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 SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
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.
[ ] Yes [X] No
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at November 1, 2001 was 12,815,092 shares.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2001 and
2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000
(unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 18
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 26
2
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,041 $ 1,445
Accounts receivable, net 8,691 9,548
Inventories 3,368 3,113
Other current assets 441 807
-------- --------
TOTAL CURRENT ASSETS 15,541 14,913
Property and equipment, net 6,668 8,222
Intangible assets, net 29,004 30,082
Other assets 2,387 2,296
-------- --------
TOTAL ASSETS $ 53,600 $55,513
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,650 $ 5,798
Accrued expenses 9,526 9,523
Current portion of long-term debt 33,401 32,992
Other current liabilities 1,172 1,141
-------- --------
TOTAL CURRENT LIABILITIES 49,749 49,454
Long-term debt, less current portion 1,030 1,222
Other liabilities 782 960
-------- --------
TOTAL LIABILITIES 51,561 51,636
-------- --------
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.001 par value, 550,000 shares
Authorized; 418,803 shares issued and outstanding 1 1
Common Stock, $0.001 par value; 50,000,000 shares authorized;
12,815,092 and 12,747,324 shares outstanding at September 30, 2001
and December 31, 2000, respectively. 13 13
Additional paid-in-capital 60,667 60,554
Accumulated deficit (58,642) (56,691)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 2,039 3,877
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,600 $ 55,513
======== ========
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ --------------------------------
2001 2000 2001 2000
-------------- ------------- --------------- -------------
NET REVENUES:
Managed care services $ 6,808 $ 8,903 $ 21,214 $ 26,859
Professional services 2,024 2,310 5,591 7,082
Other integrated services 18,704 21,184 59,371 67,265
-------------- ------------- --------------- -------------
Total net revenues 27,536 32,397 86,176 101,206
-------------- ------------- --------------- -------------
OPERATING EXPENSES:
Cost of product sales 8,897 9,931 28,487 32,084
Medical claims expense 5,316 7,482 16,739 21,896
Salaries, wages and benefits 8,939 9,643 27,499 30,212
Selling, general and administrative 3,317 3,747 9,748 11,038
Terminated merger costs - - - 1,810
Depreciation 661 600 2,020 1,894
Amortization 333 443 1,078 1,258
Interest 868 732 2,556 2,167
-------------- ------------- --------------- -------------
Total operating expenses 28,331 32,578 88,127 102,359
-------------- ------------- --------------- -------------
INCOME (LOSS) FROM
OPERATIONS BEFORE INCOME TAXES (795) (181) (1,951) (1,153)
Income tax expense (benefit) - (120) - (8)
-------------- ------------- --------------- -------------
NET INCOME (LOSS) $ (795) $ (61) $ (1,951) $ (1,145)
============== ============= =============== =============
Income (loss) per common share-basic and diluted $ (0.06) $ 0.00 $ (0.15) $ (0.09)
============== ============= =============== =============
Weighted average common shares outstanding-
Basic and Diluted 12,815,092 12,623,883 12,791,447 12,280,961
============== ============= =============== =============
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 NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2001 2000
--------------- --------------
OPERATING ACTIVITIES:
Net loss $ (1,951) $ (1,145)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,020 1,894
Amortization 1,078 1,258
Changes in operating assets and liabilities
Accounts receivable 857 (2,507)
Inventories (255) (284)
Other assets 557 241
Accounts payable and accrued expenses (145) (618)
Other liabilities (258) (878)
--------------- --------------
Net cash provided by (used) in operating activities 1,903 (2,039)
--------------- --------------
INVESTING ACTIVITIES:
Purchases of equipment (466) (1,704)
--------------- --------------
Net cash used in investing activities (466) (1,704)
--------------- --------------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 10,122
Principal payments on long-term debt (341) (8,789)
Net increase in revolving Credit Facility - 800
Proceeds from issuance of long-term debt 500 -
--------------- --------------
Net cash provided by financing activities 159 2,133
--------------- --------------
Increase (decrease) in cash and cash equivalents 1,596 (1,610)
Cash and cash equivalents at beginning of period 1,445 2,921
--------------- --------------
Cash and cash equivalents at end of period $ 3,041 $ 1,311
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 130 $ 1,957
Cash paid (received)for income taxes $ (108) $ 272
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 nine months ended September 30, 2001 and 2000 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 nine months ended
September 30, 2001 are not necessarily indicative of the results to be expected
for the full year. The condensed consolidated balance sheet as of December 31,
2000 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.
The Company is in default under loan agreements with its bank (its senior
lender) and another lender. Accordingly, this debt has been classified within
current liabilities on the Company's financial statements at September 30, 2001
and December 31, 2000. As of September 30, 2001 the Company's current
liabilities exceeded its current assets by $34,208. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis and to obtain additional
financing or refinancing as may be required.
In November 2001, management of the Company signed letters of intent to
refinance and replace its long-term debt (See Note 6).
6
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
2. 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 services segment contracts with
managed care organizations and health plans to administer the eye health portion
of the healthcare benefit. The professional services segment operates an
ambulatory surgical center and provides marketing, systems, software and other
services to eye care professionals. The other integrated services segment owns
and operates fully integrated eye health centers, retail optical stores and a
buying group program for optical products. 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 nine
months ended September 30, 2001 and 2000 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUES:
Managed care services $ 6,982 $ 9,567 $ 21,821 $ 28,842
Professional services 2,024 2,310 5,591 7,082
Other integrated services 21,793 24,821 69,640 75,685
--------- --------- --------- ---------
Segment totals 30,799 36,698 97,052 111,609
Elimination of inter-segment revenues (3,263) (4,301) (10,876) (10,403)
--------- --------- --------- ---------
Total net revenue $ 27,536 $ 32,397 $ 86,176 $ 101,206
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS
BEFORE TAX:
Managed care services $ 501 $ 287 $ 1,535 $ 1,697
Professional services 701 811 1,743 2,438
Other integrated services 398 1,214 2,183 4,015
--------- --------- --------- ---------
Segment totals 1,600 2,312 5,461 8,150
Depreciation (661) (600) (2,020) (1,894)
Amortization (333) (443) (1,078) (1,258)
Interest expense (868) (732) (2,556) (2,167)
Terminated merger costs -- -- -- (1,810)
Corporate (533) (718) (1,758) (2,174)
--------- --------- --------- ---------
Income (loss) from operations
before income taxes $ (795) $ (181) $ (1,951) $ (1,153)
========= ========= ========= =========
7
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
3. RESTRUCTURING
During the nine months ended September 30, 2001, $352 was charged against
the restructuring accrual that was established in the fourth quarter of 2000.
These charges principally relate to lease payments on vacant facilities that
were closed as part of the Company's restructuring activities. The majority of
the remaining restructuring liability at September 30, 2001 of $881 relates to
lease obligations on excess office space that is not expected to be utilized
over the remaining lease terms.
4. 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 September 30, 2001 cannot be ascertained. Management is of the
opinion that, after taking into account the merits of defenses, insurance
coverage and established reserves, the ultimate resolution of these matters will
not have a material adverse effect in relation to the Company's consolidated
financial statements or results of operations.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which the Company
was required to adopt effective January 1, 2001. SFAS No. 133 requires the
Company to record all derivatives on the balance sheet at fair value. The
adoption did not have a material effect on consolidated results of operations or
financial position.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests-method.
The Company does not believe that the adoption of SFAS No. 141 will have a
significant impact on its consolidated financial position or results of
operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test six months from the date of
adoption. The Company is currently assessing, but has not yet determined, the
impact of SFAS No. 142 on its consolidated financial position and results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 addresses the conditions under which an
impairment charge should be recorded related to long-lived assets
8
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
to be held and used, except for goodwill, and those to be disposed of by sale or
otherwise. The Company is currently assessing, but has not yet determined, the
impact of SFAS No. 144 on its consolidated financial position and results of
operations.
6. SUBSEQUENT EVENTS
In November 2001, the Company and one of its major shareholders, Palisade
Concentrated Equity Partnership, LP ("Palisade") entered into preliminary,
non-binding agreements with each other and with certain third parties, including
the Company's senior lender, Bank Austria Creditanstalt Corporate Finance, Inc.
(the "Bank"), and CapitalSource Finance, LLC ("CapitalSource"), concerning a
capital restructuring. Three preliminary, non-binding agreements (which are
subject to the completion of binding, formal agreements and numerous substantial
conditions, including a shareholder vote) have been signed by the parties as
follows: (i) a letter of intent between Palisade and the Bank which establishes
terms on which the Company's debt to the Bank would be refinanced and repaid at
a discount (ii) a commitment letter from CapitalSource to the Company offering
to loan the Company funds to repay the Bank debt at the discount negotiated
between Palisade and the Bank and (iii) a letter of intent between Palisade and
the Company setting terms on which Palisade would provide funds to repay the
Bridge Loan.
The terms of the these agreements provide for, among other things:
(a) Refinancing of all of the Company's debts and other obligations, direct
and contingent, to the Bank, totaling as of November 1, 2001,
approximately $34.3 million and retirement of all of the Bank's stock,
warrants and other ownership interests in the Company for payments
totaling approximately $23.4 million. Of the payments of $23.4 million,
$13.0 million would be paid in cash and $10.4 million would be paid in
the form of a two-year, interest-bearing promissory note issued by the
Company. The $13.0 million cash payment to the Bank would come from
proposed loans provided by CapitalSource in the form of a $6.5 million
three-year revolving credit facility, a $3.0 million term loan facility
and a $5.5 million 18-month bridge loan.
(b) Palisade's investment of $3.5 million of cash in the Company to satisfy
the outstanding Bridge Loan of $2.75 million plus interest and letter
of credit backing for obligations of the Company totaling $16.7
million.
(c) Issuance, to Palisade, of 2,500,000 newly authorized shares of the
Company's Series B, 12.5%, voting convertible redeemable participating
preferred stock (convertible into common stock on a one-for-ten basis)
and warrants to purchase approximately 16,730,000 additional shares of
the Company's common stock.
9
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, 2000, as filed with the Securities and Exchange
Commission.
Overview. OptiCare Health Systems, Inc. (the "Company") is an integrated eye
care services company focused on 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 managed care
organizations and health plans to administer the eye health portion of the
healthcare benefit. The professional services segment operates an ambulatory
surgical center and provides marketing, systems, software and other services to
eye care professionals. The other integrated services segment owns and operates
fully integrated eye health centers, retail optical stores and a buying group
program for optical products.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Managed care services revenue. Managed care services revenue decreased to
$6.8 million for the three months ended September 30, 2001 from $8.9 million for
the three months ended September 30, 2000, a decrease of $2.1 million. This
decrease in revenue is primarily due to two managed care contracts that were not
renewed in December 2000 by Anthem Blue Cross and Blue Shield of Connecticut
("Anthem"). In addition, the contract with ConnectiCare was amended in April
2001, allowing ConnectiCare to resume administration of the contract, further
reducing managed care revenue.
Professional services revenue. Professional services revenue was $2.0
million for the three months ended September 30, 2001 compared to $2.3 million
for the three months ended September 30, 2000, a decrease of $0.3 million. This
decrease represents a decrease in revenue from ambulatory surgery services,
primarily due to the closure of two Connecticut surgery centers in the fourth
quarter of 2000.
Other integrated services revenue. Other integrated services revenue
decreased to $18.7 million for the three months ended September 30, 2001 from
$21.2 million for the three months ended September 30, 2000, a decrease of $2.5
million. This decrease represents a $1.4 million decrease in optometry and
ophthalmology revenue, primarily due to the closure of certain optical and eye
health locations in Connecticut during 2000, and a $1.1 million decrease in
buying group revenue resulting primarily from a decrease in purchasing volume.
Cost of product sales. Cost of product sales decreased to $8.9 million for
the three months ended September 30, 2001 from $9.9 million for the three months
ended September 30, 2000, a decrease of $1.0 million. This decrease is comprised
of a $0.9 million decrease in cost of sales related to the buying group program,
which decreased due to the decrease in purchasing volume. The remaining decrease
of $0.1 million is attributed to the closure of certain optical and eye health
facilities in Connecticut during 2000.
Medical claims expense. Medical claims expense decreased to $5.3 million for
the three months ended September 30, 2001 from $7.5 million for the three months
ended September 30, 2000, a decrease of $2.2 million. The medical loss ratio
(MLR) decreased to 78.1% for the three months ended September 30, 2001 from 84.0
% for the three months ended September 30, 2000. This decrease is primarily due
to the two Anthem contracts and the ConnectiCare contract that are no longer
managed by the Company which had higher MLRs than the average of the Company's
remaining contracts.
10
Salaries, wages and benefits. Salaries, wages and benefits decreased to $8.9
million for the three months ended September 30, 2001 from $9.6 million for the
three months ended September 30, 2000, a decrease of $0.7 million. Of this
decrease, approximately $0.3 million represents a decrease in compensation in
optometry and ophthalmology operations primarily due to reductions in staff
resulting from the closure of certain optical and eye health facilities in
Connecticut during 2000. Compensation expense related to managed care operations
decreased $0.2 million due to decreased staff. The remaining decrease of
approximately $0.2 million represents reduced employee costs in professional
services and corporate operations, primarily due to reductions in executive and
managerial employees.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $3.3 million for the three months ended
September 30, 2001 from $3.7 million for the three months ended September 30,
2000, a decrease of $0.4 million. The decrease is primarily attributable to
reduced overhead, including rent, utilities and maintenance associated with
closed locations and other reductions in general and administrative expenses in
connection with the company's overall cost-cutting measures.
Income (loss) before income taxes. The company reported a loss from
operations before income taxes of $0.8 million for the three months ended
September 30, 2001 compared to a loss from operations before income taxes of
$0.2 million for the three months ended September 30, 2000. The change is
primarily attributable to reduced profits from other integrated services segment
partially offset by corporate savings.
Income tax expense (benefit). The company did not record an income tax
benefit on its operating loss for the quarter ended September 30, 2001,
primarily due to the uncertainty surrounding the company's ability to utilize
its net operating loss carryforwards.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended
September 30, 2000
Managed care services revenue. Managed care services revenue decreased to
$21.2 million for the nine months ended September 30, 2001 from $26.9 million
for the nine months ended September 30, 2000, a decrease of $5.7 million. This
decrease in revenue is primarily due to two managed care contracts that were not
renewed in December 2000 by Anthem Blue Cross and Blue Shield of Connecticut
("Anthem"). In addition, the contract with ConnectiCare was amended in April
2001, allowing ConnectiCare to resume administration of the contract, further
reducing managed care revenue.
Professional services revenue. Professional services revenue was $5.6
million for the nine months ended September 30, 2001 compared to $7.1 million
for the nine months ended September 30, 2000, a decrease of $1.5 million. Of
this decrease approximately $1.1 million represents a decrease in ambulatory
surgery services revenue, primarily due to the closure of two of the company's
ambulatory surgery centers in the fourth quarter of 2000, and $0.4 million
represents decreased sales of software systems.
Other integrated services revenue. Other integrated services revenue
decreased to $59.4 million for the nine months ended September 30, 2001 from
$67.3 million for the nine months ended September 30, 2000, a decrease of $7.9
million. This decrease represents a $4.5 million decrease in optometry and
ophthalmology revenue, primarily due to the closure of certain Connecticut
optical and eye health locations during 2000 in connection with the Connecticut
restructuring, and a $3.4 million decrease in buying group revenue resulting
primarily from a decrease in purchasing volume.
Cost of product sales. Cost of product sales decreased to $28.5 million for
the nine months ended September 30, 2001 from $32.1 million for the nine months
ended September 30, 2000, a decrease of $3.6 million. Of this decrease, $3.1
million represents a decrease in cost of sales related to the buying group
program, and is directly related to the decrease in purchasing volume. The
remaining decrease of $0.5 million is a result of the Connecticut restructuring
in 2000 of which approximately $0.3 million relates to optometry and
ophthalmology services and $0.2 million relates to ambulatory surgical services.
11
Medical claims expense. Medical claims expense decreased to $16.7 million
for the nine months ended September 30, 2001 from $21.9 million for the nine
months ended September 30, 2001, a decrease of $5.2 million. The medical loss
ratio (MLR) decreased to 78.9% for the nine months ended September 30, 2001 from
81.5 % for the nine months ended September 30, 2000. This decrease is primarily
due to the two Anthem contracts and the ConnectiCare contract that are no longer
managed by the Company which had higher MLRs than the average of the Company's
remaining contracts.
Salaries, wages and benefits. Salaries, wages and benefits decreased to
$27.5 million for the nine months ended September 30, 2001 from $30.2 million
for the nine months ended September 30, 2000, a decrease of $2.7 million. This
decrease is primarily due to decreases in operations personnel, primarily due to
the Connecticut restructuring that included the closure of two ambulatory
surgery centers and other optical and eye health locations during 2000. The
company also experienced net reductions in corporate personnel at the executive
and managerial levels.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $9.7 million for the nine months ended
September 30, 2001 from $11.0 million for the nine months ended September 30,
2000, a decrease of $1.3 million. The decrease is primarily attributable to the
company's plan to reduce overhead and streamline operations. This decrease
includes reduced rent, utilities and maintenance costs associated with the
closing of certain optical, eye health and ambulatory surgery centers in 2000
under the Connecticut restructuring.
Terminated merger costs. Terminated merger costs of $1.8 million in 2000
represent merger costs associated with the proposed merger with Vision
Twenty-One, which was terminated in June 2000. These costs consisted primarily
of professional fees.
Interest expense. Interest expense increased to $2.6 million for the nine
months ended September 30, 2001 from $2.2 million for the nine months ended
September 30, 2000 an increase of approximately $0.4 million. This increase is
primarily due to interest costs on a higher average balance of long-term debt in
2001 as compared to 2000.
Income (loss) before income taxes. The company reported a loss from
operations before income taxes of $2.0 million for the nine months ended
September 30, 2001 compared to a loss from operations before income taxes of
$1.2 million for the nine months ended September 30, 2000. The change is
primarily attributable to reduced profits from other integrated services and
professional services segments partially offset by corporate savings.
Income tax expense. The company did not record an income tax benefit on its
operating loss for the nine months ended September 30, 2001, primarily due to
the uncertainty surrounding the company's ability to utilize its net operating
loss carryforwards. The income tax benefit for the nine months ended September
30, 2000 was the result of income tax expense from operations offset by tax
benefits related to the terminated merger costs.
LIQUIDITY AND CAPITAL RESOURCES
The company's principal sources of liquidity are from cash flows
generated from operations and from borrowings under the company's credit
facility. The company's principal uses of liquidity are to provide working
capital and meet debt service requirements. As of September 30, 2001, the
company had cash and cash equivalents of approximately $3.0 million, but no
additional borrowing capacity under its revolving credit facility.
Net cash provided by operating activities of $1.9 million for the nine
months ended September 30, 2001 included a $2.0 million loss from operations
offset by non-cash charges of $3.1 million for depreciation and amortization and
$0.8 million of other changes in working capital. Net cash used in operating
activities of
12
$2.0 million for the nine months ended September 30, 2000 included a $1.1
million loss from operations, a $2.5 million increase in accounts receivable
driven by higher revenue and a $1.5 million decrease in accounts payable,
accrued expenses, and other liabilities. These and other changes in working
capital were partially offset by $3.2 million of non-cash charges for
depreciation and amortization.
The company invested $0.5 million in property and equipment during the nine
months ended September 30, 2001 compared to $1.7 million during the nine months
ended September 30, 2000. Fixed asset purchases in 2000 were higher than usual
and incurred primarily to support the integration and anticipated growth of the
company.
Net cash provided by financing activities was $0.2 million for the nine
months ended September 30, 2001 compared to $2.1 million for the nine months
ended September 30, 2000. Net cash provided by financing activities in 2001
represented $0.5 million in additional financing under the company's bridge
loan, offset by $0.3 million in principal payments on long-term debt. The
primary sources of cash from financing activities for the nine months ended
September 30, 2000 was $10.0 million of net proceeds from the sale of 3,571,429
registered shares of common stock in January 2000 and $0.8 million in advances
under the revolving credit facility, which was offset by $8.8 million of
principal payments on long-term debt.
As of September 30, 2001, under agreement with the Texas Department of
Insurance, the company was required to maintain restricted investments of
$250,000.
The company was unable to pay the interest and principal of approximately
$1.7 million due on January 2, 2001 to its senior lender, Bank Austria, under
its credit facility. Bank Austria formally declared an event of default under
its credit facility on March 23, 2001, and on September 25, 2001, Bank Austria
demanded payment in full of all outstanding obligations of the company to Bank
Austria. In addition, on October 10, 2001, Alexander Enterprise Holdings Corp.
formally declared an event of default under its loan to the company, as a result
of the company's aforementioned default under its credit facility. As of
November 1, 2001 the company has not made its scheduled principal payments due
in 2001 under its credit facility and the company's arrearage with respect to
such delinquent principal and interest totaled approximately $6.2 million. Total
principal and accrued interest due to Bank Austria under its credit facility and
to Alexander Enterprise Holdings Corp. under its bridge loan was approximately
$34.5 million at November 1, 2001. Without new financing, the company cannot pay
its obligations to Bank Austria and Alexander Enterprise, and Bank Austria and
Alexander Enterprise have the right to commence foreclosure upon the assets of
the company.
The company will need to obtain additional financing or refinancing of its
existing debt to ensure sufficient funding of its operations and to have the
ability to service its debt obligations. In November 2001, the company signed
preliminary, non-binding agreements (described below) with certain third
parties, including the company's bank, to reduce and replace its existing credit
facility. However, there can be no assurance that the company will complete such
refinancing. Failure to obtain such refinancing would have a material adverse
effect on the company's business, financial condition and results of operations.
The Bank Austria credit facility described below was established in 1999 at
the time of the mergers of PrimeVision Health and OptiCare Eye Health Centers.
Bank Austria Credit Facility, Alexander Enterprise Bridge Loan
In August 1999, in connection with the mergers of PrimeVision Health and
OptiCare Eye Health Centers, the company established a credit facility by
entering into a loan agreement with Bank Austria Creditanstalt Corporate
Finance, Inc., as agent for the lenders. Borrowings from the credit facility
were used to pay certain indebtedness of PrimeVision Health and OptiCare Eye
Health Centers and to fund the company's business operations. The credit
facility is comprised of a term loan and up to a $12.7 million revolving credit
facility,
13
and is secured by a security interest in substantially all of the assets of the
company. The company is required to maintain certain financial ratios, which are
calculated on a quarterly and annual basis, as part of the financial covenants
set forth in the credit facility. After giving effect to the amendment discussed
below, the credit facility is to terminate on June 1, 2003. As of November 1,
2001, the company had $17.4 million of borrowings outstanding under the term
loan and $12.3 million of advances outstanding under the revolving credit
facility.
The interest rate applicable to the Bank Austria credit facility equals the
Base Rate or the Eurodollar Rate (each, as defined in the credit facility
agreement with Bank Austria), as the company may from time to time elect. The
Base Rate, after giving effect to the amendment discussed below, is generally
the higher of: (a) the prime rate of Bank Austria for domestic commercial loans
in effect on such applicable day, or (b) the federal funds rate in effect on
such applicable day plus three-quarters of one percent (3/4 of 1%), which
generally equals LIBOR plus 2.25%. The Eurodollar Rate has generally equaled the
offered rate quoted by Bank Austria in the inter-bank Eurodollar market for U.S.
dollar deposits of an aggregate amount comparable to the principal amount of the
Eurodollar loan to which the quoted rate is to be applicable.
The company's subsidiaries guaranteed the payments and other obligations
under the credit facility, and the company (including certain subsidiaries)
granted a security interest in substantially all assets in favor of the Bank
Austria lenders. The company also pledged the capital stock of certain of
subsidiaries to the lenders.
The Bank Austria credit facility contains certain restrictions on the
conduct of our business, including restrictions on incurring debt, declaring or
paying any cash dividends or making any other payment or distribution on our
capital stock, and creating liens on the company's assets. We are required to
maintain certain financial covenants, including a minimum fixed charge coverage
ratio, a leverage ratio, a senior leverage ratio, and an interest coverage
ratio. The company is also restricted from incurring capital expenditures in
excess of a specified amount and is required to achieve minimum cash flows.
The occurrence of certain events or conditions described in the credit
facility constitute an "event of default," including:
o Failure to make payment of principal or interest when due;
o Failure to observe or perform certain affirmative covenants and
other covenants; or
o The occurrence of a vacancy in the offices of the chief executive
or chief financial officer which is not filled by a person
reasonably acceptable to the lenders.
Effective June 30, 2000, the Bank Austria credit facility was amended to
provide, among other things, that: (i) the terminated merger costs associated
with the Vision Twenty-One merger were excluded from the calculation of the
financial covenants and the company's borrowing availability; (ii) the interest
rate was increased by one-half of one percent (1/2 of 1%) to the amount set
forth above; (iii) the term was reduced by one year with the termination date
changing from June 1, 2004 to June 1, 2003; and (iv) the company agreed to
raise, or enter into binding commitments to raise, no less than $5.0 million by
January 1, 2001 through the issuance of equity or subordinated indebtedness or
other means reasonably approved by Bank Austria. In accordance with the terms of
the amended credit facility, 50% of any capital raised through the issuance of
equity or subordinated indebtedness would be used to reduce indebtedness under
the credit facility. The remainder would be used for capital expenditures and to
meet working capital requirements. In the event other means were used to raise
such capital, the company could be required to use all of such funds to reduce
indebtedness under the Credit Facility.
On October 10, 2000 the company obtained $2.25 million through a bridge
financing arrangement with Alexander Enterprise Holdings Corp. and entered into
a second amendment to the Bank Austria credit facility. Of the $2.25 million of
proceeds from the bridge loan, $1.2 million was paid to Bank Austria as required
by the amended credit facility, and the remaining $1.1 million was used for
general working capital purposes. Of
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the $1.2 million paid to Bank Austria, $0.3 million was applied to past due
interest, $0.4 million was used to repay principal and $0.5 million was applied
as a prepayment of interest.
The bridge loan was secured through a security agreement in which Alexander
Enterprise was granted a security interest in substantially all of the assets of
the company, which is junior to the security interests of Bank Austria.
The bridge loan was evidenced by a secured promissory note (the "Note")
issued to Alexander Enterprise which accrues interest at the Eurodollar rate,
generally equal to LIBOR, plus two and one-quarter percent (2-1/4%). It is to
mature on June 1, 2003, the same date as the maturity of the Bank Austria credit
facility.
Also on October 10, 2000, Alexander Enterprise and Bank Austria entered into
an intercreditor agreement pursuant to which Bank Austria agreed that, in the
event of a "Qualified Sale" (a sale or other disposition of collateral securing
the credit facility or the bridge loan; or a principal repayment of either the
credit facility or the bridge loan as a result of a bankruptcy proceeding
involving the company) from which Bank Austria receives at least $5.0 million,
then, to the extent that the proceeds from such Qualified Sale exceed $5.0
million, such excess proceeds would be payable to Alexander Enterprise.
In connection with the bridge loan, the company issued a warrant to a
designee of Alexander Enterprise to purchase 2,250,000 shares of common stock at
$1.00 per share. The estimated fair value of the warrant at the date of issuance
was $0.6 million. This value was determined using the Black-Scholes pricing
model. This value was recorded as a discount to the bridge loan and is being
amortized to interest expense over the life of the loan.
On January 5, 2001, the bridge loan from Alexander Enterprise was amended.
In connection with the amended bridge loan, the company received an additional
$0.5 million of cash; it cancelled warrants issued in October 2000 to purchase
2,250,000 shares of common stock at $1.00; and it issued new warrants to
purchase (i) 2,000,000 shares of common stock at an exercise price of $1.00 per
share and (ii) 750,000 shares of common stock at an exercise price of $0.40 per
share. Funds for this $0.5 million addition to the bridge loan were provided by
Palisade Private Concentrated Equity Partnership, L.P ($400,000); Dean J.
Yimoyines, M.D., president and chief executive officer of the company ($50,000);
and Alexander Enterprise ($50,000).
On February 26, 2001, we entered into a Pre-Workout Agreement with Bank
Austria Creditanstalt Corporate Finance, Inc. Bank Austria provides a term loan
and revolving credit facility which totaled at December 31, 2000, $29.7million.
The Pre-Workout Agreement established certain understandings between the bank
and ourselves including the fact that we were in default under the loan
documents which govern the term loan and revolving credit facility. Such
defaults included our failure to pay principal and interest when due and our
failure to observe or perform certain affirmative covenants and other covenants.
On March 23, 2001, Bank Austria formally notified us of the occurrence of
events of default under the aforementioned credit facility. The bank forbid the
company from making any payments on account of debt junior to that of the bank,
including under certain Seller Notes representing long-term obligations of the
company to certain medical practices.
Pursuant to an understanding reached with the bank shortly after receiving
such notice, we engaged Morris-Anderson & Associates, Ltd., a management
consulting firm, to assist us in restructuring our long-term debt. Although in
its March 23 notice the bank had formally reserved its rights under the terms of
the credit facility, the aforementioned understanding was that, during a period
of unspecified duration, the events of default referred to in that notice would,
on an operating basis, be considered waived while we worked with Morris-Anderson
to restructure our debt. We continued, however, to be prohibited from paying any
junior debt, including Seller Notes.
On September 25, 2001, Bank Austria gave the company formal notice of: (i)
the occurrence of certain additional defaults under the credit facility loan
documents; (ii) the immediate termination of the
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commitments under the loan documents; and (iii) the requirement that all amounts
outstanding under the credit facility were to be immediately due and payable.
The company continues to negotiate in good faith with Bank Austria and with
other parties in an effort to replace the Bank Austria credit facility with
another financing arrangement which would provide adequate capital support, at a
manageable cost, to the company.
On October 2, 2001, Alexander Enterprise gave the company formal notice of:
(i) the occurrence of a default under the bridge loan documents; (ii) the
requirement that all amounts outstanding under the bridge loan were to be
immediately due and payable. The company continues to negotiate in good faith
with Alexander Enterprise and with other parties in an effort to replace the
Alexander Enterprise credit facility with another financing arrangement which
would provide adequate capital support, at a manageable cost, to the company.
New Capital Structure for OptiCare
In November 2001, certain letters of intent were entered into concerning a
major capital restructuring of the company. If certain conditions are met and
the transactions contemplated by these letters of intent are consummated, these
transactions as presently proposed are expected (as of November 2001) to lower
the company's long-term debt by approximately $9.9 million, increase its equity
by approximately $9.0 million and reduce its next-12-months' debt service by
approximately $3.7 million.
One of the company's major shareholders, Palisade Concentrated Equity
Partnership, L.P. ("Palisade") reached preliminary agreement with Bank Austria
Creditanstalt Corporate Finance, Inc. ("Bank Austria") concerning new terms for
refinancing all of the company's borrowings and other direct and indirect
obligations to Bank Austria. Those terms, if implemented as proposed, provide
that, in exchange for payments to the bank by the company which payments would
total approximately $23.4 million (payable partly in cash at closing and partly
by issuance of a two-year promissory note of the company), Bank Austria would:
o Cancel the company's existing principal and interest obligations, which
total approximately $31.6 million (approximately $29.7 million in
principal and $1.9 million in interest);
o Eliminate the company's contingent exposure to Bank Austria, which, as
of November 1, 2001, totaled approximately $2.7 million;
o Relinquish to the company (which will retire) all of Bank Austria's
stock, warrants and other ownership interests in the company.
As part of its letter of intent with the company, Palisade also --subject
to a number of conditions--tentatively agreed if the proposed transactions are
consummated, to provide funds with which the company could satisfy bridge loans
of $2.3 million, plus interest, from Alexander Enterprise Holdings, Inc.
In this capital restructuring, if the proposed transactions are
consummated, Palisade would invest in the company a total of $3.5 million of
cash and provide letter of credit backing for obligations of the company
totaling $16.7 million. A portion of the letter of credit backing would support
new, secured credit facilities to be provided by CapitalSource Finance, LLC,
which is an asset-based lender specializing in the health care industry.
Palisade may also consider providing letter of credit backing for an
as-yet-undetermined amount of undertakings by the company which would be
required to support the company's growth.
After carefully considering options available to the company, both
management and the special committee of the company's Board of Directors have
concluded that, without the cash investment and credit support being offered by
Palisade, the company would not be able to obtain the substantial--and
necessary--reduction, described above, of the company's debt to Bank Austria,
nor would the company be able to obtain the other financing involved in this
proposed transaction.
In exchange for that investment and support, Palisade would acquire 2.5
million shares of the company's newly authorized Series B 12.5% Voting
Convertible Redeemable Participating Preferred Stock (convertible
16
into common stock on an one-for-ten basis) and warrants to purchase
approximately 16.7 million additional shares of the company's common stock.
Palisade would also convert an existing bridge loan to the company into
preferred stock. This would raise Palisade's effective ownership of voting stock
of the company from the present 18.5% to approximately 75% on a fully-diluted
basis.
There can be no assurance that these proposals will be carried out on the
terms presently proposed, or on other terms comparably favorable to the company,
or at all on any terms, or that, if the proposals are implemented, that the
company will be able to recover its financial strength and become profitable.
Statements in this Form 10-Q regarding the proposed capital restructuring
have not been reviewed or approved by Bank Austria and Bank Austria has assumed
no responsibility for such statements.
RECENT ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which the Company
was required to adopt effective January 1, 2001. SFAS No. 133 requires the
Company to record all derivatives on the balance sheet at fair value. The
adoption did not have a material effect on consolidated results of operations or
financial position.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests-method.
The Company does not believe that the adoption of SFAS No. 141 will have a
significant impact on its consolidated financial position or results of
operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test six months from the date of
adoption. The Company is currently assessing, but has not yet determined, the
impact of SFAS No. 142 on its consolidated financial position and results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 addresses the conditions under which an
impairment charge should be recorded related to long-lived assets to be held and
used, except for goodwill, and those to be disposed of by sale or otherwise. The
Company is currently assessing, but has not yet determined, the impact of SFAS
No. 144 on its consolidated financial position and results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The company is subject to pre-determined Medicare reimbursement rates which,
for certain products and services, have decreased over the past three years. A
decrease in Medicare reimbursement rates could have an adverse affect on the
company's results of operations if it cannot manage these reductions through
increases in revenues or decreases in operating costs. To some degree, prices
for health care are driven by Medicare reimbursement rates, so that 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 nine-month periods ended September 30,
2001 and 2000.
17
FORWARD-LOOKING INFORMATION
Certain 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) may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include those relating to the proposed new financial structure for the company,
the end of the suspension of the trading of the company's common stock by the
American Stock Exchange and the continued listing of the stock on the Exchange,
future opportunities, the outlook of customers, the reception of new services,
technologies and pricing methods, existing and potential strategic alliances,
the likelihood of incremental revenues offsetting expense related to new
initiatives, and expected improvements in the company's financial condition as a
result of the proposed 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. Such factors include: changes in the regulatory
environment applicable to the company's business, demand and competition for the
company's products and services, general economic conditions, risks related to
the eye care industry, the company's ability to successfully integrate and
profitably manage its operations, failure to restructure the Company's bank
facility, the Company's ability to regain compliance with the AMEX requirements
and to maintain continued listing of its common stock, the risks related to
managed care contracting, the ability of the Company to successfully raise
capital on commercially reasonable terms, if at all, and other factors and other
risks detailed from time to time in the company's periodic earnings releases and
reports filed with the Securities and Exchange Commission, as well as the risks
and uncertainties discussed in this Form 10-Q. The company undertakes no
obligation to publicly update or revise forward looking statements to reflect
events or circumstances after the date of this Form 10-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 financing activities. 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 2001, although there
can be no assurances that interest rates will not significantly change. An
increase of 10% in the interest payable by the Company would increase interest
expense for the nine months by approximately $0.3 million, assuming that the
Company's borrowing level is unchanged. The Company did not use derivative
instruments to adjust the Company's interest rate risk profile during the nine
months ended September 30, 2001.
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The company was unable to pay the interest and principal of approximately
$1.7 million due on January 2, 2001 to its senior lender, Bank Austria, under
its credit facility. Bank Austria formally declared an event of default under
the credit facility on March 23, 2001, and on September 25, 2001, Bank Austria
demanded payment in full of all outstanding obligations of the company to Bank
Austria. In addition, on October 2, 2001, Alexander Enterprise formally declared
an event of default under its loan to the company, as a result of the company's
aforementioned default under its credit facility. As of November 1, 2001 the
company has not made its scheduled principal payments due in 2001 under its
credit facility and the company's arrearage with respect to such delinquent
principal and interest totaled approximately $6.2 million. Total
18
principal and accrued interest due to Bank Austria under its credit facility and
to Alexander Enterprise under its bridge loan aggregated approximately $34.5
million at November 1, 2001.
The company continues to negotiate in good faith with Bank Austria and with
other parties in an effort to replace the Bank Austria credit facility with
another financing arrangement which would provide adequate capital support, at a
manageable cost, to the company.
ITEM 5. OTHER INFORMATION
Proposed New Capital Structure for OptiCare
In November 2001, certain letters of intent were entered into concerning a
major capital restructuring of the company. If certain conditions are met and
the transactions contemplated by these letters of intent are consummated, these
transactions as presently proposed are expected (as of November 2001) to lower
the company's long-term debt by approximately $9.9 million, increase its equity
by approximately $9.0 million and reduce its next-12-months' debt service by
approximately $3.7 million.
One of the company's major shareholders, Palisade Concentrated Equity
Partnership, L.P. ("Palisade") reached preliminary agreement with Bank Austria
Creditanstalt Corporate Finance, Inc. ("Bank Austria") concerning new terms for
refinancing all of the company's borrowings and other direct and indirect
obligations to Bank Austria. Those terms, if accepted by Bank Austria and
implemented as proposed, would provide that, in exchange for payments to the
bank by the company of approximately $23.4 million (payable partly in cash at
closing and partly by issuance of a two-year promissory note of the company),
Bank Austria:
o Would cancel the company's existing principal and interest obligations,
which total approximately $31.6 million (approximately $29.7 million in
principal and $1.9 million in interest);
o Would eliminate the company's contingent exposure to Bank Austria,
which, as of November 1, 2001, totaled approximately $2.7 million;
o Would relinquish to the company (which would retire) all of Bank
Austria's stock, warrants and other ownership interests in the company.
As part of Palisade's proposal, if the proposed transactions are
consummated, Palisade would also, subject to a number of conditions, provide
funds with which the company could satisfy bridge loans of $2.3 million, plus
interest, owed to Alexander Enterprise Holdings, Inc.
In this capital restructuring, if the proposed transactions are consummated,
Palisade would invest in the company a total of $3.5 million of cash and provide
letter of credit backing for obligations of the company totaling $16.7 million.
A portion of the letter of credit backing would support new, secured credit
facilities to be provided by CapitalSource Finance, LLC, which is an asset-based
lender specializing in the health care industry. Palisade may also consider
providing letter of credit backing for an as-yet-undetermined amount of
undertakings by the company which would be required to support the company's
growth.
After carefully considering its alternatives the company has concluded that,
without the very substantial cash investment and credit support being offered by
Palisade, or without a comparable amount of cash and credit support from another
source, the company would not be able to obtain the substantial--and
necessary--reduction, described above, of the company's debt to Bank Austria,
nor would the company be able to obtain the other financing involved in this
proposed transaction. If the company is unable to refinance its debt to Bank
Austria, which is now due and payable in full, with the arrangements proposed by
Palisade (or a comparable proposal from another source not presently known or
available to the company), Bank Austria would have the right to commence
foreclosure proceedings on substantially all the company's assets.
19
In exchange for the investment and support Palisade has proposed, Palisade
would acquire 2.5 million shares of the company's newly authorized Series B
12.5% Voting Convertible Redeemable Participating Preferred Stock (convertible
into common stock on an one-for-ten basis) and warrants to purchase
approximately 16.7 million additional shares of the company's common stock.
Palisade would also convert an existing bridge loan to the company into
preferred stock. This would raise Palisade's effective ownership of voting stock
of the company from the present 18.5% to approximately 75% (on a fully-diluted
basis).
There can be no assurance that these proposals will be carried out on the
terms presently proposed, or on other terms comparably favorable to the company,
or at all on any terms, or that, if the proposals are implemented, the company
will be able to recover its financial strength and become profitable.
Changes in the Board of Directors
On January 3, 2001, Martin Franklin and Ian Ashken resigned from the Board
of Directors. Allan Barker, resigned from the Board of Directors on January 9,
2001, as did William Goss on January 25, 2001 and Norman S. Drubner on February
23, 2001. Carl Schramm and Steven Ditman resigned from the Board of Directors
effective June 1, 2001 and June 15, 2001, respectively.
Effective November 1, 2001, Raymond W. Brennan, Alan J. Glazer, Norman S.
Drubner, and Frederick A. Rice were appointed by the sole Director then serving,
Dean J. Yimoyines, M.D., President of the Company, to fill vacancies on the
company's Board of Directors.
William Blaskiewicz Named Chief Financial Officer
On September 1, 2001, William A. Blaskiewicz was named Chief Financial
Officer, replacing Steven Ditman, who resigned on August 24, 2001 to pursue
another opportunity. A certified public accountant since 1987, Mr. Blaskiewicz
joined OptiCare in 1998 after four years as director of a billion-dollar budget
at a large insurance company. Since then, as our Chief Accounting Officer, he
worked very closely with Mr. Ditman in overseeing all aspects of our financial
and cash management operations.
Proposed Sale of Connecticut Operations Cancelled
On May 21, 2001, we announced a decision to terminate an agreement relating
to a proposed sale of our Connecticut-based medical, surgical and retail
operations. That proposed sale, which was announced in November 2000, was to
have been made to an investor group which included ophthalmologists employed
through our Connecticut operations.
Also on May 21, 2001, we announced that the Connecticut operations would be
managed by Gordon Bishop as President, and Nancy Noll as Vice President. Mr.
Bishop is an industry veteran with broad experience who has been an employee of
the company since 1999; Ms. Noll has held positions of increasing responsibility
with OptiCare over a 23-year career.
American Stock Exchange Suspends Trading, Issues Notice of Intent to De-list
OptiCare Stock
On April 20, 2001, the American Stock Exchange suspended trading of the
company's common stock, and the stock has not traded since that date. The last
reported sale price of our common stock, on April 20, 2001, was $0.26 per share.
On November 21, 2001, the American Stock Exchange notified the company of
its intent to de-list OptiCare stock. The principal reasons for the
determination, according to the Exchange, were the company's failure to file its
Form 10-K for the year 2000 and its quarterly Form 10-Qs for the first three
quarters of 2001.
20
The company immediately appealed this determination and requested a hearing
before a committee of the Exchange. We subsequently filed the Form 10-K and, as
of the date of this filing, will have filed all of our required Form 10-Qs.
These filings move the company in the direction of compliance with American
Stock Exchange listing requirements.
Further, if the company's proposed new capital structure were in place, and
the company becomes current in its SEC filings, the company believes that it
would be eligible, subject to review by the exchange, for the resumption of
trading of its common stock on the American Stock Exchange. However, there can
be no assurance that the company's request for continued listing will be
granted, or that trading of its stock will resume, or, if trading is resumed, of
the prices at which the stock will be traded.
Pre-Workout Agreement Signed with Bank Austria
On February 26, 2001, we entered into a Pre-Workout Agreement with Bank
Austria Creditanstalt Corporate Finance, Inc. Bank Austria provides a term loan
and revolving credit facility, which totaled at December 31, 2000, $29.7
million. The Pre-Workout Agreement established certain understandings between
the bank and ourselves including the fact that we were in default under the loan
documents, which govern the term loan and revolving credit facility. Such
defaults included our failure to pay principal and interest when due and our
failure to observe or perform certain affirmative covenants and other covenants.
On March 23, 2001, Bank Austria formally notified us of the occurrence of
events of default under the aforementioned credit facility. The bank forbade the
company from making any payments on account of debt junior to that of the bank,
including under certain Seller Notes representing long-term obligations of the
company to certain medical practices.
Pursuant to an understanding reached with the bank shortly after receiving
such notice, we engaged Morris-Anderson & Associates, Ltd., a management
consulting firm, to assist us in restructuring our long-term debt. Although in
its March 23 notice the bank had formally reserved its rights under the terms of
the credit facility, the aforementioned understanding was that, during a period
of unspecified duration, the events of default referred to in that notice would,
on an operating basis, be considered waived while we worked with Morris-Anderson
to restructure our debt. We continued, however, to be prohibited from paying any
junior debt, including Seller Notes.
On September 25, 2001, Bank Austria gave the company formal notice of: (i)
the occurrence of certain additional defaults under the credit facility loan
documents; (ii) the immediate termination of the commitments under the loan
documents; and (iii) the requirement that all amounts outstanding under the
credit facility were to be immediately due and payable. The company continues to
negotiate in good faith with Bank Austria and with other parties in an effort to
replace the Bank Austria credit facility with another financing arrangement
which would provide adequate capital support, at a manageable cost, to the
company. It believes that the proposed transactions involving Bank Austria,
Palisade Concentrated Equity Partnership, L.P. and CapitalSource Finance, LLC,
comprise such an arrangement.
Alexander Enterprise Bridge Loan
On October 10, 2000 the company obtained $2.25 million through a bridge
financing arrangement with Alexander Enterprise Holdings Corp. and entered into
a second amendment to the Bank Austria credit facility. Of the $2.25 million of
proceeds from the bridge loan, $1.2 million was paid to Bank Austria as required
by the amended credit facility, and the remaining $1.1 million was used for
general working capital purposes. Of
21
the $1.2 million paid to Bank Austria, $0.3 million was applied to past due
interest, $0.4 million was used to repay principal and $0.5 million was applied
as a prepayment of interest. On January 5, 2001, the company borrowed an
additional $0.5 million under the Alexander Enterprise bridge loan. Funds for
this addition to the bridge loan were provided by Palisade ($400,000), Dean J.
Yimoyines, M.D., president and chief executive officer of the company ($50,000),
and Alexander Enterprise ($50,000). The lenders under this bridge loan also
received warrants to purchase the company's common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q.
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 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 by
reference to Exhibit 3.1 to Registrant's report on Form 8-K
filed on August 30, 1999.
3.3 Amended and Restated By-laws of Registrant adopted March 27,
2000, incorporated by reference to Exhibit 3.3 to
Registrant's 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
by reference to Exhibit 3.2 to Registrant's 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 by reference to Exhibit 3.3 to the
Registrant's 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
10.1 Vision care capitation agreement between OptiCare Eye Health
Centers and Blue Cross & Blue Shield of Connecticut, Inc.
(and its affiliates) dated October 23, 1999, incorporated by
reference to Exhibit 10.9 to the Registration Statement
333-78501.
10.2 Eye care services agreement between OptiCare Eye Health
Centers and Anthem Health Plans, Inc. (d/b/a Anthem Blue
Cross and Blue Shield of Connecticut), effective November 1,
1998, incorporated by reference to Exhibit 10.10 to the
Registration Statement 333-78501.
10.3 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, incorporated herein by reference to
Exhibit 10.11 to the Registration Statement 333-78501.
10.4 Form of employment agreement between the Registrant and Dean
J. Yimoyines,
22
EXHIBIT DESCRIPTION
M.D., effective August 13, 1999, incorporated herein by
reference to Exhibit 10.12 to the Registration Statement
333-78501.+
10.5 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.+
10.6 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, 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 by reference to Exhibit 10.1 to the
Registrant's report on Form 8-K filed on August 30, 1999.
10.7 Guaranty dated as of August 13, 1999, among the Registrant,
OptiCare Eye Health Centers, 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 by reference to Exhibit 10.2 to the
Registrant's report on Form 8-K filed on August 30, 1999.
10.8 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 by reference to Exhibit 10.3
to the Registrant's report on Form 8-K filed on August 30,
1999.
10.9 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 by reference to Exhibit 10.4 to the Registrant's
report on Form 8-K filed on August 30, 1999.
10.10 Pledge and Security Agreement, dated as of August 13, 1999,
among each of the Registrant, OptiCare Eye Health Centers,
PrimeVision Health, Inc., Consolidated Eye Care, Inc.,
renamed OptiCare Eye Health Network, Inc., and each of the
other subsidiaries and affiliates of the company listed on
the signature pages thereto, in favor of the Agent for the
benefit of the Lenders and the LC Issuer, incorporated by
reference to Exhibit 10.5 to the Registrant's report on Form
8-K filed on August 30, 1999.
10.11 Assignment of Notes and Security Agreement, dated as of
August 13, 1999, between PrimeVision Health, Inc. and the
Agent, incorporated by reference to Exhibit 10.6 to the
Registrant's report on Form 8-K filed on August 30, 1999.
10.12 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.
10.13 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 by reference to Exhibit 10.9 to the
Registrant's Form 10-Q filed on August 14, 2000.
23
EXHIBIT DESCRIPTION
10.14 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 9/30/00,
Exhibit 10.11.
10.15 Secured promissory note dated as of October 10, 2000, made by
the company to Alexander Enterprise Holdings Corp.,
incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended 9/30/00,
Exhibit 10.12
10.16 Security Agreement dated as of October 10, 2000 among the
Registrant, OptiCare Eye Health Centers, 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 9/30/00, Exhibit 10.13
10.17 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 Alexander Enterprise Holdings Corp. ("Bridge Loan").
Incorporated by reference to Exhibit 10.49 to Registrant's
report on Form 10-K filed on November 29, 2001.
10.18 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 by
reference to Exhibit 10.51 to Registrant's report on Form
10-K filed on November 29, 2001.
10.19 OptiCare Directors' and Officers' Trust Agreement dated
November 7, 2001 between the Registrant and Norman S.
Drubner, Esq., as Trustee. incorporated by reference to
Exhibit 10.52 to Registrant's report on Form 10-K filed on
November 29, 2001.+
10.20 Agreement for Consulting Services dated April 16, 2001
between the Registrant and Morris Anderson and Associates,
Ltd. Incorporated by reference to Exhibit 10.53 to
Registrant's report on Form 10-K filed on November 29, 2001.
10.21 Employment Agreement dated as of September 1, 2001 between
the Registrant and William Blaskiewicz. Incorporated by
reference to Exhibit 10.21 to Registrant's report on Form
10-Q for the quarter ended March 31, 2001 filed on December
3, 2001.+
10.22 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. ("Bridge Loan"). Incorporated
by reference to Exhibit 10.54 to Registrant's report on Form
10-K filed on November 29, 2001.
10.23 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. ("Bridge Loan"). Incorporated by reference
to Exhibit 10.55 to Registrant's report on Form 10-K filed on
November 29, 2001.
24
EXHIBIT DESCRIPTION
10.24 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. ("Bridge
Loan"). Incorporated by reference to Exhibit 10.56 to
Registrant's report on Form 10-K filed on November 29, 2001.
10.25 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, LLP. ("Bridge Loan"). Incorporated by reference
to Exhibit 10.57 to Registrant's report on Form 10-K filed on
November 29, 2001.
10.26 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 by
reference to Exhibit 10.58 to Registrant's report on Form
10-K filed on November 29, 2001.
10.27 Amendment to Security Agreement dated as of January 5, 2001
among the Registrant, OptiCare Eye Health Centers,
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 by reference
to Exhibit 10.59 to Registrant's report on Form 10-K filed on
November 29, 2001.
. + Management contract or compensatory plan
b. Reports filed on Form 8-K filed in the period covered by this report:
None
25
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: December 3, 2001 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)
26