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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
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.
[ ]Yes [x]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 April 20, 2001 was $3,331,924. Trading in the registrant's
Common Stock was halted on April 20, 2001. The last reported sale price was
$0.26 per share.
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of November 1, 2001 was 12,815,092 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
OPTICARE HEALTH SYSTEMS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.......................................................3
ITEM 2. PROPERTIES....................................................17
ITEM 3. LEGAL PROCEEDINGS.............................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................20
ITEM 6. SELECTED FINANCIAL DATA.......................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...............34
ITEM 11. EXECUTIVE COMPENSATION........................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K .......................55
SIGNATURES..............................................................61
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PART I
ITEM 1. BUSINESS
GENERAL
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing managed care and professional eye care services. We provide
managed eye care services to health plans in eight states, and we own and
operate integrated eye health centers, including laser and ambulatory surgery
facilities and retail optical stores, in Connecticut and North Carolina. We
generate fee income by providing support services, such as wholesale buying
services, to eye care professionals around the country. We also develop and sell
integrated practice management systems, including Internet-based software
solutions, to eye care professionals.
RECENT DEVELOPMENTS
Proposed New Capital Structure for OptiCare
In November 2001, certain letters of intent were entered into concerning a
major capital restructuring of the company. If certain conditions are met and
the transactions contemplated by these letters of intent are consummated, these
transactions as presently proposed are expected (as of November 2001) to lower
the company's long-term debt by approximately $9.9 million, increase its equity
by approximately $9.0 million and reduce its next-12-months' debt service by
approximately $3.7 million.
One of the company's major shareholders, Palisade Concentrated Equity
Partnership, L.P. ("Palisade") reached preliminary agreement with the company's
senior lender, Bank Austria Creditanstalt Corporate Finance, Inc. ("Bank
Austria"), concerning new terms for refinancing all of the company's borrowings
and other direct and indirect obligations to Bank Austria. Those terms, if
accepted by Bank Austria and implemented as proposed, would provide that, in
exchange for payments to the bank by the company of approximately $23.4 million
(payable partly in cash at the closing and partly by issuance of a two-year
promissory note of the company), Bank Austria:
o Would cancel the company's existing principal and interest
obligations, which total approximately $31.6 million (approximately
$29.7 million in principal and $1.9 million in interest);
o Would eliminate the company's contingent exposure to Bank Austria,
which, as of November 1, 2001, totaled approximately $2.7 million;
o Would relinquish to the company (which would retire) all of Bank
Austria's stock, warrants and other ownership interests in the
company.
As part of Palisade's proposal, if the proposed transactions are
consummated, Palisade would also, subject to a number of conditions, provide
funds with which the company could satisfy bridge loans of $2.3 million, plus
interest, owed to Alexander Enterprise Holdings, Inc.
In this capital restructuring, if the proposed transactions are
consummated, Palisade would invest in the company a total of $3.5 million of
cash and provide letter of credit backing for obligations of the company
totaling $16.7 million. A portion of the letter of credit backing would support
new, secured credit facilities to be provided by CapitalSource Finance, LLC,
which is an asset-based lender specializing in the health care industry.
Palisade may also consider providing letter of credit backing for an
as-yet-undetermined amount of undertakings by the company which would be
required to support the company's growth.
After carefully considering its alternatives the company has concluded
that, without the very substantial cash investment and credit support being
offered by Palisade, or without a comparable amount of cash and credit support
from another source, the company would not be able to obtain the
substantial--and necessary--reduction, described above, of the company's debt
to Bank Austria, nor would the company be able to obtain the other financing
involved in this proposed transaction. If the company is unable to refinance its
debt to Bank Austria, which is now due and payable in full, with the
arrangements proposed by Palisade (or a comparable proposal from another source
not presently known or available to the company), Bank Austria would have the
right to commence foreclosure proceedings on substantially all the company's
assets.
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In exchange for the investment and credit support Palisade has proposed,
Palisade would acquire 2.5 million shares of the company's newly authorized
Series B 12.5% Voting Convertible Redeemable Participating Preferred Stock
(convertible into common stock on an one-for-ten basis) and warrants to purchase
approximately 16.7 million additional shares of the company's common stock.
Palisade would also convert an existing bridge loan to the company into
preferred stock. This would raise Palisade's effective ownership of voting stock
of the company from the present 18.5% to approximately 75% (on a fully diluted
basis). (See "New Capital Structure.")
There can be no assurance that these proposals will be carried out on the
terms presently proposed, or on other terms comparably favorable to the company,
or at all on any terms, or that, if the proposals are implemented, the company
will be able to recover its financial strength and become profitable.
Changes in the Board of Directors
On January 3, 2001, Martin Franklin and Ian Ashken resigned from the Board
of Directors. Allan Barker, resigned from the Board of Directors on January 9,
2001, as did William Goss on January 25, 2001 and Norman S. Drubner on February
23, 2001. Carl Schramm and Steven Ditman resigned from the Board of Directors
effective June 1, 2001 and June 15, 2001, respectively.
Effective November 1, 2001, Raymond W. Brennan, Alan J. Glazer, Norman S.
Drubner, and Frederick A. Rice were appointed by the sole Director then serving,
Dean J. Yimoyines, M.D., President of the Company, to fill vacancies on the
company's Board of Directors. (See Item 10, Directors and Executive Officers of
the Company.)
William Blaskiewicz Named Chief Financial Officer
On September 1, 2001, William A. Blaskiewicz was named Chief Financial
Officer, replacing Steven Ditman, who resigned on August 24, 2001 to pursue
another opportunity. A certified public accountant since 1987, Mr. Blaskiewicz
joined OptiCare in 1998 after four years as director of a billion-dollar budget
at a large insurance company. Since then, as our Chief Accounting Officer, he
worked very closely with Mr. Ditman in overseeing all aspects of our financial
and cash management operations. For information about Mr. Blaskiewicz's business
and professional background, see "Item 10, Directors and Executive Officers of
the Company."
Proposed Sale of Connecticut Operations Cancelled
On May 21, 2001, we announced a decision to terminate an agreement relating
to a proposed sale of our Connecticut-based medical, surgical and retail
operations. That proposed sale, which was announced in November 2000, was to
have been made to an investor group which included ophthalmologists employed
through our Connecticut operations.
Also on May 21, 2001, we announced that the Connecticut operations would be
managed by Gordon Bishop as President, and Nancy Noll as Vice President. Mr.
Bishop is an industry veteran with broad experience who has been an employee of
the company since 1999; Ms. Noll has held positions of increasing responsibility
with OptiCare over a 23-year career.
OptiCare Stock Trading Suspended by American Stock Exchange
On April 20, 2001, the American Stock Exchange suspended trading of the
company's common stock, and the stock has not traded since that date. Due to a
number of factors, including late filing of this and other SEC-required reports
and the company's non-compliance with the continued listing requirements of the
exchange, there is a possibility that de-listing proceedings with respect to our
stock may be commenced by the stock exchange. If a de-listing proceeding is
commenced, the company expects to immediately file an appeal. There can be no
assurance that any appeal would be successful.
If the proposed new capital structure were in place, and the company becomes
current in its SEC filings, the company believes it would be eligible, subject
to review by the exchange, for the resumption of the trading of its common stock
on the American Stock Exchange. However, there can be no assurance that trading
will resume, or, if trading is resumed, the prices at which the stock will be
traded.
The last reported sale price of our common stock, on April 20, 2001, was
$0.26 per share.
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For further information concerning the company's listing with the American
Stock Exchange, see "Part II. Item 5. Market for the Company's Common Equity and
Related Stockholder Matters."
Pre-Workout Agreement Signed with Bank Austria
On February 26, 2001, we entered into a Pre-Workout Agreement with Bank
Austria Creditanstalt Corporate Finance, Inc. Bank Austria provides a term loan
and revolving credit facility, which totaled at December 31, 2000, $29.7
million. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.") The
Pre-Workout Agreement established certain understandings between the bank and
ourselves including the fact that we were in default under the loan documents,
which govern the term loan and revolving credit facility. Such defaults included
our failure to pay principal and interest when due and our failure to observe or
perform certain affirmative covenants and other covenants.
On March 23, 2001, Bank Austria formally notified us of the occurrence of
events of default under the aforementioned credit facility. The bank forbid the
company from making any payments on account of debt junior to that of the bank,
including under certain Seller Notes representing long-term obligations of the
company to certain medical practices.
Pursuant to an understanding reached with the bank shortly after receiving
such notice, we engaged Morris-Anderson & Associates, Ltd., a management
consulting firm, to assist us in restructuring our long-term debt. Although in
its March 23 notice the bank had formally reserved its rights under the terms of
the credit facility, the aforementioned understanding was that, during a period
of unspecified duration, the events of default referred to in that notice would,
on an operating basis, be considered waived while we worked with Morris-Anderson
to restructure our debt. We continued, however, to be prohibited from paying any
junior debt, including Seller Notes.
On September 25, 2001, Bank Austria gave the company formal notice of: (i)
the occurrence of certain additional defaults under the credit facility loan
documents; (ii) the immediate termination of the commitments under the loan
documents; and (iii) the requirement that all amounts outstanding under the
credit facility were to be immediately due and payable. The company continues to
negotiate in good faith with Bank Austria and with other parties in an effort to
replace the Bank Austria credit facility with another financing arrangement
which would provide adequate capital support, at a manageable cost, to the
company. It believes that the proposed transactions involving Bank Austria,
Palisade Concentrated Equity Partnership, L.P. and CapitalSource Finance, LLC,
described below in "Item 1. Business - New Capital Structure," comprise such an
arrangement.
Alexander Enterprise Bridge Loan
On October 10, 2000 the company obtained $2.25 million through a bridge
financing arrangement with Alexander Enterprise Holdings Corp. and entered into
a second amendment to the Bank Austria credit facility. Of the $2.25 million of
proceeds from the bridge loan, $1.2 million was paid to Bank Austria as required
by the amended credit facility, and the remaining $1.1 million was used for
general working capital purposes. Of the $1.2 million paid to Bank Austria, $0.3
million was applied to past due interest, $0.4 million was used to repay
principal and $0.5 million was applied as a prepayment of interest. On January
5, 2001, the company borrowed an additional $0.5 million under the Alexander
Enterprise bridge loan. Funds for this addition to the bridge loan were provided
by Palisade ($400,000), Dean J. Yimoyines, M.D., president and chief executive
officer of the company ($50,000), and Alexander Enterprise ($50,000). The
lenders under this bridge loan also received warrants to purchase the company's
common stock. See "Item 1. New Capital Structure - Background" and "Item 13.
Certain Relationships and Related Transactions - Participations in the Alexander
Bridge Loans."
Termination of Agreement to Acquire Vision Twenty-One
Effective June 29, 2000, the company terminated a merger agreement with
Vision Twenty-One dated February 10, 2000. The transaction was subject to
certain closing conditions, which were not met, resulting in the termination. In
June 2000, we recorded a charge of $1.8 million of merger-related costs,
primarily professional fees, associated with the proposed merger.
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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 been
used to pay down indebtedness, to expand our laser correction and professional
services division, and for general corporate purposes.
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 using 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. Ophthalmologists
are licensed to conduct diagnostic examinations and to perform ophthalmic
surgery. Optometrists complete four years of optometry school and are generally
licensed to perform routine eye exams and prescribe corrective optical devices
(principally eyeglasses and contact lenses). Optometrists do not perform
surgery, but often provide pre- and post-operative care. There are approximately
31,000 practicing optometrists and 20,000 practicing ophthalmologists in the
U.S.
The U.S. market for eye care services and products is very large and
growing. Approximately 60% of the U.S. population--165 million people--require
some form of vision correction; and over 100 million--or some 60% of those
consumers--purchase eye wear each year.
Annual market growth rates of 5% are expected to continue for the next
several years. As the median age of the population increases, the number of
Americans requiring vision correction will inevitably grow. Further, the rise of
third party plan providers continues to fuel growth in the industry. Since 1989,
the coverage rate in the eye care population has grown from 40% to 54%.
Spending in 2001 for health care services related to eye care is estimated
to be over $29 billion, and spending on retail optical products is projected at
$18 billion. The company does substantial business in both parts of this $47
billion market.
Managed Care
According to InterStudy, a health care research firm, total 2000 U.S.
enrollment in health maintenance organizations, the most common type of managed
care plan, was 80.9 million. This represents a 23% increase in membership versus
1997. An additional 84.5 million Americans were enrolled in preferred provider
organizations in 2000. Almost all managed care plans cover medical/surgical
treatment of eye disorders and many also provide vision care benefits, including
routine eye exams or optical products.
We believe that enrollment in managed care plans, which provide coverage of
eye care services, will continue to grow. We 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 believe
several factors would be responsible for this:
o Demographics, specifically the aging baby boom segment of the
population;
o Increasing acceptance of the managed care model for provision of
health services; and
o Increasing market acceptance of the proposition that management of
insurance claims processing
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services for as specialized a medical sector as eye care services and
products is best provided by companies that focus on that sector.
As a result, we believe this market segment has significant growth potential,
and we believe we are positioning ourselves to capitalize on that, although
favorable results cannot be assured.
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
substantial. Of the $47 billion eye care market, consumers spend approximately
$18 billion on retail optical products. Approximately 83%, or $14..9 billion, is
spent on lenses and frames, while approximately 12%, or $2.2 billion, is spent
on contact lenses.
We also expect the demand for eye surgery to show steady growth. Common eye
disorders include glaucoma, macular degeneration, diabetic retinopathy and
cataracts. We believe that the aging of the population, including the "baby
boom" generation, will increase the demand for medical and surgical treatment of
these disorders. Glaucoma affects approximately 3 million people in the U.S. and
is projected by industry sources to double by 2030. Cataract surgery, the most
widely performed eye care surgical procedure in the U.S., is typically done on
an outpatient basis using local anesthesia, and the procedure time is typically
less than 30 minutes. In 2000, an estimated 2.7 million cataract procedures were
performed in the U.S. Since the preponderance of these other eye disorders
affect patients over the age of 65, the Medicare program is the primary payer
for treatment of these disorders, including surgery.
DESCRIPTION OF BUSINESS DIVISIONS
OptiCare's business operations are managed through three divisions which,
together, cover every sector of the eye care industry:
o Managed Care Services. We contract with managed care plans to manage
the eye health portion of those plans.
o Professional Services. We operate ambulatory surgical and laser
correction centers and provide marketing, systems, software and other
services to eye care professionals.
o Other Integrated Services. We own and operate fully integrated eye
health centers, retail optical stores and a buying group program.
Managed Care Services Division
We have significant expertise in providing managed care services for
insurance companies, HMOs and other third-party payers 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 November 1, 2001, we administered eye care benefits for over 5 million
lives, delivered through networks of eye care professionals nationwide. The
types of products administered include: capitated, fee for service, discount,
and medical management plan arrangements. Types of benefits administered include
routine wellness eye examinations, optical hardware, and medical/surgical eye
care.
Under each managed care contract, we credential eye care professionals who
provide the eye care services specified under the contract to the third-party
payer's members. We also perform other services, including quality assurance and
utilization review, member services, provider relations, and claim data
analysis. Most contracts have a term of three years and contain an automatic
renewal provision for additional one-year periods and grant either party the
right to terminate the contract upon 90-180 days' notice.
Upon obtaining a managed care contract, we typically develop a network of
eye care professionals to provide the eye care services required under the
contract. Generally, we attempt to contract first with eye care professionals
with whom we have a business relationship. Additionally, we seek to enter into
contracts with independent eye care professionals as well as to work in
conjunction with our health plan partners to build networks that meet set access
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standards. 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 our panels are recredentialed every two years.
All credentialed eye care professionals must meet the guidelines of the National
Committee for Quality Assurance (NCQA), a leading quality assurance authority.
OptiCare has received full accreditation and was re-awarded accreditation as a
Credentialing Verification Organization by NCQA.
We believe that our managed care services provide significant value to
third-party payers by delivering high quality, cost-effective managed eye care
to plan members and comprehensive administrative services to the third-party
payer. Some of the services provided include:
Plan Member Relations. Service representative staff are available to answer
questions on members' benefits and the status of claims and to resolve any
complaints about the service rendered.
Simplified Pre-Authorization Process. Network eye care professionals, with
the assistance of our staff, may obtain required authorizations for the plan
members prior to performing an eye care procedure. We believe that this approach
simplifies the process for the plan members and thereby increases such members'
overall satisfaction with their eye care benefits. During 2000, we reduced the
number of procedures requiring pre-authorization from over 250 to approximately
40. In 2001, we further reduced pre-authorization requirements to procedures
associated with two diseases. This increases our risk of adverse claims
experience, and there can be no assurance that adverse claims experience will
not develop. To enhance our claim payment administration, we utilize proprietary
systems which allow us to strictly follow CMS (formerly HCFA) rules for payment
of eye care claims. In addition, the company offers internet accessibility for
eye-care-specific clinical criteria for contract providers, allowing for
improvements in education and training. The company also has Internet
capabilities for claim submission, claim tracking, provider locator, and
eligibility and benefit verification. We feel this will continue to help lower
our cost of operations, improve service, and speed the payment cycle to our
providers.
Quality Assurance Program. We solicit patient comments through monthly
patient satisfaction surveys sent to a sample of members of our managed care
customers. In addition, we track unsolicited comments that typically are in the
nature of telephone complaints. If a plan member is dissatisfied with the
service received, a service representative can quickly resolve routine
complaints relating to matters such as eyeglasses, contact lenses and the
quality of the eye examination. We believe that our issue-resolution structure
is unique to the industry and increases plan members' satisfaction with their
eye care benefits. In addition, we perform prospective-outcome studies and other
quality assessment studies on the care rendered by our network of providers.
Utilization Review Services. We periodically monitor eye care professionals
in our network to verify that he or she is properly coding the medical services
and treatment provided. Using proprietary clinical criteria for eye care
procedures that are based on Center for Medicare and Medicaid Services (CMS,
formerly HCFA) local carrier policy and the American Academy of Ophthalmology's
own guidelines, we work with eye care professionals regarding the appropriate
eye care treatment of members. While these practices are intended to control our
costs, there can be no assurance that costs may not become excessive.
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 the company's health plans. These reports show, among other things, the
application of such health plan's funds for the benefit of its participants. We
utilize our systems technology to regularly and carefully monitor the economic
and qualitative performance of the networks, individual providers and health
plan customers.
Licensing Requirements. Our managed care division provides services to
customers in eight states. Texas requires the company to be licensed, and our
subsidiary, AECC Total Vision of Texas, is licensed as a single-service HMO in
Texas. We hold licenses as a third-party administrator in Florida and are a
licensed utilization review agent in Texas, Tennessee, New York, and
Connecticut.
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Professional Services Division
Surgical Centers. We own and operate two surgery centers in Connecticut,
one of which is a laser correction center. In our ambulatory surgery center in
Waterbury, CT, ophthalmic surgeons perform a range of eye care surgical
procedures, including cataract surgery, and surgical treatment of glaucoma,
macular degeneration and diabetic retinopathy. In our laser center in Danbury,
CT, we use a state of the art VISX excimer laser for the correction of
nearsightedness, farsightedness and astigmatism. In these centers, we bill
patients (or their insurers, HMOs, Medicare, Medicaid or other responsible
third-party payers) for use of the surgery facility, which becomes Professional
Services Division revenue. Our surgeons bill the patients separately for their
services, which becomes Other Integrated Services Division revenue (see "Other
Integrated Services Division" below). For laser correction, patients are billed
directly and generally we are not reimbursed by third party payers. Our
ambulatory facility in Waterbury is state licensed, approved for the payment of
facility fees by most health plans and is Medicare approved. We have contracted
with OptiCare P.C. to provide surgical and other services to patients at the
ambulatory surgical centers. (See "Item 13. Certain Relationships and Related
Transactions.")
Management Services. We sell a broad range of management services and eye
care systems to eye care professionals, principally ophthalmologists and
optometrists.
Through our wholly-owned subsidiary, Cohen Systems, Inc., we develop and
provide point-of-sale software systems for optometry practices, retail optical
locations and manufacturing laboratories. These products support eye health
practice management, billing, collections, record-keeping and inventory control
applications.
As of November 1, 2001, we had approximately 150 retail customers and 100
lens manufacturing customers using our eye care systems and software services
throughout the United States and Canada. We have developed and we sell
Internet-based order entry software systems which capture and link all eye
health patient data, provide such data to a remote manufacturing location for
immediate custom processing of optical goods, such as eyeglasses and contact
lenses, and generate invoices and other record-keeping data. One of the great
advantages of these systems is that they involve a seamless, error-free
interface between the patient examination and testing phase and the
computer-driven eyeglass manufacturing phase.
Health Services Organization. Our Health Services Organization ("HSO")
provides marketing, managed care and other administrative services to individual
ophthalmology and optometry practices. As of November 1, 2001, we had HSO
agreements in place with 26 ophthalmology and optometry practices. Most of these
agreements run for 15 years from their respective commencement dates. Under
them, we receive a percentage (generally 3%) of the revenues earned by these
practices in exchange for the core services we provide. In addition, the
practices may obtain various supplemental services, including certain laser
correction programs, systems administration and human resources services, which
they may purchase at agreed-upon rates on a menu basis. HSO participants also
have access to our buying group program.
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 the majority 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.
The company is having disputes with a number of its Health Services
Organization practices, some of which are not paying their services fees. The
company is confident of the validity and enforceability of its agreements with
these practices and expects to collect substantially all fees in accordance with
the terms of the HSO agreements. There is pending litigation between the company
and certain of these practices. (See "Item 3. Legal Proceedings.")
Other Integrated Services Division
The Other Integrated Services division provides eye care services and
products to consumers through our 46 integrated eye health centers and retail
optical stores located in Connecticut and North Carolina. The division also
provides wholesale distribution of eye health products.
Integrated Eye Health Centers. Our integrated eye health centers provide
comprehensive eye care services to consumers, including medical and surgical
treatment of eye diseases and disorders by ophthalmologists, and vision
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measuring and non-surgical correction services by optometrists. We operate 21
centers in Connecticut and conduct all management, billing, systems and related
procedures for the operation of these centers.
Retail Optical Stores. Our retail optical stores, both owned and franchised,
provide vision correction services by optometrists, and/or sell eyeglasses and
other optical products. The optical facilities are either free-standing or are
located within fully integrated eye health centers. These retail optical stores
provide all customary optical goods and are supported by the company's billing,
collection, and information systems. We operate 43 retail optical locations 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 29 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. Though these agreements are generally
for five year terms, we usually 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. This program supplies 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 program leverages the
purchasing strength of the large number of participating optometrists and buys
from a national panel of approximately 175 vendors. We enter into a
non-exclusive account relationship with the buying ophthalmologists and
optometrists who place orders directly with our contracted vendors. The vendors
are required to furnish a discount to the purchasers, ship the product directly
to the practice and bill us at the predetermined price. We, in turn, bill the
participating practices and bear the credit risk. Earnings of the buying group
are based on the spread between the merchandise cost to us and the prices paid
for the merchandise by group members.
TRADEMARKS
We own the following U.S. trademark registrations: OPTICARE(R) and the
miscellaneous curve design, which is the OptiCare Health Systems, Inc. logo;
EYECARE FOR A LIFETIME(R); EYEWEAR AND EYECARE FOR A LIFETIME(R); CONNECTICUT
VISION CORRECTION(R); THE DIFFERENCE IS CLEAR(R); THE VISION OF HEALTH(R); and
TLC(R). Other trademarks for which applications for U.S. registration are
pending are: RBNI(TM); KEEPING YOU AHEAD OF THE CURVE(TM); DOCTOR'S EXPRESS(TM);
OPTICARE LASER ADVANTAGE(TM); LOSE THE GLASSES, and KEEP THE VISION(TM). We also
own the following domain names: opticare.com; opticareeye.com; opticare.net;
opticarenas.net; 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. While some of the competition is local and regional, we do have
national competitors.
Our Managed Care Services Division competes with several regional and
national eye health companies which
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provide services to managed care plans. These include Vision Twenty-One and
Vision Service Plan of America. We also compete for managed care contracts with
HMOs, PPOs and private insurers, many of which have larger provider networks
and greater financial and other resources. Managed care organizations compete
on the basis of administrative strength, size, quality and geographic coverage
of their provider networks, marketing abilities, information systems, operating
efficiencies and price.
With respect to Professional Services, we generally compete with a range of
services-specific operators catering to eye health professionals. Such service
providers include marketing companies, and systems and software vendors. We have
identified few, if any, integrated providers of eye health services other than
physician practice management companies. These operate under a significantly
different business model, requiring substantial capital investment by the
practice management company and equity participation by ophthalmologists and
optometrists.
For our 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 chains, 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 of 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 each was 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:
Excimer Laser Regulation. Medical devices, including the excimer lasers used
in our eye surgery and laser
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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 them..
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, HMOs, and other companies that engage in the
business of insurance or pre-paid health care. In most states, these laws do not
apply to discounted fee-for-service arrangements or networks that are paid on a
capitated basis,. There are exceptions to these rules in some states. For
example, certain states, such as Texas, require a license for a capitated
arrangement with any party unless the risk-bearing entity 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. Unless the regulatory authority permits us to continue to operate
while the licensure process is progressing, we could suffer losses of revenue
that would result in material adverse changes in our business while the
licensing process is pending. In addition, many of the licensing requirements
mandate strict financial and other requirements we may not immediately be able
to meet. Once licensed, we would be subject to continuing oversight by and
reporting to the licensing authority. These same requirements can also serve as
barrier to entry to competition in states where the company holds such
licensure.
Regulation of Our HMO Subsidiary. We hold one single service HMO license in
Texas. Texas requires the filing of quarterly and annual reports, submission to
periodic on-site audits, and maintenance of statutory capital reserves within
the state. The Texas managed care business is 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. Texas also requires pre-approval from its
Department of Insurance prior to allowing a significant change of ownership
control to take place. In Texas, a single service HMO must maintain a minimum
net worth of $500,000 and may be required to have additional capitalization
based on a risk-based capital requirement.
Texas Commissioner of Insurance Order. Our wholly owned Texas HMO, AECC
Total Vision Health Plan of Texas, Inc., is required by the terms of the Order
of the Commissioner of Insurance, dated August 12, 1999, as modified on February
8, 2001, to maintain a minimum net worth of $1,000,000. The modified order no
longer requires the HMO to obtain prior approval from the Texas Department of
Insurance to pay dividends or make other payments to affiliated companies
subject to the statutes, rules and regulations that govern such payments. We
have a cost allocation agreement with our Texas HMO subsidiary, approved by the
Texas Department of Insurance, which permits 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 Department of
Insurance.
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Third Party Administration Licensing. Some states require licensing for
companies providing administrative services in connection with managed care
business. We hold a third-party administrator license in Florida. We intend to
seek licenses in the states where they are available for eye care networks.
Physician Incentive Plans. Medicare regulations impose certain disclosure
requirements on managed care networks that compensate providers in a manner that
is related to the volume of services provided to Medicare patients (other than
services personally provided by the provider). Additionally, if what Medicare
defines as "incentive payments" exceed 25% of the provider's potential payments,
the network is also required to: a) show that the provider has certain "stop
loss" financial protections; and b) conduct certain Medicare enrollee surveys.
"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
qualified and licensed provider who is willing to abide by the terms of the
network's contracts. These laws could limit our ability to develop effective
managed care networks in such states. The company believes that the medical
management and eye care claim data analysis services we offer would provide
greater value to our clients if such legislation were adopted in states where we
do business. There are currently no states in which we operate our managed care
business that have "any willing provider" requirements.
Corporate Practice of Optometry and Ophthalmology. The laws of many states
prohibit corporations that are not owned entirely by eye care professionals
from:
o Employing eye care professionals;
o Receiving for their own account reimbursements from third party
payers for health care services rendered by licensed professionals;
o Controlling clinical decision-making; or
o Engaging in other activities that constitute the practice of
optometry or ophthalmology.
To comply with these requirements, we:
o Contract with professional associations (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 we provide
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 "Item 13. "Certain Relationships and
Related Transactions - OptiCare P.C. Professional Services and Support
Agreement;" and "- Optometric Eye Care Center, P.A. Professional Services and
Support Agreement.")
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
13
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.
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 payers, including federal healthcare programs, and setting up provider
networks that included physicians. Payments to the management company included a
"fair market value payment" for operating services provided by the manager, a
payment based on a percentage of the cost of capital assets, and an additional
20% of net revenues of the practice for management services. The OIG noted that
since the manager was paid a percentage of net revenue, including revenue from
business derived from managed care contracts arranged by the manager, a
potential technical violation of the anti-kickback statute existed. The OIG
further noted that, since the manager would presumably receive some compensation
for management efforts in connection with the development and operation of
specialist networks, any evaluation by the OIG would require information about
the relevant financial relationships. The OIG summarized that while the
management arrangement "may" violate the anti-kickback statute, a definitive
conclusion would require a determination of the parties' intent, which is beyond
the scope of the advisory opinion process.
Our services agreements are different from the arrangements reviewed by the
OIG in its advisory opinion. Therefore, we believe that the opinion is
inapplicable to our relationships with our eye care professionals. 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 mislead a person to believe that a non-licensed professional is
eligible to be engaged in the delivery of eye care services. Certain of our
forms of services agreements provide that all advertising shall conform to these
requirements, but there can be no assurance that the interpretation of the
applicable laws or our advertising will not inhibit us or result in legal
violations that could have a material adverse effect on us.
The laws described above have civil and criminal penalties and have been
subject to limited judicial and regulatory interpretation. They are enforced by
regulatory agencies that are vested with broad discretion in interpreting their
meaning. Our agreements and activities have not been examined by federal or
state authorities under these laws and regulations. There can be no assurance
that review of our business arrangements will not result in determinations that
adversely affect our operations or that certain material agreements between us
and eye care providers or third-party payers will not be held invalid and
unenforceable.
In addition, these laws and their interpretation vary from state to state.
The regulatory framework of certain jurisdictions may limit our expansion into,
or ability to continue operations within, such jurisdictions if we are unable to
modify our operational structure to conform to such regulatory framework. Any
limitation on our ability to continue
14
operating in the manner in which we have operated in the past could have an
adverse effect on our business, financial condition and results of operations.
NEW CAPITAL STRUCTURE
In November 2001, certain letters of intent were entered into concerning a
major capital restructuring of the company. If certain conditions are met and
the transactions contemplated by these letters of intent are consummated, these
transactions as presently proposed are expected (as of November 2001) to lower
the company's long-term debt by approximately $9.9 million, increase its equity
by approximately $9.0 million and reduce its next-12-months' debt service by
approximately $3.7 million.
Background
At November 1, 2001, the company owed its current senior lender, Bank
Austria Creditanstalt Corporate Finance, Inc., a total of approximately $31.6
million, consisting of $29.7 million of principal and $1.9 million of interest.
The company was in default with respect to its obligations under this Bank
Austria credit facility, and Bank Austria had accelerated all amounts owed under
the credit facility. In addition, the company had contingent exposure to Bank
Austria in connection with approximately $2.7 million of note and services fee
payments which were originally due to the company and which had been assigned to
the bank.
Much of this debt was accumulated by one of the company's two principal
subsidiaries, PrimeVision Health, Inc., in the course of purchasing physician
practices in the mid-1990s, when PrimeVision was an independent company. In
1999, PrimeVision and OptiCare Eye Health Centers, Inc., the company's other
principal subsidiary, each merged with one of our wholly-owned subsidiaries.
At the time of the 1999 mergers, it was expected that a significant portion
of the debt accumulated by PrimeVision Health, Inc. could be converted into
equity through a public offering of the company's stock. However, the company
was only successful in completing an offering of approximately 3.7 million
shares of common stock early in 2000, with net proceeds of approximately $12.5
million. The proceeds of this offering were applied, in part, to reduce the
company's debt, but a substantial portion of the company's debt remained
outstanding. (Among the investors in this private placement was Palisade
Concentrated Equity Partnership, L.P. ("Palisade") which invested $7.0 million.)
On October 10, 2000, the company obtained a $2.25 million bridge loan from
Alexander Enterprise Holdings, Inc. In January 2001, that bridge loan was
increased by $0.5 million to $2.75 million. (Of that $500,000 increase, $400,000
was provided by Palisade; $50,000 by Dean J. Yimoyines, M.D., President and
Chief Executive Officer of the company; and $50,000 by Alexander.) The bridge
loan was used to support operations while the company continued seeking a
capital structure which it could service.
The company believes that the plans described below for equity infusion and
for debt forgiveness and refinancing comprise such a structure.
THE PROPOSED NEW CAPITAL STRUCTURE
The proposed restructuring involves the company and three other
principal parties: its current senior lender, Bank Austria; a proposed new
senior lender, CapitalSource Finance, LLC, which is an asset-based financial
institution specializing in the health care industry; and Palisade. At the
request of Palisade, Dean J. Yimoyines, M.D., who is a founder of the company,
the Chairman of its Board of Directors, and its President and Chief Executive
Officer, will also participate as an investor in the planned restructuring.
Three preliminary, non-binding agreements (which are subject to the
completion of binding, formal agreements and numerous, substantial conditions)
have been signed by these parties:
o A letter of intent between Palisade and Bank Austria which
establishes terms on which the company's debt to Bank Austria would
be refinanced and repaid at a significant discount;
15
o A commitment letter from CapitalSource to the company offering to
loan the company sufficient funds to make the upfront cash payment
required in connection with the repayment of the Bank Austria debt at
the discount negotiated between Palisade and Bank Austria; and
o A letter of intent between Palisade and the company setting terms on
which Palisade would provide:
-- Sufficient funds to enable the company to repay the Alexander
bridge loan; and
-- Letter of credit backing for the portion of the bank debt, which
Bank Austria has agreed to refinance, and for a portion of the
loans from CapitalSource.
These documents are not, themselves, legally binding. The company,
Palisade, Bank Austria and CapitalSource are currently negotiating binding,
formal agreements. If such binding, formal agreements are executed, they would
be subject to the fulfillment of substantial conditions, including the company
being in compliance with the requirements of the American Stock Exchange, and
approved by the company's stockholders. There can be no assurance that all the
necessary parties will agree to the terms as presently proposed, or that all
conditions to implementation of the new capital structure will be fulfilled on a
timely basis.
If the terms as outlined in the letters of intent and commitment letter are
approved by all parties, and all conditions are fulfilled, and all the
definitive agreements as outlined above are executed and implemented, the terms
of the agreements as outlined above would enable the company to:
o Settle with Bank Austria all of its debts and other obligations,
direct and contingent by making an initial cash payment and issuing
a two-year promissory note;
o Buy and retire all of Bank Austria's stock, stock rights, warrants
and other ownership interests in the company;
o Buy from Bank Austria certain notes due from physicians and rights to
payment under certain Health Services Organization contracts which
had previously been assigned to the bank; and
o Satisfy in full the Alexander bridge loan.
If the transactions were completed as described above--of which there can
be no assurance--they would be expected to have the following effects on the
balance sheet for the company (compared with our November 2001 position):
o $1.35 million in physician notes receivable would be added to the
company's assets;
o Long-term debt would decline by $9.9 million; and
o Equity would increase by $9.0 million.
If the transactions were completed as described above, annual principal and
interest payments in the first year following the transaction are expected to
decrease from an estimated $5.6 million under the current financing from Bank
Austria to $1.9 million under the new capital structure. In the second 12 months
following implementation of the transactions described above, principal and
interest payments are estimated to be $1.9 million, assuming no increase in
prevailing interest rates, of which there can be no assurance.
The proposed new capital structure is expected to enable the company to do
business on a more secure footing. Growth opportunities--particularly in managed
care--require substantial, dependable financial strength, and without a stable
financial base, the company would expect to be unable to sustain and grow its
managed care business, in particular, as well as its other business segments.
Palisade's Prior and Projected Ownership and Support
In 2000, as part of a private placement (more fully described in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources"), Palisade provided a cash
infusion of $7.0 million in exchange for 2.0 million shares of common stock. In
early 2001, when the company was very short of cash, Palisade, along with the
company's president and chief executive officer, Dean
16
Yimoyines, M.D., provided, within the framework of the Alexander bridge loan,
an additional $450,000.
In the course of the proposed capital restructuring, if the proposed
transactions are consummated, Palisade would:
o Invest in the company an additional $3.5 million of cash and receive
preferred stock having voting rights equal to 25 million shares of
the company's common stock;
o Provide letter of credit backing for obligations of the company
totaling $16.7 million and receive warrants to purchase approximately
16.7 million additional shares of the company's common stock; and
o Convert its participation ($400,000 of principal, plus accrued
interest) in the Alexander bridge loan to preferred stock having
voting rights equal to approximately 3.2 million shares of the
company's common stock;
These transactions, if implemented, would raise Palisade's effective
ownership of voting stock of the company from the present 18.5% to approximately
75% (on a fully diluted basis).
EMPLOYEES
We and our affiliates have approximately 733 employees, including, 235
licensed ophthalmologists, optometrists, and opticians and 93 ophthalmologist
assistants. These amounts include an aggregate of 113 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 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 5 to 20 years in total. The combined annual base
rent is $848,000 for a total of 44,400 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 23,400 square feet.
Each of the foregoing offices is leased from a party that is affiliated or
associated with one or more of our present or former directors or executive
officers. (See "Item 13. Certain Relationships and Related Transactions -
Certain Leases.")
We and our affiliate, Optometric Eye Care Center, lease 45 additional
offices in the states of Connecticut, North Carolina, Florida and Texas,
principally for our eye health services and retail optical operations. These
leases have remaining terms of 1 to 11 years. Many of these leases are also
subject to renewal options. We believe our properties are adequate and suitable
for our business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
HEALTH SERVICES ORGANIZATION LAWSUITS
The company and/or its subsidiaries are involved in two lawsuits, described
below, each initiated by a medical practice which was unwound from the former
PrimeVision Health network and which remained affiliated with the
17
company through an Health Services Organization ("HSO") agreement. Both suits
are in the earliest stages of litigation, and there can be no assurance of a
favorable outcome.
Fogg, Maxwell & Lanier, M.D., Inc., et al. v. PrimeVision Health, Inc. and
OptiCare Health Systems, Inc., et al., filed August 30, 2001, Superior Court of
California. Plaintiffs, a California medical practice and its principal
shareholders, contend that, since the amount of the "services fee" (calculated
as a percentage of practice revenue) the practice pays to Prime, a subsidiary of
the company, allegedly exceeds the value of the "core services" received from
Prime by the practice, the HSO agreement is unlawful, as it violates the
California Business and Professions Code. At Prime's request, the case has been
removed from California state court to the U.S. District Court in California.
OptiCare and Prime have denied the plaintiffs' allegations and have filed
counterclaims for payment of past due services fees. Among other things, the
company has argued that the HSO agreements were part of a larger unwind package
which conveyed valuable benefits to the participating practices and that such
benefits are part of the consideration the practices receive in exchange for
their services fees. Though the company strongly believes in the merits of its
position and intends to vigorously defend itself, the case is in its earliest
stages and no assurance can be given of a favorable outcome.
Charles Retina Institute, P.C. and Steven T. Charles, M.D. v. OptiCare
Health Systems, Inc., filed on September 18, 2001, Chancery Court of Tennessee.
Plaintiffs, a Tennessee medical practice and its principal owner, sought court
approval to cease making required services fees payments on grounds that the
magnitude of such payments is not warranted by the allegedly low value of the
core services received. The company has removed the case to the U.S. District
Court in Tennessee. Prime filed a suit against Charles Retina Institute, P.C.
and Steven T. Charles, M.D. in U.S. District Court in North Carolina setting out
in some detail the history of the relationship with plaintiffs in the Tennessee
case. Among other things, the company has argued that the HSO agreements were
part of a larger unwind package which conveyed valuable benefits to the
participating practices and that such benefits are part of the consideration the
practices receive in exchange for their services fees. Though the company
strongly believes in the merits of its position and intends to vigorously
prosecute its claim, the case is in its earliest stages and no assurance can be
given of a favorable outcome.
BILLING COMMUNICATION ERROR IN CONNECTICUT
OptiCare Eye Health Centers, Inc., our Connecticut subsidiary, has been
involved in discussions with the Attorney General of Connecticut concerning a
potential consensual administrative order relating to confusing statements sent
to some of our customers in the 1995-99 period showing balances due to us.
Though the statements were marked "This Is Not A Bill," some customers paid
balances, duplicating amounts later received by OptiCare from insurers. When the
misunderstanding was discovered, OptiCare reimbursed all customers who
mistakenly paid. The terms of the written order are still being finalized.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of OptiCare Health Systems, Inc. was held
on October 30, 2000. There were represented, in person or by proxy, 8,328,473
shares of common stock entitled to vote at the meeting, constituting a quorum.
At the meeting, the directors nominated were elected by the following votes:
NUMBER
OF SHARES NUMBER
VOTED OF SHARES
FOR: VOTE WITHHELD:
--------------------- --------------------
Dean J. Yimoyines, M.D. 8,272,401 56,072
Steven L. Ditman 8,293,190 35,283
Allan L.M. Barker, O.D. 8,292,701 35,772
Ian G.H. Ashken 8,292,964 35,509
Martin E. Franklin 8,293,190 35,283
William J. Goss 8,293,610 34,863
18
NUMBER
OF SHARES NUMBER
VOTED OF SHARES
FOR: VOTE WITHHELD:
--------------------- --------------------
Carl J. Schramm 8,293,610 34,863
At the same meeting, the election of Deloitte & Touche LLP as independent
auditors of the company, for the year ended December 31, 2000, was ratified by a
vote of 8,050,853 in favor, 18,070 votes against and 259,550 abstentions.
There were no broker non-votes on any of the above proposals.
19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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,
immediately prior to the mergers, the capital stock of certain subsidiaries, and
(iii) approximately 8.7 million shares of post-reverse-stock-split common stock
were issued 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 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."
On April 20, 2001, the American Stock Exchange suspended trading of the
company's common stock, and the stock has not traded since that date. Due to a
number of factors, including late filing of this and other SEC-required reports
and the company's non-compliance with the continued listing requirements of the
exchange, there is a possibility that de-listing proceedings with respect to our
stock may be commenced by the stock exchange. If a de-listing proceeding is
commenced, the company expects to immediately file an appeal. There can be no
assurance that any appeal would be successful
If the proposed new capital structure were in place, and the company becomes
current in its SEC filings, the company believes it would be eligible, subject
to review by the exchange, for the resumption of the trading of its common stock
on the American Stock Exchange. However, there can be no assurance that trading
will resume, or, if trading is resumed, the prices at which the stock will be
traded.
The last reported sale price of our common stock, on April 20, 2001, was
$0.26 per share.
The company cannot assure that the current suspension of trading of the
company's common stock will be lifted, or that, once lifted, the company's
common stock will always be listed without further suspensions, or that the
exchange will not, presently or at any time in the future, seek to de-list the
company's common stock. The exchange's rules for continued listing include
stockholders' equity requirements, which the company may not meet if it
experiences further losses; and market value requirements, which the company may
not meet if the price of the common stock declines.
If the company's common stock is de-listed or if, once the pending
suspension of trading is lifted, it is then de-listed from the exchange, trading
in the company's common stock would be conducted, if at all, in the over-the
counter market. This would make it more difficult for stockholders to dispose of
their common stock and more difficult to obtain accurate quotations on the
company's common stock. This could have an adverse effect on the price of the
common stock. There are separate rules regulating broker-dealers who trade on
behalf of customers in unlisted stocks. These rules require the following:
o Broker-dealers may sell the common stock only to established
customers and accredited investors (generally defined as investors
with a net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with a spouse);
o Broker-dealers must make special suitability determinations about the
purchaser; and
o Broker-dealers must receive the purchaser's written consent to the
transaction prior to sale.
The effect of these requirements may be to limit the ability or incentive of
broker-dealers to sell the company's common stock, and that in turn diminishes
the ability of stockholders to sell their common stock in the secondary
20
market.
The Securities and Exchange Commission has adopted regulations that define
"penny stock" to include common stock that has a market price of less than $5.00
per share, subject to certain exceptions. These rules include the following
requirements:
o Broker-dealers must deliver, prior to the transaction, a disclosure
schedule prepared by the SEC relating to the penny stock market.
o Broker-dealers must disclose the commissions payable to the
broker-dealer and its registered representative.
o Broker-dealers must disclose current quotations for the securities.
o If a broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the
market.
o Finally, the broker-dealer must furnish its customers with monthly
statements disclosing recent price information for all penny stocks
held in the customer's account and information on the limited market
in penny stocks.
Many securities listed on the exchange would be covered by the definition of
penny stock, but transactions in a security listed on the exchange are exempt
from such rules (except the "sole market-maker" provision mentioned above) if:
o The issuer has $2,000,000 in tangible assets;
o The customer is an institutional accredited investor; and
o The transaction is not recommended by the broker-dealer.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules.
The high and low prices for the period from August 16, 1999 through December
31, 2000 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 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.
2000 HIGH LOW
---- ---- ---
4th Quarter $0.875 $ 0.25
3rd Quarter 2.125 0.688
2nd Quarter 3.50 2.00
1st Quarter 4.50 3.00
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
_______________________________________________________________________________________
* 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
Eye Health Centers and PrimeVision Health became effective.
21
** Quotations for all periods ending on or before August 13, 1999 have been
adjusted to give effect to a 0.06493-for-1 reverse stock split that became
effective at the close of business on August 13, 1999.
________________________________________________________________________________
As of November 1, 2001, there were approximately 202 stockholders of record
of our common stock. The number of record holders was determined from the
records of the company's transfer agent, ChaseMellon Shareholder Services, and
does not include beneficial owners of our common stock whose shares are held in
the names of various securities brokers, dealers and registered clearing
agencies.
We 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 agreement, 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 equity securities we issued in 2000
and 1999, which were not registered under the Securities Act. (See, also, "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
On October 10, 2000, in connection with a $2.25 million loan from Alexander
Enterprise Holdings Corp, we issued warrants to a designee of Alexander
Enterprise to purchase 2.25 million shares of our common stock at $1.00 per
share for an aggregate purchase price of $2.25 million. On January 5, 2001, the
amount of that loan was increased by $500,000, funds for which were provided by
Palisade Concentrated Equity Partnership, L.P.; Dean J. Yimoyines, M.D.,
president and chief executive officer of the company; and Alexander Enterprise.
In connection with that increase, the warrants issued in October 2000 to
purchase 2.25 million shares were cancelled and new warrants were issued to
purchase 2.0 million shares of common stock at an exercise price of $1.00 and
750,000 shares at an exercise price of $0.40, for an aggregate purchase price of
$2.3 million. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.")
In August 2000, pursuant to a share adjustment agreement, we issued an
aggregate of 31,133 shares of common stock to two physicians formerly affiliated
with the company. In addition, pursuant to a settlement agreement and mutual
general release, the company issued an aggregate of 31,167 shares of common
stock to two other physicians formerly affiliated with the company in exchange
for, among other things, a $200,000 reduction of convertible subordinated
promissory notes issued by PrimeVision Health, Inc.
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.
On or about August 13, 1999, in connection with the closing of the mergers
of OptiCare Eye Health Centers and PrimeVision Health, 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 PrimeVision Health, Inc. and OptiCare Eye Health
Centers, Inc. We also granted options to purchase an additional 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 obtaining a new a 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 Bank Austria of
debt in the amount of $2.45 million 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.
22
On August 13, 1999, in connection with the mergers of OptiCare Eye Health
Centers and PrimeVision Health, we issued a convertible promissory note in the
aggregate principal amount of $4.0 million to Marlin Capital, L.P. in exchange
for, among other things, the cancellation of 4,000 shares of Preferred Stock of
PrimeVision Health, Inc. (See "Item 13. Certain Relationships and Related
Transactions - Arrangements with Marlin Capital, L.P.")
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 options, the foregoing purchasers are accredited investors within
the meaning of Regulation D promulgated under the Securities Act. At the time of
issuance, all of the foregoing securities 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,
---------------------------------------------------------------
2000 1999 (1) 1998 1997 1996
---- ----- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Total net revenues $127,883 $ 94,633 $ 64,612 $ 58,346 $ 52,157
Income (loss) from continuing operations (14,171) 351 (3,239) (2,034) (767)
Weighted average shares outstanding (2) 12,354 4,776 2,256 1,856 693
Income (loss) from continuing operations per share $ (1.15) $ (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 prior to 2000 have been
adjusted to reflect the conversion associated with the reverse merger with
Saratoga in 1999.
(3) Income (loss) from continuing operations per share for 1999 and 1998 was
calculated after giving effect to preferred stock dividends.
________________________________________________________________________________
23
AS OF DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Net assets of discontinued operations - - $ 5,582 $69,473 $13,845
Total current assets $14,913 $ 21,345 20,237 18,274 20,306
Total assets 55,513 66,740 26,556 86,397 26,296
Total current liabilities 49,454 20,654 51,198 8,289 4,138
Total debt (including current portion) 34,214 43,148 39,976 46,536 22,273
Mandatorily redeemable preferred stock - - 9,200 - -
Total stockholders' equity (deficit) 3,877 5,274 (34,690) 4,546 4,683
________________________________________________________________________________________________________________
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto of OptiCare Health Systems, Inc., which
are included elsewhere herein. (See the "Index to Financial Statements,"
beginning at page F-1.)
Overview. OptiCare Health Systems, Inc. is an integrated eye care services
company that delivers a range of services and systems for eye health
professionals and consumers, including, managed care and professional eye care
services. On August 13, 1999, Saratoga Resources, Inc. ("Saratoga"), a Delaware
corporation, PrimeVision Health, Inc. and OptiCare Eye Health Centers, Inc.
merged pursuant to the terms of an Agreement and Plan of Merger dated as of
April 12, 1999. In this transaction, PrimeVision 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 mergers, our shareholders approved an amendment to
the Articles of Incorporation changing, among other things, the company's name
to OptiCare Health Systems, Inc., effective August 13, 1999.
For accounting purposes, PrimeVision 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 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 stores and optical manufacturing
laboratories. The total purchase price of approximately $1.7 million was
comprised of approximately $0.9 million in cash and notes payable and 110,000
shares of common stock (having a value on that date of approximately $0.8
million). The Cohen Acquisition was accounted for under the purchase method of
accounting, whereby the purchase cost has been allocated to the fair value of
assets acquired and liabilities assumed with the excess identified as goodwill.
Fair values were based on valuations and other studies. The goodwill resulting
from this transaction was approximately $1.4 million and is being amortized on a
straight-line basis over 25 years. The results of operations of Cohen Systems,
Inc. are included in our consolidated financial statements from the purchase
date.
The company conducts its business through three business segments: (1)
managed care services (2) professional services and (3) other integrated
services. The managed care services segment contracts with managed care plans to
manage the eye health portion of managed care plans. The professional services
segment operates ambulatory surgical and laser correction centers and provides
marketing, systems, software and other services to eye care
24
professionals. The other integrated services segment owns and operates fully
integrated eye health centers, retail optical stores and a buying group program
for optical products.
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Managed Care revenue. Managed care revenue increased to $35.7 million for
the year ended December 31, 2000 from $24.4 million for the year ended December
31, 1999, an increase of $11.3 million or 46.3%. This increase is primarily due
to revenue associated with managed care contracts held by OptiCare Eye Health
Centers that were acquired in connection with the mergers as well as new managed
care contracts and growth in existing member lives.
Effective December 1, 2000, Anthem Blue Cross and Blue Shield of Connecticut
("Anthem"), a managed care customer in Connecticut, ended its managed care
contract with the company on Anthem's commercial Health Maintenance Organization
("HMO") business. Anthem also withdrew from the Medicare + Choice market in
Connecticut, effective January 1, 2001. The Commercial HMO Medicare + Choice
contracts represent approximately $6.4 million in total annual revenue to the
company.
Professional Services revenue. Professional services revenue increased to
$8.3 million for the year ended December 31, 2000 from $4.1 million for the year
ended December 31, 1999, an increase of $4.2 million or 103.4%. Of this
increase, $2.4 million represents revenue from laser vision correction and
ambulatory surgery services as a result of the merger with OptiCare Eye Health
Centers in August 1999 and $0.6 million represents revenue associated with sales
of software systems by Cohen Systems, Inc., which was acquired by the company in
October 1999. In addition, $1.0 million of this increase represents Health
Services Organization ("HSO") revenue from agreements with various ophthalmology
practices.
Other Integrated Services revenue. Integrated services and product sales
revenue increased to $83.9 million for the year ended December 31, 2000 from
$66.1 million for the year ended December 31, 1999, an increase of $17.7 million
or 26.8%. This increase represents a $21.0 million increase in optometry and
ophthalmology revenue, primarily as a result of the merger with OptiCare Eye
Health Centers and is partially offset by a $3.0 million decrease in buying
group revenue resulting primarily from a decrease in purchasing volume.
Cost of product sales. Cost of product sales decreased to $40.2 million for
the year ended December 31, 2000 from $41.2 million for the year ended December
31, 1999, a decrease of $1.0 million or 2.5%. This decrease represents a $3.0
million decrease in cost of sales associated with the buying group program as a
result of the decrease in its sales, and is partially offset by an increase in
cost of sales of optometry, ophthalmology and ambulatory surgery center
operations associated with the merger with OptiCare Eye Health Centers.
Medical claims expense. Medical claims expense increased to $29.7 million
for the year ended December 31, 2000 from $19.5 million for the year ended
December 31, 1999, an increase of $10.2 million or 51.8%. The medical loss ratio
(MLR) representing medical claims expense as a percentage of managed care
revenue increased from 80.0% in 1999 to 83.0% in 2000. This increase in MLR is
primarily due to increased utilization coupled with increased reimbursement
rates to providers.
Salaries wages & benefits. Salaries, wages and benefits increased to $40.0
million for the year ended December 31, 2000 compared to $20.1 million for the
year ended December 31, 1999, an increase of $19.9 million or 99.4%. Of this
increase approximately $15.6 million represents compensation expense associated
with the company's optometry, ophthalmology and ambulatory surgery center
operations, primarily due to the mergers in August 1999. In addition,
compensation expense increased $1.0 million as a result of increased personnel
from the Cohen Acquisition in October 1999. The remaining increase primarily
represents increased employee costs associated with an increase in corporate and
operations staff added to support the company's combined business and growth in
managed care business subsequent to the merger. This increase in staff was later
reduced in 2000 in connection with the company's restructuring plan and other
cost cutting measures, whereby the company eliminated certain positions in its
corporate and operating areas. The decrease in costs associated with these
workforce reductions are expected to be realized in 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $15.6
25
million for the year ended December 31, 2000 from $7.9 million for the year
ended December 31, 1999, an increase of $7.7 million or 97.1%. Of this
increase, approximately $5.3 million represents general and administrative
expenses of OptiCare Eye Health Centers and $0.3 million represents general and
administrative expenses of Cohen Systems, as a result of the mergers in 1999.
In addition, $0.7 million represents increased general and administrative costs
of managed care operations primarily incurred to support the company's growth
in its managed care business. The remaining $1.4 million primarily represents
an increase in corporate and other costs associated with the company's overall
growth or 31.7%.
Restructuring and other one-time charges. Restructuring and other one-time
charges includes a restructuring charge of $2.3 million, terminated merger costs
of $1.8 million and other non-recurring charges of $0.2 million. The
restructuring charge was recorded to cover restructuring costs associated with
the company's restructuring plan, which included closing and consolidating
certain facilities, reducing overhead and streamlining operations. The
restructuring charge was comprised of $0.2 million of employee termination
costs, $1.2 million of lease related charges, $0.8 million of fixed asset
write-offs and $0.1 million of other related expenses. The terminated merger
costs represent non-recurring costs associated with the merger with Vision
Twenty-One, which was terminated in June 2000. The company also recorded a $0.2
million charge consisting of one-time costs related to the canceled sale of the
Connecticut operations. These costs consisted primarily of professional fees and
related transaction expenses.
Depreciation. Depreciation expense increased to $2.8 million for the year
ended December 31, 2000 from $1.4 million for the year ended December 31, 1999,
an increase of $1.4 million. This increase is primarily due to depreciation on
fixed assets acquired in connection with the mergers with OptiCare Eye Health
Centers in August 1999 as well as depreciation on fixed asset purchases and
leasehold improvements which were made to support the integration and growth of
the company subsequent to the mergers.
Amortization and write-off of goodwill. Amortization expense increased to
$2.9 million for the year ended December 31, 2000 from $0.6 million for the year
ended December 31, 1999, an increase of $2.3 million. Of this increase, $1.3
million represents a write-off of goodwill. That write-off represents the
unamortized goodwill balance allocated to the managed care operations in
Connecticut which were closed. The remaining increase is primarily due to the
amortization of intangibles recorded in connection with the mergers with
OptiCare Eye Health Centers in August 1999.
Interest expense. Interest expense increased to $3.5 million for the year
ended December 31, 2000 from $3.2 million for the year ended December 31, 1999,
an increase of $0.3 million or 7.8%. The increase in interest expense is
primarily due to an increase in the average interest rate associated with our
bank indebtedness as well as interest costs associated with the $2.3 million of
additional financing obtained by the company on October 10, 2000 from Alexander
Enterprise.
Income (loss) from continuing operations before income taxes. Income from
continuing operations before income taxes was a loss of $(11.2) million for the
year ended December 31, 2000 compared to income of $0.6 million for the year
ended December 31, 1999, a decrease of $11.8 million. This decrease was
primarily attributed to restructuring and other one-time charges of $4.3
million, a write-off of goodwill of $1.3 million, and an increase of $2.4
million in depreciation and amortization. The remaining change is primarily due
to other increases in corporate and operating expenses described above.
Income tax expense. The company recorded income tax expense of $3.0 million
for the year ended December 31, 2000. The tax expense is primarily due to the
establishment of a valuation allowance against the company's deferred tax
assets. The valuation was based on the uncertainty regarding the company's
ability to utilize its net operating loss carryforwards.
Loss from discontinued operations, net of tax. Discontinued operations
represent the loss from Prime's ophthalmology division. During 1999, the company
revised its estimate of loss on those disposed operations and recorded an
additional loss of $2.5 million, net of a tax benefit of $0.2 million. The
disposal of these operations was substantially completed by December 31, 1999.
There was no loss from discontinued operations recorded during 2000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
26
Managed Care 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.
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.
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
company's 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 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 and 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
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taxes and non-deductible goodwill amortization.
Loss from discontinued operations, net of tax. Discontinued operations
represents 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.
LIQUIDITY AND CAPITAL RESOURCES
The company's principal sources of liquidity are from cash flows generated
from operations and from borrowings under the company's credit facility. The
company's principal uses of liquidity are to provide working capital and meet
debt service requirements. As of December 31, 2000, the company had cash and
cash equivalents of approximately $1.4 million, no additional borrowing capacity
under its revolving credit facility and was in violation of certain covenants
under its credit facility.
The company was unable to pay the interest and principal of approximately
$1.7 million due on January 2, 2001 to its senior lender, Bank Austria, under
the credit facility. Bank Austria formally declared an event of default under
the credit facility on March 23, 2001, and on September 25, 2001, Bank Austria
demanded payment in full of all outstanding obligations of the company to Bank
Austria. In addition, on October 5, 2001, Alexander Enterprise formally declared
an event of default under its loan to the company, as a result of the company's
aforementioned default under its credit facility. As of November 1, 2001 the
company has not made its scheduled principal payments due in 2001 under its
credit facility and the company's arrearage with respect to such delinquent
principal and interest totaled approximately $6.2 million. Total princ