, Inc.
OptiCare Acquisition Corporation and CapitalSource
Finance LLC. *
21 List of Subsidiaries of the Registrant. *
23 Consent of Deloitte & Touche regarding its report on
our financial statements as of December 31, 2003 and
2002, and for each of the three years in the period
ended December 31, 2003. *
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.3 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
* Filed herewith.
+ Management or compensatory plan.
(b) REPORTS ON FORM 8-K
On November 19, 2003 we filed information regarding the modification of our
term loan and credit facility under "Item 5. Other Events and Regulations FD
Disclosure" and furnished information regarding results of our third quarter of
fiscal 2003 under "Item 12. Results of Operation and Financial Condition" on the
same current Report on Form 8-K.
50
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.
March 30, 2004 OPTICARE HEALTH SYSTEMS, INC.
By: /s/ Dean J. Yimoyines
--------------------------
Dean J. Yimoyines, M.D.
Chairman of the Board and
Chief Executive Officer
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 and Chief Executive March 30, 2004
- ------------------------------- Officer (Principal Executive Officer)
Dean J. Yimoyines, M.D.
/s/ William A. Blaskiewicz Vice President and Chief Financial Officer March 30, 2004
- ------------------------------- (Principal Financial and Accounting Officer)
William A. Blaskiewicz
/s/ Eric J. Bertrand Director March 30, 2004
- -------------------------------
Eric J. Bertrand
/s/ Norman S. Drubner Director March 30, 2004
- -------------------------------
Norman S. Drubner, Esq.
/s/ Mark S. Hoffman Director March 30, 2004
- -------------------------------
Mark S. Hoffman
/s/ Richard L. Huber Director March 30, 2004
- -------------------------------
Richard L. Huber
/s/ Clark A. Johnson Director March 30, 2004
- -------------------------------
Clark A. Johnson
/s/ Melvin Meskin Director March 30, 2004
- -------------------------------
Melvin Meskin
/s/ Mark S. Newman Director March 30, 2004
- -------------------------------
Mark S. Newman
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001 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, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2003.
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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standard No. 142.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
March 29, 2004
F-2
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
2003 2002
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,695 $ 3,086
Accounts receivable, net 9,369 5,273
Inventories 5,918 2,000
Deferred income taxes, current -- 1,660
Notes receivable 105 516
Other current assets 462 369
-------- --------
Total Current Assets 17,549 12,904
-------- --------
Property and equipment, net 4,683 3,337
Goodwill 19,195 20,516
Intangible assets, net 1,179 1,353
Deferred income taxes, non-current -- 3,140
Deferred debt issuance costs, net 398 1,187
Notes receivable, less current portion 791 838
Restricted cash 1,158 252
Other assets 902 1,578
-------- --------
TOTAL ASSETS $ 45,855 $ 45,105
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 5,644 2,902
Claims payable and claims incurred but not reported 1,534 2,143
Accrued salaries and related expenses 2,609 1,838
Accrued expenses 1,364 1,274
Current portion of long-term debt 1,124 1,266
Current portion of capital lease obligations 10 61
Unearned revenue 993 1,053
Other current liabilities 549 131
-------- --------
Total Current Liabilities 13,827 10,668
NON-CURRENT LIABILITIES:
Long-term debt - related party -- 15,588
Other long-term debt, less current portion 11,469 2,564
Capital lease obligations, less current portion -- 7
Other liabilities 512 608
-------- --------
Total Non-Current Liabilities 11,981 18,767
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11, 13, and 20)
SERIES B 12.5% REDEEMABLE, CONVERTIBLE PREFERRED STOCK AT AGGREGATE LIQUIDATION
PREFERENCE-RELATED PARTY 5,635 5,018
STOCKHOLDERS' EQUITY:
Series C Preferred Stock, $.001 par value ($16,251 aggregate liquidation
preference); 406,158 shares issued and outstanding at December 31, 2003;
No shares authorized, issued or outstanding at December 31, 2002 1 --
Common Stock, $0.001 par value; 150,000,000 shares authorized; 30,386,061 and
28,913,990 shares issued and outstanding at December 31, 2003 and 2002, 30 29
respectively
Additional paid-in-capital 79,700 63,589
Accumulated deficit (65,319) (52,966)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 14,412 10,652
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,855 $ 45,105
======== ========
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,
-----------------------------------
2003 2002 2001
--------- --------- ---------
NET REVENUES:
Managed vision $ 28,111 $ 29,426 $ 28,988
Product sales 72,834 39,409 44,352
Other services 22,035 20,350 20,742
Other income 2,722 2,346 --
--------- --------- ---------
Total net revenues 125,702 91,531 94,082
--------- --------- ---------
OPERATING EXPENSES:
Medical claims expense 22,000 22,326 22,966
Cost of product sales 56,253 31,064 35,545
Cost of services 9,034 8,158 8,840
Selling, general and administrative 38,174 26,298 26,151
(Gain) loss from early extinguishment of debt 1,896 (8,789)
Goodwill impairment 1,639 -- --
Depreciation 1,899 1,851 1,773
Amortization 174 181 1,124
Interest 2,059 3,048 3,022
--------- --------- ---------
Total operating expenses 133,128 84,137 99,421
--------- --------- ---------
Income (loss) from continuing operations before income taxes (7,426) 7,394 (5,339)
Income tax expense (benefit) 4,927 2,528 (8,026)
--------- --------- ---------
Income (loss) from continuing operations (12,353) 4,866 2,687
Income from discontinued operations, net of income taxes -- 313 293
Loss on disposal of discontinued operations, net of income
tax expense of $342 -- (4,434) --
--------- --------- ---------
Net income (loss) (12,353) 745 2,980
Preferred stock dividends (618) (531) --
--------- --------- ---------
Net income (loss) available to common stockholders $ (12,971) $ 214 $ 2,980
========= ========= =========
EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations:
Basic $ (0.43) $ 0.35 $ 0.21
Diluted $ ( 0.43) $ 0.10 $ 0.21
Income (loss) from discontinued operations:
Basic -- $ (0.33) $ 0.02
Diluted -- $ (0.33) $ 0.02
Net income (loss):
Basic $ (0.43) $ 0.02 $ 0.23
Diluted $ (0.43) $ 0.01 $ 0.23
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,
--------------------------------
2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $(12,353) $ 745 $ 2,980
(Income) loss on discontinued operations -- 4,121 (293)
-------- -------- --------
Income (loss) from continuing operations (12,353) 4,866 2,687
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 1,899 1,851 1,773
Amortization 174 181 1,124
Deferred income taxes 4,800 2,658 (7,800)
Bad debt expense 506 323 498
Non-cash interest expense 958 258 556
Non-cash (gain) loss on early extinguishment of debt 1,867 (8,789) --
Non-cash gain on contract settlements (576) -- --
Non-cash goodwill impairment charge 1,639 -- --
Non-cash compensation charges 178 -- --
Loss on disposal of fixed assets 62 -- 73
Changes in operating assets and liabilities
Accounts receivable 1,914 1,166 636
Inventories 1,814 (213) 21
Other assets (50) (168) (519)
Accounts payable and accrued expenses (5,663) (3,192) (1,018)
Other liabilities 201 (136) 2,401
Cash provided by discontinued operations -- 992 1,020
-------- -------- --------
Net cash (used in) provided by operating activities (2,630) (203) 1,452
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (890) (765) (317)
Purchase of notes receivable -- (1,350) --
Payments received on notes receivable 458 658 --
Refund of security deposits 775 -- --
Purchase of restricted investments (900) -- --
Purchase of assets from Wise Optical, excluding cash (6,192) -- --
Net proceeds from sale of discontinued operations -- 3,862 --
-------- -------- --------
Net cash (used in) provided by investing activities (6,749) 2,405 (317)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 314 23,474 500
Net increase (decrease) in revolving credit facility 8,837 (4,917) --
Proceeds from exercise of warrants -- 2,450 --
Proceeds from issuance of stock 144 4,000 9
Principal payments on long-term debt (988) (25,143) (488)
Payment of financing costs (261) (1,445) --
Principal payments on capital lease obligations (58) (71) (65)
-------- -------- --------
Net cash provided by (used in) financing activities 7,988 (1,652) (44)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,391) 550 1,091
Cash and cash equivalents at beginning of year 3,086 2,536 1,445
-------- -------- --------
Cash and cash equivalents at end of year $ 1,695 $ 3,086 $ 2,536
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,061 $ 1,359 $ 432
Cash paid (received) for income taxes 76 45 (109)
Reduction of debt in exchange for reduction of receivables 86 1,011 --
Conversion of senior subordinated debt to Series C Preferred Stock 16,251 -- --
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)
Series A Series C
Preferred Stock Preferred Stock Common Stock Additional
---------------- ---------------- -------------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
-------- ------- -------- -------- ---------- --------- --------- ------------ ----------
Balance at December 31, 2000 418,803 $ 1 -- -- 12,747,324 $ 13 $ 60,554 $ (56,691) $3,877
Issuance of 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
Issuance of common stock -- -- -- 17,525,000 17 2,433 -- 2,450
Cancellation of shares (418,803) (1) -- -- (1,426,102) (1) (375) -- (377)
Issuance of warrants -- -- -- -- - -- 1,383 -- 1,383
Dividends on redeemable
preferred stock -- -- -- -- -- -- (531) -- (531)
Net income for 2002 -- -- -- -- -- -- -- 745 745
-------- ------- -------- -------- ---------- --------- --------- ------------ ----------
Balance at December 31, 2002 -- $ -- -- -- 28,913,990 $ 29 $ 63,589 $ (52,966) $ 10,652
Issuance of preferred
stock -- -- 406,158 $ 1 -- -- 16,113 -- 16,114
Issuance of common stock -- -- -- -- 1,555,000 1 651 -- 652
Cancellation of shares -- -- -- -- (82,929) -- (35) -- (35)
Dividends on redeemable
preferred stock -- -- -- -- -- -- (618) -- (618)
Net loss for 2003 -- -- -- -- -- -- -- (12,353) (12,353)
-------- ------- -------- -------- ---------- --------- --------- ------------ ----------
Balance at December 31, 2003 -- $-- 406,158 $ 1 30,386,061 $30 $ 79,700 $ (65,319) $ 14,412
======== ======= ======== ======== ========== ========= ========= ============ ==========
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 vision benefits management
(managed vision), the distribution of products and software services to eye care
professionals, and consumer vision services, including medical, surgical and
optometric services and optical retail. The Company contracts with OptiCare,
P.C.--a professional corporation--which employs ophthalmologists and
optometrists to provide the surgical, medical, optometric and other professional
services to patients.
The Company acquired Wise Optical on February 7, 2003 and was accounted for
as a purchase. Accordingly, the results of operations of Wise Optical are
included in the Company's results of operations since February 1, 2003, the
deemed effective date of the acquisition for accounting purposes.
2. MANAGEMENT'S PLAN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company incurred
a substantial net loss and experienced negative cash flows in 2003, primarily
due to substantial operating losses at Wise Optical. The losses at Wise Optical
were largely attributable to significant expenses incurred for integration
(primarily severance and stay bonuses, legal and professional fees), weakness in
gross margins and an operating structure built to support a higher sales volume.
In September 2003, the Company began implementing strategies and operational
changes designed to improve the operations of Wise Optical, which included
further developing its sales force, improving customer service, enhancing
productivity, eliminating positions and streamlining its warehouse and
distribution processes. The Company believes these initiatives will lead to
increased sales, improved gross margins and reduced operating costs.
The Company's Managed Vision segment experienced decreased revenues and
operating income in 2003 due to a loss of contracts as a result of state
legislative changes in Texas. In addition, the Managed Vision segment incurred
significant expenses in 2003 to build a sales force and the infrastructure
necessary to expand into the direct-to-employer market. The Company's first
direct-to-employer contract became effective in September 2003 and four
additional contracts became effective in the fourth quarter of 2003, with
additional signed contracts becoming effective in 2004. The Company expects
increased margins in its Managed Vision segment through its product mix shift to
the higher margin and shortened sales cycle of the direct product and sees the
direct-to-employer market as an opportunity for significant growth.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its affiliate OptiCare P.C.. All intercompany accounts and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers investments purchased with an original maturity of
three months or less when purchased to be cash equivalents.
F-7
RECEIVABLES
Receivables are stated net of allowances for doubtful accounts. The
allowance for doubtful accounts reflects our best estimate of probable losses
inherent in the accounts receivable balance from bad debts. We determine the
allowance based on historical experience and other currently available evidence.
Adjustments to the allowance are recorded to bad debt expense, which is included
in operating expenses. Gross receivables are stated net of contractual
allowances and insurance disallowances. (See also "Services Revenue" below)
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 7 - 10 years
Computer hardware and software 3 - 5 years
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs are being amortized on the straight-line
method, which approximates the interest method, over the term of the related
debt and such amortization is included in interest expense. Amortization expense
of deferred debt issuance costs totaled $248 and $258 for the years ended
December 31, 2003 and 2002, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for goodwill and intangible assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" (see "New Accounting Pronouncements"), which was
adopted by the Company on January 1, 2002. In accordance with this standard,
goodwill and other intangible assets with indefinite useful lives are no longer
subject to amortization, but are reviewed by the Company for impairment on an
annual basis, or more frequently if events or circumstances indicate potential
impairment. The evaluation methodology for potential impairment is inherently
complex, and involves significant management judgement in the use of estimates
and assumptions. The Company uses multiples of revenue and earnings before
interest, taxes, depreciation and amortization of comparable entities to value
the reporting unit being evaluated for goodwill impairment.
The Company evaluates impairment using a two-step process. First, we compare
the aggregate fair value of the reporting unit to its carrying amount, including
goodwill. If the fair value exceeds the carrying amount, no impairment exists.
If the carrying amount of the reporting unit exceeds the fair value, then we
compare the implied fair value of the reporting unit's goodwill with its
carrying amount. The implied fair value is determined by allocating the fair
value of the reporting unit to all the assets and liabilities of that unit, as
if the unit had been acquired in a business combination and the fair value of
the unit was the purchase price. If the carrying amount of the goodwill exceeds
the implied fair value, then goodwill impairment is recognized by writing the
goodwill down to the implied fair value.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired in a business combination accounted for as a
purchase. During the year 2001, goodwill was amortized using the straight-
F-8
line method, generally over a period of 25 years. Intangible assets, which
represent purchased service and non-compete agreements, are amortized over their
contract life and are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable.
MANAGED VISION 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 primarily under capitated programs. 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, such as fee-for-service
and other preferred provider arrangements, is recognized when the services are
provided and the Company's customers are obligated to pay for such services.
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) 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 adjustments to revenue 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 under agreements between the Company and each practice. 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.
OTHER INCOME
Revenue from HSO settlements are recognized in other income when received.
MEDICAL CLAIMS EXPENSE
Claims expense is recorded as provider services are rendered and includes an
estimate for claims incurred but not reported ("IBNR").
F-9
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.
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") and
a licensed captive insurance company domiciled in South Carolina, OptiCare
Vision Insurance Company ("OVIC"). 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. OVIC is subject to the regulation and
supervision by the South Carolina Department of Insurance and requires minimum
capital and surplus levels.
Under the Company's agreements with the Texas and South Carolina Departments
of Insurance, the Company was required to pledge investments of $250 and $500,
respectively, at December 31, 2003.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 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. A valuation allowance against
deferred tax assets is recorded if, based on the weight of historic available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
F-10
REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 2002 the Company issued 3,204,959 shares of Series B 12.5%
Voting Cumulative Convertible Participating Preferred Stock. Each share of
Series B Preferred Stock is, at the holder's option, immediately convertible
into a number of shares of common stock based on such share's current
liquidation value. Each share of Series B Preferred Stock must be redeemed in
full by the Company on December 31, 2008. (See also Note 15)
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" requires an issuer to classify a
mandatorily redeemable instrument as a liability if it represents an
unconditional obligation requiring the Company to redeem the instrument by
transferring its assets at a specified or determinable date or upon an event
that is certain to occur. The Company's convertible redeemable preferred stock
is not classified as a liability due to its conversion feature.
STOCK-BASED COMPENSATION
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. As permitted under SFAS No. 123 and as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an Amendment of Statement of Financial Accounting Standard No. 123",
the Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25
"Accounting for Stock Issued to Employees" and related interpretations, and
provides 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.
Pro forma information regarding net loss and loss per share is required by
SFAS No. 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 No. 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 for 2003 and 2002 (there were no options granted in
2001):
2003 2002
--------------- -------------
Risk free interest rate 3.0% 3.0%
Dividends - -
Volatility factor .60 .60
Expected Life 5 years 5 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------ ------------
Net income (loss) available to common stockholders,
as reported $ (12,971) $ 214 $ 2,980
Less: Total stock-based employee compensation
expense determined under Black-Scholes
option pricing model, net of related tax effects (357) (519) (321)
------------- ------------ ------------
Pro forma net income (loss) $ (13,328) $(305) $ 2,659
============= ============ ============
Earnings (loss) per share - As reported:
Basic $ (0.43) $ 0.02 $0.23
Diluted $ (0.43) $ 0.01 $0.23
Earnings (loss) per share - Pro forma:
Basic $ (0.44) $ (0.02) $0.21
Diluted $ (0.44) $ (0.02) $0.20
F-11
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 for which it is practicable to estimate that value. The
Company's financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, long-term debt and redeemable
preferred stock.
The Company considers the carrying amount of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, accrued liabilities and
long-term debt 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. Using available market information,
the Company determined that the fair value at December 31, 2003 of the
redeemable preferred stock was $30,602 compared to a carrying value of $5,635.
CONCENTRATIONS
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.
The Company has six managed vision contracts with two insurers, CIGNA and
United St. Louis, which account for 14 % of the Company's consolidated revenue
in 2003.
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, managed care claims accrual,
deferred taxes and in evaluating goodwill and intangibles for impairment, 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.
NEW ACCOUNTING PRONOUNCEMENTS
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 the
Company's financial position or results of operations.
Effective January 1, 2003, the Company adopted 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
F-12
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
approximately $8.8 million and related income tax expense of approximately $3.5
million 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.
Effective January 1, 2003, the Company adopted 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. 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 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 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 December 31, 2003 and did not have a material effect on the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments. This
statement is generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Most of the guidance in SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of SFAS No. 150 did not have a
material impact on the Company's financial position or results of operations.
F-13
4. 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.
Wise Optical has experienced substantial operating losses in 2003. These
losses are largely attributable to significant expenses incurred by Wise
Optical, including integration costs (primarily severance and stay bonuses and
legal and professional fees), weakness in gross margins and an operating
structure built to support a higher sales volume. In September 2003, the Company
began implementing strategies and operational changes designed to improve the
operations of Wise Optical. These efforts include developing our sales force,
improving customer service, enhancing productivity, eliminating positions and
streamlining our warehouse and distribution processes. In addition, effective
September 3, 2003, Gordon Bishop, President of the Company's Consumer Vision
division, has replaced the former President of the Distribution sector of the
Distribution and Technology division. Gordon brings industry expertise and a
strong optical background to Wise Optical, along with a focus on operating
expenses. The Company believes these changes will lead to increased sales,
improved gross margins and reduced operating costs.
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 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:
YEAR ENDED
DECEMBER 31,
---------------------------------------------
2003 2002 2001
----------- ------------ -------------
Net Revenues $132,380 $157,413 $154,215
Loss from continuing operations (12,206) (6,641) 2,135
Net (loss) income (12,206) (10,762) 2,428
Income (loss) per common share from continuing
operations (1):
Basic $ (0.43) $ (0.53) $ 0.16
Diluted $ (0.43) $ (0.53) $ 0.15
Net income (loss) per common share from
continuing operations (1):
Basic $ (0.43) $ (0.83) $0.18
Diluted $ (0.43) $ (0.83) $0.17
(1) Includes effect of preferred stock dividends.
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.
The aggregate purchase price of Wise Optical of $7,949 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
$329. Funds for the acquisition were obtained via the Company's revolving credit
note with CapitalSource Finance, LLC ("CapitalSource"), which was increased from
$10,000 to $15,000 in connection with the acquisition of Wise Optical.
The aggregate purchase price of $7,949 was 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. The
goodwill resulting from this transaction, of $318, was assigned to the Company's
Distribution and Technology operating segment and is expected to be amortizable
for tax purposes. The goodwill from this acquisition was written-off in
September 2003 due to impairment, primarily resulting from the unexpected losses
at Wise Optical. See Note 10.
F-14
The following table sets forth the allocation of purchase price
consideration to the assets acquired and liabilities assumed at the date of
acquisition.
Assets:
Cash and cash equivalents $ 1,427
Accounts receivable 6,626
Inventory 5,732
Property and equipment, net 2,416
Other assets 148
Goodwill 318
--------------
Total assets $16,667
==============
Liabilities:
Accounts payable and accrued expenses $ 8,657
Other liabilities 61
--------------
Total liabilities $ 8,718
==============
5. 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 ("NCOP"). Accordingly, during the quarter ended June 30, 2002 the
Company recorded a $3,940 loss on disposal of discontinued operations based on
the estimated fair value of the net assets held for sale. On August 12, 2002 the
Company consummated the sale of the NCOP net assets to Optometric Eye Care
Center, P.A. ("OECC"), an independent professional association owned by two
former officers of the Company and recorded an additional loss on disposal of
$494, including income tax expense of $342. In connection with the sale, the
Company received $4,200 in cash and a $1,000 promissory note. Additional
consideration included OECC's surrender of 1,321,010 shares of the Company's
common stock (for retirement) with an estimated fair market value of $357 and
OECC's assumption of $135 of certain other liabilities. The aggregate gross
consideration from the sale of approximately $5,692 was offset by approximately
$477 of closing and other direct costs associated with the sale. The Company
paid $3,074 to its bank from the proceeds it received from the sale, of which
$500 was applied as a payment on the term loan and $2,574 was applied as a
payment on the outstanding credit facility.
This 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 are as follows:
2002 2001
-------- --------
External revenue $ 16,771 $ 17,985
======== ========
Intercompany revenue $ 4,875 $ 9,602
======== ========
Income from discontinued operations before taxes $ 523 $ 489
Income tax expense 210 196
------- --------
Income from discontinued operations 313 293
Loss on disposal of discontinued operations, net of
income taxes of $342 (4,434) --
-------- --------
Total income (loss) from discontinued operations $(4,121) $ 293
======== ========
Income (loss) per share from discontinued operations $ (0.33) $ 0.02
======== ========
F-15
6. SEGMENT INFORMATION
During the third quarter of 2002, the Company sold its retail optometry
division in North Carolina and modified the Company's strategic vision.
Accordingly, the Company 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, although there is some cross-marketing and selling between the
segments. 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, which do not meet
the quantitative thresholds for a reportable segment. Included in the "All
Other" category is revenue earned under the Company's HSO operation, which
receives fee income for providing certain support services to individual
ophthalmology and optometry practices. While the Company continues to meet its
contractual obligations by providing the requisite services under its HSO
agreements, the Company is in the process of disengaging from a number of these
arrangements.
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, 2003, 2002 and 2001 is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
REVENUES:
Managed vision $ 28,111 $ 29,426 $ 28,988
Consumer vision 30,871 28,834 28,606
Distribution and technology 69,038 35,029 38,721
--------- --------- ---------
Reportable segment totals 128,020 93,289 96,315
All other 2,869 3,283 2,568
Elimination of inter-segment revenues (5,187) (5,041) (4,801)
--------- --------- ---------
Total net revenue $ 125,702 $ 91,531 $ 94,082
========= ========= =========
SEGMENT INCOME (LOSS):
Managed vision 1,271 $ 2,630(1) $ 2,018
Consumer vision 2,856 1,463 385
Distribution and technology (2,695) 267 (71)
--------- --------- ---------
Total reportable segment income 1,432 4,360 2,332
All other 2,053 2,335 2,041
Depreciation (1,899) (1,851) (1,773)
Amortization expense and write-off of goodwill (1,813) (181) (1,124)
Interest expense (2,059) (3,048) (3,022)
Corporate (3,244) (3,010) (3,793)
Gain (loss) on early extinguishment of debt (1,896) 8,789 --
--------- --------- ---------
Income (loss) from continuing operations before
income taxes $ (7,426) $ 7,394 $ (5,339)
========= ========= =========
(1) Includes a $600 reduction in claims expense due to a favorable adjustment to
the reserve.
F-16
YEAR ENDED DECEMBER 31,
---------------------------
2003 2002 2001
------- ------- -------
ASSETS:
Managed vision $15,567 $15,133 $14,435
Consumer vision 10,229 10,200 11,767
Distribution and technology 16,351 7,456 7,652
------- ------- -------
Segment totals 42,147 32,789 33,854
Discontinued operations -- -- 11,729
Corporate and other 3,813 12,316 14,159
------- ------- -------
Total $45,960 $45,105 $59,742
======= ======= =======
CAPITAL EXPENDITURES:
Managed vision $ 135 $ 51 $ 25
Consumer vision 591 518 143
Distribution and technology 142 12 36
------- ------- -------
Segment totals 868 581 204
Discontinued operations -- 379 306
Corporate and other 22 184 113
------- ------- -------
Total $ 890 $ 1,144 $ 623
======= ======= =======
7. 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 that closed in
January 2002. (See Note 11)
OPERATIONS RESTRUCTURING
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 was completed in
2001.
During the year ended December 31, 2003, 2002 and 2001, $206, $119 and $436,
respectively, was charged against the restructuring accrual, representing
primarily severance and lease related payments on vacant facilities that were
closed as part of the Company's restructuring activities. In 2003, the Company
reduced its restructuring reserve by $140 due to a change in estimated future
rent payments. The remaining restructuring liability at December 31, 2003 of
$471 principally relates to lease obligations on excess office space that are
not expected to be utilized over the terms of the remaining leases.
8. RECEIVABLES
Activity in the allowance for doubtful accounts consisted of the following for
the years ended December 31:
2003 2002 2001
------------- ----------- ------------
Balance at beginning of period $ 587 $501 $558
Allowance of acquired company (Wise Optical) 642 - -
Additions charged to expense 506 323 498
Deductions (546) (237) (555)
------------- ----------- ------------
Balance at end of period $ 1,189 $587 $501
============= =========== ============
F-17
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
---------------------------
2003 2002
------------- -----------
Leasehold improvements $3,881 $3,166
Furniture and equipment 5,441 5,043
Computer hardware and software 6,174 3,828
------------- -----------
Total 15,496 12,037
Accumulated depreciation and amortization (10,813) (8,700)
------------- -----------
Property and equipment, net $4,683 $3,337
============= ===========
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". The standard changed the accounting for goodwill and
intangible assets with an indefinite life whereby such assets are no longer
amortized; however the standard does require at least annually a test for
impairment, and a corresponding write-down, if appropriate. The first step of
the goodwill impairment test identifies potential impairment and the second step
of the test is used to measure the amount of impairment loss, if any. The
Company completed its transitional test for impairment in the second quarter of
2002 and its annual test for impairment during the fourth quarter of 2002. No
impairment charges were required in connection with these tests and there were
no changes to the carrying value of goodwill during 2002.
In the third quarter of 2003, the Company performed an interim impairment
test of goodwill due to decreases in Buying Group sales and significant
operating losses at Wise Optical. The Company completed the first step of the
impairment test, which resulted in carrying value exceeding estimated fair
value, indicating impairment. The Company was unable to finalize the second step
of the impairment test during the third quarter, but recorded an estimated
impairment charge of $1,300 in September 2003. The Company finalized the second
step of its interim impairment test during the fourth quarter of 2003 and based
on the results of that test recorded an additional $339 impairment charge. The
Company also performed its annual test for goodwill impairment for all of its
reporting units as of December 31, 2003 and no additional impairment charge was
required.
Changes in the carrying amount of goodwill for the year ended December 31,
2003, by segment, are as follows:
MANAGED CONSUMER DISTRIBUTION &
VISION VISION TECHNOLOGY TOTAL
-------- -------- -------------- --------
Balance, December 31, 2002 $ 11,820 $ 4,746 $ 3,950 $ 20,516
Goodwill from acquisition -- -- 318 318
Impairment charge -- -- (1,639) (1,639)
-------- ------- ------------ --------
Balance, December 31, 2003 $ 11,820 $ 4,746 $ 2,629 $ 19,195
======== ======= ============ ========
F-18
Comparative information as if goodwill had not been amortized is as follows:
2003 2002 2001
------------ ----------- ------------
Net income (loss) as reported $ (12,353) $ 745 $2,980
Add back: goodwill amortization -- -- 943
------------ ----------- ------------
Adjusted net income (loss) (12,353) 745 3,923
Preferred stock dividend (618) (531) --
------------ ----------- ------------
Adjusted net income (loss) available to common
Stockholders $ (12,971) $ 214 $3,923
============ =========== ============
Earnings (loss) per common share - basic:
Net income (loss) available to common stockholders $ (0.43) $0.02 $ 0.23
Goodwill amortization -- -- 0.07
------------ ----------- ------------
Adjusted net income (loss) per share $ (0.43) $0.02 $ 0.30
============ =========== ============
Earnings (loss) per common share - diluted:
Net income (loss) available to common stockholders $ (0.43) $0.01 $ 0.23
Goodwill amortization -- -- 0.07
------------ ----------- ------------
Adjusted net income (loss) per share $ (0.43) $0.01 $ 0.30
============ =========== ============
Intangible assets subject to amortization are as follows as of December 31:
2003 2002
---------------------------------------- -----------------------------------------
Gross Accumulated Net Gross Accumulated Net
Amount Amortization Balance Amount Amortization Balance
------------ --------------- ----------- ------------ --------------- -----------
Service Agreement $ 1,658 $ (479) $ 1,179 $1,658 $ (368) $1,290
Non-compete agreements 265 (265) -- 265 (202) 63
------------ --------------- ----------- ------------ --------------- -----------
Total $ 1,923 $ (744) $ 1,179 $1,923 $ (570) $1,353
============ =============== =========== ============ =============== ===========
Amortization expense for the years ended December 31, 2003 and 2002 was $174
and $181, respectively. Annual amortization expense is expected to be $111 for
each of the years 2004 through 2008.
11. LONG-TERM DEBT
The details of the Company's long-term debt at December 31, 2003 and 2002 are as
follows:
2003 2002
----------- -----------
Term note payable to CapitalSource, due January 25, 2006. Monthly principal
payments of $25 with balance due at maturity. $ 2,075 $ 2,333
Revolving credit note to CapitalSource, due January 25, 2006. 10,394 1,557
Senior subordinated secured notes payable due January 24, 2012. (1) - 15,588
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 11.4%. 124 1,189
Unamortized discounts - (1,249)
----------- -----------
Total 12,593 19,418
Less current portion 1,124 1,266
----------- -----------
$ 11,469 $ 18,152
=========== ===========
(1) Converted into Series C Preferred Stock on May 12, 2003.
F-19
Aggregate maturities of long-term debt by year are $1,124 in 2004, $300 in
2005 and $11,869 in 2006.
The Company had standby letters of credit outstanding at December 31, 2003
and 2002 for $900 and $400, respectively. The letters of credit outstanding at
December 31, 2003 and 2002 were secured by restricted certificates of deposit
and security deposits, respectively.
THE CAPITALSOURCE LOAN AND SECURITY AGREEMENT
In January 2002 the Company entered into an Amended and Restated Revolving
Credit, Term Loan and Security Agreement (the "Amended Credit Facility") with
CapitalSource. CapitalSource acquired this agreement from the Company's previous
senior secured lender, Bank Austria, discussed below. The Amended Credit
Facility made available to the Company a $3,000 term loan and up to a $10,000
revolving loan facility (the "Revolver") secured by a security interest in
substantially all of the assets of the Company. The revolver agreement requires
the Company to maintain a lock-box arrangement whereby amounts received into the
lock-box is applied to reduce the revolver debt outstanding.
The Amended Credit Facility contains certain restrictions on the conduct of
the Company's 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 capital stock, and creating or suffering liens on the Company's
assets. The Company is required to maintain certain financial covenants,
including a minimum fixed charge coverage ratio and minimum net worth. The
Company did not meet its minimum fixed charge ratio covenant for the three
months ended September 30, 2003 and December 31, 2003, however, the Company
received a waiver for non-compliance with this covenant through February 29,
2004.
On February 7, 2003, in connection with the Company's acquisition of Wise
Optical, the Company's credit facility with CapitalSource was amended. The
amendment primarily resulted in an increase in the Company's Revolver from
$10,000 to $15,000.
On November 14, 2003 the Company amended the terms of the Amended Credit
Facility which, among other things, (i) increased the term loan by $314 and
extend the maturity date of the term loan from January 25, 2004 to January 25,
2006, (ii) extended the maturity date of the revolver January 25, 2005 to
January 25, 2006, (iii) permanently increased the advance rate on eligible
receivables of Wise Optical from 80% to 85%, (iv) temporarily increased the
advance rate on eligible inventory of Wise Optical from 50% to 55% through March
31, 2004, (v) provide access to a $700 temporary over-advance bearing interest
at prime plus 5 1/2% due March 31, 2004 (which was prepaid in full by March 1,
2004) and was guaranteed by Palisade Concentrated Equity Partnership, L.P.
("Palisade"), (vi) waived the Company's non-compliance with the minimum fixed
charge ratio financial covenant through March 31, 2004 and (vii) changed the net
worth covenant from ($27,000) to tangible net worth of ($10,000). In connection
with this amendment, the Company agreed to pay CapitalSource $80 in financing
fees. The amendment also included an additional $150 termination fee if the
Company terminates the Revolver prior to December 31, 2004. Additionally, if the
Company terminates the Revolver pursuant to a refinancing with another
commercial financial institution, it shall pay CapitalSource, in lieu of a
termination fee, a yield maintenance amount shall mean an amount equal to the
difference between (i) the all-in effective yield which could be earned on the
revolving balance through January 25, 2006 and (ii) the total interest and fees
actually paid to CapitalSource on the Revolver prior to the termination date or
date of prepayment.
The interest rate applicable to the term loan under the Amended Credit
Facility equals the prime rate plus 3.5% (but not less than 9%) and the interest
rate applicable to the Revolver is prime rate plus 1.5% (but not less than
5.75%). During 2003, the Company's average borrowing rate was approximately
8.43%. The Company pays a monthly unused line fee that equals the excess, if
any, of $3,000 over all interest accrued for such month. Although the Company
may borrow up to $15,000 under the Revolver, availability is based on the value
of the collateral underlying the facility at any given time and on the amount
outstanding under the Revolver at such time. As of December 31, 2003 the Company
had approximately $479 of availability under its Revolver.
On March 29, 2004 we entered into the Second Amended Credit Facility with
CapitalSource which incorporates all of the changes embodied in the above
amendments and: (i) confirmed that the temporary over-advance was repaid as of
February 29, 2004 (ii) changed the expiration date of the waiver of our fixed
ratio covenant from March 31,
F-20
2004 to February 29, 2004 (iii) reduced the tangible net worth covenant from
$(10) million to $(2) million.
Prior to January 2002, the Company was a party to a 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. As
previously discussed, on January 25, 2002 Bank Austria forgave approximately
$10,000 of principal and interest and sold this loan to CapitalSource.
CapitalSource, as lender, and the Company, as borrower, amended and restated the
terms of the indebtedness as described above (see also Note 7).
SENIOR SUBORDINATED SECURED NOTES
In January 2002, Palisade made a subordinated loan to the Company of $13,900
and Ms. Yimoyines made a subordinated loan to the Company of $100 (collectively,
the "Senior Secured Loans"), which were evidenced by senior subordinated secured
notes. These notes were subordinated to the Company's senior indebtedness with
CapitalSource, and were secured second priority security interests in
substantially all of the Company's assets. Principal was due on January 25, 2012
and interest was payable quarterly at a rate of 11.5% per annum. In the first
and second years of the notes, the Company 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.
On May 12, 2003, Palisade and Ms. Yimoyines exchanged the entire amount of
principal and interest due to them under the Senior Secured Loans, totaling an
aggregate of $16,246, for a total of 406,158 shares of Series C Preferred Stock,
of which 403,256 shares were issued to Palisade and 2,902 shares were issued to
Ms. Yimoyines. The 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).
12. GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT
On January 25, 2002, the Company recorded a gain on the early extinguishment
of debt of $8,789 before income tax as a result of the Company's debt
restructuring. 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. (See Note 11)
On May 12, 2003, the Company recorded a $1,847 loss on the exchange of
$16,246 of debt for Series C Preferred Stock. The $1,847 loss represents the
write-off of the unamortized deferred debt issuance costs and debt discount
associated with the extinguished debt. (See Notes 11 and 16)
On November 14, 2003, the Company amended the Amended Credit Facility with
CapitalSource and recorded a $49 loss on the extinguishment of debt,
representing financing fees and the write-off of unamortized deferred debt
issuance costs associated with the original loans under the Amended Credit
facility. (See Note 11)
13. 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 17).
Several facility leases have annual rental terms comprised of base rent at the
inception of the lease adjusted by an amount based, in part, upon the increase
in the consumer price index. Lease expense charged to continuing operations
during the years ended December 31, 2003, 2002 and 2001 was $2,438, $3,990 and
$5,087, respectively.
Property and equipment includes the following amounts for capital leases at
December 31:
2003 2002
----------- -----------
Furniture, machinery and equipment $ 248 $ 248
Less accumulated amortization (235) (181)
----------- -----------
$ 13 $ 67
=========== ===========
F-21
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, 2003:
CAPITAL OPERATING
LEASES LEASES
---------- ----------
2004 $ 10 $2,620
2005 -- 2,505
2006 -- 2,277
2007 -- 2,067
2008 1,853
Thereafter -- 3,248
---------- ----------
Total minimum lease payments $ 10 $ 14,570
========== ==========
14. 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, 2003, 2002, and 2001 were $243,
$288 and $333, respectively.
15. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On January 25, 2002 the Company designated and issued 3,204,959 shares of
Series B 12.5% Voting Cumulative Convertible Participating Preferred Stock (the
"Series B Preferred Stock") having a liquidation preference of $1.40 per share.
Subject to a senior liquidation preference of the Series C Preferred Stock (see
Note 16), the Series B Preferred Stock ranks senior to all other currently
issued and outstanding classes or series of the Company's 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, at
the holder's option, immediately 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 increases at a rate of 12.5% per year compounded annually.
Each share of Series B Preferred Stock must be redeemed in full by the
Company on December 31, 2008, at a price equal to the greater of (i) the
aggregate adjusted redemption value of the Series B Preferred Stock ($1.40 per
share) plus accrued but unpaid dividends or (ii) 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.
As of December 31, 2003, cumulative accrued and unpaid dividends on the Series B
Preferred Stock totaled $1,150 or $0.36 per preferred share. As of December 31,
2003 there were 3,204,959 shares of Series B Preferred Stock outstanding with a
liquidation value of $1.76 per share.
16. STOCKHOLDERS' EQUITY
SERIES C PREFERRED STOCK
On May 12, 2003, the Company issued 406,158 shares of Series C preferred
stock to Palisade and Ms. Yimoyines, collectively, in exchange for amounts due
to them by the Company under Senior Secured Loans (See Note 11.) The Series C
Preferred Stock 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 is, at the holder's option, convertible into 50 shares
of common stock and has the same dividend rights, on an as converted basis, as
the Company's common stock. The Company authorized for issuance 5,000,000 shares
of Series B and Series C Preferred Stock, collectively.
F-22
WARRANTS
As of December 31, 2003, the following warrants to purchase common stock of
the Company were outstanding and exercisable with expiration dates ranging from
2005 to 2012:
OUTSTANDING EXERCISE
WARRANTS PRICE
-------------- ----------
275,000 $ 0.14
20,000 $ 0.16
750,000 $ 0.40
2,000,000 $ 1.00
50,000 $ 3.50
30,000 $ 4.50
--------------
3,125,000
==============
In December 2002 warrants to purchase 17,500,000 common shares of the Company
were exercised at a price of $0.14 per share. These warrants were scheduled to
expire in 2012.
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 in the ESPP. The amount that may be offered
pursuant to this plan is 450,000 shares. Effective July 2001, the Company
suspended the purchase of shares by employees under the ESPP. As of December 31,
2003, the purchase of shares under the ESSP remained suspended and, therefore,
no shares were purchased by employees during 2003. 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.
STOCK PLANS
The Company's stock plans provide for the grant of incentive stock options
and non-qualified stock options as well as restricted stock. 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 four years from the date of grant. The weighted average fair value of
stock options, calculated using the Black-Scholes option pricing model, granted
during 2003 and 2002 was $0.37 and $0.11 per share, respectively. There were
225,000 and 25,000 shares of restricted common stock issued in 2003 and 2002,
respectively, with a weighted average fair value at the date of grant of $0.65
and $0.16, respectively. There were no stock options or restricted stock granted
during the year ended December 31, 2001. As of December 31, 2003, 8,734,791
shares were reserved for issuance under the stock plans, including 3,211,329
shares available for future grant.
Presented below is a summary of the status of the Company's stock options
and the related transactions for the years ended December 31, 2003, 2002 and
2001.
WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------------- -------------
December 31, 2000 1,242,146 $ 5.33
Canceled (321,688) $ 4.51
----------------- -------------
December 31, 2001 920,458 $ 5.62
Granted 4,732,500 $ 0.33
Canceled (68,892) $ 5.71
----------------- -------------
December 31, 2002 5,584,066 $ 1.14
Granted 888,000 $ 0.66
Exercised (580,000) $ 0.25
Canceled (368,604) $ 0.66
----------------- -------------
December 31, 2003 5,523,462 $ 1.19
================= =============
F-23
The following table summarizes in more detail information regarding the
Company's stock options outstanding at December 31, 2003.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
Exercise Price OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
------------------- --------------- -------------- ------------- -------------- ------------
$0.15 - $0.16 1,350,000 8.0 $ 0.15 675,000 $ 0.15
$0.20 745,000 8.4 $ 0.20 411,250 $ 0.20
$0.25 - $0.26 862,500 8.5 $ 0.26 412,500 $ 0.25
$0.31 - $0.36 540,000 8.9 $ 0.36 407,500 $ 0.36
$0.65 - $0.77 758,000 9.1 $ 0.66 215,000 $ 0.65
$1.00 - $1.78 245,000 8.1 $ 1.14 95,000 $ 1.37
$2.00 - $2.56 545,131 6.7 $ 2.35 395,131 $ 2.49
$5.85 440,000 5.6 $ 5.85 440,000 $ 5.85
$6.37 - $63.73 37,831 4.7 $30.42 37,831 $30.42
--------------- -------------- ------------- -------------- ------------
Total 5,523,462 8.0 $ 1.19 3,089,212 $ 1.75
=============== ============== ============= ============== ============
17. RELATED PARTY TRANSACTIONS
The Company incurred rent expense of $106 and $146 in 2002 and 2001,
respectively, which was paid to certain doctors for the use of equipment.
The Company incurred rent expense of $1,086, $1,780 and $2,098 in 2003, 2002
and 2001, respectively, which was paid to entities in which certain officers of
the Company had an interest, for the lease of facilities.
In the normal course of business, the Company contracts with OptiCare P.C.
to provide medical, surgical and optometric services to patients. The Company's
Chief Executive Officer is the sole stockholder of OptiCare P.C.
A subsidiary of the Company remains a guarantor with respect to two leases
where the lessee is an entity owned by two former officers of the Company.
Aggregate annual rent under the leases is $194,392. Each of the guarantees and
its underlying lease involved the professional optometry practice locations and
retail optical business the Company oeprated in the State of North Carolina,
which were sold to Optometric Eye Care Center, P.A. (''OECC'') in August 2002.
Although, in connection with that sale, OECC assumed from the Company any
obligations the Company or its subsidiaries or affiliates may have had as lessee
under those leases, OECC and the Company were unable to obtatin landlord consent
to the assignment of the Company's guarantees with respect to the leases, which
expire in 2005. As a guarantor, performance by the Company would be required if
the borrowing entity defaulted, however the Company had deemed that its
performance as a guarantor is not likely to occur.
In January 2002, the Company issued senior subordinated secured notes
payable to Palisade, a significant shareholder, for $13,900 and to Ms.
Yimoyines, wife of the Company's Chief Executive Officer, for $100. For the
years ended December 31, 2002, interest expense on the notes to Palisade and Ms.
Yimoyines was $1,577 and $11, respectively, which was paid in kind. In May 2003,
Palisade and Ms. Yimoyines exchanged the entire amount of principal and interest
due to them under these notes for shares of Series C Preferred Stock, of which
403,256 shares were issued to Palisade and 2,902 shares were issued to Ms.
Yimoyines. Interest expense on the notes payable to Palisade and Ms. Yimoyines
in 2003, prior to the exchange for Series C Preferred Stock, was $658 and $5,
respectively.
In January 2002, in connection with providing the Senior Secured Loans to
the Company, Palisade and Ms. Yimoyines received warrants to purchase 17,375,000
and 125,000 shares, respectively, of the Company's common stock at an exercise
price of $0.14. These warrants were exercised in December 2002.
In January 2002, Palisade purchased 2,571,429 shares of the Company's Series
B Preferred Stock for $3,600 in cash and Ms. Yimoyines purchased 285,714 shares
of Series B Preferred Stock for $400 in cash. Also in January 2002, the Company
issued an additional 309,170.5 shares of Series B Preferred Stock to Palisade to
satisfy an outstanding loan of $400 of principal and $33 of accrued interest and
issued an additional 38,646.3 shares of Series B Preferred Stock to Ms.
Yimoyines to satisfy an outstanding loan of $50 of principal and $4 of accrued
interest due to Ms. Yimoyines. As of December 31, 2003, accrued and unpaid
dividends on these shares owned by Palisade and Ms. Yimoyines totaled $1,034 and
$116, respectively.
As of December 31, 2002 the Company had an unsecured promissory note payable
to an officer of the Company related to an amount owed in connection with the
Company's purchase of Cohen Systems in 1999. The note, which accrues interest at
7.50% and matures on December 1, 2004, had an outstanding balance of $106 at
December 31, 2003 and is reflected as a current liability. For the year ended
December 31, 2003 and 2002, interest expense on this note was $12 and 9,
respectively.
F-24
18. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2003 2002 2001
-------------- ------------- --------------
Income (loss) from continuing operations $ (12,353) $ 4,866 $ 2,687
Preferred stock dividends (618) (531) --
-------------- ------------- --------------
Income (loss) from continuing operations applicable to
Common stockholders (12,971) 4, 335 2,687
Discontinued operations -- (4,121) 293
-------------- ------------- --------------
Net income (loss) applicable to common shareholders $ (12,971) $ 214 $ 2,980
============== ============= ==============
Weighted average common shares - basic 30,066,835 12,552,185 12,795,433
Effect of dilutive securities:
Options * 790,102 *
Warrants * 7,887,094 *
Preferred Stock * 29,942,229 418,803
-------------- ------------- --------------
Weighted average common shares - dilutive 30,066,835 51,171,610 13,214,236
============== ============= ==============
Basic Earnings Per Share:
Income (loss) from continuing operations $(0.43) $ 0.35 $ 0.21
Discontinued operations - (0.33) 0.02
-------------- ------------- --------------
Net income (loss) per common share $(0.43) $ 0.02 $ 0.23
============== ============= ==============
Diluted Earnings Per Share:
Income (loss) from continuing operations $(0.43) $ 0.10 $ 0.21
Discontinued operations - $ (0.33) 0.02
-------------- ------------- --------------
Net income (loss) per common share $(0.43) $ 0.01 $ 0.23
============== ============= ==============
* Anti-dilutive
The following table reflects the potential common shares of the Company at
December 31, 2003, 2002 and 2001 that have been excluded from the calculation of
diluted earnings per share due to anti-dilution.
2003 2002 2001
-------------- ------------- -------------
Options 5,523,462 2,111,566 920,458
Warrants 3,125,000 2,830,000 3,501,198
Convertible preferred stock 60,574,323 -- --
-------------- ------------- -------------
Total 69,222,785 4,941,566 4,421,656
============== ============= =============
19. 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. The liability method of
accounting for deferred income taxes requires a valuation allowance against
deferred tax assets if, based on the weight of historic available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized. The Company recorded income tax expense of $4,927 for the year ended
December 31, 2003, which included $7,600 of tax expense to establish a full
valuation allowance against the Company's deferred tax assets. The 2003 tax
expense was partially offset by $2,673 of tax benefit on the Company's loss from
continuing operations.
F-25
Significant components of the Company's deferred tax assets and liabilities
consisted of the following at December 31, 2003 and 2002:
2003 2002
------------- --------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 2,956 $ 1,389
Accruals 1,438 1,451
Allowance for bad debts 412 202
Depreciation and amortization 2,395 1,480
Other 399 278
------------- --------------
Total deferred tax assets 7,600 4,800
Valuation allowance (7,600) --
------------- --------------
Total deferred tax assets, net $ -- $ 4,800
============= ==============
The current portion of the deferred tax asset, which is included in other
current assets, was $0 and $1,660 at December 31, 2003 and 2002, respectively.
As of December 31, 2003, the Company has net operating loss carryforwards
available of approximately $6,800 for federal tax purposes. These NOL
carryforwards expire in the years 2021 through 2023.
The components of income tax expense (benefit) for the years ended December
31, 2003, 2002 and 2001 are as follows:
2003 2002 2001
------------ ------------ -------------
Current:
Federal $ -- $ -- $ --
State 127 80 (30)
------------ ------------ -------------
Total current 127 80 (30)
------------ ------------ -------------
Deferred:
Federal 3,980 2,030 (6,634)
State 820 418 (1,362)
------------ ------------ -------------
Total deferred 4,800 2,448 (7,996)
------------ ------------ -------------
Total income tax expense (benefit) $ 4,927 $ 2,528 $(8,026)
============ ============ =============
A reconciliation of the tax provision (benefit) at the U.S. Statutory Rate
to the effective income tax rate as reported is as follows:
2003 2002 2001
------------ ------------ -------------
Tax provision (benefit) at U.S. Statutory Rate (34)% 34 % (34)%
State income taxes, net of federal benefit 8 % 5 % (6)%
Non-deductible expenses and other (11)% (5)% 33 %
Change in valuation allowance 104 % -- (143)%
------------ ------------ -------------
Effective income tax rate 67 % 34 % (150)%
============ ============ =============
20. COMMITMENTS AND CONTINGENCIES
HEALTH SERVICE ORGANIZATION LAWSUITS
In September and October 2001, the following actions were commenced: Charles
Retina Institute, P.C. and Steven T. Charles, M.D. v. OptiCare Health Systems,
Inc., filed in Chancery Court of Tennessee for the Thirtieth Judicial District
at Memphis; Eye Associates of Southern Indiana, P.C. and Bradley C. Black, M.D.
v. PrimeVision Health, Inc., filed in United States District Court, Southern
District of Indiana; and Huntington & Distler, P.S.C., John A. Distler, M.D. and
Anne C. Huntington, M.D. v. PrimeVision Health, Inc., filed in United States
District
F-26
Court, Western District of Kentucky. Plaintiffs (ophthalmology or optometry
practices) in each of these actions alleged that our subsidiary, PrimeVision
Health, Inc. (referred to as "PrimeVision") defaulted under agreements effective
as of April 1, 1999 entitled Services Agreement (HSO Model) (referred to as
"Services Agreements") by failing to provide the services allegedly required
under those agreements in exchange for annual fees (referred to as "HSO Fees")
to be paid to PrimeVision. Plaintiffs also alleged that PrimeVision repudiated
any duty to perform meaningful services under the Services Agreements and never
intended to provide meaningful services. Plaintiffs seek declaratory relief that
they are not required to make any payments of HSO Fees to PrimeVision under the
Services Agreements for a variety of reasons, including that plaintiffs are
discharged of any duty to make payments, there was no termination of the
Services Agreements that would trigger an obligation by plaintiffs to pay
PrimeVision the amounts designated in the agreements as being owed upon early
termination (referred to as the "Buy-out Price"), the agreements contained an
unenforceable penalty, there was lack of consideration, and there was a mutual
and material misunderstanding. Plaintiffs also seek damages for non-performance
and breach of duty of good faith and fair dealing, and seek to rescind the
Services Agreements for fraud in the inducement, material misrepresentation, and
mistake. Finally, plaintiffs seek punitive damages and attorneys' fees, interest
and costs. PrimeVision also filed denials of all of the material allegations of
the complaints in the Huntington & Distler and Eye Associates of Southern
Indiana cases, and asserted counterclaims to recover HSO Fees and the Buy-out
Price.
In November 2001, PrimeVision commenced the following action: PrimeVision
Health, Inc. v. Charles Retina Institute and Steven T. Charles, M.D. filed in
United States District Court for the Eastern District of North Carolina, Western
District. In this action, PrimeVision sued in North Carolina, which is its
principal place of business, one of the practices which had, in an action cited
above, sued it in Tennessee. PrimeVision alleged that the Services Agreement and
a Transition Agreement, also entered into by Defendant and PrimeVision in April
1999, were part of an integrated transaction in which many practices (referred
to as the "Practices") that had previously entered into a physician practice
management (referred to as "PPM") arrangement with PrimeVision converted to a
health service organization (referred to as "HSO") model. As part of that
integrated transaction, the Practices (including Defendant) repurchased assets
that they had sold to PrimeVision in or about 1996 and were able to terminate
agreements entered into with PrimeVision in 1996 and the obligations thereunder.
PrimeVision sought a declaratory judgment that the Services Agreement is
enforceable and that Defendant must pay to PrimeVision the annual HSO Fees
required under the Services Agreement or, alternatively, the Buy-out Price.
The Multidistrict Litigation. On March 18, 2002, PrimeVision filed a motion
with the Judicial Panel on Multidistrict Litigation in Washington, D.C.
(referred to as the "Judicial Panel") to transfer the foregoing litigation to a
single federal district court for consolidated or coordinated pretrial
proceedings. Over the opposition of the plaintiffs, the Judicial Panel granted
the motion and ordered that all of the cases be consolidated in the U.S.
District Court for the Western District of Kentucky under the caption In re
PrimeVision Health, Inc. Contract Litigation, MDL 1466 ("MDL 1466").
In October and November 2002, PrimeVision commenced the following actions:
1. PrimeVision Health, Inc. v. The Brinkenhoff Medical Center, Inc., Michael
Brinkenhoff, M.D., Tri-County Eye Institute, and Mark E. Schneider, M.D., 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., Jeffrey P. Wasserstrom, M.D., a
medical corporation, Jeffrey P. Wasserstrom, M.D., Lawrence S. Rice, a medical
corporation and Lawrence S. Rice, 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;
4. PrimeVision Health, Inc. v. Eye Surgeons of Indiana, P.C., Michael G.
Orr, M.D., Kevin L. Waltz, M.D. and Surgical Care, Inc., in the United States
District Court for the Southern District of Indiana, Indianapolis Division;
5. PrimeVision Health, Inc. v. Downing-McPeak Vision Centers, P.S.C. and
John E. Downing, M.D., in the United States District Court for the Western
District of Kentucky, Bowling Green Division;
6. Prime Vision Health, Inc. v. HCS Eye Institute, P.C., Midwest Eye
Institute of Kansas City, John C. Hagan, III, M.D. and Michael Somers, M.D.,
filed in the United States District Court for the Western District of Missouri;
and
F-27
7. PrimeVision Health, Inc. v. Delaware Eye Care Center, P.A., a
professional corporation; and Gary Markowitz, M.D., filed in the Superior Court
of the State of Delaware, New Castle County.
PrimeVision requested the Judicial Panel to transfer all of the actions
except No. 7 to Kentucky and consolidate them as part of MDL 1466. (Action 7
could not be transferred because it was filed in state court.) The Judicial
Panel entered a conditional transfer order for such actions, and because there
was no opposition to transfer and consolidation in Actions 4, 5 and 6, they are
now part of MDL 1466. One practice defendant in Action 1, and the defendants in
Actions 2 and 3 opposed transfer to MDL 1466. On April 11, 2003, the Judicial
Panel denied those defendants' motions to vacate the Judicial Panel's order to
conditionally transfer the actions to the Western District of Kentucky and
ordered the remaining three actions transferred to the Western District of
Kentucky for inclusion in the coordinated or consolidated pretrial proceedings
occurring there.
The actions filed by PrimeVision contain similar allegations as the action
PrimeVision filed against Charles Retina Institute in North Carolina District
Court as described above. Instead of declaratory relief, however, PrimeVision
seeks money damages for payment of the contractual Buy-Out Price.
All of the defendants have denied the material allegations of the
complaints, and the defendants in Actions 3, 4, 5, 6 and 7 above have asserted
counterclaims and seek relief similar to the claims asserted and relief sought
by the practices in the Charles Retina, Eye Associates of Southern Indiana and
Huntington & Distler cases. PrimeVision has denied all of the material
allegations of the counterclaims.
The parties have exchanged written discovery and have begun taking
depositions. PrimeVision also is willing to discuss a potential settlement with
any or all of the Practices, although there is no indication that the Practices
are prepared to discuss settlement on the same general basis or terms as
PrimeVision. At this stage of the actions, we are unable to form an opinion as
to the likely outcome or the amount or range of potential loss, if any.
During 2002 and 2003, we reached settlement with two HSO Practices with
which we were in litigation and with 11 other practices with which we were not
in litigation but where there was a mutual desire to disengage from the Services
Agreements. While we continue to meet our contractual obligations by providing
the requisite services under our Services Agreements, we are in the process of
disengaging from a number of these arrangements.
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
of our assets. We believe we 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 we misled it with
respect to our financial condition, and, as a result, Plaintiff has suffered
damages. Plaintiff seeks specific performance of the Asset Purchase Agreement
and an injunction prohibiting us 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 we engaged in innocent misrepresentation, negligent
misrepresentation, intentional and fraudulent misrepresentation, and unfair
trade practices with respect to the Asset Purchase Agreement.
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. Optivest LLC has withdrawn its
lawsuit however non-binding mediation has not been successful and the parties
will submit this matter to binding arbitration to be scheduled in the future.
THREATENED LITIGATION
As previously reported, in the fourth quarter of 2002, the Company 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
F-28
issues. In April 2003 the parties proceeded with non-binding mediation and
believed the matter had been resolved, however, since that time the parties have
been in discussion regarding the resolution reached at the mediation and no
formal settlement agreement has been entered into at this time.
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, 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 effect in relation to the Company's
consolidated financial position or results of operations.
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Historical quarterly results have been restated, as presented below, to
reflect the Company's adoption of SFAS No. 145, which resulted in the
reclassification of the Company's previously reported gain from extinguishment
of debt of $8,789 and related income taxes of $3,475 in 2002 from an
extraordinary item to continuing operations.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- ------------ ------------ -------------
2003
Net revenue $ 31,996 $ 32,897 $ 32,946 $27,793
Gross profit 10,225 10,484 9,022 8,692
Income (loss) from continuing operations 160 (2,173) (8,479) (1,861)
Net income (loss) 160 (2,173) (8,479) (1,861)
Preferred stock dividend (140) (160) (159) (159)
Basic and diluted earnings (loss) per share:
Loss from continuing operations 0.00 (0.08) (0.29) (0.07)
Net loss 0.00 (0.08) (0.29) (0.07)
2002
Net revenue $ 23,290 $24,046 $23,010 $ 21,185
Gross profit 6,612 7,478 8,193 7,700
Income (loss) from continuing operations 4,868 (125) 104 21
Discontinued operations 189 (3,945) (23) (342)
Net income (loss) 5,057 (4,070) 81 (321)
Preferred stock dividend (103) (142) (143) (143)
Basic earnings (loss) per share:
Income (loss) from continuing operations 0.37 (0.02) (0.01) (0.01)
Net income (loss) 0.39 (0.33) (0.01) (0.04)
Diluted earnings (loss) per share:
Income (loss) from continuing operations 0.08 (0.02) (0.01) (0.01)
Net income (loss) 0.08 (0.33) (0.01) (0.04)
Quarterly and year-to-date computations of earnings per share amounts are
made independently. Therefore, the sum of earnings per share amounts for the
quarters may not agree with the per share amounts for the year.
F-29