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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
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
Incorporation or Organization) Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ ] Yes [X] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at April 30, 2005 was 30,664,991 shares.
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2005 and
December 31, 2004, (unaudited) 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004, (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004, (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits 22
SIGNATURE 23
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,691 $ 2,228
Accounts receivable, net 2,002 2,164
Inventory 1,823 1,851
Assets held for sale - 7,894
Other current assets 1,007 681
----------------- -----------------
TOTAL CURRENT ASSETS 7,523 14,818
----------------- -----------------
Property and equipment, net 2,449 2,628
Goodwill, net 16,738 16,663
Intangible assets, net 1,041 1,068
Assets held for sale, non-current - 1,150
Other assets 3,306 3,487
----------------- -----------------
TOTAL ASSETS $31,057 $ 39,814
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,372 $ 2,727
Accrued expenses 6,322 6,514
Current portion of long-term debt 1,669 332
Current portion of capital lease obligations 54 11
Liabilities of held for sale business - 5,683
Other current liabilities 1,168 1,119
----------------- -----------------
TOTAL CURRENT LIABILITIES 10,585 16,386
----------------- -----------------
Long-term debt, less current portion 2,235 10,024
Capital lease obligations, less current portion 111 19
Other liabilities 1,422 1,476
----------------- -----------------
TOTAL NON-CURRENT LIABILITIES 3,768 11,519
----------------- -----------------
Series B 12.5% mandatorily redeemable, convertible
preferred stock--related party 6,533 6,344
STOCKHOLDERS' EQUITY:
Series C & D preferred stock--related party 1 1
Common stock 31 31
Additional paid-in-capital 83,447 79,192
Accumulated deficit (73,308) (73,659)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 10,171 5,565
----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 31,057 $ 39,814
================= =================
See notes to condensed consolidated financial statements.
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
----------------------------------
2005 2004
--------------- --------------
NET REVENUES:
Managed vision $ 6,380 $ 6,051
Product sales 2,984 3,007
Other services 4,680 4,964
Other income 318 620
--------------- --------------
Total net revenues 14,362 14,642
--------------- --------------
OPERATING EXPENSES:
Medical claims expense 4,669 4,644
Cost of product sales 979 1,075
Cost of services 1,718 2,064
Selling, general and administrative 6,144 6,149
Depreciation 242 211
Amortization 27 27
Interest 207 317
--------------- --------------
Total operating expenses 13,986 14,487
--------------- --------------
Income from continuing operations
before income tax 376 155
Income tax expense 25 6
--------------- --------------
Income from continuing operations 351 149
Discontinued operations:
Loss from discontinued operations - (1,113)
Income tax benefit - -
--------------- --------------
Loss from discontinued operations - (1,113)
--------------- --------------
Net income (loss) 351 (964)
Preferred stock dividends (189) (174)
--------------- --------------
Net income (loss) available to
common stockholders $ 162 $(1,138)
=============== ==============
EARNINGS (LOSS) PER SHARE:
Earnings Per Share - Basic:
Income from continuing operations $ 0.00 $ 0.00
Discontinued operations $ 0.00 $ (0.04)
Net income (loss) per common share $ 0.00 $ (0.04)
Earnings Per Share - Diluted:
Income from continuing operations $ 0.00 $ 0.00
Discontinued operations $ 0.00 $ (0.04)
Net income (loss) per common share $ 0.00 $ (0.04)
See notes to condensed consolidated financial statements.
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
2005 2004
--------------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ 351 $ (964)
Loss on discontinued operations - 1,113
--------------- --------------
Income from continuing operations 351 149
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation 242 211
Amortization 27 27
Non-cash interest expense 35 39
Non-cash gain on contract settlements (29) -
Changes in operating assets and liabilities:
Accounts receivable 162 (273)
Inventory 28 37
Other assets (187) (280)
Accounts payable and accrued expenses (1,554) 1,674
Other liabilities (224) 130
Cash provided by discontinued operations - 552
--------------- --------------
Net cash (used in) provided by operating activities (1,149) 2,266
--------------- --------------
INVESTING ACTIVITIES:
Cash received on notes receivable 27 46
Purchase of fixed assets (63) (17)
Investments in acquisition (75) -
Net proceeds from the sale of discontinued operations 3,361 -
Net cash received due to buyer of discontinued operations 219 -
--------------- --------------
Net cash provided by investing activities 3,469 29
--------------- --------------
FINANCING ACTIVITIES:
Net decrease in revolving credit facility (6,200) (1,920)
Principal payments on long-term debt (125) (119)
Principal payments on capital lease obligations (3) (1)
Payment of financing costs (13) -
Proceeds from issuance of Series D preferred stock 4,445 -
Equipment financing 24 -
Payment of bank financing fees (13) (25)
Proceeds from issuance of common stock 28 -
--------------- --------------
Net cash used in financing activities (1,857) (2,065)
--------------- --------------
Increase in cash and cash equivalents 463 230
Cash and cash equivalents at beginning of period 2,228 1,695
--------------- --------------
Cash and cash equivalents at end of period $ 2,691 $ 1,925
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 213 $ 286
Cash paid for income taxes $ 47 $ 38
See notes to condensed consolidated financial statements.
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of OptiCare
Health Systems, Inc., a Delaware corporation, and its subsidiaries (collectively
the "Company") for the three months ended March 31, 2005 and 2004 have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of
1934, as amended, and are unaudited. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the condensed consolidated
financial statements have been included. The results of operations for the three
months ended March 31, 2005 are not necessarily indicative of the results to be
expected for the full year. The condensed consolidated balance sheet as of
December 31, 2004 was derived from the Company's audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America.
In September 2004, the Company sold its Technology business, CC Systems,
Inc. and in January 2005, sold its Distribution business which was comprised of
Wise Optical and the Buying Group. The effective date of the Distribution
transaction was December 31, 2004. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," both sales were accounted for as discontinued operations.
Amounts in the financial statements and related notes for the 2004 period have
been reclassified to reflect treatment of these businesses as held for sale.
2. MANAGEMENT'S PLAN
The Company incurred operating losses in 2004 due primarily to significant
operating losses at Wise Optical. In January 2005, the Company sold its
Distribution business which included the Wise Optical operation. In September
2004, the Company also sold its Technology business, CC Systems, Inc. The sale
of these operations generated cash proceeds and reduced demands on working
capital and corporate personnel. In addition, in January 2005, the Company sold
280,618 shares of newly created Series D preferred stock for an aggregate price
of $4,445.
In addition, in 2003 the Managed Vision segment 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-based revenues. The
Company believes that it now has the sales force and infrastructure necessary to
expand our direct-to-employer business and expects increased profitability as a
result of this product shift that has lead to new contracts and improved gross
margins. The Company experienced significant improvements in revenue and
profitability in the Consumer Vision segment from 2003 to 2004, largely from
growth in existing store sales and enhanced margins as a result of sales
incentives, which we expect to continue. The Company has also continued to
settle outstanding litigation with positive results through April 2005.
The Company believes the combination of these initiatives executed in the
operating segments will continue to improve the Company's liquidity and should
ensure compliance with covenants in the loan agreement with CapitalSource
Finance LLC ("CapitalSource") in the future.
3. NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ("FASB") approved
Emerging Issues Task Force ("EITF") Issue 03-6 "Participating Securities and the
Two-Class Method under SFAS 128." EITF 03-6 supersedes the guidance in Topic No,
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings per Share," and requires the use of the two-class method of
participating securities. The two-class method
is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. In
addition, EITF 03-6 addresses other forms of participating securities, including
options, warrants, forwards and other contracts to issue an entity's common
stock, with the exception of stock-based compensation (unvested options and
restricted stock) subject to the provisions of Accounting Principles Board
("APB") Opinion No. 25 "Accounting for Stock Issued to Employees" ("Opinion 25")
and FASB's Statement 123R "Share-Based Payments" ("Statement 123R"), EITF 03-6
is effective for the reporting periods beginning after March 31, 2004 and should
be applied by restating previously reported earnings per share. The adoption of
EITF 03-6 did not have a material impact on the Company's condensed consolidated
financial statements.
In December 2004, the FASB issued Statement 123R. Statement 123R eliminates
the option to apply the intrinsic value measurement provisions of Opinion 25.
Rather the Statement 123R requires companies to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide services in exchange for the
award, the requisite period (usually the vesting period). Statement 123R will
also require companies to measure the cost of employee services received in
exchange for Employee Stock Purchase Plan ("ESPP") awards and the Company will
be required to expense the grant date fair value of the Company's ESPP awards.
Statement 123R will be effective for the Company's fiscal quarter beginning July
1, 2005. Based on the number of stock options outstanding as of December 31,
2004, the effect of the adoption of Statement 123R would be to increase annual
compensation expense by approximately $0.2 million commencing in the Company's
fiscal quarter beginning July 1, 2005. Based on Securities and Exchange
Commission Release 2005-57, we have elected to defer the adoption of Statement
123R until January 1, 2006. As a result, the Company will not incur any
compensation expense in 2005 related to stock options.
4. STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Opinion
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.
SFAS No. 123 "Accounting for Stock-Based Compensation, as amended by SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure" an
amendment of Statement of Financial Accounting Standards No. 123" requires that
companies which do not elect to account for stock-based compensation as
prescribed by this statement, disclose the pro forma effects on earnings and
earnings per share as if SFAS No. 123 had been adopted. If the Company applied
the recognition provisions of SFAS No. 123, the Company's reported net income
(loss) and earnings (loss) per share available to common stockholders, using the
Black-Scholes option pricing model, would have been adjusted to the pro forma
amounts indicated below.
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
----------- -----------
Net income (loss) available to common stockholders, as
reported $ 162 $(1,138)
Less: Total stock-based employee compensation expense,
net of related tax effects, determined under the fair
value method for all awards (36) (23)
----------- -----------
Pro forma net income (loss) $ 126 $(1,161)
=========== ===========
Earnings (loss) per share - Basic:
As reported $ 0.00 $ (0.04)
Pro forma $ 0.00 $ (0.04)
Earnings (loss) per share - Diluted:
As reported $ 0.00 $ (0.04)
Pro forma $ 0.00 $ (0.04)
5. DISCONTINUED OPERATIONS
In May 2004, the Company's Board of Directors approved management's plan to
exit the technology business, which was comprised of CC Systems, Inc. (formerly
reported in the Company's Distribution and Technology segment). The Company
completed the sale of the net assets of CC Systems, Inc. on September 10, 2004.
In accordance with SFAS No. 144 the disposal of CC Systems, Inc. is accounted
for as a discontinued operation. In connection with the sale, the Company
received $700 in cash. Additional consideration provided by the buyer included
the surrender of 82,500 shares of the Company's common stock which had a fair
market value of approximately $21 and the forgiveness of an unsecured promissory
note payable by the Company which had an outstanding balance of $71 at the time
of the sale. In the third quarter of 2004, the Company recorded a $1,005 loss on
the disposal of discontinued operations based on the fair value of the net
assets held for sale. The results of operations of CC Systems, Inc. are included
in the condensed consolidated financial statements as part of discontinued
operations for the period ended March 31, 2004.
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
aggregate purchase price of Wise Optical was $7,949 and consisted of
approximately $7,290 of cash, 750,000 shares of the Company's common stock that
had an estimated fair market value of $330 at the time of acquisition, and
transaction costs of approximately $329. Funding for the acquisition was
obtained via the Company's revolving credit note with CapitalSource.
Wise Optical experienced substantial operating losses in 2003 and 2004.
These losses were 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 included developing the sales force,
improving customer service, enhancing productivity, eliminating positions and
streamlining the Company's warehouse and distribution processes. The Company
believed these changes would lead to increased sales, improved gross margins and
reduced operating costs. Wise Optical continued to experience substantial
operating losses in 2004 despite the strategies and operating changes that were
implemented.
In December 2004, the Company's Board of Directors approved management's
plan to exit the Distribution business, which was comprised of Wise Optical and
the Buying Group, (formerly reported in the Company's Distribution segment) and
to dispose of the Company's Distribution business. The Company completed the
sale of the net assets of the Distribution business on January 12, 2005 to
entities formed by the Company's Chairman and former Chief Executive Officer.
The effective date of the transaction was December 31, 2004. In accordance with
SFAS No. 144 the disposal of the Distribution business is accounted for as a
discontinued operation. The aggregate gross consideration from the sale was
$4,150, less a working capital adjustment of $575 and estimated closing costs
and other direct costs of $349. The Company recorded a $3,400 loss on the
disposal of discontinued operations based on the fair value of the net assets
held for sale. The results of operations of Wise Optical are included in the
condensed consolidated financial statements as part of discontinued operations
for the period ended March 31, 2004.
In connection with the sale of the Distribution business, the Company
entered into a supply agreement with the buyers of the Distribution business.
The supply agreement is a four year commitment to purchase, on a non-exclusive
basis, $4,200 of optical products per year from certain designated manufacturers
and suppliers. This annual commitment includes the purchase of $1,275 of contact
lenses a year. In addition, the Company is also obligated to pay an annual fee
based on the total of all purchases it makes under the supply agreement. The
supply agreement also contains certain buyout provisions depending on when the
supply agreement is terminated. During the first quarter ended March 31, 2005,
the Company had approximately $900 in product purchases related to this supply
agreement.
Also in connection with the sale of the Distribution business, the lease
obligation on the facility occupied by Wise Optical and located in Yonkers, New
York will remain with the Company. The lease term on the facility expires in
June 2011. The Company estimated its potential exposure on the lease to be
$1,300 at December 31, 2004 and recorded a provision for this amount which was
included in the loss on disposal of discontinued operations for the year ended
December 31, 2004. During the first quarter ended March 31, 2005, we incurred
$62 of rent payments related to this lease reducing our provision balance to
$1,238 at March 31, 2005.
Operating results of the discontinued operations for the three months ended
March 31, 2004 are as follows:
External revenue $ 15,571
==============
Intercompany revenue $ 1,449
==============
Loss from discontinued operations before tax $ (1,113)
Income tax expense -
--------------
Loss from discontinued operations (1,113)
==============
Loss per share from discontinued operations $ (0.04)
==============
6. INTANGIBLE ASSETS
Intangible assets subject to amortization are comprised of a service
agreement and non-compete agreements. The fifteen year service agreement has a
gross carrying amount of $1,658 and accumulated amortization of $617 and $590 at
March 31, 2005 and December 31, 2004, respectively. The non-compete agreements,
which had a gross carrying amount of $265, were fully amortized at March 31,
2005 and December 31, 2004. Amortization expense for the three months ended
March 31, 2005 and 2004 was $27 and $27, respectively. Annual amortization
expense is expected to be $111 in each of the years 2005 through 2008.
7. DEBT
The loan agreement with CapitalSource requires the Company to maintain a
lock-box arrangement with its banks whereby amounts received into the lock-boxes
are applied to reduce the revolving credit note outstanding. The agreement also
contained certain subjective acceleration clauses in the event of a material
adverse event. EITF Issue 95-22 "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements That Include both a Subjective
Acceleration Clause and a Lock-Box Arrangement" required the Company to classify
outstanding borrowings under the revolving credit note as current liabilities.
On August 27, 2004, the Company amended its loan agreement with
CapitalSource to eliminate the lender's ability to declare a default based upon
subjective criteria as described in EITF 95-22. Palisade Concentrated Equity
Partnership, L.P. ("Palisade"), provided a $1,000 guarantee against the loan
balance due to CapitalSource related to this amendment. As a result of this
amendment, the Company has classified the loan balance related to the revolving
credit facility as long-term at March 31, 2005 and December 31, 2004.
On January 12, 2005, we amended the term loan and revolving credit facility
with CapitalSource to reduce the tangible net worth covenant for December 2004
and January 2005 from ($3,000,000) to ($6,500,000). Without this Amendment, we
would have been in violation of the tangible net worth covenant at December 31,
2004. Under the term loan and revolving credit facility, as amended, we must
maintain a tangible net worth of at least ($3,000,000) after February 1, 2005.
We paid CapitalSource $12,500 in financing fees in connection with this
amendment.
The Company had standby letters of credit outstanding at March 31, 2005 and
December 31, 2004 of $1,100. There were no draw downs against these standby
letters of credit in 2005 or 2004. The letters of credit outstanding at March
31, 2005 and December 31, 2004 were secured by restricted certificates of
deposit and security deposits.
8. SEGMENT INFORMATION
During the third quarter of 2004, the Company sold its Technology business,
CC Systems, Inc., and on January 12, 2005 sold its Distribution business, which
was comprised of Wise Optical and the Buying Group with an effective date of
December 31, 2004. As a result of selling these businesses, the Company has the
following two reportable operating segments: (1) Managed Vision and (2) Consumer
Vision. 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 two
operating segments.
The Managed Vision segment contracts with insurers, insurance fronting
companies, employer groups, managed care plans and other third party payers 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.
In addition to its reportable operating segments, the Company's "Other"
category includes other non-core operations and transactions, which do not meet
the quantitative thresholds for a reportable segment. Included in the "Other"
category is revenue earned under the Company's health service organization
("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 the Company's segments based on
income before income taxes, interest expense, depreciation and amortization, and
other corporate overhead. Summarized financial information, by segment, for the
three months ended March 31, 2005 and 2004 is as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ -----------
REVENUES:
Managed vision $ 6,380 $ 6,051
Consumer vision 7,920 8,154
------------ -----------
Reportable segment totals 14,300 14,205
Other 324 633
Elimination of inter-segment revenues (262) (196)
------------ -----------
Total net revenue $ 14,362 $ 14,642
============ ===========
SEGMENT INCOME:
Managed vision $ 404 $ 166
Consumer vision 892 931
------------ -----------
Total reportable segment income 1,296 1,097
Other 249 424
Depreciation (242) (211)
Amortization expense (27) (27)
Interest expense (207) (317)
Corporate (693) (811)
------------ -----------
Income from continuing operations before
income taxes $ 376 $ 155
============ ===========
9. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- --------------
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 351 $ 149
Preferred stock dividends (189) (174)
--------------- --------------
Income (loss) from continuing operations applicable to 162 (25)
Common Stockholders
Discontinued operations - (1,113)
--------------- --------------
Net income (loss) applicable to Common Stockholders $ 162 $ (1,138)
=============== ==============
Weighted average common shares outstanding - basic 30,618,562 30,388,891
Effect of dilutive securities:
Options 1,054,492 *
Warrants 115,348 *
Preferred Stock 76,846,234 *
--------------- --------------
Weighted average common shares - diluted 108,634,636 30,388,891
=============== ==============
Earnings Per Share - Basic:
Income from continuing operations $ 0.00 $ 0.00
Discontinued operations $ 0.00 $ (0.04)
--------------- --------------
Net income (loss) per common share $ 0.00 $ (0.04)
=============== ==============
Earnings Per Share - Diluted:
Income from continuing operations $ 0.00 $ 0.00
Discontinued operations $ 0.00 $ (0.04)
--------------- --------------
Net income (loss) per common share $ 0.00 $ (0.04)
=============== ==============
* Anti-dilutive
The following table reflects the potential common shares of the Company for
the three months ended March 31, 2005 and 2004 that are not included in the
dilutive securities for purposes of computing weighted average common shares -
diluted. The amounts reflected for the three months ended March 31, 2004 have
been excluded from the calculation of diluted earnings per share due to
anti-dilution.
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2005 2004
--------------- --------------
Options 4,524,951 6,160,289
Warrants 3,159,652 3,125,000
Convertible Preferred Stock - 61,801,304
--------------- --------------
7,684,603 71,086,593
=============== ==============
10. MERGER PROPOSAL
On April 8, 2005, the Company announced that Refac, an affiliated company,
has expressed interest in exploring an acquisition of the Company in a stock
transaction and that the Company and Refac have entered into discussions
regarding same. Refac also announced that it has entered into acquisition
discussions with U.S. Vision, Inc., another affiliated company, which is
privately-held and operates the 6th largest retail optical chain in the United
States.
The Company, Refac and U.S. Vision are all controlled by Palisade which
beneficially owns approximately 89% of the Company's outstanding common stock
(on a fully diluted basis), 90% of Refac's outstanding common stock and 88% of
U.S. Vision's outstanding common stock.
Refac was incorporated in 1952 and for most of its history, was engaged in
intellectual property licensing activities. During the period from 1997 to 2002,
it was also engaged in the business of product development and graphic design
and had invested these creative resources, together with its licensing skills,
in certain product development ventures. In March 2002, Refac announced plans to
reposition itself for sale or liquidation and by the end of 2002, it had
disposed of all of its operating segments with the exception of its licensing
business and it has limited the operations of that segment to managing certain
existing license agreements and related contracts. On February 28, 2003, Refac
completed a merger with a wholly-owned subsidiary of Palisade pursuant to which
Palisade acquired control of Refac and, in May 2003, Palisade increased its
ownership to approximately 90% through an additional cash investment of $17,000.
Palisade had indicated that it intended to use Refac as a vehicle for making
acquisitions and the purpose of the stock purchase transaction was to provide
Refac with additional capital for making these acquisitions. As of December 31,
2004, Refac reported a net worth of $31,197 with approximately $29,000 available
for acquisitions.
U.S. Vision, a privately held company, is a leading store-within-a-store
retailer of optical products and services with net revenues of approximately
$128,000 during its most recent fiscal year. It operates 518 locations in 47
states and Canada, consisting of 506 licensed departments and 12 freestanding
stores.
11. CONTINGENCIES
The Company is both a plaintiff and defendant in lawsuits incidental to its
current and former operations. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at March 31, 2005 cannot be ascertained. Management is of the opinion
that, after taking into account the merits of defenses and established reserves,
the ultimate resolution of these matters will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may be understood more fully by reference to our
consolidated financial statements, notes to the consolidated financial
statements, and management's discussion and analysis contained in our Annual
Report on Form 10-K for the year ended December 31, 2004, as filed with the
Securities and Exchange Commission.
OVERVIEW
We are an integrated eye care services company focused on vision benefits
management (managed vision) and retail optical sales and eye care services to
patients (consumer vision).
Throughout 2004, we implemented cost cutting measures and programs designed
to increase sales and product margins at our contact lens distributor, Wise
Optical. However, we were unable to increase sales or improve product margins
and operating income at Wise Optical, which negatively impacted our results of
operations in 2004. As a result of the continued troubles at Wise Optical, on
January 12, 2005, our wholly-owned subsidiary, OptiCare Acquisition Corp.,
entered into an Asset Purchase Agreement with Wise Optical, LLC and
AECC/Pearlman Buying Group, LLC, both entities formed by Dean J. Yimoyines,
M.D., our former Chief Executive Officer, current President and Chief Executive
Officer of our medical affiliate, OptiCare P.C., and our current Chairman,
pursuant to which we sold, effective as of December 31, 2004, substantially all
of the assets and certain liabilities of our Distribution division, which
consisted of Wise Optical, and our Optical Buying Group, for an aggregate
purchase price of approximately $4.2 million less a working capital adjustment
of $0.6 million and estimated closing costs and other direct costs of $0.3
million.
In addition, in May 2004, our Board of Directors approved management's plan
to exit and dispose of our Technology business, CC Systems, Inc. We completed
the sale of the net assets of CC Systems on September 10, 2004.
As a result of selling these businesses, we now have the following two
reportable operating segments: (1) Managed Vision and (2) Consumer Vision. Our
Managed Vision segment contracts with insurers, managed care plans and other
third party payers and employer groups to manage claims payment administration
of eye health benefits for those contracting parties and to provide insurance.
Our Consumer Vision segment 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.
We have financed our operations and certain acquisitions through a term
loan and revolving credit facility with Capital Source Finance, LLC (Capital
Source), portions of which our majority stockholder, Palisade Concentrated
Partnership, L.L.C. (Palisade), has guaranteed. In connection with the sale of
certain assets of our Distribution division on January 12, 2005, we amended the
terms of our revolving credit facility with CapitalSource to reduce the tangible
net worth covenant for December 2004 and January 2005 from ($3,000,000) to
($6,500,000). Without this Amendment, we would have been in violation of the
tangible net worth covenant at December 31, 2004. Pursuant to the terms of the
revolving credit facility, as amended, we must maintain a tangible net worth of
at least ($3,000,000) after February 1, 2005. Management believes it will comply
with its future financial covenants, 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31,
2004
Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts. Managed Vision revenue increased to
approximately $6.4 million for the three months ended March 31, 2005 compared to
approximately $6.1 million for the three months ended March 31, 2004, an
increase of approximately $0.3 million or 4.9%. The increase in Managed Vision
revenue relates primarily to $0.8 million in sales from new contracts entered
into in the latter half of 2004. These new contract sales were partially offset
by approximately $0.5 million in lower revenues related to membership declines
experienced by two of our larger customers.
Product sales revenue. Product sales primarily include the sale of optical
products through our Consumer Vision segment. Product sales revenue remained
relatively flat at approximately $3.0 million for the three months ended March
31, 2005 and March 31, 2004.
Other services revenue. Other services revenue includes revenue earned from
providing eye care services in our Consumer Vision segment and HSO services.
Other services revenue decreased to approximately $4.7 million for the three
months ended March 31, 2005 compared to approximately $5.0 million for the three
months ended March 31, 2004, a decrease of approximately $0.3 million or 6.0%.
This decrease is primarily due to decreased services volume in the medical,
optometry and surgical areas attributable to decline in the number of patients
seen in the first quarter 2005 as compared to 2004. We expect services revenue
to remain at these levels or increase slightly in the future.
Other income. Other income represents non-recurring settlements on HSO
contracts. Other income for the three months ended March 31, 2005 was
approximately $0.3 million compared to approximately $0.6 million for the three
months ended March 31, 2004, representing a decrease of approximately $0.3
million or 50.0%, which resulted from a decrease in the number of settlements in
the current quarter.
Medical claims expense. Medical claims expense remained relatively constant
at approximately $4.7 million for the three months ended March 31, 2005 and
March 31, 2004. The medical claims expense loss ratio (MLR) representing medical
claims expense as a percentage of Managed Vision revenue decreased to 73.2% for
the three months ended March 31, 2005 from 76.8% for the three months ended
March 31, 2004. The favorable change in MLR is a result of changes to existing
contracts and the performance of new contracts entered into 2004. We expect
claims expense to increase in the future as we enter into additional
direct-to-employer contracts.
Cost of product sales. Cost of product sales decreased to approximately
$1.0 million for the three months ended March 31, 2005 compared to approximately
$1.1 million for the three months ended March 31, 2004, a decrease of
approximately $0.1 million or 9.1%. This decrease is primarily due to a decrease
in product costs associated with our Consumer Vision division.
Cost of services. Cost of services decreased to approximately $1.7 million
for the three months ended March 31, 2005 compared to approximately $2.1 million
for the three months ended March 31, 2004, a decrease of approximately $0.4
million or 19.0%. This decrease is primarily due to the decrease in services
volume in the Consumer Vision area.
Selling, general and administrative expenses. Selling, general and
administrative expenses remained relatively constant at approximately $6.1
million for the three months ended March 31, 2005 and March 31, 2004.
Interest expense. Interest expense decreased to approximately $0.2 million
for the three months ended March 31, 2005 from approximately $0.3 million for
the three months ended March 31, 2004, a decrease of approximately $0.1 million
or 33.3%. This decrease in interest expense is primarily due to a decrease in
the average outstanding debt balance resulting from our $6.3 million debt pay
down in January 2005. Cash proceeds received from the sale of the Distribution
business and the issuance of the Series D preferred stock were used for the debt
pay down.
Income tax expense. Income tax expense recorded for the three months ended
March 31, 2005 primarily represents minimum state tax expense.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities at the date of our financial statements. Management bases its
estimates and judgments on historical experience, current economic and industry
conditions and on various other facts that are believed to be reasonable under
the circumstances. Actual results may differ significantly from these estimates
under different assumptions, judgments or conditions. The accounting policies
and judgments, estimates and assumptions are described in greater detail in the
Company's Annual Report on Form 10-K in the "Critical Accounting Policies and
Estimates" of Managements Discussion and Analysis and in Note 3 to the
Consolidated Financial Statements for the year ended December 31, 2004.
Management believes critical accounting estimates are used in determining
the adequacy of the allowance for doubtful accounts, insurance disallowances,
managed care claims accrual, valuation allowance for deferred tax assets and in
evaluating goodwill and intangibles for impairment.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary sources of liquidity have been cash flows generated from
operations in our Managed Vision and Consumer Vision segments, other income from
litigation settlements and borrowings under our term loan and revolving credit
facility with CapitalSource. We have continued to settle outstanding litigation
with positive results through April 2005.
As of March 31, 2005, we had cash and cash equivalents of approximately
$2.7 million and additional availability under our revolving credit facility
with CapitalSource of approximately $1.6 million. The additional availability is
primarily attributable to the over advance of $1.4 million provided with the
August 27, 2004 amendment to the credit facility.
As a result of the restatement of our condensed consolidated financial
statements for the three months ended March 31, 2004, we were not in compliance
with the minimum fixed charge ratio covenant under our term loan and revolving
credit facility with CapitalSource as of March 31, 2004. In addition, we were
not in compliance with this covenant as of April 30 or May 31 2004. As discussed
below, we amended our term loan and revolving credit facility with CapitalSource
on August 16, 2004 and received a waiver from CapitalSource for any
non-compliance with this covenant as of March 31, 2004, April 30, 2004, May 31,
2004 and June 30, 2004.
On January 12, 2005, we amended the term loan and revolving credit facility
with CapitalSource to reduce the tangible net worth covenant for December 2004
and January 2005 from ($3,000,000) to ($6,500,000). Without this Amendment, we
would have been in violation of the tangible net worth covenant at December 31,
2004. Under the term loan and revolving credit facility, as amended, we must
maintain a tangible net worth of at least ($3,000,000) after February 1, 2005.
We paid CapitalSource $12,500 in financing fees in connection with this
amendment. We were in compliance with all of our covenants as of January 31,
2005, February 28, 2005 and March 31, 2005.
The following table sets forth a quarter-over-quarter comparison of the
components of our liquidity and capital resources for the quarters ended March
31, 2005 and 2004:
In millions)
2005 2004 CHANGE
---- ---- ------
Cash and cash equivalents $ 2.7 $ 1.9 $ 0.8
Cash provided by (used in):
Operating activities (1.1) 2.3 (3.4)
Investing activities 3.5 - 3.5
Financing activities (1.9) (2.1) 0.2
Net cash used in operating activities was approximately $1.1 million for
the three months ended March 31, 2005 compared to approximately $2.3 million of
net cash generated from operations for the three months ended March 31, 2004, a
decrease of approximately $3.4 million. The net cash used in operating
activities during the first quarter of 2005 resulted primarily from the
settlement of accounts payable, offset in part by net income of approximately
$0.4 million. The cash provided by operating activities in the first quarter of
2004 was primarily due to an increase in accounts payable and accrued expenses
of approximately $1.7 million and to cash generated by discontinued operations
of approximately $0.6 million.
Net cash provided by investing activities was approximately $3.5 million
for the three months ended March 31, 2005 and was primarily attributable to
approximately $3.4 million in proceeds received related to the sale of the
Distribution business in January 2005. There were no significant sources or uses
of cash related to investing activities for the three months ended March 31,
2004.
Net cash used in financing activities was approximately $1.9 million for
the three months ended March 31, 2005 compared to approximately $2.1 million of
net cash used in financing activities for the three months ended March 31, 2004.
Net cash used in financing activities in 2005 of $1.9 million resulted primarily
from approximately $6.3 million in debt repayments under our revolving credit
facility and term loan with Capital Source, offset in part by cash proceeds
received of approximately $4.4 million from the issuance of Series D preferred
stock. The debt repayments of $6.3 million were made in part with cash proceeds
received from the sale of the Distribution business and from the issuance of the
Series D preferred stock. Net cash used in financing activities in 2004 was
primarily attributable to approximately $2.0 million in debt repayments under
our revolving credit facility and term loan with Capital Source.
We incurred operating losses in 2004 due primarily to substantial operating
losses at Wise Optical. In January 2005, we sold our Distribution business
including the Wise Optical operation. In September 2004, we sold our Technology
business, CC Systems, Inc. The sale of these operations generated cash proceeds
and reduced demands on working capital and corporate personnel. In addition, in
January 2005, we sold 280,618 shares of newly created Series D preferred stock,
which is convertible into our common stock, for an aggregate price of
approximately $4.4 million.
In addition, in 2003 the Managed Vision segment began shifting away from
the lower margin and long sales cycle of our third party administrator, or 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-based revenues. We
believe we now have the sales force and infrastructure necessary to expand our
direct-to-employer business and expect increased profitability as a result of
this product shift that has led to new contracts. We experienced significant
improvements in revenue and profitability in the Consumer Vision segment from
2003 to 2004, largely from growth in existing store sales and enhanced margins
as a result of sales incentives that we expect to continue. We have also
continued to settle outstanding HSO litigation with positive results through
April of 2005.
We believe the combination of the above initiatives executed in the
operating segments will continue to improve our liquidity and should ensure
compliance with CapitalSource covenants in the future. We believe that our cash
flow from operations, borrowings under our amended term loan and revolving
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 including the purchase of certain operating equipment.
The CapitalSource Loan and Security Agreement
As of March 31, 2005, we had borrowings of $1.7 million outstanding under
our term loan with CapitalSource, $2.1 million of advances outstanding under our
revolving credit facility (including a $1.4 million temporary over-advance) with
CapitalSource and $1.6 million of additional availability under this revolving
credit facility. Our term loan with CapitalSource matures on January 25, 2006
and our revolving credit facility matures on January 25, 2007.
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 $15.0 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.
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,
(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 paid CapitalSource $80,000
in financing fees. The amendment also included an additional $150,000
termination fee if we terminated the revolving credit facility prior to 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. Accordingly, on March 29, 2004, we amended and restated the terms of our
term loan and revolving credit facility with Capital Source which incorporated
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 this amendment, we agreed to pay
$25,000 to CapitalSource in financing fees.
We were not in compliance with the minimum fixed charge ratio covenant
under our term loan and revolving credit facility with CapitalSource as of March
31, 2004. In addition, we were not in compliance with this covenant as of April
30, 2004 or May 31, 2004. We were in compliance with the covenant as of June 30,
2004. In connection with a waiver and amendment to the term loan and revolving
credit facility with CapitalSource entered into on August 16, 2004, we received
a waiver from CapitalSource for any non-compliance with this covenant as of
March 31, 2004, April 30, 2004, May 31, 2004 and June 30, 2004.
The August 16, 2004 waiver and amendment also amended the term loan and
revolving credit facility to, among other things, extend the maturity date of
the revolving credit facility from January 25, 2006 to January 25, 2007, (ii)
provide access to a $2.0 million temporary over-advance bearing interest at
prime plus 5 1/2%, and in no event less than 6%, which is to be repaid in eleven
monthly installments of $100,000 commencing on October 1, 2004 with the
remaining balance to be repaid in full by August 31, 2005, which is guaranteed
by our largest stockholder, Palisade (iii) change the fixed charge ratio
covenant from between 1.5 to 1 to not less than 1 and to extend the next test
period for this covenant to March 31, 2005, (iv) decrease the minimum tangible
net worth financial covenant from ($2.0) million to ($3.0) million and (v) add a
debt service coverage ratio covenant of between 0.7 to 1.0 for the period
October 31, 2004 to February 28, 2005. In addition, the waiver and amendment
increased the termination fee payable if we terminate the revolving credit
facility by 2.0% and increased the yield maintenance amount payable, in lieu of
the termination fee, if we terminate the revolving credit facility pursuant to a
refinancing with another commercial financial institution, by 2.0%. The yield
maintenance amount was also changed to 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, 2007 and (ii) the total interest and fees actually
paid to CapitalSource on the revolving credit facility prior to the termination
or repayment date. On August 17, 2004, we paid CapitalSource $25,000 in
financing fees in connection with this waiver and amendment.
In addition, on August 27, 2004, we amended our loan agreement with
CapitalSource to eliminate a material adverse change as an event of default or
to prevent further advances under the loan agreement. This amendment eliminates
the lender's ability to declare a default based upon subjective criteria as
described in consensus 95-22 issued by the Financial Accounting Standards Board
Emerging Issues Task Force. Palisade provided a $1.0 million
guarantee against the loan balance due to CapitalSource related to this
amendment. We paid CapitalSource $15,000 in financing fees in connection with
this amendment.
On January 12, 2005, we amended the term loan and revolving credit facility
with CapitalSource to reduce the tangible net worth covenant for December 2004
and January 2005 from ($3.0) million to ($6.5) million. Without this amendment,
we would have been in violation of the tangible net worth covenant at December
31, 2004. Under the term loan and revolving credit facility, as amended, we must
maintain a tangible net worth of at least ($3.0) million after February 1, 2005.
We paid CapitalSource $12,500 in financing fees in connection with this
amendment.
The term loan and revolving credit facility with CapitalSource are subject
to the second amended and restated revolving credit, term loan and security
agreement dated March 29, 2004, as amended on August 16, 2004, August 27, 2004
and January 12, 2005. The revolving credit, term 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, both as discussed above. Upon the occurrence of certain
events or conditions described in the revolving credit, term 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.
Pursuant to the revolving credit, term loan and security agreement, as
amended, our term loan with CapitalSource matures on January 25, 2006 and our
revolving credit facility matures on January 25, 2007. We are required to make
monthly principal payments of $25,000 on the term loan with the balance due at
maturity. Although we may borrow up to $15.0 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 advance rate under our revolving credit facility is 85% of all
eligible accounts receivable and 50 to 55% of all eligible inventory. The $0.9
million reduction in our inventory value as a result of the mathematical and
fundamental errors in accounting and reconciliation for inventory reduced our
borrowing availability under this formula from $2.5 million to $1.9 million at
March 31, 2004. The interest rate applicable to the term loan equals the prime
rate plus 3.5% (but not less than 9.0%) and the interest rate applicable to the
revolving credit facility is prime rate plus 1.5% (but not less than 6.0%).
If we terminate the revolving credit facility prior to December 31, 2005,
we must pay CapitalSource a termination fee of $600,000. If we terminate the
revolving credit facility after December 31, 2005 but prior to the expiration of
the revolving credit facility the termination fee is $450,000. 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, 2007 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.
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.
We believe that we will be able to comply with our financial covenants
under our amended credit facility with CapitalSource. However, if we incur
additional operating losses and we continue to fail to comply with our financial
covenants 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.
The Series B Preferred Stock
As of March 31, 2005, we had 3,204,959 shares of Series B Preferred Stock
issued and outstanding. Subject to the senior liquidation preference of the
Series C and Series D Preferred Stock described below, the Series B Preferred
Stock ranks senior to all other currently issued and outstanding classes or
series of our stock with respect to dividends, redemption rights and rights on
liquidation, winding up, corporate reorganization and dissolution. Each share of
Series B Preferred Stock is convertible into a number of shares of common stock
equal to such share's current liquidation value, divided by a conversion price
of $0.14, subject to adjustment for dilutive issuances. The number of shares of
common stock into which each share of Series B Preferred Stock is convertible
will increase over time because the liquidation value of the Series B Preferred
Stock, which was $2.04 per share as of March 31, 2005, increases at a rate of
12.5% per year, compounded annually.
The Series C Preferred Stock
As of March 31, 2005, we had 406,158 shares of Series C Preferred Stock
issued and outstanding. 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 with exception of the Series D Preferred Stock.
Each share of Series C Preferred Stock is convertible into 50 shares of common
stock and has the same dividend rights, on an as converted basis, as our common
stock.
The Series D Preferred Stock
In January 2005, we issued and sold an aggregate of 280,618 shares of our
newly created Series D Preferred Stock, which are initially convertible into an
aggregate of 11,224,720 shares of our common stock, to Palisade and Ms.
Yimoyines, the spouse of our Chairman and former Chief Executive Officer, for an
aggregate purchase price of approximately $4.4 million. Each share of Series D
Preferred Stock has a senior liquidation preference over all other series and
classes of our currently outstanding capital stock equal to (a) $15.84 and (b)
an amount in cash equal to all accrued but unpaid dividends thereon. Each share
of Series D Preferred Stock is initially convertible, at the option of the
holder, into 40 shares of our common stock based on an initial conversion price
of $0.396. The conversion price is subject to adjustment for dividends on our
common stock and subdivisions and/or reclassifications of our common stock. Each
holder of Series D Preferred Stock is entitled to vote, on an as converted
basis, on all matters with the holders of our common stock and receive dividends
equally and ratably with the holders of our common stock in an amount equal to
the dividends such holder would receive if it had converted its Series D
Preferred Stock into common stock on the date the dividends are declared.
Impact of Reimbursement Rates
Our revenue is subject to pre-determined Medicare reimbursement rates
which, for certain products and services have decreased over the past three
years. A decrease in Medicare reimbursement rates could have an adverse effect
on our results of operations if we cannot manage these reductions through
increases in revenues or decreases in operating costs. To some degree, prices
for health care are driven by Medicare reimbursement rates, so that our
non-Medicare business is also affected by changes in Medicare reimbursement
rates.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
The statements in this Form 10-Q and elsewhere (such as in other filings by
us with the Securities and Exchange Commission, press releases, presentations by
us or our 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, as amended. When used in this
document and elsewhere, words such as "anticipate," "believe," "expect," "plan,"
"intend," "estimate," "project," "could," "may," "predict" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements include those relating to:
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 may not have a material adverse impact on our financial
position or results of operations;
o Our belief that our new direct-to-employer product will lead to
increased revenue and gross margins in our Managed Vision segment;
o Our expectation that EITF 03-6 will not have a material impact on our
condensed consolidated financial statements;
o Our expectation of future revenue, profitability and expense levels
for our Company as a whole and for each of its segments;
o Our expectation of increased demand for optical products and eye care
services;
o Our belief that enrollment in health care plans may grow;
o Our belief that we are well positioned to compete for all types of eye
care contracts;
o Our expectation that interest rates may not have a material adverse
effect on income or cash flows in 2005;
o Our belief that our initiatives may continue to improve liquidity and
should ensure compliance with covenants in our amended term loan and
revolving credit facility with CapitalSource; and
o Our belief that cash from operations, borrowings under our amended
term loan and revolving 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 our actual results,
performance or achievements to be materially different from any future results
expressed or implied by such forward-looking statements. Also, our business
could be materially adversely affected and the trading price of our common stock
could decline if any of the following risks and uncertainties develop into
actual events. Such risk factors, uncertainties and the other factors include:
o The fact that we have failed financial covenants and may fail them in
the future;
o If we default on our debt to CapitalSource, it could foreclose on our
assets;
o 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;
o 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;
o The fact that 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;
o Loss of the services of key management personnel could adversely
affect our business;
o If we fail to execute our growth strategy, we may not become
profitable;
o If we are unable to obtain additional capital, our growth could be
limited;
o We have a history of losses and may incur further losses in the
future;
o We may not be able to maintain the listing of our common stock on the
American Stock Exchange, which may make it more difficult for
stockholders to dispose of our common stock;
o 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;
o Failure to negotiate profitable capitated fee arrangements could have
a material adverse effect on our results of operations and financial
condition;
o The possibility that we may have potential conflicts of interests with
respect to related party transactions which could result in certain of
our officers, directors and key employees having interests that differ
from our stockholders and us;
o Health care regulations or health care reform initiatives could
materially adversely affect our business, financial condition and
results of operations;
o The fact that 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;
o The fact that our largest stockholder, Palisade, 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;
o The fact that conflicts of interest may arise between Palisade and us;
o The fact that conflicts of interest may arise between Dean J.
Yimoyines and us; and
o Other risks and uncertainties discussed elsewhere in this Form 10-Q
and detailed from time to time in our periodic earnings releases and
reports filed with the Securities and Exchange Commission.
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-Q or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk from exposure to changes in interest rates
based on our financing activities under our credit facility with CapitalSource,
due to its variable interest rate. The nature and amount of our indebtedness may
vary as a result of future business requirements, market conditions and other
factors. The extent of our interest rate risk is not quantifiable or predictable
due to the variability of future interest rates and financing needs.
We do not expect changes in interest rates to have a material effect on
income or cash flows in the year 2005, although there can be no assurances that
interest rates will not significantly change. A 10% change in the interest rate
payable by us on our variable rate debt would have increased or decreased the
three-month interest expense by approximately $10,000 assuming that our
borrowing level is unchanged. We did not use derivative instruments to adjust
our interest rate risk profile during the three months ended March 31, 2005.
ITEM 4. 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
Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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 our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
HEALTH SERVICE ORGANIZATION LAWSUITS
In March 2005 and April 2005, we reached settlement with Indianapolis
Ophthalmology, Inc. and John H. Abrams, M.D. and Charles Retina Institute, P.C.
and Steven T. Charles, M.D., M.D., respectively, two HSO practices which we were
in litigation in the matter of In re Prime Vision Health, Inc. Contract
Litigation, MDL 1466, which was previously reported in our Annual Report on Form
10-K for the year ended December 31, 2004. These settlements resulted in cash
payments to us and mutual termination of the HSO service agreements.
ITEM 6. EXHIBITS
a. Exhibits
The following Exhibits are filed as part of this Quarterly Report on Form
10-Q:
EXHIBIT DESCRIPTION
------- -----------
10.1 First Amendment, dated April 29, 2005 to the Employment
Agreement for Gordon A. Bishop dated September 8, 1999.
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.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned, hereunto duly authorized.
Date: May 16, 2005 OPTICARE HEALTH SYSTEMS, INC.
By: /s/ William A. Blaskiewicz
-------------------------------------
William A. Blaskiewicz
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer and duly
authorized officer)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.1 First Amendment, dated April 29, 2005, to the Employment
Agreement for Gordon A. Bishop dated September 8, 1999.
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.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.