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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.001 par value American Stock Exchange
- ------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 15, 2000, was $30,800,564.
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of March 15, 2000 was 12,543,557 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
OPTICARE HEALTH SYSTEMS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
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PART I
ITEM 1. BUSINESS
GENERAL
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing laser correction, managed care and professional eye care
services. We currently own, operate and develop laser and ambulatory surgery
centers and provide systems, including Internet-based software solutions, to eye
care professionals. We also provide managed eye care services to health plans
and operate integrated eye health centers, retail optical stores and a buying
group program.
In the fourth quarter of 1999, our board of directors approved a new
corporate strategy to focus on the growth of laser correction in the eye care
industry. As part of our new growth strategy, we reorganized our operations from
two divisions into the following three divisions: Laser Correction and
Professional Services, Managed Care Services, and Other Integrated Services.
RECENT DEVELOPMENTS
Agreement to Acquire Vision Twenty-One
On February 10, 2000, we entered into a merger agreement with Vision
Twenty-One, Inc. The transaction provides for 6,000,000 shares, which number is
subject to adjustment as described in the merger agreement, of our common stock
to be issued to shareholders of Vision Twenty-One and the assumption of
approximately $60 million of Vision Twenty One's outstanding debt. The merger
will combine the laser correction and managed eye care businesses of the two
companies. The merger agreement also calls for Vision Twenty-One to continue to
divest certain of its other operating businesses prior to closing. Following the
closing of the merger, we expect to have over 10,000,000 managed eye care lives
and a national provider panel of approximately 11,000 practicing
ophthalmologists and optometrists, providing us with a unique platform to
accelerate the growth of our laser correction and ambulatory surgery segments.
The transaction is subject to certain closing conditions, including
regulatory approvals, the approval of Vision Twenty-One's and our shareholders,
and the restructuring of certain debt obligations of us and Vision Twenty-One,
as well as a financing to provide not less than $30 million of equity or
mezzanine capital.
Sale of Registered Shares
During January 2000, we sold in the aggregate 3,571,429 registered shares
of common stock at a price of $3.50 per share. We received proceeds from the
offering of approximately $12.5 million, including the cancellation of a $2
million note previously issued by us. See "Certain Relationships and Related
Transactions - Arrangements with Marlin Capital, LLP." The proceeds have and
will be used to pay down indebtedness, to expand our laser correction and
professional services division, and for general corporate purposes.
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THE EYE CARE INDUSTRY
Overview
The eye care market includes both eye care services and optical products.
In the eye care services market, eye health professionals, including
ophthalmologists and optometrists, provide diagnostic eye examinations and
treatment interventions to address complex eye and vision conditions. The most
common conditions addressed by eye care professionals are nearsightedness,
farsightedness and astigmatism. These eye and vision conditions have
historically been treated with pharmaceuticals, prescription glasses, contact
lenses or some combination of these treatments. With the introduction of LASIK
in 1996, eye care professionals are beginning to use laser correction as an
additional treatment alternative for these three conditions. The optical
products portion of the eye care market consists of the manufacture,
distribution and sale of optical goods, including corrective lenses, eyeglasses,
frames, contact lenses and other related optical products.
In the U.S., eye care services have traditionally been delivered by
ophthalmologists and optometrists. Ophthalmologists are specifically trained
physicians who have completed four years of medical school, obtained a medical
degree and have received specialty training in ophthalmology. In addition to
diagnostic examinations, ophthalmologists are licensed to perform ophthalmic
surgery. Optometrists complete four years of optometry school and are generally
licensed to perform routine eye exams and prescribe corrective optical goods.
Optometrists do not perform surgery, but often provide pre-and post-operative
care. There are approximately 32,000 practicing optometrists and 22,000
practicing ophthalmologists in the U.S.
According to the Vision Council of America, 163 million people, or
approximately 60% of the U.S. population, utilized eye care services in 1998,
and 60% of those eye care consumers purchased eye wear products. Spending in
1998 for both services and products is estimated to be over $55 billion,
increasing at approximately 6% per year.
Laser Correction
Recently, new surgical technologies and procedures have been introduced for
surgical correction of common vision conditions. Within the eye care industry,
one sector that is experiencing rapid growth is laser correction. Although
earlier applications for laser based surgical treatment of eye disorders, such
as photorefractive keratotomy, or PRK, were introduced in the late 1980's,
widespread interest in laser correction did not occur until the introduction and
approval of LASIK. Introduced in 1996 in the U.S., LASIK has led to a dramatic
increase in the popularity of laser correction surgery.
The three most common conditions which are candidates for laser correction
are:
o nearsightedness, which is caused by a steepening of the cornea,
resulting in the blurring of distant objects;
o farsightedness, which is caused by a flattening of the cornea,
resulting in the blurring of close objects; and
o astigmatism, in which images are not focused on any point due to the
varying curvature of the eye
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along different axes, which results in a distorted view of images.
In the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue, which remains hinged to
the eye. A number of laser pulses are then applied to the cornea to remove
tissue and thereby correct the patient's vision by reshaping the patient's
cornea. After the surgeon replaces the layer of corneal tissue, no bandages are
required and most patients experience no discomfort. A LASIK procedure typically
takes 10 to 15 minutes from set-up to completion and is performed in an
outpatient setting. At this time, only ophthalmologists are licensed to perform
LASIK, although optometrists are often involved in providing pre-and
post-operative care.
Because of the effectiveness and convenience of LASIK, laser correction has
grown from approximately 430,000 procedures to be performed in 1998 to industry
estimates of 980,000 procedures to be performed in 1999. Despite this rapid
growth, the number of laser correction patients in 1998 represented less than
0.3% of the 163 million people with refractive vision conditions in the U.S.
Further, unlike most other eye-related surgical procedures, laser correction is
an elective procedure for which patients pay and are generally not reimbursed by
third party payors.
Laser correction has been practiced in the United States only since 1996,
and so there is only minimal information available for medical and scientific
study of its long-term effects. Long-term follow-up data may reveal additional
complications that may have a material adverse effect on acceptance of laser
correction. Concern over the safety of laser correction procedures could
adversely affect market acceptance of laser correction or result in adverse
regulatory action, including product recalls. Any of these factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Concerns about the safety and effectiveness of laser correction include
predictability and stability of results. Potential complications and side
effects include:
o post-operative discomfort;
o an increase in the light-scattering properties of the cornea during
healing (corneal hazing);
o glare/halos (undesirable visual sensations produced by bright
lights);
o decreases in contrast sensitivity;
o temporary increases in pressure within the eye in reaction to
medication;
o modest fluctuations in focusing capabilities during healing;
o modest decreases in best corrected vision (i.e., with corrective
lenses);
o unintended over- or under-corrections;
o decline in corrective effect;
o disorders in corneal healing, corneal scars and corneal ulcers; and
o induced astigmatism.
5
Managed care
According to InterStudy, a health care research firm, total 1998 U.S.
enrollment in health maintenance organizations, the most common type of managed
care plan, was 76.6 million. This represents a 14% increase in membership versus
1997. Almost all managed care plans cover medical/surgical treatment of eye
disorders and many also provide vision care benefits, including routine eye
exams or optical products. According to the 1999 U.S. Optical Industry Handbook,
66% of consumers seeking eye care services received either full or partial
reimbursement from a third-party insurance or managed care plan.
We believe that enrollment in managed care plans and, therefore, the
population with coverage of eye care services will continue to grow. We believe
this trend will be supported by managed care plans offering enhanced vision and
eye care benefits in order to more aggressively compete for potential
membership. We also believe that the management of eye care services and
products is specialized and best provided by companies that focus on these
services. Given its success in both acquiring new customers and retaining
existing customers, we believe this market segment has significant growth
potential.
Other eye care products and services
Although vision correction techniques and technologies are growing
dramatically, the demand for basic optical goods, including corrective lenses,
eyeglass frames and other optical products, and eye health surgery, remains
significant. Of the $55 billion eye care market, consumers spend approximately
$16.3 billion on retail optical products. Approximately 83%, or $13.5 billion,
is spent on lenses and frames, while approximately 12%, or $2 billion, is spent
on contact lenses.
We also expect the demand for eye surgery other than vision to show steady
growth. Common eye disorders include glaucoma, macular degeneration, diabetic
retinopathy and cataracts. We believe that the aging of the population,
including the "baby boom" generation, will increase the demand for medical and
surgical treatment of these disorders. Glaucoma affects approximately 3 million
people in the U.S. and is projected by industry sources to double by 2030.
Cataract surgery, the most widely performed eye care surgical procedure in the
U.S., is typically performed on an outpatient basis using local anesthesia, and
the procedure time is typically less than 30 minutes. In 1997, over 2.3 million
cataract procedures were performed in the U.S. Since the preponderance of these
other eye disorders affect patients over the age of 65, the Medicare program is
the primary payor for treatment of these disorders, including surgery.
DESCRIPTION OF BUSINESS DIVISIONS
As a result of our expectations for the growth of laser correction, we have
reorganized our operations from two business divisions to three:
o Laser Correction and Professional Services. We develop laser
correction centers and provide marketing, systems, software and other
services to eye care professionals.
o Managed Care Services. We contract with managed care plans to manage
the eye health portion of managed care plans.
o Other Integrated Services. We own and operate fully integrated eye
health centers, retail optical
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stores and a buying group program.
Laser Correction and Professional Services Division
Laser Correction. We have two business models for providing laser
correction and ambulatory surgery services. The first model involves ownership
and operation of laser vision correction and ambulatory surgical centers. In the
second model, we operate the OptiCare Laser Advantage(Trademark) program, in
which we develop laser correction centers for independent ophthalmologists, and
participate on a fee-per-procedure basis in the growth of that center.
We own and operate four surgery centers in Connecticut, one of which is a
laser correction center. In our ambulatory surgery centers, ophthalmic surgeons
perform a range of eye care surgical procedures, including cataract surgery, and
surgical treatment of glaucoma, macular degeneration and diabetic retinopathy.
One of the ambulatory surgery centers is being converted from an eye-care-only
center to a multi-specialty facility, permitting ophthalmic surgery and other
types of non-eye care surgery to be performed there. In these centers, we bill
patients (or their insurers, HMO's, Medicare, Medicaid or other responsible
third-party payors) for use of the surgery center facility, and the 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, Connecticut is approved for the payment of
facility fees by most health plans and our other surgery facilities are Medicare
approved. We have contracted with OptiCare P.C. to provide surgical and other
services to patients at the ambulatory surgical centers. OptiCare P.C., is
wholly owned by Dean J. Yimoyines, M.D., Chairman of the Board, President and
Chief Executive Officer and a beneficial holder of 3.1% of the Company's common
stock.
In the OptiCare Laser Advantage(Trademark) program, we use our
marketplace position to identify, screen and negotiate agreements with
prospective ophthalmology practices which already perform laser correction
surgery at separate surgery centers, but have no ownership position in the
center. Working with these physicians and the laser manufacturer, we will
participate in developing, equipping, training and implementing a new laser
correction center to be owned by the practice. We will also provide a laser
vision correction marketing program and ongoing marketing support for the
center. We intend to enter into agreements which provide that we be paid by each
practice on a multi-year, fixed-price-per procedure basis, with guaranteed
minimum procedure volume. As the laser correction volume of the center grows, we
receive increasing revenues. To support the program, we have executed a
strategic partnership agreement with Summit Technology, an excimer laser
manufacturer and anticipate agreements with other laser manufacturers. We opened
our first center under this business model in Rocky Mount, N.C.
Professional Services. Beyond establishing laser vision correction centers,
we sell a broad range of other management services and eye care systems to eye
care professionals, principally ophthalmologists and optometrists.
As a result of our acquisition on October 1, 1999, of Cohen Systems, Inc.,
we provide eye care systems and software, in which we sell Internet based and
point-of-sale systems solutions for optometry practices, retail optical
locations and manufacturing laboratories. These products support eye health
practice management, point-of-sale, and inventory control applications. As of
March 15, 2000, we had approximately 150 retail customers and 100 lens
manufacturing customers for various eye care systems and software services
throughout the United States and Canada. In addition to these products, we have
developed and sell Internet based order entry software systems that captures and
links all eye health patient data, including providing such data to a remote
manufacturing location for immediate processing of patient optical goods orders.
7
Our Health Service Organization ("HSO") operations provide marketing,
managed care and other administrative services to individual ophthalmology and
optometry practices. As of March 15, 2000, we had HSO agreements in place with
31 ophthalmology and optometry practices, having in the aggregate 56 facilities,
pursuant to which we offer core and supplemental services. These agreements
generally run for a fifteen-year term. Under these agreements we receive a
percentage of the revenues earned by these practices (generally 3% of revenues).
In addition to these services, the practices may obtain various supplemental
services at agreed upon rates, which are purchased on a menu basis. In the HSO
arrangements, we offer core services including access to its buying group
program and marketing assistance.
Our HSO customers are also allowed access to supplemental services
including certain laser correction programs, systems administration and human
resources services.
We believe that there will be increasing demand for management and
information systems solutions for independent practitioners who are not
interested in a traditional physician practice management model. Management
believes that these independent practitioners, which make up approximately 95%
of practicing ophthalmologists, still require assistance in a range of
administrative, marketing and information systems and software services. We
believe these doctors have the potential to benefit from the Company's services
in this area.
Managed Care Services Division
We have significant expertise in providing managed care services for
insurance companies, HMO's and other third-party payors and have leveraged our
leadership position in key markets to build a strong provider base of eye care
professionals. We believe that we are well positioned to compete for all types
of eye care contracts because of our managed care expertise, sophisticated
information systems and operating history.
As of March 15, 2000, we administered eye care benefits for over 5 million
lives, delivered through networks of eye care professionals nationwide.
Approximately 2.7 million of these lives are in medical/surgical benefit plans,
which we believe, makes us one of the largest specialized managers of eye care
medical/surgical benefits in the country.
Under each managed care contract, we credential eye care professionals who
provide the eye care services specified under the contract to the third-party
payor's members. We also perform other services, including quality assurance and
utilization review, and are compensated on either a capitated or fee-for-service
basis. Most contracts have a term of three years and contain an automatic
renewal provision for additional one-year periods and grant either party the
right to terminate the contract upon 90-180 days notice.
Upon obtaining a managed care contract, we develop a network of eye care
professionals to provide the eye care services required under the contract.
Generally, we attempt to contract first with eye care professionals with whom we
have a business relationship. Additionally, we seek to enter into contracts with
independent eye care professionals. We undertake a thorough credential review
process on each prospective eye care professional, which includes obtaining a
copy of the state license and Drug Enforcement Agency number, verifying hospital
privileges, liability insurance and board certification, and reviewing work
history for each provider. Eye care professionals who are on one of our panels
are recredentialed every two years.
8
All credentialed eye care professionals must meet the guidelines of the National
Committee for Quality Assurance a leading quality assurance authority.
We believe that our managed care services provide significant value to
third-party payors by delivering high quality, cost-effective managed eye care
to plan members and comprehensive administrative services to the third-party
payor. Some of the services provided include:
Plan Member Relations. Service representative staff are available to answer
questions on members' benefits, the status of claims and to resolve complaints
about the service rendered.
Simplified Pre-Authorization Process. Network eye care professionals, with
the assistance of our staff, obtain any required authorizations for the plan
members prior to performing an eye care procedure. We believe that this approach
simplifies the process for the plan member and thereby increases the plan
members' overall satisfaction with their eye care benefits. We utilize
proprietary systems to effectively administer eye health claims submitted,
including Internet-based electronic authorization and claim protocols, to lower
cost, reduce cycle time and improve the effectiveness of the administrative
process.
Quality Assurance Program. We solicit patient comments through monthly
patient satisfaction surveys sent to a sample of members of its managed care
customers. In addition, we track unsolicited comments that typically are in the
nature of telephone complaints. If a plan member is dissatisfied with the
service received, a service representative staff can quickly resolve routine
complaints relating to matters such as eyeglasses, contact lenses and the
quality of the eye examination. We believe that our issue-resolution structure
is unique to the industry and increases plan members' satisfaction with their
eye care benefits. In addition, we perform prospective-outcome studies and other
quality assessment studies on the care rendered by our network of providers.
Utilization Review Services. We periodically monitor every eye care
professional in our network to verify that the eye care professionals are
properly coding the medical services and treatment provided. Using proprietary
clinical criteria for eye care procedures that are based on the American Academy
of Ophthalmology's own guidelines, we work with eye care professionals regarding
the appropriate eye care treatment of members.
Credentialing. We provide credentialing services according to national
standards set forth by the National Committee of Quality Assurance by which
health plans are measured for compliance with quality assurance initiatives. The
credentialing process includes collection of data from applications prepared by
physicians, verification of licenses, insurance and education, and review of the
physician's file in the National Practitioner Data Bank.
Periodic Cost Reports. Periodic analytical reports on costs are prepared
for each of the company's health plans and the application of the funds of the
health plans for the benefit of the participants. We utilize our systems
technology to regularly and carefully monitor the economic and qualitative
performance of the networks, individual providers and health plan customers.
Licensing requirements. Our managed care division provides services to
customers in 8 states. Texas requires the company to be licensed, and our
subsidiary, AECC Total Vision of Texas, is licensed as a single-purpose HMO in
Texas. Prior to January 1, 2000, the managed care division also had a single
service license in North Carolina, but because of regulatory changes, this
license is no longer required to conduct the Company's business and has been
relinquished. We expect to seek a utilization review license in Georgia
9
in the next 12 months for our Georgia managed care operations. We hold licenses
as a third-party administrator in Florida and a utilization review agent in
Rhode Island, but have not commenced business in either state at the present
time.
Other Integrated Services Division
The Other Integrated Services division provides eye care services and
products to consumers and also provides wholesale distribution of eye health
products. We provide these diversified eye care services to customers at our
integrated eye health centers and retail optical stores.
Integrated eye health centers. Our integrated eye health centers provide
comprehensive eye care services to consumers, including medical and surgical
treatment by ophthalmologists of eye diseases and disorders, and vision
measuring and non-surgical correction services for patients by optometrists. We
operate 17 centers in Connecticut and provide all management, billing, systems
and related services for the operation of these centers.
Retail optical stores. Our retail optical stores, both owned and
franchised, provide vision correction services through optometrists, and/or sell
eyeglasses and other optical products. The optical locations are either
free-standing or co-located with fully integrated eye health centers. The retail
optical stores provide all the customary optical goods and provide all the
billing, collection, and information systems to support the company's optical
operations. We own 46 retail optical locations as well as 7 optical dispensaries
in Connecticut and North Carolina. In Connecticut, we also have a complete
manufacturing facility in which lenses are manufactured, surfaced and ground to
specifications and supplied to all of our Connecticut locations.
For both the integrated eye health centers and retail optical stores,
we contract with professional corporations -- OptiCare, P.C., and Optometric Eye
Care Center, P.A. -- which employ ophthalmologists and optometrists to provide
surgical, medical and other professional services to consumers. We provide
management services to OptiCare P.C. under a renewable 5-year professional
services and support agreement, and to Optometric Eye Care Center, P.A. under a
renewable 15-year professional administrative services and support agreement.
In addition to our owned and operated locations, we have entered into
license agreements regarding our franchise of 32 retail optical locations in
North Carolina and South Carolina. Pursuant to these license agreements, we
permit these establishments to utilize our proprietary trademarks and trade
names, including "Optometric Eye Care Center," and offer specific marketing
programs and group purchasing services. These agreements are generally for five
year terms, however, we generally grant the licensee the right to terminate the
agreement upon 90 days notice. The licensees pay us a fee based on a percentage
of their gross revenue and have the option of requesting additional services
from us on a separate fee basis.
Optical Supplies. We purchase most of our eyeglasses, contact lenses and
other optical goods and devices through our Buying Group.
- -
Buying Group Program. We operate one of the largest U.S. wholesale optical
goods distribution or "buying group" programs, which supplies both our
integrated eye health centers and retail optical operations, as well as
independent ophthalmology and optometric practices with optical and ophthalmic
goods and medical supplies, i.e., eyeglass frames and lenses, contact lenses,
clinical equipment and other supplies. Over 4,000 eye care professionals
nationwide participate in our Buying Group. This purchasing program leverages
the purchasing strength of the large number of participating optometrists and
buys from a national panel of
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approximately 175 vendors. We enter into a non-exclusive account relationship
with the buying ophthalmologists and optometrists who place "bill to-ship to"
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 are achieved from the
buying group program based upon the spread between the merchandise cost and the
prices paid for the merchandise by the group members.
TRADEMARKS
We own the following U.S. trademark registrations: OPTICARE(Registered
Trademark), EYECARE FOR A LIFETIME(Registered Trademark), CONNECTICUT VISION
CORRECTION(Registered Trademark), and THE DIFFERENCE IS CLEAR(Registered
Trademark). Other trademarks for which applications for U.S. registration are
pending are: RBNI(Trademark), KEEPING YOU AHEAD OF THE CURVE(Trademark)and curve
design, DOCTOR'S EXPRESS(Trademark), DOCTORSXPRESS.COM(Trademark)and OPTICARE
LASER ADVANTAGE(Trademark). We also own the following domain names:
opticare.com; opticare.net; opticarenas.net; doctorsxpress.com; and
opticareonline.com. We consider these trademarks and domain names important to
our business. However, our business is not dependent on any individual trademark
or trade name.
COMPETITION
The market for eye care services is highly competitive in each segment of
our business. In the Laser Correction and Professional Services Division, we
compete with:
o Refractive laser surgery companies;
o Stand-alone laser surgery operators;
o Hospitals; and
o Physician practice management companies, among others.
While some of the competition in this segment is local and regional, we do
have national competitors. For laser correction, these include Lasersight, TLC
The Laser Center, Inc., Laser Vision Centers, Inc., ClearVision Laser Centers,
Ltd., LCA-Vision Inc. and Novamed. Laser correction companies primarily compete
on the basis of quality of service, reputation, price and convenience. With
respect to professional services, we generally compete with a range of services
specific operators providing services to eye health professionals, such as
marketing companies, systems and software vendors. We have identified few, if
any, integrated providers of eye health services other than physician practice
management companies, which, under a substantially different business model,
require substantial capital investment by the practice management company and
equity participation by ophthalmologists and optometrists.
Our Managed Care Services Division competes with several regional and
national eye health companies which provide services to managed care plans.
These include Vision Twenty-One and Vision Service Plan of America. We also
compete for managed care contracts with HMO's, PPO's and private insurers, many
of which have larger provider networks and greater financial and other
resources. Managed care organizations compete on the basis of administrative
strength, size, quality and geographic coverage of their provider networks,
marketing abilities, informational systems, the strategy of their managed care
contracts, operating efficiencies and price.
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For our Other Integrated Services Division, the most direct form of
competition is with independent ophthalmologists and optometrists, as well as
regional operators of retail optical locations. On a national basis, companies
that compete in this sector include retail optical operators, such as
LensCrafters, Cole National, Sight Resources, Eye Care Centers of America, and
Sterling Vision. Retail optical operators compete on price, service, product
availability and location. Buying group organizations compete on the basis of
price, size and purchasing power of their member buying group, the strength of
their credit, and the strength of their supplier agreements and relationships.
Several competitors in each of our divisions have greater capital or may
charge less for certain services. However, we believe the integrated nature of
our business model provides significant competitive advantages in the
marketplace.
FORMATION AND HISTORY
Our present form is the result of two mergers completed on August 13, 1999
(more fully described below) between (i) a subsidiary of the company and
OptiCare Eye Health Centers, Inc., a Connecticut corporation ("OptiCare Eye
Health Centers"), and (ii) another subsidiary of the company and PrimeVision
Health, Inc., a Delaware corporation ("PrimeVision Health"). As a result of the
mergers, OptiCare Eye Health Centers and PrimeVision Health are wholly owned
subsidiaries of the company. At the time of the mergers, PrimeVision Health and
OptiCare Eye Health Centers were each an integrated vision services company,
with PrimeVision Health headquartered in North Carolina, and OptiCare Eye Health
Centers headquartered in Connecticut.
The company was incorporated in Delaware in 1994 under the name "Saratoga
Resources, Inc." ("Saratoga"). At the time the company was formed, it succeeded
by merger to the assets of an oil exploration and production business.
Saratoga, while engaged in the oil business prior to 1999, experienced
several years of losses and in 1998 determined to spin off its oil assets and
seek a merger partner or other transaction to take advantage of Saratoga's
status as a publicly held company. On April 12, 1999, Saratoga entered into a
merger agreement with PrimeVision Health and OptiCare Eye Health Centers.
Pursuant to the merger agreement, Saratoga spun off or otherwise disposed of its
assets other than a modest amount of cash and two "shell" subsidiaries, and
PrimeVision Health and OptiCare Eye Health Centers merged with the shell
subsidiaries. The merger agreement closed on August 13, 1999, and, pursuant to
the merger agreement, Saratoga changed its name to "OptiCare Health Systems,
Inc.," which is now the name of our company.
At the closing of the merger agreement, the board of directors and
management of Saratoga resigned and, in accordance with the terms of the merger
agreement, were replaced by persons selected by PrimeVision Health and OptiCare
Eye Health Centers. Likewise, the capital structure of the company was altered
by amendments to the certificate of incorporation and by the filing of a
certificate of designation establishing a class of preferred stock designated as
the Series A Convertible Preferred Stock.
GOVERNMENT REGULATION
The federal and state governments extensively regulate the health care
industry. Our business is subject to numerous federal and state laws and
regulations, including the following:
12
Excimer Laser Regulation. Medical devices, including the excimer lasers
used in our eye surgery and laser centers, are subject to regulation by the U.S.
Food and Drug Administration, referred to as the FDA. Medical devices may not be
marketed for commercial sale in the United States until the FDA grants
pre-market approval for the device.
The FDA has not specifically approved the use of LASIK or the use of
excimer lasers to treat both eyes on the same day, commonly referred to as
bilateral treatment. The FDA considers these uses to be a practice of medicine
decision. Ophthalmologists, including our affiliated ophthalmologists, often
perform LASIK and bilateral treatment in an exercise of professional judgment in
connection with the practice of medicine.
Failure to comply with applicable FDA requirements could subject the
company, our affiliated providers or laser manufacturers to enforcement action,
product seizures, recalls, withdrawal of approvals and civil and criminal
penalties. Further, failure to comply with regulatory requirements, or any
adverse regulatory action, including a reversal of the FDA's current position
that the "off-label," or non-FDA-approved, use of excimer lasers by physicians
outside the FDA approved guidelines is a practice of medicine decision, which
the FDA is not authorized to regulate, could result in a limitation on or
prohibition of the company's use of excimer lasers.
Regulation of Laser Vision Marketing. The marketing and promotion of laser
correction and other vision correction surgery procedures in the United States
are subject to regulation by the FDA and the Federal Trade Commission, referred
to as the FTC. The FDA and FTC have released a joint communique on the
requirements for marketing these procedures in compliance with the laws
administered by both agencies. The FTC staff also issued more detailed staff
guidance on the marketing and promotion of these procedures and has been
monitoring marketing activities in this area through a non-public inquiry to
identify areas that may require further FTC attention. The FDA has traditionally
taken the position that the promotion and advertising of lasers by manufacturers
and physicians should be limited to the uses approved by the FDA. Although the
FDA does not prevent surgeons from using excimer lasers off-label, the FDA
reserves the right to regulate advertising and promotion of off-label uses.
Insurance Licensure. Most states impose strict licensure requirements on
health insurance companies, HMO's, and other companies that engage in the
business of insurance or pre-paid health care. In most states, these laws do not
apply to discounted fee-for-service arrangements or networks that are paid on a
capitated basis, i.e. based on the number of covered persons the network is
required to serve without regard to the actual rendering of eye care service to
patients, provided that the association with which the network provider has
contracted is a licensed health insurer or HMO. There are exceptions to these
rules in some states. For example, certain states require a license for a
capitated arrangement with any party unless the risk-bearing association is a
professional corporation that employs the eye care providers. If we are required
to become licensed under these laws, the licensure process can be lengthy and
time consuming and, 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 its business while the
licensing process is pending. In addition, many of the licensing requirements
mandate strict financial and other requirements we may not immediately be able
to meet. Once licensed, we would be subject to continuing oversight by and
reporting to the licensing authority.
Regulation of our HMO Subsidiary. We hold one single service HMO license in
Texas. Prior to January 1, 2000, we also held a single service HMO license in
North Carolina. However, because of
13
regulatory changes, this license is no longer required to conduct the company's
business and has been relinquished. Texas requires the filing of quarterly and
annual reports as well as periodic on-site audits.
The Florida, North Carolina and Texas, managed care businesses are highly
regulated. Such regulation can include, but is not limited to, caps on
permissible premiums charged to customers; mandated benefits; and rules
governing relationships with, and payments to, network providers. Each of these
states also require pre-approval from their respective Departments of Insurance
prior to allowing a significant change of ownership control to take place.
In Texas, a single service HMO must maintain a reserve of $500,000, net of
accrued unpaid liabilities. However, if such a reserve is currently unavailable,
the HMO must achieve and maintain a current reserve of $200,000; this reserve
must increase to $275,000 by December 31, 1999; $350,000 by December 31, 2000;
$425,000 by December 31, 2001; and $500,000 by December 31, 2002.
Texas Administrative Oversight Order. Our wholly owned Texas HMO, AECC
Total Vision Health Plan of Texas, Inc., is required by the terms of an
administrative oversight order dated August 18, 1999, from the Texas Insurance
Department to maintain a minimum net worth of $1,400,000. The Texas HMO is also
prohibited from paying dividends or making any other payments to us without the
prior written approval of the Texas Insurance Department. The Texas HMO
subsidiary is therefore restricted in its ability to apply its earnings (if any)
to the payment of dividends on our common stock, the reduction of bank debt or
any other corporate purpose, other than operation of the Texas HMO. We do not
consider this requirement burdensome under present circumstances, but we are
nevertheless restricted in the use of its capital. We have a cost allocation
agreement with our Texas HMO subsidiary, approved by the Texas Insurance
Department, which permits this subsidiary to reimburse us, the parent company,
for shared administrative costs. The cost allocation agreement may be amended
only with approval of the Texas Insurance Department.
Third Party Administration Licensing. Some states require licensing for
companies providing administrative services in connection with managed care
business. We hold third-party administrator's licenses in Florida and Rhode
Island. We intend to seek licenses in the states where they are available for
eye care networks. However, we may not be able to meet the licensing
requirements in all states, and this may have an adverse effect on our business
and operating results or inhibit its growth.
Physician Incentive Plans. Medicare regulations impose certain disclosure
requirements on managed care networks that compensate providers in a manner that
is related to the volume of services provided to Medicare patients (other than
services personally provided by the provider). If incentive payments exceed 25%
of the provider's potential payments, the network is also required to show that
the providers have certain "stop loss" financial protections and to conduct
certain Medicare enrollee surveys.
"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
qualified and licensed provider who is willing to abide by the terms of the
network's contracts. These laws may also prohibit termination of providers
without cause. These laws limit our ability to develop effective managed care
networks in such states.
Corporate Practice of Optometry and Ophthalmology. The laws of many states
prohibit corporations that are not owned entirely by eye care professionals
from:
o employing eye care professionals;
14
o receiving for their own account reimbursements from third party payors
for health care services rendered by licensed professionals;
o controlling clinical decision-making; or
o engaging in other activities that constitute the practice of
optometry or ophthalmology.
To comply with these requirements, we:
o contract with professional associations (which are owned by one or
more licensed optometrists or ophthalmologists), which in turn employ
or contract with licensed optometrists or ophthalmologists to provide
professional services to patients;
o perform only non-professional services;
o do not represent to the public or customers that it provides
professional eye care services; and
o do not exercise influence or control over the practices of the eye
care practitioners employed by the professional associations.
Our agreements with eye care providers specifically provide that all
decisions required by law to be made by licensed ophthalmologists or
optometrists shall be made only by such licensed persons, and that we shall not
engage in any services or activities which would constitute the practice of
ophthalmology or optometry. If health care regulations and their interpretations
change in the future, we may have to revise the terms of such agreements to
comply with regulatory changes. See "Certain Relationships and Related
Transactions -- OptiCare P.C. and -- Optometric Eye Care Centers, Inc."
State Fee-Splitting and Anti-kickback Law. Most states have laws
prohibiting the paying or receiving of any remuneration, direct or indirect,
that is intended to induce referrals for health care products or services. Many
states also prohibit "fee-splitting" by health care professionals with any party
except other health care professionals in the same professional corporation or
practice association. In most cases, these laws apply to the paying of a fee to
another person for referring a patient or otherwise generating business, and do
not prohibit payment of reasonable compensation for facilities and services
other than the generation of business, even if the payment is based on a
percentage of the revenues of the professional practice. However, in some
states, "fee-splitting" has been interpreted to include payments by health
professionals of a portion of fees in return for certain services.
The North Carolina Medical Board stated in an Official Position Statement,
which was adopted in 1993 and amended in 1996, that sharing profits between a
non-physician and physician partner on a percentage basis is fee splitting and
is grounds for disciplinary action. In the past year, this issue has been raised
in several lawsuits in the state. In each of these cases, the court was asked to
find that the profit sharing arrangement between a physician or physician group
and management company is unethical and void as against public policy. To date,
no court in North Carolina has ruled on this issue. There is a risk that a court
could find that our arrangements with physicians are unethical and void as
against public policy or that the Medical Board could determine that the
Company's arrangements with physicians in the state constitute unethical
fee-splitting and that these physicians are subject to disciplinary action. This
risk could also extend to arrangements with optometrists since the North
Carolina Optometry Board has informally indicated that it takes a similar view
on fee-splitting.
15
North Carolina law also prohibits health care providers from paying any
type of financial compensation to any person, firm or corporation for
recommending or securing the provider's employment by a patient, or as a reward
for having made a recommendation resulting in the provider's employment by a
patient.
Federal Fee-Splitting and Anti-kickback Law. Federal law prohibits the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of patients covered by federally funded health care programs
such as Medicare and Medicaid, or in return for purchasing, leasing, ordering or
arranging for the purchase, lease or order of any product or service that is
covered by a federal program.
On April 15, 1998 the Office of Inspector General of the U.S. Department of
Health and Human Services (the "OIG") issued Advisory Opinion 98-4, which raised
questions about whether a percentage of revenue management fee arrangement could
be viewed as violating the federal anti-kickback law if the manager is involved
in helping generate revenues derived from Medicare and Medicaid programs. Under
the arrangement reviewed by the OIG, the manager's duties included management
and marketing services, negotiation and oversight of health care contracts with
various payors, including Federal healthcare programs, and setting up provider
networks that included physicians. Payments to the management company included a
"fair market value payment" for operating services provided by the manager, a
payment based on a percentage of the cost of capital assets, and an additional
20% of net revenues of the practice for management services. The OIG noted that
since the manager was paid a percentage of net revenue, including revenue from
business derived from managed care contracts arranged by the manager, that a
potential technical violation of the anti-kickback statute existed. The OIG
further noted that since the manager would presumably receive some compensation
for management efforts in connection with the development and operation of
specialist networks, any evaluation by the OIG would require information about
the relevant financial relationships. The OIG summarized that while the
management arrangement "may" violate the anti-kickback statute, a definitive
conclusion would require a determination of the parties' intent, which is beyond
the scope of the advisory opinion process.
Our services agreements are different from the arrangements reviewed by the
OIG in its advisory opinion. Therefore, we believe that the opinion is
inapplicable to our relationships with our eye care professionals. As a result,
there are no present plans to change the terms of these relationships, but we
will continue to monitor any clarifications or determinations in this area. If
the forms of our services agreements are ever determined to be in violation of
the federal anti-kickback statute, it is likely that there would be a material
adverse impact on our business, financial condition and results of operation.
Advertising Restrictions. Many states, including Connecticut and North
Carolina, prohibit licensed eye care professionals from using advertising which
includes any name other than their own, or from advertising in any manner that
is likely to lead a person to believe that a non-licensed professional is
engaged in the delivery of eye care services. Certain of our forms of services
agreements provide that all advertising shall conform to these requirements, but
there can be no assurance that the interpretation of the applicable laws or our
advertising will not inhibit us or result in legal violations that could have a
material adverse effect on us.
The laws described above have civil and criminal penalties and have been
subject to limited judicial and regulatory interpretation. They are enforced by
regulatory agencies that are vested with broad discretion in interpreting their
meaning. Our agreements and activities have not been examined by federal or
state
16
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 payors will not be held invalid and
unenforceable. In addition, these laws and their interpretation vary from state
to state. The regulatory framework of certain jurisdictions may limit our
expansion into, or ability to continue operations within, such jurisdictions if
we are unable to modify its operational structure to conform with such
regulatory framework. Any limitation on our ability to continue operating in the
manner in which it has operated in the past could have an adverse effect on our
business, financial condition and results of operations.
CREDIT FACILITY
On August 13, 1999, we and certain of our subsidiaries entered into a loan
and security agreement and certain other agreements relating to the loan
agreement with a group of lenders represented by Bank Austria Creditanstalt
Corporate Finance, Inc. The outstanding balance under this credit facility as of
March 15, 2000, is approximately $29.6 million.
Under the terms of the credit facility, the lenders have made available a
maximum aggregate principal amount at any time outstanding of $34.2 million,
which includes a term loan facility in the aggregate principal amount of $21.5
million, and a revolving credit facility in the maximum aggregate principal
amount at any time outstanding of $12.7 million, including, a letter-of-credit
sub-facility of up to $1.5 million. We use our credit facility to supplement
working capital.
We may borrow and repay under the revolving credit facility until June 1,
2004, subject to the terms and conditions of the credit facility. The term loan
facility is repayable in fifteen quarterly principal installments, with the
first fourteen installments repayable in accordance with the amortization
schedule set forth in the credit facility, and the final payment of all
principal amounts outstanding, being due and payable on June 1, 2004. The credit
facility also requires us to make certain mandatory prepayments, including upon
the offering of common stock, and allows us to make optional prepayments. The
credit facility terminates, and all amounts outstanding under the credit
facility are due and payable, on June 1, 2004.
The interest rate under the credit facility equals the base rate or the
eurodollar rate (each, as defined in the credit facility), as we may from time
to time elect. The base rate is generally the higher of (a) the prime rate of
Bank Austria for domestic commercial loans in effect on such applicable day, or
(b) the federal funds rate in effect on such applicable day plus one-half
percentage point. The eurodollar rate generally equals the quotient of the
offered rate quoted by Bank Austria in the interbank eurodollar market for U.S.
dollar deposits of an aggregate amount comparable to the principal amount of the
eurodollar loan to which the quoted rate is to be applicable.
Our subsidiaries have guaranteed the payments and our other obligations
under the credit facility, and we and certain of our subsidiaries have granted a
security interest in substantially all assets, in favor of our lenders. We have
pledged the capital stock of certain of our subsidiaries to the lenders.
The credit facility contains certain restrictions on the conduct of our
business, including restrictions on incurring debt, declaring or paying any cash
dividends or any other payment or distribution on our capital stock, and
creating liens on our assets. We are required to maintain certain financial
covenants, including, a minimum fixed charge coverage ratio, a leverage ratio, a
senior leverage ratio, and
17
an interest coverage ratio. We are also restricted from incurring capital
expenditures in excess of a specified amount and are required to achieve minimum
cash flows.
The occurrence of certain events or conditions described in the credit
facility constitute an "event of default," including:
o failure to make payment of principal or interest when due;
o failure to observe or perform certain affirmative covenants and other
covenants; or
o the occurrence of a vacancy in the offices of the chief executive or
chief financial officer which is not filled by a person reasonably
acceptable to the lenders.
For further information regarding our credit facility, see
"Management's Discussions and Analyses of Financial Conditions and Results of
Operations - Liquidity."
EMPLOYEES
We and our affiliates have approximately 925 employees, including 110
executive or managerial personnel, 207 licensed ophthalmologists, optometrists,
and opticians and 148 ophthalmologist assistants. These amounts include an
aggregate of 259 part-time personnel, i.e., working fewer than 30 hours per
week. We believe that our relations with our employees are good. We are not a
party to any collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTIES
We have executive offices in Waterbury, Connecticut and Rocky Mount, North
Carolina. The Waterbury facility, which contains corporate offices, Managed Care
offices and an integrated eye health center, is leased under four separate
leases with remaining terms ranging from five to 13 years. Each of these leases
also has renewal options ranging from five to 20 years in total. The combined
base annual rent is $865,817 for a total of 47,200 square feet.
The Rocky Mount facilities, which contain executive offices, HMO offices
and an operations center, are adjacent facilities leased under four separate
leases with remaining terms of three to five years. The combined base rent for
these four facilities is $239,000 for a total of 33,900 square feet.
Each of the foregoing offices is leased from a party that is affiliated or
associated with one or more of our directors or executive officers. See
"Certain Relationships and Related Transactions."
We lease 32 additional offices in the states of Connecticut, North
Carolina, Florida and Texas, principally for its eye health services and retail
optical operations. These leases have remaining terms of between one and 11
years. Many of these leases are also subject to renewal options. We believe our
properties are adequate and suitable for its business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
18
OptiCare Eye Health Centers Physicians Action and Countersuits. Seven
physicians employed by OptiCare, P.C. commenced an action in January 1999 in the
Connecticut Superior Court complaining of inducements that led them to affiliate
with OptiCare Eye Health Centers. Shortly after the commencement of the action,
three of the plaintiffs withdrew from the lawsuit. The remaining four plaintiffs
seek damages for individual harm they claim to have suffered. One plaintiff also
purports to sue derivatively on behalf of OptiCare Health Eye Centers for harm
suffered by the shareholders. The defendants deny the factual and legal validity
of the claims asserted and have moved to dismiss the complaint. The derivative
portion of the complaint was dismissed on June 14, 1999. Dr Yimoyines, our
Chairman, Chief Executive Officer and President, has been named as a defendant
in this action.
OptiCare Eye Health Centers and OptiCare P.C. instituted actions in January
and February, 1999, in the Connecticut Superior court against two physicians for
unfair trade practices, tortious interference and abuse of process based on
defendants' course of conduct that plaintiffs complain is unlawfully designed to
force plaintiffs to modify the defendants' employment contracts. Defendants have
moved to strike the complaint. OptiCare Eye Health Centers and OptiCare, P.C.
are opposing the motion to strike, and if successful in their opposition intend
to vigorously pursue their claims. We have also brought a counterclaim against
three of the physicians for anticipatory breach of contract. The foregoing
actions have been consolidated in Connecticut Superior Court. These actions are
in the early stages of discovery. We believe that we will prevail in these
actions. However, if the physicians prevail in these actions, our business,
financial condition and results of operations could be materially adversely
affected.
Missouri Action, Counterclaim and Related Put Option. PrimeVision Health
commenced an action (the "Missouri Action") in United States District Court for
the Eastern District of Missouri, in August 1998, seeking damages from an
ophthalmologist (the "Missouri Seller") who sold his ophthalmology practice to
PrimeVision Health. PrimeVision Health has alleged that the Missouri Seller
falsely and fraudulently inflated the value of the corporation he sold to
PrimeVision Health, in the amount of approximately $2 million. The Missouri
Seller has counterclaimed against PrimeVision Health, for, among other things,
enforcement of a put option, damages for allegedly malicious prosecution and a
declaration that his administrative services agreement with PrimeVision Health
is terminated and of no further force or effect. The litigation is in its
earliest stages.
As part of the purchase transaction, PrimeVision Health issued a put option
by which the Missouri Seller, at his election, may require PrimeVision Health to
purchase the balance of his ophthalmology practice, based on substantially the
same valuation which PrimeVision Health is challenging in court. The exercise
price that would be payable by PrimeVision Health under the put option is
approximately $4 million. In January 1999, the Missouri Seller exercised the put
option. PrimeVision Health has asserted to the Missouri Seller that PrimeVision
Health is not obligated to honor the put for the same reasons that PrimeVision
Health is seeking damages in the Missouri Action -- that the value of the
corporation sold by the Missouri Seller to PrimeVision Health was falsely
inflated. As noted above, the Missouri Seller has counterclaimed in the Missouri
Action to enforce the put. We believe that we will prevail in the pending
Missouri Action and in any attempt to enforce the put. If the Missouri Seller
were to prevail in this action, our business, financial condition and results of
operations could be materially adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of 1999.
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
19
The following information about the market prices of our common stock
should be read in light of the material and substantial qualitative changes in
our business that became effective upon the closing of the mergers of Saratoga
with PrimeVision Health and OptiCare Eye Health Centers, on August 13, 1999.
Among other changes (i) Saratoga effected a 0.06493-for-1 reverse stock split on
August 13, 1999, (ii) Saratoga spun off to its stockholders of record prior to
the mergers, the capital stock of certain subisidiaries, and (iii) the issuance
of approximately 8.7 million of post-reverse-stock-split common stock to
effectuate the mergers. The prices reported below for periods ending on or
before August 13, 1999 have been adjusted to reflect the reverse stock split.
Commencing August 16, 1999, our common stock has been listed on the
American Stock Exchange and is traded under the symbol "OPT" (or, from August 16
through September 20, 1999 under the symbol "OPTWI"). Prior to August 16, 1999,
our common stock was not listed on any stock exchange, but quotations from time
to time were reported by the NASD on the OTC bulletin Board under the symbol
"SRIK."
The high and low prices for the period from August 16, 1999 through
December 31, 1999 are based on trades effected on the American Stock Exchange.
The range of high and low bid information for the shares of our common stock for
the last two complete fiscal years, and for January 1 through August 13, 1999,
as set forth below, was reported by the National Quotation Bureau. Such
quotations represent prices between dealers, do not include retail markup,
markdown or commission, and may not represent actual transactions.
1999 HIGH LOW
---- ---- ---
4th Quarter $5.00 $2.75
3rd Quarter*:
August 16 - September 30* 12.50 5.00
July 1 - August 13** 0.106 0.037
2nd Quarter 0.067 0.004
1st Quarter 0.004 0.004
1998
----
4th Quarter 0.016 0.004
3rd Quarter 0.016 0.016
2nd Quarter 0.073 0.012
1st Quarter 0.012 0.012
* The range of prices and quotations in the 3rd Quarter of 1999 is reported
separately for periods ending on or before August 13, 1999, which is the
last trading day before the reverse stock split and the mergers of OptiCare
health Centers and Prime Vision Health became effective.
** Quotations for all periods ending on or before August 13, 1999, have been
adjusted to give effect to a 1-for-.06493 reverse stock split that became
effective at the close of business on August 13, 1999.
20
On March 15, 2000, the last reported sale price of our common stock on the
American Stock Exchange was $4.00 per share. As of March 15, 2000, there were
approximately 183 stockholders of record of our common stock.
We have never paid any cash dividends on our common stock and do not intend
to pay any cash dividends for the foreseeable future. It is our present policy
that any retained earnings will be used for repayment of indebtedness, working
capital, capital expenditures and general corporate purposes. Furthermore, we
are precluded from declaring or paying any cash dividends, or making a
distribution to our stockholders under the covenants of our revolving credit and
term loan agreements, until the termination of such agreement and the repayment
of all amounts due to such lender.
Recent Sales of Unregistered Securities
Described below is information regarding all of our equity securities that
we have issued during 1999 that were not registered under the Securities Act.
On or about August 13, 1999, in connection with the closing of the mergers,
we granted options to purchase 631,367 shares of our common stock under the
Performance Stock Program, at an average exercise price of $5.44 per share, in
replacement of options previously granted by each of Prime Vision Health, Inc.
and OptiCare Eye Health Centers, Inc.
On or about August 13, 1999, we granted options to purchase 721,250
shares of our common stock under the Performance Stock Program, at an average
exercise price of $5.85 per share.
On August 13, 1999, in connection with entering into a new credit facility,
we issued to Bank Austria Creditanstalt Corporate Finance, Inc. (i) 418,803
shares of the Series A Convertible Preferred Stock upon conversion by the bank
of debt in the amount of $2,450,000 and (ii) as a financing fee, 100,000
warrants to purchase, at an exercise price of $5.85 per warrant, 100,000 shares
of (A) our common stock or (B) Series A Convertible Preferred Stock, or (C) a
combination of our common stock and Series A Convertible Preferred Stock
aggregating 100,000 shares.
On August 13, 1999, in connection with the mergers, we issued a convertible
promissory note in the aggregate principal amount of $4,000,000 to Marlin
Capital, L.P. in exchange for among other things, the cancellation of 4,000
shares of Preferred Stock of Prime Vision Health, Inc. See "Certain
Relationships and Related Transactions - Arrangements with Marlin Capital, L.P."
On October 1, 1999, we entered into a stock purchase agreement with Stephen
Cohen, Robert Airola, Gerald Mandel and Reginald Westbrook. Pursuant to the
agreement, we acquired all of the issued outstanding shares of capital stock of
Cohen Systems, Inc. d/b/a CC Systems, Inc. in exchange for, among other things,
a base purchase price comprised of 110,000 shares of our common stock, and
$750,000 in the form of installment payments over a two year period and a
promissory note.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. No underwriter was engaged in connection with
the foregoing sales of securities. We have reason to believe that (i) all of the
foregoing purchasers were familiar with or had access to information concerning
our operations and financial condition, (ii) all of those individuals purchasing
securities represented that they acquired the shares for investment and not with
a view to the distribution thereof, and (iii) other than with respect to the
21
options, that the foregoing purchasers are accredited investors within the
meaning of Regulation D promulgated under the Securities Act. At the time of
issuance, all of the foregoing securities of our common stock were deemed to be
restricted securities for purposes of the Securities Act and the certificates
representing such securities bore or will bear legends to that effect.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data has been
derived from audited historical financial statements and should be read in
conjunction with the consolidated financial statements of the company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere herein. The company in its
present form is the result of mergers completed on August 13, 1999 among
Saratoga, PrimeVision Health and OptiCare Eye Health Centers. For accounting
purposes, PrimeVision Health was treated as the accounting acquirer and,
therefore the predecessor business for historical financial statement reporting
purposes.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 (1) 1998 1997 1996 1995
-------- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Total net revenues $94,633 $64,612 $58,346 $52,157 $38,523
Income (loss) from continuing operations 351 (3,239) (2,034) (767) (391)
Weighted average shares outstanding (2) 4,776 2,256 1,856 693 -
Income (loss) from continuing operations
per share (3) $ (0.05) $ (2.54) $ (1.10) $ (1.11) $ -
(1) The Company acquired OptiCare Eye Health Centers, Inc. on August 13, 1999
and Cohen Systems, Inc. on October 1, 1999, which were accounted for as
purchases. Accordingly, the results of operations of OptiCare Eye Health
Centers and Cohen Systems, Inc. are included in the historical results of
operations since September 1, 1999 and October 1, 1999, respectively, the
deemed effective dates of the acquisitions for accounting purposes.
(2) The weighted average common shares outstanding have been adjusted to
reflect the conversion associated with the reverse merger with Saratoga.
(3) Income (loss) from continuing operations per share for 1999 and 1998 are
calculated after giving effect to preferred stock dividends.
AS OF DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Net assets of discontinued operations - $5,582 $69,473 $13,845 -
Total current assets $ 21,345 20,237 18,274 20,306 $5,315
Total assets 66,740 26,556 86,397 26,296 11,873
Total current liabilities 20,654 51,198 8,289 4,138 2,941
Total debt (including current portion) 43,148 39,976 46,536 22,273 6,895
Mandatorily redeemable preferred stock - 9,200 - - 40
Total stockholders' equity (deficit) 5,274 (34,690) 4,546 4,683 23,036
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto of OptiCare Health Systems, Inc., which
are included elsewhere herein. See the Index to Financial Statements, beginning
at page F-1.
Overview. OptiCare Health Systems, Inc. is an integrated eye care services
company that delivers a range of services and systems for eye health
professionals and consumers, including laser correction, managed care and
professional eye care services. On August 13, 1999 Saratoga Resources, Inc.
("Saratoga"), a Delaware corporation, PrimeVision Health, Inc. and OptiCare Eye
Health Centers, Inc. merged (the "Mergers") pursuant to the terms of an
Agreement and Plan of Merger dated as of April 12, 1999. In this transaction
PrimeVision Health merged with Saratoga through a reverse acquisition by
PrimeVision Health of Saratoga at book value with no adjustments reflected to
historical values. Immediately following the PrimeVision Health merger, OptiCare
Eye Health Centers was acquired by Saratoga, which was accounted for under the
purchase method of accounting with the excess of purchase price over the
estimated fair value of net assets acquired recorded as goodwill.
In connection with the merger, our shareholders approved an amendment to
the Articles of Incorporation changing, among other things, the company's name
to OptiCare Health Systems, Inc., effective August 13, 1999.
For accounting purposes, PrimeVision Health was the accounting acquirer and
the surviving accounting entity. Accordingly, the operating results of OptiCare
Eye Health Centers have been included in the accompanying consolidated financial
statements since September 1, 1999, the deemed effective date of the acquisition
for accounting purposes. The impact of results from August 13, 1999 through
August 31, 1999 are deemed immaterial to the consolidated financial statements.
Financial results for periods prior to September 1, 1999 are based solely upon
the results reported by Prime and its subsidiaries. The excess of the aggregate
purchase price including merger costs of $29.1 million over the estimated fair
value of the net assets acquired was approximately $20.7 million. Of this excess
$18.5 million has been recorded as goodwill and is being amortized on a
straight-line basis over 25 years and $2.2 million has been used to eliminate
the valuation allowance related to Prime's deferred tax assets. In addition, the
company recorded an intangible asset of $7.1 million in connection with a new
administrative services agreement that is being amortized over 25 years.
On October 1, 1999, we purchased Cohen Systems, Inc. (the "Cohen
Acquisition"), a software systems provider specializing in point of sale and
internet-based solutions for optical retail and optical manufacturing
laboratories. The total purchase price of approximately $1.6 million was
comprised of approximately $0.8 million in cash and notes payable and 110,000
shares of common stock (having a value of approximately $0.8 million). The Cohen
Acquisition was accounted for under the purchase method of accounting, whereby
the purchase cost has been allocated to the fair value of assets acquired and
liabilities assumed with the excess identified as goodwill. Fair values were
based on valuations and other studies. The goodwill resulting from this
transaction was approximately $1.2 million and is being amortized on a
straight-line basis over 25 years. The results of operations of Cohen Systems,
Inc. are included in our consolidated financial statements from the purchase
date.
23
In the fourth quarter of 1999, our board of directors approved a new
corporate strategy to focus on the growth of laser correction in the eye care
industry. In connection with that strategy, we reorganized our operations from
two operating segments into three segments : (1) laser correction and
professional services, (2) managed care services and (2) other integrated
services. The laser correction and professional services segment includes a
range of services rendered to licensed practitioners of ophthalmology and
optometry, including the development and marketing of laser correction centers,
the sale of eye health systems and software, and the operation of ambulatory
surgery centers. The managed care segment provides a range of administrative,
network management and related services to health maintenance organizations and
other health care entities. The integrated services and product sales segment
operates integrated eye health centers in Connecticut and owns and operates
retail optical stores in Connecticut and North Carolina. This segment also
includes a buying group program for optical products.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Laser correction and professional services revenue. Laser correction and
professional services revenue was $4.1 million for the year ended December 31,
1999. This revenue was comprised of $1.5 million from laser vision correction
and ambulatory surgery services, $1.6 million from HSO service agreements and
$1.0 million of revenue from Cohen Systems, Inc. for the three months ended
December 31, 1999. There was no such revenue from these operations in 1998 or
1997.
Managed care services revenue. Managed care revenue increased to $24.4
million for the year ended December 31, 1999 from $14.9 million for the year
ended December 31, 1998, an increase of $9.5 million or 63.8%. Of this increase,
$3.7 million represents managed care revenue of OptiCare Eye Health Centers for
the months of September through December 1999. The remaining increase is due to
new managed care contracts and growth in existing member lives.
Other integrated services revenue. Integrated services and product sales
revenue increased to $66.1 million for the year ended December 31, 1999 from
$49.7 million for the year ended December 31, 1998, an increase of $16.4 million
or 33.0%. Of this increase $10.4 million represents optometry and ophthalmology
revenue of OptiCare Eye Health Centers for the months of September through
December 1999. The increase is also a result of growth in revenue from the
buying group that increased from $30.0 million for the year ended December 31,
1998 to $33.4 million for the year ended December 31, 1999, an increase of $3.4
million or 11.3%. The remaining increase is attributable to growth in the other
optometry and retail areas.
Cost of product sales. Cost of product sales increased to $41.2 million for
the year ended December 31, 1999 from $35.2 million for the year ended December
31, 1998, an increase of $6.0 million or 17.1%. Of this increase approximately
$3.3 million represents an increase in costs of product sales related to the
buying group program, representing an increase of approximately 11.9% from 1998
and is consistent with the related increase in buying group revenue. In
addition, approximately $1.8 million of this increase relates to cost of product
sales associated with the optometry, ophthalmology and surgical centers
operations of OptiCare Eye Health Centers for the months of September through
December 1999. The remaining increase is consistent with the increases in
revenues in the other optometry and software sales areas.
Medical claims expense. Medical claims expense increased to $19.5 million
for the year ended
24
December 31, 1999 from $11.0 million for the year ended December 31, 1998, an
increase of $8.5 million or 77.3%. This increase is primarily due to new managed
care contracts and growth in existing member lives and is consistent with the
increase in managed care services revenue. The remaining increase of
approximately $2.7 million represents medical claims expenses of OptiCare Eye
Health Centers for the four months ended December 31, 1999.
Salaries wages & benefits. Salaries, wages and benefits increased to $20.1
million for the year ended December 31, 1999 from $9.3 million for the year
ended December 31, 1998, an increase of $10.8 million or 116.1%. Of this
increase $8.0 million represents compensation expenses of OptiCare Eye Health
Centers for the months of September through December 1999. The remaining
increase primarily represents increased employee costs associated with servicing
increased managed care contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $7.9 million for the year ended December
31, 1999 from $6.0 million for the year ended December 31, 1998, an increase of
$1.9 million or 31.7%. This increase is primarily attributed to the general and
administrative expenses of OptiCare Eye Health Centers for the period September
1 through December 31, 1999.
Interest Expense. Interest expense decreased to $3.2 million for the year
ended December 31, 1999 from $4.5 million for the year ended December 31, 1998,
a decrease of $1.3 million or 28.9%. Interest expense primarily relates to our
bank indebtedness and notes payable to sellers in connection with acquisition
activities. The decrease in interest expense is primarily due to the reduction
in outstanding bank debt and reduced interest rates associated with the mergers
in August 1999 and the reduction in the seller notes payable in connection with
the disposal of PrimeVision Health's ophthalmology division in December 1998.
Income (loss) from continuing operations before income taxes. Income from
continuing operations before income taxes increased to $0.6 million for the year
ended December 31, 1999 from a loss of $(2.8) million for the year ended
December 31, 1998, an increase of $3.4 million or 121.4%. This increase was
primarily attributed to revenue growth and the reduction of interest expense as
described above.
Income tax expense. The effective tax rate for the year ended December 31,
1999 of 45.2% represents the tax expense on the book income for the year. The
1999 rate differs from the statutory rate primarily due to state income taxes
and non-deductible goodwill amortization.
Loss from discontinued operations, net of tax. Discontinued operations
represent the loss from Prime's ophthalmology division. Loss from discontinued
operations for the year ended December 31, 1998 was $34.9 million. Discontinued
operations for the year ended December 31, 1999 includes an additional loss on
disposal of $2.3 million, which represents our revised estimate of loss.
Net Income (loss). The company had a net loss of $2.0 million for the year
ended December 31, 1999 compared to a net loss of $38.1 million for the year
ended December 31, 1998, a decrease of $36.1 million. This change was the result
of an increase in net income from continuing operations of $3.6 million and a
decrease in the loss from discontinued operations of $32.5 million.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
25
For the year ended December 31, 1998, the company recorded a net loss of
approximately $38.1 million, was highly leveraged and was not in compliance with
its bank debt covenants. Accordingly, all bank debt was classified in current
liabilities at December 31, 1998. Management determined that the ophthalmology
segment was the main contributing factor to the company's liquidity problems,
due to lower than anticipated cash flows from the ophthalmology practices, as
evidenced by the historical operating losses experienced by the ophthalmology
segment.
On December 15, 1998, in recognition of the significant losses and the fact
that the physician practice management business model as operated by the company
was largely unsuccessful, the company determined that the business should be
disposed of and that a combination should be sought with a related business with
a stronger infrastructure. Subsequent to such decision by the board, the merger
among Saratoga, PrimeVision Health and OptiCare Eye Health Centers was approved.
Other integrated services net revenue. Other integrated services revenue
decreased to $49.7 million for the year ended December 31, 1998 from $50.9
million for the year ended December 21, 1997, a decrease of $1.2 million or
2.4%. This change is primarily due a decrease in the revenues in the buying
group and is slightly offset by a small increase in the optometry division.
Managed care services revenue. Managed care net revenue increased to $14.9
million for the year ended December 31, 1998 from $7.4 million for the year
ended December 31, 1997, an increase of $7.5 million or 101.3%. This increase is
primarily attributable to additional managed care contracts in 1998.
Cost of product sales. Cost of product sales decreased to $35.2 million for
the year ended December 31, 1998 from $37.0 million for the year ended December
31, 1997, a decrease of $1.8 million or 4.9%. This decrease is consistent with
the related decrease in other integrated services revenue.
Medical claims expense. Medical claims expense increased to $11.0 million
for the year ended December 31, 1998 from $5.0 million for the year ended
December 31, 1997, a increase of $6.0 million or 120%. This increase is
consistent with the increase in managed care revenues.
Salaries, wages & benefits. Salaries, wages and benefits were relatively
unchanged at $9.3 million for the year ended December 31, 1998 compared to $ 9.1
million for the year ended December 31, 1997, an increase of $0.2 million or
2.2%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $6.0 million for the year ended December
31, 1998 from $5.2 million for the year ended December 31, 1997 an increase of
$0.8 million or 15.4%. The increase in 1998 was primarily due to additional
costs to support revenue growth in the managed care division.
Interest expense. Interest expense increased to $4.5 million for the year
ended December 31, 1998 from $3.9 million for the year ended December 31, 1997,
an increase of $0.6 million or 15.4%. This increase is due to increased
borrowings on PrimeVision Health's bank credit facility resulting from
acquisitions and lower than expected cash generation in the discontinued
ophthalmology business.
Loss from continuing operations before income taxes. Loss from continuing
operations before income taxes decreased to $2.8 million for the year ended
December 31, 1998 from $3.1 million for the year ended December 31, 1997, a
decrease of $0.3 million or 9.7%.
26
Income taxes. The effective tax rate for the year ended December 31, 1998
of 15.5% represents the tax expense on book losses during 1998. The book basis
loss before income taxes is significantly more than the tax basis loss.
Accordingly, the effective tax rate differs from the statutory rate. Prime's
effective tax rate in 1997 was (33.7%).
Income (loss) from discontinued operations, net of tax. Discontinued
operations represent the income (loss) from Prime's ophthalmology division. Loss
from discontinued operations for the year ended December 31, 1998 was $34.9
million. In 1997, income from discontinued operations was $0.6 million.
Net loss. The company had a net loss of $38.1 million for the year ended
December 31, 1998 compared to a net loss of $1.4 million for the year ended
December 31, 1997, an increase in loss of $36.7 million. This change was the
result of the $34.9 million loss from discontinued operations in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The company's principal sources of liquidity are from cash flows generated
from operations and from borrowing under the company's credit facility. The
company's principal uses of liquidity are to provide working capital, meet debt
service requirements and finance the company's strategic plans. As of December
31, 1999, the company had cash and cash equivalents of approximately $2.9
million and $0.8 million of additional borrowing capacity available under its
revolving credit facility, net of a $0.4 million letter of credit obligation.
In August 1999, in connection with the mergers, the company entered into a
loan agreement (the "Credit Facility") with Bank Austria. Proceeds from the
Credit Facility were used to pay certain indebtedness of Prime Vision Health and
OptiCare Eye Health Centers and to fund the company's business operations. The
Credit Facility provides the company with a $21.5 million term loan and up to a
$12.7 million revolving credit facility and is secured by a security interest in
substantially all of the assets of the company. The company is required to
maintain certain financial ratios, which are to be calculated on a quarterly and
annual basis beginning on December 31, 1999. The first principal payment on the
term loan is April 1, 2000 and the Credit Facility terminates and all amounts
outstanding thereunder are due and payable on June 1, 2004. As of December 31,
1999, the company had advances outstanding of $11.5 million under the credit
facility.
The interest rate applicable to the credit facility will equal the Base
Rate or the Eurodollar Rate (each, as defined in the loan agreement with Bank
Austria ("Loan Agreement")), as the company may from time to time elect, in
accordance with the provisions of the Loan Agreement. The base rate will
generally be the higher of (a) the prime rate of Bank Austria for domestic
commercial loans in effect on such applicable day or (b) the federal funds rate
in effect on such applicable day plus one-half of one percent (1/2 of 1%), which
generally equals LIBOR plus 2.25% (in January 2000, the rate decreased to LIBOR
plus 1.75%). The Eurodollar rate will generally equal the offered rate quoted by
Bank Austria in the inter-bank Eurodollar market for U.S. dollar deposits of an
aggregate amount comparable to the principal amount of the Eurodollar loan to
which the quoted rate is to be applicable.
For the year ended December 31, 1999 the company used $0.4 million in
operating activities, $1.2 million in investing activities and $1.5 million in
financing activities. Cash used in operating activities included $2.3 million of
discontinued operations partially offset by a non-cash charge of 2.0 million of
depreciation and amortization. Cash used in investing activities included $1.9
million of capital expenditures. Net cash used in financing activities included
$32.5 million for the repayment of the old credit facility and $33.0 million of
proceeds from the new credit facility.
27
of borrowings under the company's revolving credit facility, which is partially
offset by $1.7 million of principal repayments.
For the year ended December 31, 1998 the company generated $2.2 million in
operating activities and $1.9 million in financing activities while investing
activities used cash of $0.6 million. Cash from operating activities represents
a $3.2 million net loss from continuing operations, a non-cash charge of $1.4
million of depreciation and amortization, an increase in accounts receivable and
decreases in inventory, accounts payable and accrued expenses. Net cash provided
from financing activities consisted of $8.0 million from the issuance of
mandatorily redeemable preferred stock that is partially offset by the repayment
of $6.0 million of bank indebtedness. Cash used in investing activities
consisted of $0.6 million of capital expenditures.
For the year ended December 31, 1997, proceeds from the issuance of
long-term debt totaled $28.8 million, which was primarily used in the
discontinued operations of the company.
As of December 31, 1999, under agreements with the North Carolina and Texas
Departments of Insurance, the company was required to maintain restricted
investments of $25,000 and $500,000 on behalf of these respective regulatory
bodies. In addition, the company is not to declare or pay dividends or otherwise
transfer any funds from its limited purpose health maintenance organization in
Texas without prior approval from the Department of Insurance. As of January 1,
2000, the company withdrew its HMO license in North Carolina and is no longer
subject to any liquidity restrictions with the North Carolina Department of
Insurance. The company does not believe the requirements of the Texas Department
of Insurance will have a material impact on the company's liquidity.
In January 2000, the company completed the sale of 3,571,429 registered
shares of common stock. The net proceeds from the stock offering were
approximately $12.5 million, which included the cancellation of a $2 million
subordinated note payable previously issued by the company. The company used
$7.0 million of the net proceeds to pay down long-term debt and expects to use
the remaining proceeds for, among other things, expansion of laser correction,
working capital and general corporate purposes.
Management believes that the combination of funds expected to be provided
by its operations and its Credit Facility will be sufficient to meet funding
needs for the next twelve months. The company may incur additional indebtedness
and may issue notes or equity securities, in public or private transactions, in
order to fund future acquisitions, capital expenditure and working capital
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The company 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 affect
on the company's results of operations if it can not 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 the
company's non-Medicare business is also affected by changes in Medicare
reimbursement rates.
Management believes that inflation has not had a material effect on the
company's revenues for the past three years.
28
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-K and elsewhere (such as in other
filings by the company with the Securities and Exchange Commission, press
releases, presentations by the company or its management and oral statements)
may constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include those relating to future opportunities, the outlook of customers, the
reception of new services, technologies and pricing methods, resolution of the
Year 2000 Issue, existing and potential strategic alliances, development and
execution of an e-commerce strategy, the success of initiatives including
opening laser vision correction centers and the likelihood of incremental
revenues offsetting expense related to those new initiatives. In addition, such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the company to be materially different from any future results expressed or
implied by such forward-looking statements. Such factors include: changes in the
regulatory environment applicable to the company's business, demand and
competition for the company's products and services, general economic
conditions, risks related to the eye care industry, the company's ability to
successfully integrate and profitably operate its operations, and other risks
detailed from time to time in the company's periodic earnings releases and
reports filed with the Securities and Exchange Commission, as well as the risks
and uncertainties discussed in this Form 10-K. The company undertakes no
obligation to publicly update or revise forward looking statements to reflect
events or circumstances after the date of this Form 10-K or to reflect the
occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is subject to market risk from exposure to changes in interest
rates based on financing activities under the company's credit facility. The
nature and amount of the company's indebtedness may vary as a result of future
business requirements, market conditions and other factors. The extent of the
company's interest rate risk is not quantifiable or predictable due to the
variability of future interest rates and financing needs. The company does not
expect changes in interest rates to have a material effect on income or cash
flows in the year 2000, although there can be no assurances that interest rates
will not significantly change. An increase of 10% in the interest rate payable
by the company would increase the annual interest expense by $0.3 million,
assuming that the company's borrowing level is unchanged. The company did not
use derivative instruments to adjust the company's interest rate risk profile
during the year ended December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the reports of
independent certified public accountants thereon are set forth on pages F-1
through F- 24 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Our board of directors formally approved the appointment of Deloitte &
Touche LLP as its
29
independent accountants on August 30, 1999, and at the same time, determined not
to engage Ernst & Young LLP as the Company's independent accountants for the
year ended December 31, 1999. Ernst & Young LLP audited Saratoga's consolidated
financial statements as of and for the year ended December 31, 1998. The board
of directors of Saratoga formally approved the appointment of Ernst & Young LLP,
of Dallas, Texas, as its independent accountants to audit Saratoga's
consolidated financial statements for 1998 on March 29, 1999.
The report of Ernst & Young LLP on Saratoga's consolidated financial
statements for 1998 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principle. In connection with Ernst & Young's audit of Saratoga's financial
statements for 1998, and through March 29, 1999, Ernst & Young LLP had no
disagreements with the company or Saratoga on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Ernst &
Young LLP, would have caused them to make reference to those disagreements in
their report on Saratoga's consolidated financial statements for 1998. At
Saratoga's request, Ernst & Young LLP furnished a letter addressed to the
Securities and Exchange Commission stating that it agrees with the previous
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and position of each of our
directors and executive officers as of March 15, 2000. 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 POSITIONS
- ---- --- ---------
Dean J. Yimoyines, M.D. 52 Chairman of the Board of Directors, President and Chief Executive
Officer
Steven L. Ditman 45 Executive Vice President, Chief Financial Officer and Director
Allan L.M. Barker, O.D. 52 President of the Laser Correction and Professional Services Division
Martin E. Franklin 35 Director
John F. Croweak 63 Director
Carl J. Schramm 53 Director
Ian G.H. Ashken 39 Director
D. Blair Harrold, O.D. 53 President of Retail Optometry, North Carolina Operations
Samuel B. Petteway 43 President of the Managed Care Division
Gordon A. Bishop 50 President of the Buying Group
Dr. Yimoyines has served as Chairman of the Board, Chief Executive Officer
and President since August 13, 1999. Dr. Yimoyines is a founder of OptiCare Eye
Health Centers and has served as the
30
Chairman, President and Chief Executive Officer of OptiCare Eye Health Centers
since 1985. Dr. Yimoyines has been instrumental in the development and
implementation of OptiCare Eye Health Centers business for nearly twenty years.
He graduated with distinction from the George Washington School of Medicine. He
completed his ophthalmology residency at the Massachusetts Eye and Ear
Infirmary, Harvard Medical School. He completed fellowship training in
vitreoretinal surgery at the Retina Associates in Boston. Dr. Yimoyines is a
graduate of the OPM (Owner/President Management) program at Harvard Business
School and a Fellow of the American Academy of Ophthalmology.
Mr. Ditman has served as Executive Vice President, Chief Financial Officer
and a Director since August 13, 1999. Mr. Ditman served as a Director of
OptiCare Eye Health Centers since July 1989 and the Chief Financial Officer and
Treasurer of OptiCare Eye Health Centers since March, 1992. Mr. Ditman has also
served as Chief Operating Officer of OptiCare Eye Health Centers since May,
1998. From October, 1986 until March, 1992, Mr. Ditman served as Director,
Chief Financial Officer and Treasurer of the Daytona Group and Drubner
Broadcasting. During the same period of time, Mr. Ditman also served as Chief
Financial Officer and Treasurer of The Drubner Investment Group. Mr. Ditman
served as Corporate Controller of Victor Electric Wire and Cable Corporation
from November, 1981 until October, 1986. Mr. Ditman served as a senior auditor
for KPMG Peat Marwick from 1977 to 1981. Mr. Ditman received his Bachelor of
Science in Accounting from Northeastern University in June 1977. Mr. Ditman
became a Certified Public Accountant in 1980 and was licensed in the State of
Rhode Island.
Dr. Barker is President of the Laser Correction and Professional Services
Division and has served as a Director since August 13, 1999. Dr. Barker has
been a senior executive officer and Director of Prime since 1996. He is a
licensed optometrist with 25 years experience in the eye care industry. From
October, 1989 to July, 1996, Dr. Barker served as co-president of Consolidated
Eye Care, Inc., the parent company of AECC/Pearlman Buying Group and AECC Total
Vision Health Plan, Inc. Also during this period Dr. Barker served as vice
president and secretary of Optometric Eye Care Center, P.A. Dr. Barker received
his Doctor of Optometry degree in 1975 from Southern College of Optometry in
Memphis, Tennessee.
Mr. Franklin was a Director of PrimeVision Health from July, 1998 to
August 13, 1999. From February 1, 1997 through February 8, 2000, Mr. Franklin
has served as Chairman of the Board of Directors of Bolle Inc., an AMEX
company, which is a manufacturer, marketer and distributor of premium eyewear.
Mr. Franklin has been Chairman and Chief Executive Officer of Marlin Holdings,
Inc., the general partner of Marlin Capital, L.P., a private investment
partnership, since October, 1996. From May, 1996 until December, 1998, Mr.
Franklin served as Chairman and Chief Executive Officer of Lumen Technologies,
Inc., a NYSE company, which is a manufacturer and distributor of specialty
lighting equipment, and served as Executive Chairman from May, 1996 until
December, 1998. Mr. Franklin was Chairman of the Board and Chief Executive
Officer of Lumen's predecessor, Benson Eyecare Corporation from October, 1992
to May, 1996 and President from November, 1993 until May, 1996. Mr. Franklin
was non-executive Chairman and a director of Eyecare Products plc, a London
Stock Exchange Company, from December, 1993 until February, 1999. In addition,
Mr Franklin has served as a director of Specialty Catalog Corp., a NASDAQ
listed company, since 1994 and of Corporate Express, Inc., a NASDAQ listed
company since March, 1999. Mr. Franklin also serves on the boards of a number
of privately held companies and charitable organizations. Mr. Franklin received
a B.A. in Political Science from the University of Pennsylvania in 1986.
Mr. Croweak has served as a Director since August 13, 1999. Mr. Croweak
was a Director of OptiCare Eye Health Centers from September, 1995 to August
13, 1999. Mr Croweak was Chairman of the Board of Directors of Anthem Blue
Cross and Blue Shield of Connecticut state chartered from August, 1997 until
December, 1999. From April 4, 1988 through August, 1997, Mr. Croweak was Chief
Executive Officer
31
of Blue Cross and Blue Shield of Connecticut. Mr. Croweak served as a director
of Anthem Insurance Companies, Inc., a multi-state health insurance company
based in Indianapolis, Indiana, from August, 1997 until March, 2000. He is also
a director of United Illuminating, a diversified utility operator based in New
Haven, Connecticut and The New Haven Savings Bank, a state chartered savings
bank based in New Haven, Connecticut. Mr. Croweak received a BBA degree from
the University of Cincinnati in 1959.
Mr. Schramm is President of Greenspring Advisors, Inc., a consulting and
merchant banking firm specializing in health care information founded in 1995.
From 1993 to 1995, Mr. Schramm served as Executive Vice President of Fortis,
Inc., an international insurance and financial services company, where he
directed American health insurance operations. From 1987 through 1992, Mr.
Schramm was President of the Health Insurance Association of America, the
national trade association of commercial health companies. Prior to entering
the insurance industry, Mr. Schramm was a professor of Health Policy and
Management at Johns Hopkins from 1972 to 1987. Mr. Schramm holds a Ph.D. in
Economics from the University of Wisconsin and received his legal education at
Georgetown University.
Mr. Ashken, A.C.A., has served as a Director since August 13, 1999. Mr.
Ashken has been Vice Chairman of Marlin Holdings, Inc., the general partner of
Marlin Capital, L.P., since October, 1996. Mr. Ashken served as Vice-Chairman
and Secretary of Bolle Inc., an AMEX company, which is a manufacturer, marketer
and distributor of premium eyewear, from December, 1998 through February 8,
2000. From February, 1997 until his appointment as Vice-Chairman, Mr. Ashken
served as Executive Vice President, Chief Financial Officer, Assistant
Secretary and a Director of Bolle Inc. Mr. Ashken was elected Executive Vice
President, Chief Financial Officer, Assistant Secretary and a Director of Lumen
Technologies, Inc., a NYSE company, which is a manufacturer and distributor of
specialty lighting equipment, from December, 1995 until December, 1998. Mr.
Ashken was Chief Financial Officer of Lumen's predecessor, Benson Eyecare
Corporation, and a director of Benson Eyecare from October, 1992 to May, 1996.
Mr. Ashken also served as Benson Eyecare's Executive Vice President from
October, 1994 to May, 1996; and, Assistant Secretary from December, 1993 to
May, 1996. Mr. Ashken was a director of Eyecare Products plc, a London Stock
Exchange Company, from August, 1994 until in February, 1999. Mr. Ashken
received his B.A. (Hons) in Economics and Account from the University of
Newcastle in England.
Dr. Harrold has served as the President of Retail Optometry, North
Carolina Operations since August 13, 1999. Prior thereto, Dr. Harrold served as
a senior executive and director of PrimeVision Health since its acquisition of
Consolidated Eye Care, Inc. in July, 1996. Dr. Harrold founded Consolidated
Eyecare in 1989 and served as its Co-President until its acquisition by
PrimeVision Health. Dr. Harrold is a licensed optometrist, having graduated
from Ohio State University with a B.S. in physiological optics and a Doctor of
Optometry degree in 1971. Dr. Harrold has also served as President of
Optometric Eye Care Center, PA, a North Carolina professional association. Dr.
Harrold is a member of the American Optometric Association and the North
Carolina State Optometric Association and is also a Fellow in the American
Academy of Optometry.
Mr. Petteway has served as the President of the Managed Care Division
since August 13, 1999. Mr. Petteway has been President of PrimeVision Health's
managed care business operations since July, 1996 and, prior to PrimeVision
Health's acquisition of Consolidated Eye Care, Inc, the managed care business
operations of Consolidated Eyecare since 1989. Since October 1994, Mr. Petteway
has served as Chairman of the Board for Association of Eye Care Centers Total
Vision Health Plan, Inc. From April, 1995 through August 13, 1999, Mr. Petteway
served as the Chairman of the Board of AECC Total Vision Health Plan of Texas,
Inc., which are both owned by Prime. Prior to 1989, Mr. Petteway was President
of Strategic Health Services, providing consulting services to hospitals,
physicians, pharmacies and companies. Mr. Petteway
32
graduated from the University of North Carolina at Chapel Hill with a Bachelor
of Science in Pharmacy in 1979 and received a Masters in Business Administration
with Distinction from Campbell University in 1985.
Mr. Bishop has served as President of our Buying Group since August, 1999.
In that position, he has overall responsibility for our Buying Group and all
Connecticut retail optical operations. From June, 1998 to August, 1999, Mr.
Bishop directed the retail operations of OptiCare Eye Health Centers, Inc. Mr.
Bishop has over 30 years of experience in the optical industry, having served in
a variety of different capacities with different organizations in the United
States and Canada. From August of 1997 to April, 1998, he served as Vice
President of Operations for Public Optical. From July of 1994 to April of 1997,
he served as Operations Manager for Vogue Optical. From June of 1990 to July of
1994, he held positions of increasing responsibility with Standard Optical Ltd.
He ultimately held 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 and is certified by the American
Board of Opticianry and holds a Fellowship in the National Academy of
Opticianry.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On December 6, 1999 a former Director of the Company, David A. Durfee,
filed an amendment to a Form 3 originally filed in August of 1999. The original
Form 3 was filed on a timely basis, but Dr. Durfee's beneficial share ownership
was inadvertently misstated. A Form 3 and a Form 4 filed by us on behalf of
another Director, Martin E. Franklin, were each several days late because of
confusion over the correct privacy code assigned to Mr. Franklin for purposes of
electronic filings on the EDGAR system. The Form 3 reflected Mr. Franklin's
beneficial ownership at the time he became a Director of the Company on August
13, 1999. The Form 4 reflected one transaction - a purchase of common stock.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The Executive Compensation discussion below for periods prior to the
closing of the mergers on August 13, 1999, includes executive compensation of
directors and officers earned from PrimeVision Health and OptiCare Eye Health
Centers, as the case may be, and does not include any information relating to
Saratoga or Saratoga's officers and directors prior to the mergers.
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal years ended December 31,
1999, 1998 and 1997, compensation paid us to the Chief Executive Officer and our
four other most highly compensated executive officers whose total compensation
exceeded $100,000.
33
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------- -----------------
ALL OTHER
NAME AND PRINCIPAL POSITION (9) YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION (8)
- ------------------------------- ---- ---------- --------- ----------- ----------------
Dean J. Yimoyines, M.D. (1) 1999 403,650 62,152 325,000(7) 10,671
Chairman of the Board of 1998 360,537 139,756 286,450(6) 10,948
Directors, President and 1997 350,000 020,803 0 7,034
Chief Executive Officer
Steven L. Ditman (2) 1999 159,135 20,000 150,000(7) 2,700
Executive Vice President, 1998 145,673 32,000 72,977(6) 0
Chief Financial Officer 1997 125,000 20,000 0 692
and Director
Allan L.M. Barker, O.D. (3) 1999 263,161 0 0 5,000
President of the Laser 1998 305,028 271 0 5,160
Correction and Professional 1997 299,839 0 0 4,750
Services Division and Director
D. Blair Harrold, O.D. (4) 1999 263,485 0 0 3,566
President of Retail 1998 305,028 0 0 5,000
Optometry, North 1997 299,789 0