UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at August 1, 2002 was 12,783,192 shares.
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 (unaudited) 3
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 31
CERTIFICATION 32
2
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,035 $ 2,536
Accounts receivable, net 6,729 6,915
Inventories 2,174 1,787
Deferred income taxes, current 2,700 6,000
Assets held for sale 2,656 2,729
Other current assets 943 616
-------- --------
Total Current Assets 18,237 20,583
Property and equipment, net 3,751 4,723
Intangible assets, net 1,442 1,531
Goodwill, net 20,516 20,516
Deferred income taxes, non-current 1,800 1,800
Assets held for sale, non-current 4,695 8,726
Other assets 3,529 1,863
-------- --------
TOTAL ASSETS $ 53,970 $ 59,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,124 $ 4,386
Accrued expenses 6,372 7,663
Current portion of long-term debt 1,725 1,729
Liabilities of held for sale business 1,877 1,978
Other current liabilities 1,049 1,372
-------- --------
Total Current Liabilities 15,147 17,128
-------- --------
Long-term debt, less current portion 23,849 32,508
Liabilities of held for sale business 299 257
Other liabilities 1,091 2,867
-------- --------
Total non-current liabilities 25,239 35,632
-------- --------
Series B 12.5% voting, mandatorily redeemable , cumulative, convertible
preferred stock, $0.001 par value, 3,500,000 shares authorized,
3,204,959 shares issued and outstanding 4,487 -
-------- --------
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.001 par value, 550,000 shares
authorized; no shares outstanding at June 30, 2002; 418,803 shares
outstanding at December 31, 2001. - 1
Common Stock, $0.001 par value; 75,000,000 shares authorized;
12,783,192 and 12,815,092 shares outstanding at June 30, 2002 and
December 31, 2001, respectively. 13 13
Additional paid-in-capital 61,810 60,679
Accumulated deficit (52,726) (53,711)
-------- --------
Total Stockholders' Equity 9,097 6,982
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 53,970 $ 59,742
======== ========
See notes to condensed consolidated financial statements.
3
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET REVENUES:
Managed care services $ 7,159 $ 6,823 $ 14,607 $ 14,654
Product sales 10,894 12,316 21,660 24,261
Other services 5,490 5,540 10,655 10,386
Other income 646 - 646 -
------------ ------------ ------------ ------------
Total net revenues 24,189 24,679 47,568 49,301
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Medical claims expense 5,819 5,354 11,651 11,670
Cost of product sales 8,549 9,836 17,193 19,372
Cost of services 2,368 2,406 4,635 4,578
Selling, general and administrative 6,317 5,931 12,485 12,204
Depreciation 465 495 939 999
Amortization 45 332 89 591
Interest expense 834 739 1,531 1,492
------------ ------------ ------------ ------------
Total operating expenses 24,397 25,093 48,523 50,906
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes (208) (414) (955) (1,605)
Income tax benefit (83) (27) (382) (180)
------------ ------------ ------------ ------------
Loss from continuing operations (125) (387) (573) (1,425)
Income (loss) from discontinued operations, net of tax (5) 40 184 269
Loss on disposal of discontinued operations (3,940) - (3,940) -
------------ ------------ ------------ ------------
Loss before extraordinary gain (4,070) (347) (4,329) (1,156)
Extraordinary gain on early extinguishment of debt, net of
income taxes of $3,475 - - 5,314 -
------------ ------------ ------------ ------------
Net Income (loss) $ (4,070) $ (347) $ 985 $ (1,156)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE--BASIC AND DILUTED:
Loss from continuing operations available to
common stockholders $ (0.02) $ (0.03) $ (0.06) $ (0.11)
Income (loss) from discontinued operations (0.31) - (0.30) 0.02
Extraordinary gain - - 0.42 -
------------ ------------ ------------ ------------
Net income (loss) available to common stockholders $ (0.33) $ (0.03) $ 0.06 $ (0.09)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------
2002 2001
----------------- -----------------
OPERATING ACTIVITIES:
Net income (loss) $ 985 $ (1,156)
Extraordinary gain on early extinguishment of debt (5,314) -
(Income) loss on discontinued operations 3,756 (269)
------- --------
Loss from continuing operations (573) (1,425)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 939 999
Amortization 89 591
Changes in operating assets and liabilities
Accounts receivable 186 (194)
Inventories (387) (221)
Other assets (549) 821
Accounts payable and accrued expenses (1,553) 457
Other liabilities 18 (91)
------- --------
Net cash provided by (used in) operating activities (1,830) 937
------- --------
INVESTING ACTIVITIES:
Purchase of notes receivable (1,350) -
Purchases of equipment (90) (94)
------- --------
Net cash (used in) investing activities (1,440) (94)
------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 23,474 500
Increase in revolving credit facility 617
Proceeds from issuance of preferred stock 4,000
Principal payments on long-term debt (24,322) (236)
------- --------
Net cash provided by financing activities 3,769 264
------- --------
Increase (decrease) in cash and cash equivalents 499 1,107
Cash and cash equivalents at beginning of period 2,536 1,445
------- --------
Cash and cash equivalents at end of period $ 3,035 $ 2,552
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 476 $ 102
Cash paid (received) for income taxes $ - $ (108)
See notes to condensed consolidated financial statements.
5
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of OptiCare
Health Systems, Inc., a Delaware corporation, and subsidiaries (the "Company")
for the three and six months ended June 30, 2002 and 2001 have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934 and are
unaudited. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the consolidated financial statements have been included. The
results of operations for the three and six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year. The
condensed consolidated balance sheet as of December 31, 2001 was derived from
the Company's audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. DISCONTINUED OPERATIONS
In May 2002, the Company's Board of Directors approved management's plan to
dispose of the Company's North Carolina retail optometry division and is
accounted for as a disposal group under Statement of Financial Accounting
Standards ("SFAS") No. 144. Accordingly, amounts in the financial statements and
related notes for all periods presented have been reclassified to reflect SFAS
No. 144 treatment. As described in Note 9, the Company's North Carolina retail
optometry operations were sold on August 12, 2002.
The carrying amount of the assets and liabilities of the disposal group held
for sale at June 30, 2002 and December 31, 2001 were as follows:
June 30, December 31,
2002 2001
---------- ------------
Assets:
Accounts receivable $ 1,025 $ 1,350
Inventory 1,441 1,259
Property and equipment, net 1,677 1,569
Intangible assets, net - 6,608
Other assets 3,208 669
------- -------
Total assets $ 7,351 $11,455
======= =======
Liabilities:
Accounts Payable $ 955 $ 963
Accrued Expenses 740 938
Other liabilities 481 334
------- -------
Total liabilities $ 2,176 $ 2,235
======= =======
6
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
Operating results of the discontinued operations are as follows:
Three Months Ended Six months Ended
June 30, June 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
Net revenues $ 6,996 $ 7,062 $ 14,405 $14,504
======= ======= ========= =======
Income (loss) from discontinued operations before taxes $ (8) $ 67 $ 306 $ 449
Income tax expense (benefit) (3) 27 122 180
------- ------- --------- -------
Income (loss) from discontinued operations (5) 40 184 269
Loss on disposal of discontinued operations (3,940) - (3,940) -
------- ------- --------- -------
Total income (loss) from discontinued operations $(3,945) $ 40 $ (3,756) $ 269
======= ======= ========= =======
Income (loss) per share from discontinued operations $ (0.31) - $ (0.30) $ 0.02
======= ======= ========= =======
3. CAPITAL RESTRUCTURING
On January 25, 2002, the Company closed a series of transactions which
resulted in a major restructuring of its debt, equity and voting capital stock
(the "Capital Restructuring Transactions"). The Capital Restructuring
Transactions included, among other things, the following:
Palisade Concentrated Equity Partnership, L.P., a fund manager and
stockholder of the Company, purchased, for $3,600 in cash, 2,571,429 shares of
the Company's Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock, par value $.001 per share and Linda Yimoyines, wife of Dr.
Yimoyines, purchased for a $400 cash payment 285,714 shares of Series B
Preferred Stock. Each share of Series B Preferred Stock is immediately
convertible into ten shares of common stock and has the voting power equivalent
to ten shares of common stock; accrues cumulative dividends at an annual rate of
12.5%; must be redeemed in full by the Company on December 31, 2008; and with
respect to dividends, redemption rights, and rights on liquidation, winding up,
corporate reorganization and dissolution, ranks senior to the Company's common
stock.
Bank Austria Creditanstalt Corporate Finance, Inc., which was, until January
25, 2002, the Company's senior secured lender, forgave approximately $10,000 of
debt and accrued interest due to it and sold the loans and other obligations of
the Company which Bank Austria then held, including security agreements, pledges
of stock by certain of the Company's subsidiaries and guarantees of loans and
other obligations, to CapitalSource Finance LLC, an asset-based lender
specializing in the health care industry.
CapitalSource, as lender, and the Company, as borrower, amended and restated
the terms of the indebtedness acquired by CapitalSource from Bank Austria by
entering into an Amended and Restated Revolving Credit, Term Loan and Security
Agreement, referred to as the Loan and Security Agreement or Credit Facility.
Palisade made a subordinated loan to the Company of $13,900, and Linda
Yimoyines, wife of Dean J. Yimoyines, M.D., Chairman of the Board, Chief
Executive Officer and President of the Company, made a subordinated loan to the
Company of $100 which loans are evidenced by senior subordinated secured notes.
These notes are subordinate to the Company's indebtedness to its senior lender,
CapitalSource, and are secured by second-priority security interests in
substantially all of the Company's assets (the first-priority security interest
is held by CapitalSource).
7
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
In connection with providing the $13,900 subordinated loan to the Company,
Palisade received warrants to purchase up to 17,375,000 shares of common stock.
In connection with providing the $100 subordinated loan to the Company, Ms.
Yimoyines received warrants to purchase up to 125,000 shares of common stock. In
conjunction with the amendment and restatement of the credit facility,
CapitalSource received warrants to purchase 250,000 shares of common stock. The
warrants were issued at an exercise price of $0.14 per share and are exercisable
during a ten-year period expiring January 24, 2012. The estimated fair value of
the warrants of approximately $1,380 was recorded as a debt discount and is
being amortized on the interest method over the term of the related debt .
The bridge loan from Alexander Enterprise Holdings Corp. was satisfied in
full, as follows: (i) $2,534 in cash was paid to Alexander Enterprise in full
satisfaction of the $2,300 of principal and $234 of accrued interest due to
Alexander Enterprise under the Bridge Loan. Alexander Enterprise relinquished
its security interest in the assets of the company and has no further claims
against the Company. The cash was provided by the $3,600 purchase by Palisade of
Series B Preferred Stock; (ii) The Company issued 309,170.5 shares of Series B
Preferred Stock to Palisade to satisfy the $400 of principal and $33 of accrued
interest due to Palisade as a participant under the Bridge Loan; and (iii) the
Company issued 38,646.3 shares of Series B Preferred Stock to Ms. Yimoyines to
satisfy the $50 of principal and $4 of accrued interest due to Ms. Yimoyines as
a participant under the bridge loan.
The Company reacquired from Bank Austria, for a cash payment of $1,350,
certain notes and contractual rights originally issued or made to the company in
connection with the Company's transfers of certain medical practice assets to
physicians engaged in such practices.
Without further consideration, Bank Austria surrendered warrants previously
issued to it to purchase 100,000 shares of the Company's common stock;
surrendered to the Company (for retirement) 418,803 shares of Series A
convertible preferred stock of the Company; and surrendered to the Company (for
the Company to retire) 56,900 shares of common stock.
In connection with the Capital Restructuring Transactions, the number of
shares of authorized common stock was increased from 50,000,000 to 75,000,000.
The additional authorized shares provide, among other things, for the
availability of common stock to be issued upon conversion of the Series B
Preferred Stock and exercise of the warrants issued.
The following table sets forth the long-term debt of the Company:
June 30, 2002
----------------
Term note payable to CapitalSource in principal amounts of $50 per quarter. The final principal
payment is payable for the outstanding principal balance and is due and payable on June 1,
2004. Principal and interest is due and payable monthly in arrears. The interest rate equals
the Prime Rate plus 3.5%. Maturity date is January 22, 2004. The term note is collateralized
by substantially all assets of the Company. $2,933
Revolving credit note to CapitalSource, due January 22, 2005, interest is due and payable
monthly in arrears on the first of the month at an annual rate of Prime Rate plus 1.5% and is
collateralized by substantially all assets of the Company. 7,092
Senior subordinated secured notes payable due January 24, 2012. The interest
rate is 11.50% payable on the last day of each calendar quarter. The notes
are secured by second-priority security interests in substantially all the
company's assets (the first-priority security interest is held by
CapitalSource). The outstanding loan balance at June 30, 2002 includes $711
of paid in-kind interest. 14,711
Subordinated notes payable due at various dates through 2004. Principal and interest payments
are due monthly or annually. Interest is payable at rates ranging from 7% to 11.4%. 2,176
Unamortized discounts (1,338)
-------
Total 25,574
Less current portion 1,725
-------
Long-term portion $23,849
=======
8
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
4. EXTRAORDINARY ITEM
On January 25, 2002, the Company recorded a gain on the early extinguishment
of debt of $8,789 before income tax of $3,475 as a result of the Company's
Capital Restructuring Transactions. The $8,789 gain was comprised principally of
approximately $10,000 of debt and interest forgiveness by Bank Austria, the
Company's former senior secured lender, which was partially offset by $1,200 of
unamortized deferred financing fees and debt discount.
5. SEGMENT INFORMATION
The Company currently manages the operations of the business through three
operating segments: (1) Managed Care Services (2) Professional Services and (3)
Other Integrated Services. The managed care segment contracts with insurers,
managed care plans and other third party payors to manage claims payment
administration of eye health benefits for those contracting parties. The
professional services segment provides laser and ambulatory surgery facilities,
develops and sells integrated practice management systems and provides support
services to eye care professionals. The other integrated services segment owns,
operates and/or contracts with fully integrated eye health centers and
professional optometric practices and provides wholesale buying services to eye
care professionals nationwide. Management assesses the performance of its
segments based on income before income taxes, interest expense, depreciation and
amortization, and other corporate overhead.
Summarized financial information, by segment, for the three and six months ended
June 30, 2002 and 2001 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------- -------------
REVENUES:
Managed care services $ 7,241 $ 6,870 $14,754 $ 14,839
Professional services 1,531 1,958 2,960 3,567
Other integrated services 16,031 17,207 31,720 33,342
---------- ---------- ----------- -----------
Segment totals 24,803 26,035 49,434 51,748
Other revenue 646 - 646 -
Elimination of inter-segment revenues (1,260) (1,356) (2,512) (2,447)
---------- ---------- ----------- -----------
Total net revenue $24,189 $24,679 $47,568 $49,301
========== ========== =========== ===========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAX:
Managed care services $ 298 $ 545 $ 850 $ 1,034
Professional services 394 638 594 1,042
Other integrated services 573 560 969 626
---------- ---------- ----------- -----------
Segment totals 1,265 1,743 2,413 2,702
Other income 646 - 646 -
Depreciation (465) (495) (938) (999)
Amortization (45) (332) (89) (591)
Interest expense (834) (739) (1,531) (1,492)
Corporate (775) (591) (1,456) (1,225)
---------- ---------- ----------- -----------
Loss from continuing operations before
income taxes $ (208) $ (414) $ (955) $ (1,605)
========== ========== =========== ===========
9
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
6. EARNINGS (LOSS) PER SHARE
The following tables sets forth the computation of basic and diluted
earnings (loss) per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- ------------- --------------
Loss from continuing operations $ (125) $ (387) $ (573) $ (1,425)
Preferred stock dividend (142) - (245) -
------------- -------------- ------------- --------------
Loss from continuing operations available to
common stockholders (267) (387) (818) (1,425)
Income (loss) from discontinued operations (3,945) 40 (3,756) 269
Extraordinary gain - - 5,314 -
------------- -------------- ------------- --------------
Net income (loss) available to common stockholders $(4,212) $ (347) $ 740 $ (1,156)
============= ============== ============= ==============
Weighted average common shares
outstanding - Basic and diluted 12,783,192 12,799,300 12,780,101 12,796,868
============= ============== ============= ==============
Earnings (loss) per share - basic and diluted:
----------------------------------------------
Loss from continuing operations available to
common stockholders $ (0.02) $ (0.03) $ (0.06) $ (0.11)
Discontinued Operations (0.31) - (0.30) 0.02
Extraordinary item - - 0.42 -
------------- -------------- ------------- --------------
Net income (loss) per common share $ (0.33) $ (0.03) $ 0.06 $ (0.09)
============= ============== ============= ==============
The following table reflects the potential common shares of the Company
at June 30, 2002 and 2001. These potential shares have been excluded from the
calculation of diluted earnings per share because the Company incurred a loss
from continuing operations in those periods and their effect would be
antidilutive.
2002 2001
------------- -------------
Options 4,646,045 920,458
Warrants 21,196,198 3,501,198
Convertible Preferred Stock 32,049,598 418,803
------------- -------------
57,891,841 4,840,459
============= =============
7. CONTINGENCIES
The Company is both a plaintiff and defendant in lawsuits incidental to its
current and former operations. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at June 30, 2002 cannot be ascertained. Management is of the opinion
that, after taking into account the merits of defenses and established reserves,
the ultimate resolution of these matters will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
10
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
8. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Financial Accounting
Standard ("FAS") No. 142, "Goodwill and Other Intangible Assets". The standard
changes the accounting for goodwill and intangible assets with an indefinite
life whereby such assets will no longer be amortized; however the standard does
require evaluation for impairment, and a corresponding writedown, if
appropriate. FAS No. 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company
completed its transitional impairment test during the quarter ended June 30,
2002 and no impairment write-down was required.
Comparative information as if goodwill had not been amortized is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
Net income (loss) as reported $ (4,070) $ (347) $ 985 $ (1,156)
Add back: goodwill amortization - 287 - 502
----------- ---------- ---------- -----------
Adjusted net income (loss) (4,070) (60) 985 (654)
Preferred stock dividend (142) - (245) -
----------- ---------- ---------- -----------
Adjusted net income (loss) available to common
stockholders $ (4,212) $ (60) $ 740 (654)
=========== ========== ========== ===========
Earnings (loss) per common share - basic and diluted:
Net income (loss) available to common stockholders $ (0.33) $ (0.03) $ 0.06 $(0.09)
Goodwill amortization - 0.02 - 0.04
----------- ---------- ---------- -----------
Adjusted net income (loss) per share $ (0.33) $ (0.01) $ 0.06 $(0.05)
=========== ========== ========== ===========
Intangible assets subject to amortization are as follows:
At At
June 30, 2002 December 31, 2001
----------------- ----------------------
Gross Carrying Amount $ 1,923 $ 1,923
Accumulated Amortization (481) (392)
----------------- ----------------------
Total $ 1,442 $ 1,531
================= ======================
Amortization of intangibles was $45 for the three months ended June 30, 2002
and 2001, and $89 for the six months ended June 30, 2002 and 2001. Estimated
annual amortization expense is expected to be $178, $172, $111, $111 and $111
for the years 2002, 2003, 2004, 2005 and 2006, respectively.
In June 2001, the FASB issued SFAS 143, "Accounting For Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to adopt the
provisions of SFAS No. 143 at the beginning of fiscal 2003. The Company has
determined that the adoption of this statement will not have a material impact
on its financial position or results of operations.
11
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. This statement also broadens the
definition of discontinued operations to include more disposal transactions. The
provisions of this statement were adopted by the Company on January 1, 2002. The
Company applied SFAS No. 144 to the sale of its North Carolina Optometry
operations and reported a loss on disposal of $3,940 for the quarter ended June
30, 2002.
In April 2002, the FASB issued SFAS 145, "Recission of FASB Statements 4, 44
and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS No. 145
rescinds the provisions of SFAS No. 4 that requires companies to classify
certain gains and losses from debt extinguishments as extraordinary items,
eliminates the provisions of SFAS No. 44 regarding transition to the Motor
Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that
certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. In future periods, the
Company will classify debt extinguishment costs within income from operations
and will reclassify previously reported debt extinguishments as such. The
provisions of SFAS No. 145 related to lease modification are effective for
transactions occurring after May 15, 2002. Upon adoption the Company will
reclassify its previously reported gain from extinguishment of debt of $8,789
and related income tax expense of $3,475 from an extraordinary item to
continuing operations.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No.146) and nullifies EITF
Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No 94-3 had recognized the liability at the commitment date of an
exit plan. The Company is required to adopt the provisions of SFAS No. 146
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect the provisions of SFAS No.146 to have a material impact
on its financial position or results of operations.
9. SUBSEQUENT EVENT
On August 12, 2002, the Company sold substantially all of the net assets of
its North Carolina retail optometry division to Optometric Eye Care Center,
P.A., an independent professional association owned by two former officers of
the Company. In the sale, the Company received $4.2 million in cash, a $1.0
million secured promissory note, 1.3 million shares of the Company's common
stock formerly held by the owners of Optometric Eye Care Center, P.A. and the
purchaser's assumption of certain liabilities for an aggregate consideration of
approximately $5.7 million. (See also Note 2)
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion may be understood more fully by reference to the
financial statements, notes to the financial statements, and management's
discussion and analysis contained in the company's Annual Report on Form 10-K
for the year ended December 31, 2001, as filed with the Securities and Exchange
Commission.
Overview. OptiCare Health Systems, Inc. (the "company") 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. The company executes 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 insurers,
managed care plans and other third party payors to manage claims payment
administration of eye health benefits for those contracting parties. The
professional services segment provides laser and ambulatory surgery facilities;
develops and sells integrated practice management systems and provides support
services to eye care professionals throughout the country. The other integrated
services segment owns, operates and/or contracts with integrated eye health
centers and professional optometric practices in Connecticut and North Carolina,
and provides wholesale buying services to eye care professionals nationwide.
In May 2002, the company's Board of Directors approved management's plan to
dispose of the company's North Carolina retail optometry division and is
accounted for as a disposal group under Statement of Financial Accounting
Standards ("SFAS") No. 144. Accordingly, amounts in the financial statements
(and described below) for all periods presented have been reclassified to
reflect SFAS No. 144 treatment. On August 12, 2002 the company consummated the
sale of its North Carolina retail optometry operations and will file a report on
Form 8-K with respect to this transaction shortly.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Managed care services revenue. Managed care services revenue increased to
$7.2 million for the three months ended June 30, 2002 from $6.8 million for the
three months ended June 30, 2001, an increase of $0.4 million. This increase was
primarily due to negotiated increases in capitation rates and growth in existing
contracts. Increases in revenue associated with new contracts were offset by
decreases in revenue associated with contracts that are no longer being serviced
by the company.
Product sales revenue. Product sales revenue decreased to $10.9 million for
the three months ended June 30, 2002 compared to $12.3 million for the three
months ended June 30, 2001, a decrease of $1.4 million. This decrease primarily
represents a decrease in buying group revenue resulting from decreases in
purchasing volume. The decrease in volume is primarily due to consolidation in
the eyecare industry whereby smaller independent eyecare businesses are being
replaced by larger eyecare chains that purchase directly from vendors. The
company expects this shift to continue and potentially further reduce the buying
group's market share and revenue; however the company does not expect this trend
to have a material impact on its overall profitability.
Other services revenue. Optometry and ophthalmology services revenue
increased $0.4 million from three months ended June 30, 2002 compared to the
three months ended June 30, 2001 due to increased productivity. These increases
were offset by a $0.4 decrease in Health Service Organization revenue for the
quarter ended June 30, 2002 compared to the quarter ended June 30, 2001. The
company's revenue stream from fees collected under its Health Service
Organization agreements has been decreasing due to disputes with certain
physician practices who are parties to these agreements. The company is in
litigation with several of these practices and intends to pursue settlement of
these matters in the future. While a continued decrease in these contractual
fees could negatively impact our cash flows, the company is currently focusing
on resolving the disputes with these practices and believes the company will
receive cash payments and/or other consideration in settlement of these
disputes.
Other income. Other income for the three months ended June 30, 2002 was $0.6
million and was comprised of settlements of contracts.
Medical claims expense. Medical claims expense increased to $5.8 million for
the three months ended June 30, 2002 from $5.4 million for the three months
ended June 30, 2001, an increase of $0.4 million. The medical claims expense
loss ratio (MLR), representing medical claims expense as a percentage of managed
care revenue, was 81.3% for the three
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months ended June 30, 2002 compared to 78.5% for the same period in 2001. The
increase in MLR was primarily due to the lost margins on profitable contracts
which are no longer serviced by the company.
Cost of product sales. Cost of product sales decreased to $8.5 million for
the three months ended June 30, 2002 from $9.8 million for the three months
ended June 30, 2001, a decrease of $1.3 million. This decrease represented a
reduction in cost of sales related to the buying group program as a result of
the decrease in sales volume.
Cost of services. Cost of services remained relatively unchanged at $2.4
million for the three months ended June 30, 2002 and 2001.
Selling, general and administrative. Selling, general and administrative
expenses increased to $6.3 million for the three months ended June 30, 2002 from
$5.9 million for the three months ended June 30, 2001, an increase of $0.4
million. This increase primarily represents an increase in professional fees,
including legal and consulting fees.
Amortization expense. Amortization expense decreased to less than $0.1
million for the three months ended June 30, 2002 from $0.3 million for the three
months ended June 30, 2001 due to the discontinuation of the amortization of
goodwill effective January 1, 2002 in accordance with Statement of Financial
Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Income tax benefit. The company reported a $0.1 million income tax benefit
for the three months ended June 30, 2002, representing an effective tax rate of
approximately 40%. For the three months ended June 30, 2001, the company
reported a tax benefit of less than $0.1 million on a loss from continuing
operations of $0.4 million, primarily due to the uncertainty surrounding the
company's ability to utilize its net operating loss carryforwards at that time.
Discontinued operations. In May 2002, the company's Board of Directors
approved management's plan to dispose of the company's North Carolina retail
optometry division. Accordingly, during the quarter ended June 30, 2002 the
company recorded a $3.9 million loss on disposal of discontinued operations
based on the estimated fair value of the net assets held for sale. On August 12,
2002 the company consummated the sale of its North Carolina retail optometry
operations.
Net income (loss). The company reported a net loss of $4.1 million for the
three months ended June 30, 2002 compared to a net loss of $0.3 million for the
three months ended June 30, 2001, representing a change of $3.8 million. This
change was primarily due to the loss on discontinued operations in 2002 as
described above.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Managed care services revenue. Managed care services revenue remained
relatively unchanged at $14.6 million for the six months ended June 30, 2002
compared to $14.7 million for the six months ended June 30, 2001. Managed care
revenue increased slightly due to negotiated increases in capitation revenue and
growth in existing contracts, which was offset by a decrease in revenue
primarily on three contracts that were not renewed.
Product sales revenue. Product sales revenue decreased to $21.7 million for
the six months ended June 30, 2002 compared to $24.3 million for the six months
ended June 30, 2001, a decrease of $2.6 million. This decrease primarily
represents a decrease in buying group revenue resulting from decreases in
purchasing volume. The decrease in volume was due to consolidation in the
eyecare industry toward direct purchase from vendors. The company expects this
shift to continue and potentially further reduce the buying group's market share
and revenue; however the company does not expect this trend to have a material
impact on its overall profitability.
Other services revenue. Other services revenue increased to $10.7 million
for the six months ended June 30, 2002 compared to $10.4 million for the six
months ended June 30, 2001, an increase of $0.3 million. This increase includes
a $0.9 million increase in optometry and ophthalmology services revenue and a
$0.5 million increase in sales of software systems. These increases were
partially offset by a $0.3 million decrease in revenue from ambulatory surgery
center services due to a decrease in volume and an $0.8 million decrease in
Health Service Organization revenue. The company's revenue stream from fees
collected under its Health Service Organization agreements has been decreasing
due to disputes with certain physician practices who are parties to these
agreements. The company is in litigation with several of these practices and
intends to pursue settlement of these matters in the future. While a continued
decrease in these contractual fees could negatively impact our cash flows, the
company is currently focusing on resolving the disputes with these practices and
believes the company will receive cash payments and/or other consideration in
settlement of these disputes.
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Other income. Other income for the six months ended June 30, 2002 was $0.6
million and was comprised of settlements of contracts.
Medical claims expense. Medical claims expense remained relatively stable at
$11.7 million for the six months ended June 30, 2002 and June 30, 2001. The
medical claims expense loss ratio (MLR), representing medical claims expense as
a percentage of managed care revenue, was 79.8% in 2002 compared to 79.6% in
2001.
Cost of product sales. Cost of product sales decreased to $17.2 million for
the six months ended June 30, 2002 from $19.4 million for the six months ended
June 30, 2001, a decrease of $2.2 million. This decrease primarily represents a
reduction in cost of sales related to the buying group program as a result of
the decrease in sales volume.
Cost of services. Cost of services remained relatively unchanged at $4.6
million for the six months ended June 30, 2002 and 2001.
Selling, general and administrative. Selling, general and adminstrative
expenses increased to $12.5 million for the six months ended June 30, 2002 from
$12.2 million for the six months ended June 30, 2001, an increase of $0.3
million. This increase is primarily due to increases in professional fees.
Amortization expense. Amortization expense decreased from $0.1 million for
the six months ended June 30, 2002 from $0.6 million for the six months ended
June 30, 2001 due to the discontinuation of the amortization of goodwill
effective January 1, 2002 in accordance with Statement of Financial Accounting
Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Income tax benefit. The company reported a $0.4 million income tax benefit
on continuing operations for the six months ended June 30, 2002, representing an
effective tax rate of approximately 40%. For the six months ended June 30, 2001,
the company only reported a tax benefit of $0.2 million on a loss from
continuing operations of $1.6 million, primarily due to the uncertainty
surrounding the company's ability to utilize its net operating loss
carryforwards at that time.
Discontinued operations. In May 2002, the company's Board of Directors
approved management's plan to dispose of the company's North Carolina retail
optometry division. Accordingly, during the quarter ended June 30, 2002 the
company recorded a $3.9 million loss on disposal of discontinued operations
based on the estimated fair value of the net assets held for sale. On August 12,
2002 the company consummated the sale of its North Carolina retail optometry
operations.
Extraordinary item. The company reported a $5.3 million net gain on early
extinguishment of debt for the six months ended June 30, 2002. The gain was
reported in the first quarter of 2002 and was comprised of approximately $10.0
million of forgiveness of principal and interest by Bank Austria, the company's
former senior secured lender, and was partially offset by the write-off of $1.2
million of related unamortized deferred financing fees and debt discount, and
$3.5 million of income taxes.
Net income (loss). The company reported net income of $1.0 million for the
six months ended June 30, 2002 compared to a net loss of $1.2 million for the
six months ended June 30, 2001, an increase in net income of $2.2 million. The
increase was primarily due to the $5.3 million gain on the extinguishment of
debt and an $0.8 million improvement in continuing operations, which was
partially offset by a $3.9 million loss on the disposal of discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary sources of liquidity are cash flows generated from
operations and borrowings under its credit facility. The company's principal
uses of liquidity are to provide working capital, meet debt service requirements
and finance capital expenditures. We believe that our cash flow from operations,
borrowings under our credit facility, and operating and capital lease financing
will provide us with sufficient funds to finance our operations for the next 12
months.
As of June 30, 2002, we had approximately $3.0 million of cash and cash
equivalents, $2.9 million of borrowings outstanding under a term loan, and $7.1
million outstanding under our revolving credit agreement. Although we have a $10
million revolving credit facility, the amount available to be borrowed at any
time is based on the value of the
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collateral underlying the facility and on the amount outstanding under the
facility at such time. As of June 30, 2002, we had $0.1 million of available
credit under our revolving credit facility.
Net cash used in operating activities of $1.8 million for the six months
ended June 30, 2002 included a $0.6 million loss from continuing operations, a
$1.5 million decrease in accounts payable and accrued expenses and $0.7 million
of other changes in operating assets and liabilities. These uses of cash were
offset by non-cash charges of $1.0 million for depreciation and amortization.
Net cash provided by operating activities for the six months ended June 30, 2001
of $0.9 million included a $1.4 million loss from continuing operations offset
by $1.6 million of non-cash charges for depreciation and amortization a $0.5
million increase in accounts payable and accrued expenses and $0.2 million of
other changes in operating assets and liabilities.
Net cash used in investing activities was $1.4 million for the six months
ended June 30, 2002 compared to $0.1 million for the six months ended June 30,
2001. Net cash used in financing activities in 2002 consisted principally of
$1.4 million paid to reacquire certain notes receivable and contractual rights
as part of the Capital Restructuring Transactions.
Net cash provided by financing activities was $3.8 million for the six
months ended June 30, 2002 compared to $0.3 million for the six months ended
June 30, 2001. Net cash provided by financing activities in 2002 consisted of
approximately $27.5 million from the issuance of debt and preferred stock and
$0.6 million from net borrowings under the company's revolving credit facility.
These increases were partially offset by approximately $24.3 million of
principal payments on long-term debt, primarily related to the company's capital
restructuring in January 2002. The primary sources of net cash from financing
activities for the six months ended June 30, 2001 was $0.5 million of net
proceeds from funds borrowed under the company's amended bridge loan which was
partially offset by approximately $0.2 million of principal payments on
long-term debt.
Under an agreement with the Texas Department of Insurance, the company is
required to maintain a restricted investment of $250,000. The company does not
believe the requirements of the Texas Department of Insurance will have a
material impact on the company's liquidity.
The Capital Restructuring Transactions
On January 25, 2002, the company completed a series of transactions that
resulted in a major reduction in, and restructuring of, the debt described above
as well as our issuance of voting capital stock. The transactions included,
among other things, the following:
1. Palisade Concentrated Equity Partnership, L.P., a fund manager and
stockholder of the company, purchased, for $3.6 million in cash,
2,571,429 shares of the company's Series B 12.5% Voting Cumulative
Convertible Participating Preferred Stock, par value $.001 per share,
referred to as the Series B Preferred Stock, convertible into 25,714,290
shares of common stock. Linda Yimoyines, wife of Dr. Yimoyines,
purchased for a cash payment of $0.4 million, 285,714 shares of Series B
Preferred Stock. The Series B Preferred Stock is described in more
detail below.
2. Bank Austria forgave the portion of our indebtedness to it in excess of
$21.8 million and sold the loans and other obligations of the company
which Bank Austria then held, including security agreements, pledges of
stock by certain of our subsidiaries and guarantees of loans and other
obligations, to CapitalSource Finance LLC, a Delaware limited liability
company.
3. CapitalSource, as lender, and the company, as borrower, amended and
restated the terms of the indebtedness acquired by CapitalSource from
Bank Austria by entering into an Amended and Restated Revolving Credit,
Term Loan and Security Agreement, referred to as the Loan and Security
Agreement or the Credit Facility.
4. Palisade made a subordinated loan to us of $13.9 million, and Linda
Yimoyines, wife of Dean J. Yimoyines, made a subordinated loan to us of
$100,000, which loans are evidenced by senior subordinated secured
notes, the terms of which are described in more detail below.
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5. In connection with providing its $13.9 million subordinated loan to the
company, Palisade received warrants entitling Palisade to purchase up to
17,375,000 shares of common stock at an exercise price of $0.14 per
share (subject to anti-dilution provisions). In connection with her
providing a $100,000 subordinated loan to the company, Ms. Yimoyines
received warrants entitling her to purchase up to 125,000 shares of
common stock at an exercise price of $0.14 per share (subject to
anti-dilution provisions). The warrants issued to Palisade and to Ms.
Yimoyines are exercisable during a ten-year period expiring January 24,
2012.
6. In conjunction with the amendment and restatement of the credit
facility, we issued 10-year warrants to CapitalSource to purchase
250,000 shares of our common stock at an exercise price of $0.14 per
share (subject to anti-dilution provisions).
7. The company applied a portion of the proceeds of the Palisade loan to
pay down the indebtedness under our credit facility now held by
CapitalSource.
8. Our bridge loan from Alexander Enterprise was satisfied in full, as
follows:
a. $2.5 million in cash was paid to Alexander Enterprise in full
satisfaction of the principal and interest owed to Alexander
Enterprise under the bridge loan. Alexander Enterprise
relinquished its security interest in the assets of the
company and has no further claims against us. The cash was
provided by the $3.6 million purchase by Palisade of Series B
Preferred Stock.
b. We satisfied our obligations to Palisade as a participant
under the bridge loan by issuing to Palisade 309,170.5 shares
of Series B Preferred Stock. The amount of such participation,
including accrued but unpaid interest, was $432,839.
c. We satisfied our obligations to Ms. Yimoyines as a participant
under the bridge loan by issuing to Ms. Yimoyines 38,646.3
shares of Series B Preferred Stock. The amount of such
participation, including accrued but unpaid interest, was
$54,104.
9. We reacquired from Bank Austria, for a cash payment of $1.35 million,
certain notes and contractual rights originally issued or made to the
company in connection with the company's transfers of certain medical
practice assets to physicians engaged in such practices.
10. Without further consideration, Bank Austria surrendered to the company
warrants previously issued to it to purchase 100,000 shares of the
company's common stock; surrendered to the company (for retirement)
418,803 shares of Series A convertible preferred stock of the company;
and surrendered to the company (for retirement) 56,900 shares of common
stock.
11. As of the closing of the Capital Restructuring Transactions on January
25, 2002, Palisade held (i) 2,000,000 shares of our common stock which
were previously acquired, (ii) 2,880,599.5 shares of Series B Preferred
Stock, immediately convertible into 28,805,995 shares of common stock,
and (iii) immediately exercisable warrants to purchase up to an
additional 17,775,000 shares of common stock, of which warrants to
purchase 400,000 shares at $0.40 per share were previously acquired.
Thus, 44,864,690 shares of our common stock (including 12,815,092 shares
of common stock outstanding as of January 25, 2002 (i.e., prior to the
Capital Restructuring Transactions), and 32,049,598 shares of common
stock issuable upon conversion of the Series B Preferred Stock held by
Palisade and Ms. Yimoyines) would be outstanding in the event that all
of the shares of Series B Preferred Stock are converted. Without giving
effect to any warrants, Palisade may be deemed to beneficially own 74.0%
of our common stock. Giving effect to the warrants held by Palisade,
Palisade may be deemed to beneficially own 81.8% of our common stock.
In connection with the Capital Restructuring Transactions, we agreed that,
so long as Palisade owns more than 50% of the voting power of the company,
Palisade shall have the right to designate a majority of our board of directors.
Pursuant to this provision, three nominees of Palisade were elected to the
company's board of directors effective January 25, 2002.
In connection with the Capital Restructuring Transactions, our stockholders
approved various equity-related proposals by written consent in a solicitation
process which commenced on January 4, 2002. Among those was a proposal to
increase the number of shares of authorized common stock from 50,000,000 to
75,000,000. The additional
17
authorized shares provide the availability of common stock to be issued upon
conversion of the Series B Preferred Stock and exercise of the warrants which
were issued to Palisade, Ms. Yimoyines and CapitalSource.
Subject to the reservation shares of common stock for such conversion and
exercise of warrants, the additional shares will be available for issuance from
time to time by the company at the discretion of the board of directors,
normally without further stockholder action or notification (except as may be
required for a particular transaction by applicable law, requirements of
regulatory agencies or by stock exchange rules) to provide for future equity and
convertible debt financings, acquisitions of property or securities of other
corporations, debt conversions and exchanges, exercise of current and future
options and warrants, and for issuance under our current or future employee
benefit plans, stock dividends and stock splits.
In conjunction with the Capital Restructuring Transactions the company
adopted a by-law amendment which provides that, for so long as Palisade holds
more than 50% of our voting power, the approval of the majority of the company's
independent directors (as that term is defined by the American Stock Exchange)
is required to, among other things, redeem the Series B Preferred Stock; issue
any new class or series of preferred stock to Palisade; issue a security
convertible into preferred stock to Palisade; declare or pay any dividend in
cash, property or securities of the company; or amend the special voting
provision of the company's by-laws.
The CapitalSource Credit Facility
The amended and restated credit facility with CapitalSource is comprised of
a $3 million term loan and up to a $10 million revolving credit facility.
The principal terms of the term loan with CapitalSource are:
o The maximum amount of the term loan is 40% of the value of our
capital equipment, as determined by CapitalSource in its absolute
discretion; the current balance drawn down on the term loan is $3
million.
o The interest rate is 3.5 percentage points over the announced
prime rate of Citibank, N.A., but not less than 9%.
o Principal and interest are payable monthly, on the basis of a
15-year amortization, with payment in full of the balance due on
January 25, 2004, two years from the closing of the Loan and
Security Agreement.
The principal terms of the revolving credit facility with CapitalSource are:
o The maximum amount which may be advanced under the revolving
credit facility is the lesser of (i) $10 million or (ii) 80% of
eligible accounts receivable and inventory of the company, plus up
to an additional $750,000. In addition, prior to April 1, 2002,
the amount available was up to 85% of eligible accounts receivable
and inventory, plus an additional $750,000. If the outstanding
balance as of April 1, 2002 is in excess of 80% of eligible
accounts receivable and inventory, the excess must be paid down in
monthly installments over the four months ending July 31, 2002.
-- Eligible accounts receivable are accounts receivable not
more than 120 days old, subject to certain cross-aging
requirements, and subject to determination by CapitalSource.
-- Eligible inventory is inventory meeting a number of
detailed requirements of CapitalSource and valued at the
company's cost less all discounts.
o The interest rate on the revolving credit facility is 1.5
percentage points above the announced prime rate of Citibank,
N.A., but not less than 7% per year. Interest is payable monthly
in arrears.
o All accounts receivable of the company shall be paid into
lockbox accounts and immediately transferred from such lockbox
accounts into a depository account maintained by CapitalSource on
a daily basis.
o The revolving credit facility expires and the outstanding
balance of the revolving credit facility, together with accrued
but unpaid interest, comes due in full on January 25, 2005, three
years from the closing of the amended and restated Loan and
Security Agreement.
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With respect to both the term loan and the revolving credit facility, we must
also pay a monthly "unused line fee" that equals the excess, if any, of $3,000
over all interest accrued for such month.
The Loan and Security Agreement contains certain restrictions on the conduct of
our business, including, among other things, restrictions on incurring debt,
purchasing or investing in the securities of, or acquiring any other interest
in, all or substantially all of the assets of any person or joint venture,
declaring or paying any cash dividends or making any other payment or
distribution on our capital stock, and creating or suffering liens on our
assets. We are required to maintain certain financial covenants, including a
minimum fixed charge ratio and a minimum net worth.
The company's subsidiaries have guaranteed payments and other obligations
under the credit facility and the company (including certain subsidiaries) has
granted a security interest in substantially all its assets in favor of
CapitalSource. The company also pledged the capital stock of certain of its
subsidiaries to CapitalSource.
The occurrence of certain events or conditions described in the Loan and
Security Agreement (subject to grace periods in certain cases) constitutes an
"event of default." If an event of default occurs, the entire outstanding
balance of principal and interest would become immediately due and payable.
Events of default include:
o Our failure to pay any principal or interest when due;
o Our failure to pay any indebtedness to persons other than
CapitalSource in excess of $250,000 (including amounts payable to
Palisade under the note issued to Palisade);
o Our failure to observe any covenant under the credit facility
(including, e.g., the financial covenants);
o Bankruptcy, insolvency or receivership proceedings with respect to
the company;
o Certain changes of control of the company (as defined in the Loan
and Security Agreement);
o Our inability to pay our debts generally as they come due; and
o The occurrence or expectation of any material adverse change with
respect to the company.
The Palisade and Yimoyines Senior Subordinated Secured Loans
Palisade made a subordinated loan to us of $13.9 million, and Ms. Yimoyines
made a subordinated loan to us of $100,000, which loans are evidenced by senior
subordinated secured notes. The senior subordinated secured notes issued to
Palisade and to Ms. Yimoyines rank pari passu with each other. The notes are
subordinate to our indebtedness to CapitalSource and are secured by
second-priority security interests in substantially all the company's assets
(the first-priority security interest is held by CapitalSource).
Principal is due to be paid in 10 years (i.e., on January 25, 2012) and
interest is payable quarterly at the rate of 11.5%. In the first and second
years, the company has the right to defer 100% and 50%, respectively, of
interest to maturity by increasing the principal amount of the note by the
amount of interest so deferred. In the third through tenth years, the holder of
the note has the right to require the company to defer interest to maturity by
increasing the principal amount of the note by the amount of interest so
deferred. As of March 31, 2002, the Company deferred the first payment of
interest on these senior notes to maturity by increasing the principal balance
of these notes by $295,000 (the amount of interest due on the notes at March 31,
2002).
The notes contain certain restrictions on the conduct of our business,
including, among other things, restrictions on incurring debt, becoming a party
to a merger, selling or transferring substantially all of the assets of the
company, declaring or paying any cash dividends or making any other payment or
distribution on the company's capital stock or purchasing or redeeming such
stock, entering into any agreements inconsistent with the company's obligations
under the notes, making any redemption or prepayment of any subordinated debt,
creating or suffering liens on the company's assets, or materially changing the
nature of the company's business.
The occurrence of certain events or conditions described in the Notes
(subject to grace periods in certain cases) constitutes a "default." If a
default occurs, the entire outstanding balance of principal and interest would
become immediately due and payable. Such defaults include, but are not limited
to, failure to pay any principal or interest under the notes when due; failure
to pay any principal or interest when due with respect to the CapitalSource
credit facility; failure to perform or comply with any obligation under the
notes; entry of a final judgment against
19
the company, which, together with all other final judgments, exceeds in the
aggregate $250,000, and which judgment is not stayed, paid or discharged; and
bankruptcy, insolvency or receivership proceedings with respect to the company.
The Series B Preferred Stock
The company issued 3,204,959 shares of Series B 12.5% Voting Cumulative
Convertible Participating Preferred Stock. The Preferred Stock accrues
cumulative dividends at an annual rate of 12.5%. As of March 31, 2002, accrued
and unpaid dividends on the Preferred Stock were approximately $103,000.
Each share of Series B Preferred Stock is immediately convertible into ten
shares of common stock and has the voting power equivalent to ten shares of
common stock, subject to certain anti-dilution adjustments. The Preferred Stock
is redeemable at any time by the company on 30 days' notice and must be redeemed
in full by the company on December 31, 2008, at a price equal to the greater of
the aggregate adjusted redemption value of the Series B Preferred Stock plus
accrued but unpaid dividends or the amount the preferred stockholders would be
entitled to receive if the Series B Preferred Stock plus accrued dividends were
converted at that time into common stock and the company were to liquidate and
distribute all of its assets to its common stockholders.
RECENT ACCOUNTING CHANGES
Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
The standard changes the accounting for goodwill and intangible assets with an
indefinite life whereby such assets will no longer be amortized; however the
standard does require evaluation for impairment, and a corresponding writedown,
if appropriate. SFAS No. 142 requires a transitional goodwill impairment test
six months from the date of adoption. The company completed its transitional
impairment test during the quarter ended June 30, 2002 and no impairment
write-down was required.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting For Asset Retirement Obligations". This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The company is required to adopt the provisions of SFAS No. 143 at the
beginning of fiscal 2003. The company has determined that the adoption of this
statement will not have a material impact on its financial position or results
of operations
.. In August 2001, the FASB issued No. SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. This statement also broadens the
definition of discontinued operations to include more disposal transactions. The
provisions of this statement were adopted by the company on January 1, 2002. The
Company applied SFAS No. 144 to the sale of its North Carolina Optometry
operations and reported a loss on disposal of $3,940 for the quarter ended June
30, 2002.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No.13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No.145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. In future periods, the
company will classify debt extinguishment costs within income from operations
and will reclassify previously reported debt extinguishments as such. The
provisions of SFAS No.145 related to lease modification are effective for
transactions occurring after May 15, 2002. Upon adoption the Company will
reclassify its previously reported gain from extinguishment of debt of $8,789
and related income tax expense of $3,475 from an extraordinary item to
continuing operations.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146) and nullifies EITF Issue No.
94-3. SFAS No.146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, whereas EITF
No 94-3 had recognized the liability at the commitment date of an exit plan. The
company is required to adopt the provisions of SFAS No. 146 effective for exit
or disposal activities initiated after December 31, 2002. The company does not
expect the provisions of SFAS No. 146 to have a material impact on its financial
position or results of operations.
20
IMPACT OF INFLATION AND CHANGING PRICES
The company is subject to pre-determined Medicare reimbursement rates which,
for certain products and services, have decreased over the past three years. A
decrease in Medicare reimbursement rates could have an adverse effect on the
company's results of operations if it can not manage these reductions through
increases in revenues or decreases in operating costs. To some degree, prices
for health care are driven by Medicare reimbursement rates, so that the
company's non-Medicare business is also affected by changes in Medicare
reimbursement rates.
Management believes that inflation has not had a material effect on the
company's revenues for the three and six-month periods ended June 30, 2002 and
2001.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
The statements in this Form 10-Q and elsewhere (such as in other filings by
the company with the Securities and Exchange Commission, press releases,
presentations by the company or its management and oral statements) that relate
to matters that are not historical facts are "forward-looking statements" within
the meaning of Section 27A of the Securities Exchange Act of 1934. When used in
this document and elsewhere, words such as "anticipate," "believe," "expect,"
"plan," "intend," "estimate," "project," "will," "could," "may," "predict" and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements include those relating to:
o Future opportunities;
o The outlook of customers;
o The reception of new services, technologies and pricing methods;
o Existing and potential strategic alliances;
o The likelihood of incremental revenues offsetting expense related to
new initiatives; and
o Expected improvements in the company's financial condition as a
result of the new capital structure.
In addition, such forward-looking statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance or achievements of the company to be materially different from any
future results expressed or implied by such forward-looking statements. Also,
our business could be materially adversely affected and the trading price of our
common stock could decline if any of the following risks and uncertainties
develop into actual events. Such risk factors, uncertainties and the other
factors include:
o Changes in the regulatory environment applicable to the company's
business, including health-care cost containment efforts by
Medicare, Medicaid and other third-party payers;
o Demand and competition for the company's products and services;
o General economic conditions;
o Risks related to the eye care industry, including the cost and
availability of medical malpractice insurance, and adverse long-term
experience with laser and other surgical vision correction;
o Risks related to the managed care and insurance industries,
including risks relating to class action litigation seeking to
broaden the scope of covered services;
o Our ability to successfully integrate and profitably manage our
operations;
o Loss of the services of key management personnel;
o Our ability to execute our growth strategy, without which we may not
become profitable or sustain our profitability;
o Our ability to obtain additional capital, without which our growth
could be limited;
o The fact that we have a history of losses and may incur further
losses in the future;
o The fact that if we default on our debt, our creditors could
foreclose on our assets;
o The possibility that we may not compete effectively with other eye
care services companies which have more resources and experience
than us;
21
o Failure to negotiate profitable capitated fee arrangements;
o The possibility that we may have potential conflicts of interests
with respect to related party transactions which could result in
certain of our officers, directors and key employees having
interests that differ from us and our stockholders;
o Health care regulations or health care reform initiatives, which
could materially adversely affect our business, financial condition
and results of operations;
o The fact that the nature of our business could subject us to
potential malpractice, product liability and other claims;
o The fact that managed care companies face increasing threats of
private-party litigation, including class actions, over the scope of
care that the managed care companies must pay for;
o The fact that the company is dependent upon letters of credit or
other forms of third party security in connection with certain of
its contractual arrangements and, thus, would be adversely affected
in the event it was unable to obtain such credit as needed;
o The fact that certain parties are challenging the validity of and/or
the company's compliance with Health Services Organization contracts
and have ceased or may cease making payments under such contracts,
jeopardizing the company's cash flow; and
o Other risks and uncertainties discussed in this Form 10-Q and
detailed from time to time in the company's periodic earnings
releases and reports filed with the Securities and Exchange
Commission.
We undertake no obligation to publicly update or revise forward looking
statements to reflect events or circumstances after the date of this Form 10-Q
or to reflect the occurrence of unanticipated events.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is subject to market risk from exposure to changes in interest
rates based on its financing activities under its credit facility with
CapitalSource, due to its variable interest rate. The nature and amount of the
company's indebtedness may vary as a result of future business requirements,
market conditions and other factors. The extent of the company's interest rate
risk is not quantifiable or predictable due to the variability of future
interest rates and financing needs. The company does not expect changes in
interest rates to have a material effect on income or cash flows in the year
2002, although there can be no assurances that interest rates will not
significantly change. A 10% change in the interest rate payable by the company
on its variable rate debt would have increased or decreased the six month
interest expense by approximately $70,000 assuming that the company's borrowing
level is unchanged. The company did not use derivative instruments to adjust the
company's interest rate risk profile during the six months ended June 30, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Health Services Organization Lawsuits
On or about May 22, 2002, the parties in Fogg, Maxwell & Lanier, M.D.,
Inc., et al. v. PrimeVision Health, Inc. and OptiCare Health Systems, Inc., et
al., agreed to a full and final settlement of all issues.
With regard to the remaining HSO lawsuits, on June 19, 2002, the Judicial
Panel on Multidistrict Litigation granted the company's motion to consolidate
the HSO matters for all pre-trial proceedings to the United States District
Court for the Western District of Kentucky.
Optometric Eye Care Center, P.A. Claim
On August 12, 2002, the company and Optometric Eye Care Centers, P.A.
consummated a transaction for the sale of the assets and certain liabilities of
the Company's North Carolina retail optometry operations that resolved the
dispute between the parties.
22
Regulatory Proceedings
On August 2, 2002, the North Carolina Board of Optometry approved the
sale of the company's North Carolina retail optometry operations to Optometric
Eye Care Centers, P.A., however, regulatory proceedings convened by the North
Carolina Board of Optometry in exercise of its continuing authority to oversee
implementation of a consent order entered in December 1999 remain pending.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Described below is information regarding all securities that have been
sold by the company during the first quarter ended June 30, 2002 that were not
registered under the Securities Act.
On May 21, 2002, the company granted options to purchase 1,210,000 shares
at an exercise price of $0.20 per share and on June 27, 2002 granted options to
purchase 600,000 shares of common stock at $0.26 per share, 200,000 shares at
$1.00 and 200,000 shares at $2.00. These options were granted under the 2002
Stock Incentive Plan.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. No underwriter was engaged in connection with
the foregoing sales of securities. The company has reason to believe that (i)
all of the foregoing purchasers were familiar with or had access to information
concerning the operations and financial conditions of the company, (ii) all of
those individuals purchasing securities represented that they acquired the
shares for investment and not with a view to the distribution thereof, and (iii)
other than with respect to the options, that the foregoing purchasers are
accredited investors within the meaning of Regulation D promulgated under the
Securities Act. At the time of issuance, all of the foregoing securities 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 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of OptiCare Health Systems, Inc. was held
on May 21, 2002. There were represented, in person or by proxy, 8,793,201 shares
of common stock entitled to vote at the meeting, constituting a quorum. The
following matters were voted upon and approved by the company's stockholders at
the meeting:
(i) At the meeting, the directors nominated were elected by the following
votes:
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES VOTED SHARES
VOTED FOR: AGAINST: ABSTAINED:
--------------- -------------- --------------
Dean J. Yimoyines, M.D. 7,781,269 1,011,932 718,768
Eric J. Bertrand 8,500,037 293,164 -
David B. Cornstein 8,498,937 294,264 1,100
Norman S. Drubner 7,837,683 955,518 662,354
Mark S. Hoffman 8,498,937 294,264 1,100
Clark A. Johnson 8,500,037 293,164 -
Melvin Meskin 8,498,937 294,264 1,100
Mark S. Newman 8,498,937 294,264 1,100
(ii) the election of Deloitte & Touche LLP as independent auditors of the
company, for the year ending December 31, 2002, was ratified by a vote of
4,162,378 in favor, 245,175 votes against and 910,538 abstentions.
(iii) the company's amended and restated 2002 stock incentive plan was also
approved at the meeting by a vote of 7,834,147 in favor, 11,656 votes against
and 947,398 abstentions.
There were no broker non-votes on any of the above proposals.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
The following Exhibits are filed as part of this Quarterly Report on
Form 10-Q:
EXHIBIT DESCRIPTION
3.1 Certificate of Incorporation of Registrant, incorporated
herein by reference to Exhibit 3.1 to the Registrant's
Annual Report on Form 10-KSB filed February 3, 1995.
3.2 Certificate of Amendment of the Certificate of
Incorporation, dated as of August 13, 1999, as filed with
the Delaware Secretary of State on August 13, 1999,
incorporated herein by reference to Exhibit 3.1 to
Registrant's Current Report on Form 8-K filed on August 30,
1999.
3.3 Amended and Restated By-laws of Registrant adopted March 27,
2000, incorporated herein by reference to Exhibit 3.3 to
Registrant's Annual Report on Form 10-K filed on March 30,
2000.
3.4 Certificate of Designation with respect to the Registrant's
Series A Convertible Preferred Stock, as filed with the
Delaware Secretary of State on August 13, 1999, incorporated
herein by reference to Exhibit 3.2 to Registrant's Current
Report on Form 8-K filed on August 30, 1999.
3.5 Warrant agreement dated as of August 13, 1999, between the
Registrant and Bank Austria Creditanstalt Corporate Finance,
Inc., incorporated herein by reference to Exhibit 3.3 to the
Registrant's Current Report on Form 8-K filed on August 30,
1999.
3.6 Warrant Agreement dated as of October 10, 2000, by and
between OptiCare Health Systems, Inc. and Medici Investment
Corp., incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended 9/30/00,
Exhibit 10.14.
3.7 Certificate of Amendment of the Certificate of
Incorporation, dated as of January 21, 2002, increasing the
authorized common stock of the Company from 50,000,000 to
75,000,000 shares, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 3.1.
3.8 Certificate of Designation, Rights and Preferences of the
Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock of the Company, as filed with the Delaware
Secretary of State on January 23, 2002, incorporated herein
by reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.2.
3.9 Amendment No. 1 to the Amended and Restated Bylaws of
OptiCare Health Systems, Inc., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.3.
4.1 Performance Stock Program, incorporated herein by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-4, registration no. 333-78501, first filed on May 14,
1999, as amended (the "Registration Statement 333-78501"). +
4.2 Amended and Restated 1999 Employee Stock Purchase Plan,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Annual Report on Form 10-K filed on March 30,
2000.+
4.3 2000 Professional Employee Stock Purchase Plan incorporated
herein by reference to Exhibit 4.3 to Registrant's Annual
Report on Form 10-K filed on March 30, 2000.+
4.4 Amended and Restated 2002 Stock Incentive Plan.+*
10.7 Settlement agreement dated as of April 9, 1999, among
PrimeVision Health, Inc., Dr. Allan L.M. Barker, Dr. D.
Blair Harrold, Optometric Eye Care Center, P.A., Steven B.
Waite, Bank Austria AG, and Bank Austria Corporate Finance,
Inc., incorporated herein by reference to Exhibit 10.8 to
the Registration Statement 333-78501.
24
10.8 Vision care capitation agreement between OptiCare Eye Health
Centers, Inc. and Blue Cross & Blue Shield of Connecticut,
Inc. (and its affiliates) dated October 23, 1999,
incorporated herein by reference to Exhibit 10.9 to the
Registration Statement 333-78501.
10.9 Eye care services agreement between OptiCare Eye Health
Centers, Inc. and Anthem Health Plans, Inc. (d/b/a Anthem
Blue Cross and Blue Shield of Connecticut), effective
November 1, 1998, incorporated herein by reference to
Exhibit 10.10 to the Registration Statement 333-78501.
10.10 Contracting provider services agreement dated April 26,
1996, and amendment thereto dated as of January 1, 1999,
between Blue Cross and Blue Shield of Connecticut, Inc., and
OptiCare Eye Health Centers, Inc., incorporated herein by
reference to Exhibit 10.11 to the Registration Statement
333-78501.
10.11 Form of employment agreement between the Registrant and Dean
J. Yimoyines, M.D., effective August 13, 1999, incorporated
herein by reference to Exhibit 10.12 to the Registration
Statement 333-78501.+
10.12 Form of employment agreement between the Registrant and
Steven L. Ditman, effective August 13, 1999, incorporated
herein by reference to Exhibit 10.13 to the Registration
Statement 333-78501.+
10.13 Form of employment agreement between the Registrant and Dr.
Allan L.M. Barker, effective August 13, 1999, incorporated
herein by reference to Exhibit 10.14 to the Registration
Statement 333-78501.+
10.14 Form of employment agreement between the Registrant and Dr.
D. Blair Harrold, effective August 13, 1999, incorporated
herein by reference to Exhibit 10.15 to the Registration
Statement 333-78501.+
10.16 Lease dated September 22, 1987 and lease extension agreement
dated December 12, 1997 by and between Cross Street Medical
Building partnership, as landlord, and Ophthalmic Physicians
and Surgeons, P.C., as tenant, for premises located at 40
Cross Street, Norwalk, Connecticut incorporated herein by
reference to Exhibit 10.16 to the Registration Statement
333-78501.
10.17 Lease agreement dated September 1, 1995 by and between
French's Mill Associates, as landlord, and OptiCare Eye
Health Centers, Inc. as tenant, for premises located at 87
Grandview Avenue, Waterbury, Connecticut incorporated herein
by reference to Exhibit 10.17 to the Registration Statement
333-78501.
10.18 Lease agreement dated September 30, 1997 by and between
French's Mill Associates II, LLP, as landlord, and OptiCare
Eye Health Center, P.C., as tenant, for premises located at
160 Robbins Street, Waterbury, Connecticut (upper level),
incorporated herein by reference to Exhibit 10.18 to the
Registration Statement 333-78501.
10.19 Lease agreement dated September 1, 1995 and amendment to
lease dated September 30, 1997 by and between French's Mill
Associates II, LLP, as landlord, and OptiCare Eye Health
Center, P.C., as tenant, for premises located at 160 Robbins
Street, Waterbury, Connecticut (lower level), incorporated
herein by reference to Exhibit 10.19 to the Registration
Statement 333-78501.
10.20 Lease agreement dated September 1, 1995 between O.C. Realty
Associates Limited Partnership, as landlord, and OptiCare
Eye Health Centers, Inc., as tenant, for premises located at
54 Park Lane, New Milford, Connecticut, incorporated herein
by reference to Exhibit 10.20 to the Registration Statement
333-78501.
10.21 Lease dated March 1, 1997 by and between D. Blair Harrold &
Allan L.M. Barker d/b/a Harrold Barker Investment Co.
("HBIC"), as landlord, and Consolidated Eye Care, Inc.
("CEC"), as tenant, for premises located at 112-B Zebulon
Court, Rocky Mount, North Carolina, incorporated herein by
reference to Exhibit 10.12 to the Registrant's Quarterly
Report on Form 10-Q filed on November 15, 1999.
10.22 Lease dated March 1, 1997 by and between HBIC, as landlord,
and CEC, a wholly-owned subsidiary of PrimeVision Health,
Inc., as tenant, for premises located
25
at 110 Zebulon Court, Rocky Mount, North Carolina,
incorporated herein by reference to Exhibit 10.13 to the
Registrant's Quarterly Report on Form 10-Q filed on November
15, 1999.
10.23 Lease dated March 1, 1997 by and between HBIC, as landlord,
and CEC, as tenant, for premises located at 112-A Zebulon
Court, Rocky Mount, North Carolina, incorporated herein by
reference to Exhibit 10.14 to the Registrant's Quarterly
Report on Form 10-Q filed on November 15, 1999.
10.24 Form of health services organization agreement between
PrimeVision Health, Inc. and eye care providers,
incorporated herein by reference to Exhibit 10.21 to the
Registration Statement 333-78501.
10.25 Professional Services and Support Agreement dated December
1, 1995 between OptiCare Eye Health Centers, Inc. and
OptiCare P.C., a Connecticut professional corporation,
incorporated herein by reference to Exhibit 10.22 to the
Registration Statement 333-78501.
10.26 Voting Agreement, dated as of July 14, 1999, between Thomas
Cooke and PrimeVision Health, Inc., incorporated herein by
reference to Exhibit 10.23 to the Registration Statement
333-78501.
10.27 Amended and Restated Loan and Security Agreement, dated as
of August 13, 1999, among Consolidated Eye Care, Inc.,
renamed OptiCare Eye Health Network, Inc, OptiCare Eye
Health Centers, Inc., and PrimeVision Health, Inc. as
borrowers, the Registrant as the Parent, the lenders named
therein (the "Lenders"), Bank Austria, AG (the "LC Issuer"),
and Bank Austria Creditanstalt Corporate Finance, Inc., as
the agent (the "Agent") (excluding schedules and other
attachments thereto), incorporated herein by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on August 30, 1999.
10.28 Guaranty dated as of August 13, 1999, among the Registrant,
OptiCare Eye Health Centers, Inc., PrimeVision Health, Inc.,
Consolidated Eye Care, Inc., renamed OptiCare Eye Health
Network, Inc., and each of the other subsidiaries and
affiliates of the Registrant listed on the signature pages
thereto, in favor of the Lenders, the LC Issuer and the
Agent, incorporated herein by reference to Exhibit 10.2 to
the Registrant's Current Report on Form 8-K filed on August
30, 1999.
10.29 Security Agreement dated as of August 13, 1999, among the
Registrant and the other parties listed on the signature
page thereto in favor of the Agent for the benefit of the
Lenders and the LC Issuer, incorporated herein by reference
to Exhibit 10.3 to the Registrant's Current Report on Form
8-K filed on August 30, 1999.
10.30 Conditional Assignment and Trademark Security Agreement
dated as of August 13, 1999, between the Registrant and the
Agent for the benefit of the Lenders and the LC Issuer,
incorporated herein by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K filed on August 30,
1999.
10.31 Pledge and Security Agreement, dated as of August 13, 1999,
among each of the Registrant, OptiCare Eye Health Centers,
Inc., PrimeVision Health, Inc., Consolidated Eye Care, Inc.,
renamed OptiCare Eye Health Network, Inc., and each of the
other subsidiaries and affiliates of the Registrant listed
on the signature pages thereto, in favor of the Agent for
the benefit of the Lenders and the LC Issuer, incorporated
herein by reference to Exhibit 10.5 to the Registrant's
Current Report on Form 8-K filed on August 30, 1999.
10.32 Assignment of Notes and Security Agreement, dated as of
August 13, 1999, between PrimeVision Health, Inc. and the
Agent, incorporated herein by reference to Exhibit 10.6 to
the Registrant's Current Report on Form 8-K filed on August
30, 1999.
10.33 Agreement and Plan of Merger, dated as of April 12, 1999,
among the Registrant (then known as "Saratoga Resources,
Inc."), OptiCare Shellco Merger Corporation, Prime Shellco
Merger Corporation, OptiCare Eye Health Centers, Inc., a
Connecticut corporation, and PrimeVision Health, Inc.,
incorporated herein by reference to Exhibit 2 to the
Registration Statement 333-78501.
26
10.36 Stock Purchase Agreement dated October 1, 1999, among the
Registrant, Stephen Cohen, Robert Airola, Gerald Mandel and
Reginald Westbrook (excluding schedules and other
attachments thereto), incorporated herein by reference to
Exhibit 10.10 to the Registrant's Quarterly Report on Form
10-Q filed on November 15, 1999.
10.38 Lease dated March 1, 1997, between the Registrant as tenant
and Drs. D. Blair Harrold and Allan L.M. Barker as landlord,
covering premises known as 579 Cross Creek Mall,
Fayetteville, N.C., incorporated herein by reference to
Exhibit 10.39 to the Registrant's Registration Statement on
Form S-1, registration no. 333-93043, first filed on
December 17, 1999, as amended ("Registration Statement
333-93043").
10.39 Lease dated March 1, 1997, between the Registrant as tenant
and Optometric Eye Care Center, P.A., as landlord, covering
premises at 315-A Western Boulevard, Jacksonville, N.C.,
incorporated herein by reference to Exhibit 10.40 to the
Registration Statement 333-93043.
10.40 Employment agreement between the Registrant as employer and
Gordon A. Bishop, dated August, 13, 1999, incorporated
herein by reference to Exhibit 10.41 to the Registration
Statement 333-93043. +
10.41 Lease dated September 1, 1999, between the Registrant as
tenant and Harrold-Barker Realty, as landlord, covering
premises located in Rocky Mount, N.C., incorporated herein
by reference to Exhibit 10.42 to the Registration Statement
333-93043.
10.42 Professional Services and Support Agreement between the
Registrant and Optometric Eye Care Center, P.A.,
incorporated herein by reference to Exhibit 10.43 to the
Registration Statement 333-93043.
10.44 First Amendment to Amended and Restated Loan and Security
Agreement, dated as of June 30, 2000, by and among Bank
Austria Creditanstalt Corporate Finance, Inc., and the
Registrant, incorporated herein by reference to Exhibit 10.9
to the Registrant's Form 10-Q filed on August 14, 2000.
10.45 Second Amendment to Amended and Restated Loan and Security
Agreement, dated as of October 10, 2000, by and among the
Registrant and Bank Austria Creditanstalt Corporate Finance,
Inc., incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, Exhibit 10.11.
10.47 Secured promissory note dated as of October 10, 2000, made
by the Registrant to Alexander Enterprise Holdings Corp.,
incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, Exhibit 10.12
10.48 Security Agreement dated as of October 10, 2000, among the
Registrant, OptiCare Eye Health Centers, Inc., PrimeVision
Health, Inc., Consolidated Eye Care, Inc. and each of the
other subsidiaries and affiliates of the Registrant listed
on the signature pages thereto, in favor of Alexander
Enterprise Holdings Corp., incorporated herein by reference
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, Exhibit 10.13.
10.49 Amended and Restated Secured Promissory Note issued as of
October 10, 2000, by OptiCare Eye Health Centers, Inc.,
PrimeVision Health, Inc. and Consolidated Eye Care, Inc. to
Alexander Enterprise Holdings Corp. ("Bridge Loan") ,
incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000,
Exhibit 10.49.
10.50 Employment Agreement between the Registrant and Jason M.
Harrold, effective July 1, 2000, incorporated herein by
reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000, Exhibit 10.10. +
10.51 Pre-workout Agreement dated February 26, 2001, among Bank
Austria Creditanstalt Corporate Finance, Inc. and OptiCare
Eye Health Network, Inc., OptiCare Eye Health Centers, Inc.,
PrimeVision Health Inc., and the Registrant, incorporated
herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000, Exhibit
10.51.
27
10.52 OptiCare Directors' and Officers' Trust Agreement dated
November 7, 2001, between the Registrant and Norman S.
Drubner, Esq., as Trustee, incorporated herein by reference
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, Exhibit 10.52. +
10.53 Agreement for Consulting Services between Morris Anderson
and Associates, Ltd. and OptiCare Health Systems, Inc. dated
April 16, 2001, incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000, Exhibit 10.53.
10.54 Form of Warrant to purchase 2,250,000 shares of common stock
issued in connection with the Secured Promissory Note issued
as of October 10, 2000, by OptiCare Eye Health Centers,
Inc., PrimeVision Health, Inc. and OptiCare Eye Health
Network, Inc. to Medici Investment Corp., incorporated
herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000, Exhibit
10.54.
10.55 Form of Warrant to purchase 300,000 shares and 2,000,000
shares of common stock issued in connection with the Amended
and Restated Secured Promissory Note issued as of October
10, 2000, by OptiCare Eye Health Centers, Inc., PrimeVision
Health, Inc. and OptiCare Eye Health Network, Inc. to Medici
Investment Corp., incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000, Exhibit 10.55.
10.56 Form of Warrant to purchase 50,000 shares of common stock
issued in connection with the Amended and Restated Secured
Promissory Note issued as of October 10, 2000, by OptiCare
Eye Health Centers, Inc., PrimeVision Health, Inc. and
OptiCare Eye Health Network, Inc. to Dean J. Yimoyines,
M.D., incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
2000, Exhibit 10.56.
10.57 Form of Warrant to purchase 400,000 shares of common stock
issued in connection with the Amended and Restated Secured
Promissory Note issued as of October 10, 2000, by OptiCare
Eye Health Centers, Inc., PrimeVision Health, Inc. and
OptiCare Eye Health Network, Inc. to Palisade Concentrated
Equity Partnership, L.P., incorporated herein by reference
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, Exhibit 10.57.
10.58 Third Amendment to Amended and Restated Loan and Security
Agreement, dated as of January 5, 2001, by and among Bank
Austria Creditanstalt Corporate Finance, Inc. and OptiCare
Eye Health Network, Inc., OptiCare Eye Health Centers, Inc.,
PrimeVision Health Inc., and the Registrant, incorporated
herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000, Exhibit
10.58.
10.59 Amendment to Security Agreement dated as of January 5, 2001,
among the Registrant, OptiCare Eye Health Centers, Inc.,
PrimeVision Health, Inc., Consolidated Eye Care, Inc. and
each of the other subsidiaries and affiliates of the
Registrant listed on the signature pages thereto, in favor
of Alexander Enterprise Holdings Corp., incorporated herein
by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2000, Exhibit 10.59.
10.60 Restructure Agreement dated December 17, 2001, among
Palisade Concentrated Equity Partnership, L.P., Dean J.
Yimoyines, M.D. and the Company, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.1.
10.61 Amendment No. 1, dated January 5, 2002, to the Restructure
Agreement dated December 17, 2001, among Palisade
Concentrated Equity Partnership. L.P., Dean J. Yimoyines,
M.D. and the Company, incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated January
25, 2002, Exhibit 10.2.
10.62 Amendment No. 2, dated January 22, 2002, to the Restructure
Agreement dated December 17, 2001, among Palisade
Concentrated Equity Partnership, L.P. Dean J. Yimoyines,
M.D. and the Company, incorporated herein by reference to
the
28
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.3.
10.63 Senior Secured Subordinated Note dated January 25, 2002, in
the principal sum of $13,900,000, issued by the Company to
Palisade Concentrated Equity Partnership, L.P., incorporated
herein by reference to the Registrant's Current Report on
Form 8-K dated January 25, 2002, Exhibit 10.4.
10.64 Senior Secured Subordinated Note dated January 25, 2002, in
the principal sum of $100,000, issued by the Company to
Linda Yimoyines, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.5.
10.65 Subordinated Pledge and Security Agreement dated as of
January 25, 2002, by the Company (including certain of its
subsidiaries) as grantor, and Palisade Concentrated Equity
Partnership, L.P., as secured party and agent for the other
secured party (Linda Yimoyines), securing the senior secured
subordinated notes made by the Company to the secured
parties dated January 25, 2002, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.6.
10.66 Form of Warrant dated January 25, 2002, issued to Palisade
Concentrated Equity Partnership, L.P., for the purchase of
up to 17,375,000 shares of common stock., incorporated
herein by reference to the Registrant's Current Report on
Form 8-K dated January 25, 2002, Exhibit 3.4.
10.67 Form of Warrant dated January 25, 2002, issued to Linda
Yimoyines, for the purchase of up to 125,000 shares of
common stock, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 3.5.
10.68 Form of Warrant dated January 25, 2002, issued to
CapitalSource Finance, LLC, for the purchase of up to
250,000 shares of common stock, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.6.
10.69 Registration Rights Agreement dated January 25, 2002,
covering common stock held by Palisade, common stock
issuable on conversion of the Series B Preferred Stock and
exercise of the warrants issued to Palisade, Linda Yimoyines
and CapitalSource Finance, L.L.C., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.7.
10.70 Subordination Agreement dated January 25, 2002, among
Palisade Concentrated Equity Partnership, L.P., Linda
Yimoyines, CapitalSource Finance, L.L.C. and the Company,
incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 25, 2002, Exhibit 10.8.
10.71 Amended and Restated Revolving Credit, Term Loan and
Security Agreement dated as of January 25, 2002, between
CapitalSource Finance, L.L.C. and the Company, including
Annex I, Financial Covenants, and Appendix I, Definitions,
incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 25, 2002, Exhibit 10.9.
10.72 Reassignment of Rights to Payments under Services
Agreements, Physician Notes and Physician Security
Agreements, between Bank Austria Creditanstalt Corporate
Finance, Inc., and the Company, dated January 25, 2002,
incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 25, 2002, Exhibit 10.10.
10.73 Assignment and Assumption Agreement dated January 25, 2002,
between Bank Austria Creditanstalt Corporate Finance, Inc.,
and CapitalSource Finance, L.L.C., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.11.
10.74 OptiCare Directors' & Officers' Tail Policy Trust dated
January 10, 2002, between the Registrant and Norman S.
Drubner, Esq.,as trustee. +
10.75 Employment Agreement dated as of September 1, 2001, between
the Registrant and William Blaskiewicz, incorporated herein
by reference to Exhibit 10.21 of the
29
Registrant's Quarterly Report on Form 10-Q for the Quarter
ended March 31, 2001.+
10.76 Form of Employment Letter Agreement between the company and
Christopher J. Walls dated February 18, 2002.+
10.77 Form of Employment Letter Agreement between the company and
Lance A.Wilkes dated May 21, 2002.+*
* Filed herewith.
+ Management or compensatory plan.
b. Reports filed on Form 8-K filed in the period covered by this report:
NONE
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned, hereunto duly authorized.
Date: August 14, 2002 OPTICARE HEALTH SYSTEMS, INC.
By: /s/ William A. Blaskiewicz
----------------------------------------
William A. Blaskiewicz
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and duly authorized officer)
31
CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of
OptiCare Health Systems, Inc. ("the Company") that the Quarterly Report of the
Company on Form 10-Q for the period ended June 30, 2002 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and that
the information contained in such report fairly presents, in all material
respects, the financial condition of the Company at the end of such period and
the results of operations of the Company for such period.
Date: August 14, 2002
/s/ Dean J. Yimoyines
---------------------
Dean J. Yimoyines, M.D.
Chairman and Chief Executive Officer
/s/ William A. Blaskiewicz
--------------------------
William A. Blaskiewicz
Vice President and Chief Financial Officer
32